Socialist Studies Socialist Studies

Investment, Profit and Capitalism

Economic Editors: What are they good for?

What point do economic editors in the media serve? They are usually uncritical conduits for publications from the free market institutes that encircle Westminster. They also defend the profit interests of their employer and his class and, of course, they use their platform to periodically attack the ideas of Karl Marx.

David Smith, economics editor of the SUNDAY TIMES, is a case in point. In an article 'Without investment, the recovery we're seeing would be built on sand' (TIMES July 14 2021) he looks at the investment required by capitalists for recovery from the covid pandemic. At the same time he considers Marx.

Not that he has read Marx. David Smith only reads him through the prejudices of commentators. We do not know what the book he was updating which included a chapter on Karl Marx. What caught Smith's eye was a quotation by Marx from the first volume of CAPITAL in which Marx wrote:

'Accumulate, accumulate! That's Moses and the prophets!...Accumulation for accumulation's sake, production for production's sake' (Ch. XXIV).

Smith, gives us an explanation of what he thought Marx meant:

'By accumulation, Marx meant investment and the tendency of capitalists to over-invest condemned them to a future of declining profits and, ultimately, the fundamental crisis of capitalism'

He then takes Marx to task:

'It did not work out like that, and it is hard to think of many places in the world where Marxist economics is practised. Neither does this determination to accumulate at all costs remotely describe what has been happening. For the UK, indeed the problem has been chronic under investment, not over investment.'

Smith then goes on to recount a period of under investment beginning with the last economic crisis up until today.

Reading Marx

The problem of reading secondary sources is that you do not understand what Marx wrote and in what context. Each volume of Capital is linked to the next as a process in which to critically understand capitalism as a whole. The first volume is a analysis of capitalist production. The second volume is the process of circulation of capital. And the third volume is the process of capitalist production as a whole.

Marx pre-supposes a reader who "is willing to learn something new and therefore to think for himself' (Preface to the first German edition p. 19).

This would disqualify Mr Smith and those like him who are content to rely on secondary sources.

More importantly Marx wrote his three volumes of CAPITAL and THEORIES OF SURPLUS VALUE to discover "the natural laws of its movement" (Preface p. 20).

Under normal conditions capitalists do invest money capital to make a profit. The capitalist class make their profit by exploiting the working class. They pay workers less in wages and salaries than they produce in the productive process. Profit comes from surplus value.

However, while competition forces the capitalists to invest and re-invest there is periodic disruption. In the trade cycle, as Marx described, capitalism passes through an economic crisis and trade depression. If there is no likelihood of investing and making a profit, capitalists do not invest but hoard. Marx dealt with is in the second volume of CAPITAL.

In fact Marx described the capitalist economy in the following way:

"...capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation" (WAGES, PRIVE AND PROFIT, in SELECTED WORKS vol. 1. P. 440).

WAGES, PRICE AND PROFIT is a very good introduction to reading CAPITAL and to understand Marx's ideas about the commodity labour power, value and surplus value.

Smith's reference to "declining profits" refers to chapters in the third volume of CAPITAL in which Marx looked at the tendency of the rate of profit to fall. He did not say that it would continue to fall continually and gave five counter forces which stopped it falling. These were set out in Chapter XIV: increasing intensity of exploitation, depression of wages below the value of labour-power, relative over-population, and foreign trade.

Smith then concludes his comment on the falling rate of profit by stating Marx believed it would lead to a "fundamental crisis of capitalism". This is another way of saying that Marx held to a collapse theory of capitalism. He did not.

In every depression some economists and politicians declare that there is no prospect of recovery: the depression will be permanent, (Engels for a time, held that view during the Great Depression 1875-1895).

One argument supporting that view is the supposed enormous increase of productivity. Others argue that the excess productive capacity in certain industries shown by the crisis will continue to prevent new investment and increased output because it prevents a profit being made.

However, as Marx pointed out, every depression results in the destruction of much of the production plants of bankrupt companies.

The output of industry is sharply reduced when the crisis occurs and existing stocks of products are gradually got rid of. The unemployed are no longer producing but continue to be consumers though at a lower level.

In due course profitable investment prospects open up again, some of them in new industries.

What of the charge that made by Smith that Marx expected capitalism to collapse? Marx summed it up with the words "There are no permanent crises" (THEORIES OF SURPLUS VALUE Vol II Part 2 p 269). Hardly someone who expected capitalism to collapse.

Borrowing and Investing

It is useful to look at the recent history of economic depressions and the flight of produce money capital to hoards.

When the 1979 depression began the electrical company G.E.C. had what the Media called a "cash mountain" of £1500 million. Instead of using it to produce more electrical goods G.E.C. preferred to lend it to banks and the government (some cash was returned to shareholders).
Later on, in 1984, when unemployment was 3,200,000, other companies found themselves in a similar position. The DAILY MAIL (30th Oct. 1984) reported "Companies have never had so much cash", and the FINANCIAL TIMES (10th Nov, 1984) said "Many companies are brimful of cash they can hardly find any use for".

Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do. When the economic conditions improved and there were prospects of making a profit, companies were only too willing to invest.

Borrowing and investing in the production of commodities is weak not because there is a shortage of investment funds but because capitalists do not see a profitable outcome to invest.

During the last depression businesses were estimated to be holding £731.4 billion in cash hoards, the highest level on record. This hoard of money capital (£118 billion) was six times bigger than the total UK business investment for 2011 (What to do with Corporate Cash, Deloitte Press release, 7 February 2012).

One example at the time of the hoarding of money capital by businesses is Rolls Royce. This is what THE ECONOMIST recently saidabout Rolls Royce, one of British capitalisms' most successful companies:

"Like much of corporate Britain, Rolls Royce has been piling up money for a rainy day. At the end of 2010 it had £2.9 billion in cash stashed away. Its net cash (i.e. excluding debt) rose to £1.5 billion last year, equivalent to around 15% of revenues" (19th May, 2011)

Estimates of the money capital hoards varied during the last depression, but the situation was similar in Europe and the US. In the Euro zone countries, the cash hoards were estimated to be almost €2 trillion - most of it held in-term, overnight deposits ("Cash-Hoarding Companies Seem Unable to Splash Out", FINANCIAL TIMES, 1 March 11 2012)

And according to Capita Assets Service (LBC 16th September 2013) the top 300 largest Footsie companies had a "hoard" of some £166b built up over 5 years since the beginning of the trade depression waiting to be invested once economic conditions were favourable again.

More recently The NEW YORK TIMES stated that companies were hoarding trillions of dollars. In an article 'Why are Corporations Hoarding Millions' the financial journalist, Adam Davidson wrote of the current hoarding by corporations:

"General Motors is perhaps the most extreme: It now holds nearly half its value in cash. Apple holds more than a third. These numbers are maddening on their face. If the companies spent their savings, rather than hoarding them, the economy would instantly grow, and we would most likely see more jobs with better pay".

Companies only invest if they see a profitable return and they do not invest to give better pay to their workers. They exploit workers paying them as little as they can get away with.

Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do. When the economic conditions improve and there are prospects of making a profit, companies will be only too willing to invest. This is precisely what some are starting to do again. That is, until the next economic crisis and trade depression.

Learning about Marx

What about Smith's question 'it is hard to think of many places in the world where Marxist economics is practised'. Well he will not find Marx's economics read among the economists in the universities. They exist to teach that capitalism has no rivals, it is the best of all possible worlds and will last forever. He will not find Marx being taught in the secondary sources. Even self-proclaimed Marxists like Richard Wolff advocate reformed capitalism through worker co-operatives not its abolition. David Harvey, for all his laudable lectures on CAPITAL, offers an underconsumption theory of crisis with all its reformist implications.

If Smith really wanted to learn about Marx he could do no worse than read the articles of Marx's economics in SOCIALIST STUDIES or on its web site. Better still, he could read Marx in the original, although he may not like what he finds.

At the end of his lecture Value, Price and profit, Marx concluded that capitalism had nothing for the working class. Capitalism could never be made to work in its interest. The Profit system just existed to exploit them. Marx

“At the same time, and quite apart from the general servitude involved in the wages system, the working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerrilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto: "A fair day's wage for a fair day's work!" they ought to inscribe on their banner the revolutionary watchword: "Abolition of the wages system!"

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