One of the current misrepresentations of Hyman Minsky's famous "financial instability hypothesis" is that its central message refers to how in capitalist finance "stability leads to instability". The obvious absurdity here is that "stability" can never, in and of itself, lead to its opposite, "instability", unless we specify what we mean by "stability" and why these conditions hold within them the seeds of "instability". Similarly, in neoclassical economic theory, the conditions that lead to "equilibrium" are specified, but it can never be explained how this equilibrium can ever lead to dis-equilibrium except through some "exogenous" factor that is not inherent to the Automatik of the self-regulating market mechanism.
In reality, Minsky's hypothesis was based on the fact that monetary authorities (central banks and treasuries) in capitalist economies are set with the task (often under legislative direction) of reducing instability in financial markets, for obvious political and economic reasons. But in their efforts to ensure financial stability, monetary authorities simply intervene to expand the scope of financial intermediation so that markets remain liquid and stable. It is this intervention on the part of monetary authorities to stabilise what are intrinsically unstable financial markets that allows the internal dynamic contradiction of the capitalist credit pyramid to expand - to bubble over - until the whole pyramid collapses (the bubble bursts) under the weight of its own 'incredibility' - when "credit" (trust) can no longer be had because the financial entities that constitute the pyramid no longer hold any "credit", any trust.
This collapse of the capitalist credit structure is the equally famous Minsky Moment or Wile E. Coyote Moment when Wile E. Coyote runs off the edge of a cliff on blind trust - until he realizes that there is no ground under his feet, and he plunges into the abyss. The next question is then: what is this "ground" that is lacking once the credit system "runs over the cliff", that is, over-reaches itself? What is this "over-reach"? And why does it occur? Well, Minsky points out that it is inherent in the very notion of "credit" that the credit system will over-reach itself - that it will grow into an inverted pyramid because lenders who can no longer invest their capital profitably will tend "to trust" borrowers with the assurance that borrowers will be able to pay interest on the capital lent to them "on credit". It is obvious that this inverse pyramid of credit will expand until such time as borrowers are no longer able to hold to their "promise" to pay a "return on capital" - and that indeed lenders will now struggle to secure their "return of capital"!
In other words, capitalist monetary authorities act like the port authorities in Beirut: they allow the accumulation of "credit" (ammonium nitrate) to such massive quantities that eventually it leads to a terrifying explosion - a financial crisis. By postponing "crises",monetary authorities postpone and exasperate the process that leads to ever greater crises! In reality, capitalism needs regular crises to be able to eliminate the credit "flights of fancy" or trust or credit that lead to the lenders' fear of "no return of capital". So, the final question is: what are the "real" conditions that ensure (a) interest as a rate of profit, and (b) the future generation of profit?
The maximization of profit on the part of capital implies the relative suppression of wages or “socially necessary labour time”. Profit equals total revenue less wages. Greater profit entails the suppression of wages. For profit to be realized through the sale of produced goods, the capitalist needs to ensure that there is a surplus value on top of the wages that the capitalist pays to the workers. But then, the excess of production over what can be sold on the market for surplus value to be “realized” – this excess means that the capitalist bourgeoisie needs an “excess population” that can be “purchased” with the excess production from the previous cycle of production. But this “excess population” of workers needs to be paid – and so its “wages” correspond to an absolute expansion in “socially necessary labour time” such that the capitalist can accumulate new profits. That is why “capital” is not a static notion, but a social relation in constant transformation, in constant movement.
It is this contradictory tendency of capitalism – on one hand, to create unemployment so as to suppress wages, and on the other to expand the absolute size of the exploitable labour force -, it is this contradictory tendency or dynamic that leads to overpopulation and is leading us toward the apocalypse – the destruction of the biosphere.
The problem with the neoclassical economic conception of competition is that on this basis, and on the assumption of “universal freedom” excepting coercion, and the further assumption of universal knowledge (or “common knowledge” in game theory), it is absolutely impossible for a capitalist to make a “profit” from exchange – and therefore there can be no “rate of profit”, natural or otherwise. The only way in which a market participant can become a “capitalist”, and therefore make a “profit” from exchange, is if he can “exchange” his possessions or goods for the “labour-power” of workers – that is, the living activity of workers who are forced to sell their living labour as if it were just another commodity exchangeable for objectified labour, for the products that they have already produced. In that case, the capitalist will be able to buy the living labour of workers and exchange it with less of their product than the workers produce. The difference between the value of the products produced by the workers (including the means of production, of course) and what the capitalist pays to them in wages is called “surplus value” and its monetary equivalent is “profit”.
But the question now arises: what can the capitalist do with this “profit”? He can sell the excess production: but obviously there will be no new buyers because the only market participants who can buy these excess goods are workers who are already so “poor” that the only exchange good they can sell is their own living activity as “wage labour”, as their “labour-power”. What this means, quite obviously, is that for the capitalist to be able to sell his surplus value so as to realize a (monetary) “profit”, he must be able either to expand the size of the market with new exchange values belonging to populations not yet within the capitalist market sphere, or else he has to use it as a hypothecation, as a “mortgage”, on any “future labour-power” that may be available on the market.
Marx rightly stresses the difference between value and capital – because although all capital is “exchange value”, in the sense that it is capable of being exchanged, not all exchange values are capital: because capital, unlike other “exchange values”, is “value” capable of “valourising” itself. Thus, as we are about to see, capital is a historically specific form of exchange value: its peculiarity is that for capital to exist it must be “exchanged” with a unique “good” – human living labour forced to sell itself as “wage labour” – that is capable of “valourising” capital by expanding existing production. In other words, the existence of capital implies not only the existence of human living labour available “for exchange”, as if human living activity were yet another “good” or “consumable output”, as if it were a mere material “product”; but also, it implies the constant expansion of the pool of available living labour!
Money, to the extent that it exists already as capital, is therefore simply a policy [a legal claim] on future (new) labour. Objectively it exists only as money. Surplus value, the added objectified labour, in itself is money; but money now exists as capital, and as such it is a policy on future labour. Here capital enters a relationship no longer with existing labour, but also with future labour. It also presents itself no longer as consisting merely of its simple elements in the process of production, but also as money; but no longer as money that is simply the abstract form of social wealth, but again as a policy [as a claim] on the real possibility of general wealth – on the labour-force, or better on the labour-force in actu. In this form as a policy or claim on potential labour-force, its material existence as money is irrelevant and may be substituted by any other claim on the labour-force. Just as with public credit, each capitalist possesses, in the value already appropriated [as product or objectified labour], a claim on the future labour-force; by appropriating living labour in its present form as objectified labour, the capitalist has already appropriated a claim on future labour-power…. Here is already revealed the ability of capital to exist as a social power separate from its objective material existence. Here is already implicit the existence of capital as credit. Its accumulation in the form of money therefore is not at all an accumulation of the material conditions of labour [of the means of production], but rather of the legal claim to living labour [on workers]. This means posing future labour as wage labour, as use value for capital. For the new [objectified] labour created [the product] there exists no equivalent [that is, no existing exchange value]; its possibility [to be valourised] exists only in a new labour force. (K. Marx, Grundrisse, 3.2.21)
It is the law of capital, as we have seen, to create surplus labour, namely, disposable time [free time not needed for the reproduction of workers or not employed for their leisure]. And it is able to do so only to the extent that it creates more necessary labour – that is to say, to the extent that it exchanges dead labour [produced goods] with the worker [fresh living labour, that is, for human beings who are also forced to work]. The tendency of capital therefore is as much to create more [necessary] labour as is possible [in absolute terms, that is, in terms of numbers of workers], as it is to reduce the [amount of necessary] labour [needed for the reproduction of each individual worker relative to disposable labour] to the minimum necessary. Capital therefore tends both to increase the working population and to reduce incessantly part of it to the condition of over-population – as population that is superfluous [useless] until the moment that capital can utilize it [to create surplus value]. (From which we derive the truth of the theory of overpopulation and of surplus value.) ??? Grundrisse 3.2.25…???
Capital tends both to render human labour (relatively) superfluous and also to push it beyond all boundaries. Value is nothing other than objectified labour [labour-power], and surplus value (the valourisation of capital) is nothing other than the excess of objectified labour [labour-power] on the amount necessary for the reproduction of the labour force. But living labour is and remains the fundamental requisite of objectified labour [labour-power] and of surplus value, while surplus labour [disposable labour] exists only in relation to necessary labour, and therefore only to the extent that there still is necessary labour. Capital must therefore incessantly create more necessary labour [in absolute terms] to create surplus labour [and therefore surplus value]. It has to multiply surplus labour (by means of simultaneous working days [by means of more individual workers]) in order to multiply surplus value. At the same time, capital has to suppress necessary labour so as to turn it into surplus labour…
It is for this reason that the capitalist seeks the increase of the working population. And it is the actual process of reduction of necessary labour that enables the capitalist to employ new living labour [new workers] (and therefore create surplus labour [that is, surplus value]). (In other words, the production of workers becomes “cheaper”; and therefore it is possible to produce more workers in the same measure as the time for necessary labour decreases or the time needed for the reproduction of the labour force decreases....) – (K.Marx, Grundrisse, 3.2.25)
The capitalist must expand the available pool of living labour for capital, the labour force, to keep yielding profits and therefore for capital to be valourised. In other words, the existence and meaning of “interest” or “average profit” requires that the pool of living labour available to capitalists must constantly expand! This is the clear link between “the natural rate of interest” and “relative overpopulation”. Whenever capital is unable to expand the reserve army of workers the rate of interest or rate of profit must decline. In other words, the rate of profit is dependent on the existence of “relative overpopulation” because surplus value in the form of objectified labour can be realized as profit only when exchanged with money, and in the form of money or credit it can only be valourised if and when it can be exchanged with fresh labour-power.
We say “relative overpopulation” because the degree or extent of overpopulation depends on those human needs (real or distorted, as we shall see) that go to determine what is “socially necessary labour time”, and therefore the degree of exploitation or profitability of capitalist industry. These human needs determine the mass of wage labour – what we call “consumption”. We shall turn to this notion and the necessary corollary of “overconsumption” in capitalism dependent on “distorted needs” in our next intervention.