“Market forces, free enterprise, tax cuts et cetera were shallow slogans that hid the wider picture. As usual, profit and the unlimited accumulation of wealth were the driving motives. Now that the house of credit-cards is collapsing, these same megalomaniacs cannot recognise that their model is faulty.”
Domestic product records the value that is produced and sold, and invoiced. The goods and services that are swapped or paid informally are not included (though they are estimated in the grey economy). The value produced is exchanged for money, so that there is proportionality between the amount of value and the quantity of money in circulation. Money (cash or credit) changes hands more or less quickly, but technology and the passage from metal to paper and to digital have greatly accelerated the process, so that financial speculation sees vast sums move back and forth in seconds. Whatever the speed of circulation, however, an increased production of value needs more money as the go-between for the growing number of exchanges.
The supply of goods and services to the market must find a solvent demand. And both must grow together to keep to the narrow path between inflation and deflation, thereby maintaining price stability. Goods and services are produced by bringing together the means of production and labour. Their quantity increases when more means and labour are brought together, or when the same means and labour increase their productivity. In the first case the increased investment increases demand. This balances the extra supply, and the monetary creation in the form of credit is invested.  The second case is more complex. Gains in productivity should automatically bring down prices, as these are theoretically founded on production costs. But productivity grows with innovations that are covered by property rights and do not advantage every one. The innovator can cut his prices, expand his share of the market and ruin some of his competitors. Alternatively he can maintain prices and increase his profits. In this case the same production with more productivity signifies less labour and means of production brought together, less investment and less demand.
Productivity is the troublesome partner of growth, as it can easily perturb the delicate balance between supply and demand. All the more so that gains in productivity can be obtained artificially by cutting wages, taxes, social levies and environmental obligations, thereby reducing production costs (outsourcing is usually motivated by these possibilities). In general, it seems that improved productivity is spread both ways. It raises profits and brings down prices, but the cost price is still lower than the market price. If this surplus value is invested in increased production, the balance of supply and demand is maintained. But the means of production tend to over capacity, because the surplus value increases investments and forgets that mass production exists for the consumption of labour. This does not happen if the profits are used to increase consumption (e.g. by retired shareholders). However, if they go abroad, or to speculative investments on the stock, real estate and commodity markets, then the balance of supply and demand will be upset.
Even in a perfect world, steady constant growth of the value produced is probably impossible. The influence of innovation causes accelerations that are not foreseen and cannot be controlled. And, anyway, it is becoming obvious that the environmental impact of certain forms of growth is making the planet uninhabitable (e.g. fossil fuel consumption). Nonetheless, the illusion of constant growth is possible because of sleights of hand, and because the periodic upheavals they provoke are blamed on other factors. The classic method is for a nation to export finished and semi-finished goods, and to import raw materials and other means of production. The end product is consumed elsewhere, and surplus value can be invested, without leading to over capacity, for as long as this external consumption is maintained. The English cotton industry in the 19th century practised this method by importing raw cotton and exporting spun cotton, and it generated huge quantities of surplus value thanks to the new technology of steam powered machines. As the consumption was taking place elsewhere – India was the largest market – English labour could be paid starvation wages. All the more so that the ranks were constantly filled by rural exiles pushed out of employment by the mechanization of agriculture and the extension of sheep rearing. The cotton market, however, was subjected to periodic slumps (decennial according to KM). It had trouble absorbing such growth, as Indian hand-spinners became redundant and indebted. While vast fortunes were made and lost in England, numberless Indians were deprived of work and income. The process finally stabilized, but India had lost countless jobs and the value they added, to the benefit of English industrial development.
This exchange between England and India in the mid-19th century seems strangely familiar because it has been repeated by others several times since, though never with such absolute contempt for the labouring masses. The United States practised the same trade pattern before and after the Second World War. Then Japan, Germany and the ex-colonial nations adopted the idea, followed by Korea, Taiwan and their fellow Dragons. And, last but not least, the Group of Five – with China taking the lion’s share – has applied the method to an unprecedented globally unified market. The scale of the enterprise dwarfs all past attempts. And, as an extra benefit, when investments are imported and all the consumption that results is exported then, however small the value added, the trade balance is always positive. More value is sold than is bought.
The unbalanced exchange between investment and consumption allows the accumulation of capital on one side and the destruction of jobs on the other, and it produces a constant trade surplus/deficit. On one side of the equation are an exploited work force and industrial development, on the other are unemployment and debt. And when the debt reaches a certain level, it can no longer grow and the system goes into recession.
All that is happening was programmed by the laissez faire open-market deregulated ideology that has imposed its universal dictate since the end of the Cold War. Market forces, free enterprise, tax cuts et cetera were shallow slogans that hid the wider picture. As usual, profit and the unlimited accumulation of wealth were the driving motives, and egocentric hubris was the dominant mode. Now that the house of credit-cards is collapsing, these same megalomaniacs cannot recognise that their model is faulty. Their deafening claim that growth is the only solution shows they are insatiable and prohibits change. Or, as J. Stiglitz put it, the argument that the response to the current crisis has to be a lessening of social protection is really an argument by the 1% to say, “We have to grab a bigger share of the pie”. Clutching their riches, their power and their mind-sets, they are pushing the world off the cliff into chaos and mayhem.
Continuation: The Property of the Means of Production
It all comes down to the way growth is financed. Growth signifies an increase in supply, in demand and in the means of payment. Supply to the market precedes a materialised demand, as opposed to the potential demand that motivates supply. So that extra supply must be financed before the necessary extra demand, and investments that can be lengthy, or in several stages, must be made prior to any actual consumption of the end product. Supposing the extra investments in raw materials and labour are paid with credit. There is monetary creation by the banks who guarantee the payments, which goes into circulation and increases general demand. When the investments take time to reach the consumption stage, the increased general demand will be inflationary. But, if growth is prolonged, the monetary creation of the latest investments fuels demand for the end-production of previous investments.
By the power they have to create money, banks guarantee the credit that pays for investments and become, in all but name, their owners. To avoid the control of banks, entrepreneurs have always looked for alternative financial backing, in the form of unspent incomes. Instead of circulating additional money, they use money already in circulation and disrupt the balance of supply and demand. The value supplied increases without the equivalent increase in the means of payment that allows an increased demand. However, the insufficient demand can be compensated by consumer credit. Instead of creating money for investments, banks and pseudo-banks create it for consumption. Incomes are invested and credit is consumed, an inversion that is not without consequences.
The value of an investment is returned when its production is exchanged for money on the market. That means the credit can be paid back and renewed. The value of consumption is consumed, and has to be produced again. That means the credit cannot be paid back and renewed. The renewal of increased investments needs renewed credit. The renewal of increased consumption needs renewed credit, plus credit to pay back the previous credit. Invested credit grows at the same rate as investments. Consumer credit grows twice as fast as consumption. This fatality also applies to the consumption of government debts.
Derivatives have multiplied the possible forms of financial investments, but an entrepreneur aspiring to expand his business has always had several alternatives. He might ask his banker or supplier to grant him credit. He can sign an IOU (bonds), or sell shares of his company. Or he may be making enough profit to finance himself. In the first case, the virtual money of credit increases the money supply. The following cases concern income destined to consumption (mostly) or to the renewal of existing investments, and result in consumer credit or closed factories. As for reinvesting profits, it is the classic model of capitalism, the thrifty Protestant ethic described by Max Weber. But profit is part of added value and therefore of income. Profit is also the source of dividends, interest and commissions, which are in turn invested or consumed.
Financing growth with unspent incomes and compensating insufficient demand with consumer credit and public debt, or exports, insure that the property of the means of production is private. And profit, in one form or another, is the rent received by this private property. Financial profits attract incomes, and the flow feeds market bubbles whose deflations are a mass destruction of value. A market crash is a potlatch of misappropriated consumer demand. At some point unspent incomes no longer finance extra investments. They merely increase the value of existing investments. Selling investments on the market as shares and bonds (and all their variants) puts them in the commercial sphere of buying and selling at a profit. However, company shares are never put to any use – as are most other objects of commerce – and are for ever. They change hands by the billions every day of every year, in perpetual motion. And the commercial drive tends to push their price up artificially, for as long as the input of incomes is sufficient. When it reaches its limits the bubble collapses more or less suddenly.
The private property of the means of production and the rent it receives result in exponential borrowing, market speculation and the destruction of wealth. And consumer credit, the corollary of invested incomes, is a growth mechanism that gets quickly out of hand. This means the system is doomed to periodic failures, either in the flow of invested incomes or in the counter-flow of consumer credit. Occasionally both fail together, as they are at present. Unspent incomes are contracting and everyone has borrowed all they can. This could be resolved by considerably increasing incomes (i.e. wages), and letting the subsequent inflation reduce debts. However, for numerous reasons, inflation is not on the program. That is, it will not be driven by pay rises. But the monetary creation of quantitative easing will probably bring about the same result, and it will be interesting to see how that unfolds. As for building a new fail-proof system once the dust has cleared, it can only happen if there is a radical transformation of the social contract and the common weal, with fundamental modifications to the rules of property and corporate law. The world will soon be faced with the age old dilemma of war or revolution, of conservative nationalism or structural change. Will nations attack one another or will they transmute their dysfunctional institutions?
1. I have developed the different consequences of investment credit and consumer credit in a previous piece.
Kenneth Couesbouc can be reached at email@example.com.