Friday, October 24, 2008

the decline of stockholding efficacy

The rate of profit has had a falling trend over the past fifty years. This is an alarming feature of capitalist development. I might not have taken this as seriously as I should have since the consequences of a true decline in the rate of profit would be very serious indeed. I'll come back to what these consequences would be. The phenomenon was analysed in The Economist a while ago and they saw it in terms of a transfer of property income from capitalists proper, that is: shareholders, to technocrats, including the celebrated company CEOs. As such it was seen to be not entirely unhealthy; but what would they find unhealthy outside an imminent crisis? I don't want to be overly focused on the history of trends in marxism, but inevitably this phenomenon of falling profits has to be related to Karl Marx's "tendency of the rate of profit to fall". While the theorists of the political movements that held to marxist ideas (basically, Trotskyists) have tended to interpret falling profits as an expression of Marx's "tendency", proponants of revisionist "Sweezy type" marxism, sticking closer to liberal economics, have argued that property income as a whole has in fact risen (as "profit" has been displaced into other income streams, chiefly into income from interest). I think the Sweezyists are probably right about this (but not inevitably and not inevitably for all time). For reference the two things are graphed in Nitzan and Bichler's GPE Israel - figures 2.3 and 2.4. Sweezy was right to point out that the "tendency of the rate of profit to fall" is a political problem for capitalists and as such can be solved by political means, namely: monopolies and corporatism.

In Britain and the US a limited range of corporatist policies came into effect alongside a limited range of welfare state measures, as the organised left gained some limited political influence, as if these represented the mutual liabilities of some sort of social contract. That there is no such social contract is demonstrated by the fact that welfare measures have been rolled back while corporatist legislation has not. Under the heading of "planning laws" they don't seem so bad, but they have a massive influence of the world we live in and consequently over human conduct. To give an example of their effect they completely curtail free trade by preventing the sale of goods in cities except from shops such as those owned by Hammerson and Great Portland etc, so except with heavy leveraging. I'm not interested in condemning these laws, some of them have positive effects, only in asserting their importance.

Now, supposing the rate of profit falls with each passing decade. Investors have a lower and lower putative return on their capital. Housing can be construed as a type of alternative investment, whether rented or mortgaged, insofar as it generates an income stream and has an asset cost. The income stream from housing depends on the tenants (or "owner's") income and can expand up to the difference between actual income and necessary expenses. As the rate of profit falls the notional rate of profit from housing will fall in line with it. In a free market, as investors opt for those assets with the highest rate of return, asset costs will vary to equalise the rate of profit. Since the income stream for a house is more or less fixed the asset price, i.e. the house price will increase as the rate of profit falls in the wider economy. Since getting a mortgage depends on your income, house prices will eventually move outside the mortgage limits (e.g. lending six times income). This will erode the levels of owner occupancy since fewer and fewer workers will be able to afford a mortgage. Secondarily pressure will be put on the corporatist structure of society (look at its implementation today in Brazil, for instance). All of this will fundamentally change the class structure and political structure of society.

As I said I tend to favour Paul Sweezy's revisionist ideas about the actual rate of "surplus", i.e. profit and quasi profit rising. It is alarming though to look at graphs of falling profits and rising house prices and draw the inference. If the logic of the example above held, the current credit crisis would involve the teething problems of the change in ownership of housing stock from the middle class to capitalists or some kind of corporate/government amalgam. This could be glossed as "capitalism against corporatism" but would inevitably carry through corporatism of a different kind, congruent to the new social bases.

1 comment:

catmint said...

...but the rate of profit for a monopoly would decline too, because the value of the concession would increase beyond the replacement value of the capital actually employed - inventories and machinary etc.