Cooking the Books: The rich remained rich (2025)

The Cooking The Books column from the June 2025 issue of the Socialist Standard

‘Why’, the Times asked a few days after Trump announced the imposition of tariffs on imports into the US, ‘are global stock markets in a tailspin?’ Their answer was substantially correct and surprisingly honest:

‘The short answer is President Trump’s tariffs. The longer answer is that global investors are betting that the president’s tariff walls will result in a fall in corporate profits as companies face higher costs and lower demand for their goods. The prospect of falling profits encourages investors to sell their shares because it means companies will not be able to pay as much out in dividends and will be worth less in future’ (8 April).

Shares are, as the word suggests, a share in the ownership of a business and entitle their owner to some of the profits of that business. They can be traded in their own right independently of the activity of the business. The price at which they are bought and sold depends on the anticipated future profits of the business and is mainly arrived at through the expected stream of future profits being expressed as a notional capital sum which, if invested, would bring in the same amount. But this sum only exists as a share of anticipated future wealth which may or may not be realised.

This is where the Times was being honest in talking about ‘betting’ because that’s what trading in shares is partly about. Traders buy shares at a certain price because they calculate that the shares will bring in a bigger dividend or that they can be sold later at a higher price. But there is no guarantee that either will happen, any more than there is a guarantee that a horse you bet on will win. It may but, then again, it may not.

However, the stock exchange is not just a casino. It is also a place where a business can raise new or extra capital to invest by selling new shares. But once these have been issued and bought they can be traded and subject to betting and speculation just like any other shares. If their price goes up that does not of itself mean that the business that issued them has more capital to invest. Similarly, if their price falls, that doesn’t of itself reduce that capital.

The movement of the prices of shares does not affect, either way, the value of the real wealth in which capital has been invested. Obviously it does affect the amount of notional capital attributed to shareholders:

‘The world’s 500 richest people lost a collective $536bn (£417bn) in the first two days of stock market trading after Trump’s “liberation day” announcement last Wednesday. It was the biggest two-day loss of wealth ever recorded by Bloomberg’s billionaires index’ (Guardian, 7 April).

The losses here are calculated from the fall in the price of the huge holdings of shares that Musk, Zuckerberg, Bezos and the others hold in the companies they founded. But it was not a reduction in the capital value of the real wealth they own as the means of production held by their companies. That remained the same. It was a reduction in the size of a notional capital sum based on expected future profits, as traders adjusted their bets on the size of these. To some extent, a reflection of a change of betting odds.

The fall in share prices sparked by Trump’s tariffs did not mean that the value of any of the real underlying wealth the billionaires owned was wiped out, simply that the current market valuation of it was reduced.

Cooking the Books: The ‘overriding financial objective’ (2024)

The Cooking the Books column from the November 2024 issue of the Socialist Standard

‘Pay ruling “threatens Next stores”’ read a headline in the Times (20 September), reporting on an employment tribunal ruling that women workers in the company’s shops should have been paid the same as men working in its warehouses. Next’s chief executive, Lord Wolfson (the son of the founder), was quoted as saying:

‘Whether we open or close stores will depend on the individual store’s profitability. So you would never expect a retailer to open a store that wasn’t planned to make a profit.’

Knowing how capitalism works, we certainly wouldn’t expect that. In fact, we wouldn’t expect a capitalist enterprise like Next to do anything if it didn’t plan to make a profit from it. As Next put it in this year’s half-yearly report to shareholders:

‘The overriding financial objective of the Group remains the same — the delivery of long term, sustainable growth in Earnings Per Share’ (tinyurl.com/44zkry3h).

In other words, to provide shareholders with a growth in the value of their shareholding. ‘Earnings Per Share’ (EPS) is, basically, profits per share, a company’s after-tax profits divided by the number of its shares. To increase this is the ‘overriding financial objective’ not just of Next but of all companies.

A company’s profit is typically the difference between what it receives from sales less what it costs to run the business. In Next’s case, in the first half of this year its sales (and other) revenue was £2,860m and its costs £2,408m, resulting in a before-tax profit of £452m, which is about 16 percent. This is its ‘profit margin’. It means that for every £ of what Next sells they pocket 16p as profit, the rest going to cover their costs (including wages). After-tax income was £341m, the amount used to calculate EPS.

A company increases the value of its shares by increasing its profits. One way this can be done is by reducing the costs of running the business. This is why Next is so dissatisfied with the legal ruling on equal pay; implementing it will increase their costs and so reduce their profits.

Another way is to increase revenue from sales. As companies don’t normally have control over the prices they charge — they are limited by competition to what the market will bear — the main way to do this is to sell more, to ‘grow’. But the aim is not simply to increase revenue. It is, as Next puts in their report, referring to new areas for growth, ‘to maximise profitable growth’ (their emphasis). The increase in sales must outmatch the cost of bringing this about.

However, not all the profits a company makes are re-invested in growing the business. As Next says in its report:

‘Our established businesses generate more cash than we are able to profitably invest in the Group, so managing our capital to ensure high returns, and returning cash that cannot be profitably invested to shareholders, remains a central discipline of the Group.’

In Next’s case, they invest some of this surplus cash in other companies, the income from which adds to their overall profits. Another part is used to buy back some of its shares which besides distributing money to some shareholders also increases EPS (profit per share) by reducing the number of shares in issue, reducing their supply and so other things being equal pushing up the price. Yet another part is paid to shareholders as dividends. Other companies have a different mix. Some pay no dividends and re-invest all their profits in profitable growth, from which shareholders benefit through the value of their shares going up.

Whatever a company decides to do, the aim is maximise the financial benefit to shareholders. This reflects the logic of capitalism of increasing the value of invested capital (though shareholder capitalism is not the only possible framework for this).

Cooking the Books: Uninvestible (2024)

The Cooking the Books column from the May 2024 issue of the Socialist Standard

That was the word used by Chris Weston, the CEO of Thames Water, to describe how the business was regarded by its shareholders in the absence of the water companies’ regulator, Ofwat, allowing an increase in the price charged to customers (Times, 29 March).

It’s an odd word, not to be confused with ‘uninvestable’ (with an a) which refers to some item of value that cannot be invested because it cannot be money-capital. ‘Uninvestible’ (with an i) refers to a project which those with money-capital won’t invest in.

Last year the US Commerce Secretary said that businesses had told her that China had become ‘uninvestible’ because it was too risky due to interference from the government there. In the case of Thames Water it is simply a euphemism for ‘not profitable enough’:

‘Thames Water Plc said its £18.7 billion ($22.7 billion) plan to strengthen its finances won’t get funding from investors unless the regulator changes the rules to allow fatter returns. The UK’s largest water company said delivering on its full business plan, published belatedly on Thursday, rests on getting £2.5 billion additional equity from shareholders for 2025 to 2030. However, it warned that investors can get better returns in UK gilts and investment grade corporate bonds. It called on the Water Services Regulation Authority, Ofwat, to make significant changes to the rate of returns allowed for regulated water companies. (…) Thames Water called for a “material move up in the allowed rate of return” set by Ofwat in its initial guidance’ (Bloomberg).

There is little sympathy from other capitalists for the shareholders (one of which is, ironically, the Chinese sovereign wealth fund). Jacob Rees-Mogg, a capitalist as well as an MP, tweeted:

‘Thames Water ought to be allowed to go bankrupt. It would continue to be run by an administrator, the shareholders would lose their equity but they took too much cash out so deserve no sympathy and the bond holders would face a partial loss. This is capitalism, it won’t affect the water supply.’

Monopolies such as the essential utilities —there can only be one national grid for electricity, gas or water — present capitalism with a problem. If left in private hands, the capitalists who own the distribution system are in a position to hold the rest of the capitalist class to ransom by charging a monopoly price. The way the other capitalists found round this has been either nationalisation, where the state runs the industry keeping prices down, or regulation, where the state imposes a limit on the amount of profit that the privately owned utilities can make.

Historically, the US chose regulation while Britain chose nationalisation until, that is, the Thatcher government in the 1980s switched to regulation. One reason for this switch was to attract outside capital to invest in them, which made the change as much ‘internationalisation’ as privatisation. This part worked, as illustrated by the fact that, besides China, another of the owners of Thames Water is a Canadian pensions fund.

With regulation, the private owners are not in a completely weak position as they can, if they are not allowed to make enough profits, simply walk away, as the owners of Thames Water are threatening to do.

There is a lesson here for the future Labour government whose plan for growth relies on offering private capitalist enterprises an incentive to invest in some project by the state part-financing it. These enterprises, too, will be in a position to put pressure on the government by dubbing some project uninvestible unless they are allowed ‘fat returns’.

Those elusive profits. Economics from a Silk Hat. (1926)

From the March 1926 issue of the Socialist Standard

A few weeks ago the “Daily Herald” published extracts from the “Economist” showing that while wages have suffered substantial reductions during the past three years the average profits of some fifteen hundred companies have been steadily rising. It followed this up with the revolutionary proposal that Mr. Churchill should increase the income tax on the larger bugs.

Such unwonted temerity on the part of “Labour’s only Daily,” could not pass uncastigated by its Liberal tutors; and the following day there appeared in the “Westminster Gazette” a correction of the Rooster’s “fundamental errors” which reduced that lusty bird to silence.

Here is some of the stuff which the “Herald” could not answer, although it can find plenty of space for Mrs. Leonora Eyles' accounts of her hunt for God (who has, it seems, got himself lost), and similar rubbish.

“As to profits’ being something the ‘dividend-makers’ do not get, what does the D.H. think is done with the profits? Even that part which goes to ‘dividend-takers’ is spent on goods which ‘dividend-makers’ receive wages for producing.”

“That proportion of profits which is utilised in restoring plant and machinery similarly goes to pay wages to the workers in the industries concerned.” (“W.G.” 20/1/26),

Lest any irreverent reader feels tempted to explode in ribald laughter, let me solemnly assure him that this statement is made by no less an august personage than the W.G.’s City Editor; and let me further insist upon the necessity of taking him seriously, for the views he expresses are accepted by millions of our fellow-workers even to-day.

The possibility of advancing “arguments” such as those quoted arises from the illusion created by money in the process of circulation. The exchange of objects of utility is obscured by the commodity-nature of these objects. What appears to take place is an exchange of values expressed in the form of money.

Thus our City Editor would have us believe that in parting with the money-form of his profits the dividend-taker parts with the profits themselves ! What he has actually done, however, is merely to change about in them; nor does the similar case of other workers enable them to become the owners of factories, railways, docks, etc.

Let us turn the matter the other way round. The workers spend their wages upon food, clothing, shelter, etc., necessary to enable them to exist and produce wealth. The sale of food, etc., is carried on for profit. In selling goods to the workers the capitalists therefore are simply realising the profits (produced in the factories) in a money form. If we argued as does our City Editor, we should urge that our wages really go to the Capitalists, since they are spent in the manner above stated. Any such argument, however, would not alter the fact that the workers and not the Capitalists consume the impure food, shoddy clothing, and jerry-built structures that wages buy.

The most important point, however, which the Editor ignores, is the fact that in selling their power to labour in return for wages, the workers part with the force which produces all wealth. The wealth produced belongs to the purchaser of labour-power (i.e., the employer) as a matter of course, and he realises both wages and profits in the sale of his goods,

One piece of confusion which is surprising even in a City Editor is the statement that a portion of profits is “utilised for restoring plant”! What about raw material? Has not that also to be “restored”? Apparently the Editor does not grasp the fact that in transforming raw material and machinery, etc., into finished articles, the workers preserve the value of the materials consumed. The restoration, therefore, is made from the return of the original capital and not from profits. The increase of capital from profits is, of course, another matter.

The Editor then tells us that “wastefulness is bad” because it “consumes capital needlessly.” What becomes of his former argument that all expenditure employs labour, whatever its form? His standard of “goodness” or “badness” is, of course, a Capitalist one. If, instead of rioting in luxury, Capitalists invested all their profits in industry, perhaps the W.G. man will explain what would happen to the workers in the luxury trades or, for that matter, in the trades in which the superabundance of capital was invested ?

His closing paragraph, however, is a gem ! After stating that the increase of profit must be the object of all trade and all production he says : “That the margin of profit, at present is not large enough is proved by the existence of unemployment and distress.” Unable to market the wealth produced like water by the workers, the exploiting class have the cool cheek to suggest, through their mouthpieces, the pressmen, that not enough wealth is produced. Could anything give clearer evidence, fellow workers, of the hopelessness of the present system of society from your point of view. Could you ask for a more damning proof of the intellectual bankruptcy of the class which robs you?

Eric Boden

BP’s profits and the pipeline (1971)

From the June 1971 issue of the Socialist Standard

In a full page spread of the Financial Times of 6 April, the British Petroleum Company (BP), gave a summary of the chairman’s statement and accounts for 1970. Among the snippets in large print were these: “Total sales continue to rise but margins eroded” and “considering the problems we had to face, I think we did well in 1970.” The report gave details of the erosions and problems faced by BP, and in so doing of those of the world of capitalism in general. Gross income (sales) had risen from £2,124m. in 1968 up to £2,659m. in 1970, while net income (profits) fallen from £101m. in to £91m. in the same period. The chairman summed up the position neatly:

  The whole of the year has been a struggle to recover additional costs in our selling prices. In the earlier part of 1970 we had rising freight costs; now we have rising taxes and royalties in producing countries stemming from an increase in government take which the oil industry had to concede in the autumn of 1970 to producers in the Gulf and Mediterranean.

It is worth noting that the cost increases ate into profits. Price rises cannot automatically be made to compensate. Oil companies have to compete for markets and dare not let their products become uncompetitive. For once rising costs are not blamed on workers’ wages but on the sections of the capitalist class. “Larger quantities of oil had to be lifted from the Middle East in tankers chartered on a short term basis at greatly increased rates.” When it came to royalties and taxes, those paid to the Middle East, Libya and Nigeria, rose from £210m. in 1966 to £465m. in 1970. This was not all, when taxes in the consumer countries are taken into account £l,359m. was taken from BP. How their shareholders including the British government must fume, knowing that so large a part of their profits are ending up in other hands. However in spite of these “eroded margins” the company raised its capital expenditure to £322m. from £244m. last year. After all, even if their cut comes only to £90m. it is not to be sneezed at.

This all adds up to big business, very big business indeed. In the field of discovering and extracting oil BP lead the industry, to the extent that major rivals get some of their crude oil supplies from them. In the early years of this century they gained concessions to the oil fields of Persia, which are to this day a major producing area. Their discoveries of oil in Alaska recently, may prove equally important. In spite of its name BP is an international company,

 Over 90 percent of the groups trade . . . was carried on overseas and the majority of the crude oil and products was neither imported nor exported from the U.K.

Alaskan oil will, or so BP hope, gain them access to, and a large share of the American market. To this end they have been acquiring facilities such as refineries and distributive outlets. In the process they have had to overcome objections raised by government trust-busters. Now they are faced with more problems, those of transporting their product from the frozen wastes to the markets. Not only must heed be taken of technical factors, but also of costs and the aforementioned 'eroded margins’. Their proposal to build an 800 mile-long, heated pipeline, over frozen tundra to the port of Valdez has met with objections from conservationists. According to the statement ". . . the Valdez line can be built whilst fully meeting the legitimate anxieties of the conservationists”. These include the fact that the line would run over an area subject to earthquakes. From Valdez the oil would be carried by tankers. This has given rise to fears that the West coast of North America would face the consequences of polluted waters and shores as a result of having become a very busy tanker route.

The rush to get the pipeline built, and oil to the customers and a profit realised on the investments, militates against a sane and rational decision being made. Time would be needed to make thorough investigations of conditions and alternative proposals. More than this, sane terms of reference would exclude cost accountancy and commercial rivalry. How can the best decision from an environmental standpoint be taken when such objectivity is impossible under capitalist conditions?

All the arguments, whether or not they are expressed in terms of environmental considerations, must under capitalist conditions produce an answer in terms of profit margins. And we cannot help but suspect that some of the environmentalists’ genuine concern must be to the liking of some of BP’s rivals. After all if it helps to keep a rival commercially handicapped, then the preservation of the flora and fauna of Alaska is worthwhile.

Joe Carter

Cooking the Books: Cash Mountains (2019)

The Cooking the Books column from the June 2019 issue of the Socialist Standard

On the basis of figures released by the Office for National Statistics, the Times (9 April) reported:

  ‘Private companies, excluding financial institutions, have tucked away £173 billion since March 2016, the last full quarter before the referendum, and are sitting on £747 billion of cash, a level not seen before. At 35.3 per cent of GDP, the size of their pile of cash as a proportion of national output is at a historic high (…) In 2017, before the financial crisis, cash balances as a share of GDP were only 25 per cent. In 2000 they had been 20 per cent. They started to climb in 2012.’

This brings out how capitalist firms operate. A firm is an independent unit of capital seeking, through the actions of its top managers, to expand itself by making a profit and re-investing this in more productive capacity and production.

Cash mountains arise when the money profit acquired from selling the product is not immediately re-invested. This happens when the market for the product becomes saturated through overproduction, so that it is no longer profitable to produce them. In the particular case highlighted by the ONS figures, however, the reason seems to have been different.

Since the referendum, which went the wrong way as far as most of them are concerned, firms have been waiting to see what the post-Brexit profit-making conditions are likely to be. But the Brexit negotiations have dragged on and on. Profits are still being made from maintaining production at current levels but, in view of the uncertainty, they are not being re-invested in expanding production. Firms seem to have been marking time and as a result, have accumulated profits as cash.

The Times described this as ‘cash hoarding’ but this is not an entirely accurate description. It is not as if the cash is being stored in some safe. It is used to bring in an income as interest through buying stocks and shares and government bills and bonds, in effect by being lent.

Some critics of the present economic system describe it as a ‘debt-based economy’. This suggests that capitalism is driven by the pursuit of interest. Some have even absurdly suggested that capitalism has been kept going by loans to workers to buy things. Actually, capitalism is based on the pursuit of profits, of which interest is a sub-division. Some firms borrow money to invest in production for profit and, when they make a profit, share a part of this with the banks or other financial institutions that put up the money.

Those who talk of a ‘debt-based economy’ tend to think that banks create the money they lend by a few keyboard strokes. In fact, they can only lend what they have. The present ‘cash mountain’ is a reminder of where some of the what-banks-lend comes from – those who have lent them money either directly, or indirectly via the money market, including from firms that for one reason or another have built up cash mountains from uninvested profit.

Cooking the Books: Fantasy politics (and economics) (2019)

The Cooking the Books column from the December 2019 issue of the Socialist Standard

You can tell it’s election time. The parties are making all sorts of extravagant promises. The Tories are promising to spend an extra £20 billion a year on hospitals, schools and other infrastructure. Labour is promising an extra £55 billion. The Greens are promising £100 billion but, as they have no prospect of being put in a position to honour this, they can promise what they like.

It is not that the physical resources don’t exist to improve hospitals, schools, transport or to do what is needed to combat climate change. They do but, under capitalism, mobilising them has to be paid for, so it’s legitimate to ask where the money will come from.

The Tories say it’s going to come from the government borrowing it. Labour and the Greens say it will come from borrowing and also from increasing direct taxes on the profits of businesses. Neither of these two is suggesting conjuring the money out of thin air – which they might have done given that Richard Murphy, once one of Corbyn’s economic advisers, adheres to so-called ‘modern money theory’ which, in his words, ‘says governments can make money out of thin air’. And the Green Party is on record as wanting the power to create money out of thin air (that they believe the banks possess) to be transferred to a public body that will issue ‘debt-free’ money. The government could, as these theories in effect advocate, simply print the promised amounts of money but, as most people know this would cause roaring inflation, the leaders of these two parties don’t see this as a vote-catcher.

The Tories know well that capitalism runs on profits and that anything that impedes this risks provoking an economic downturn. While Labour and the Greens are saying that most of the extra money will come from borrowing, the Tories say that all of it will.

When a government borrows – and given the amounts involved here, it will have to be from capitalists – the interest payable has to come from taxes. This is not a problem as long as the economy is expanding; if this is the case even an increase in the interest rate won’t cause a problem as the increased revenue from taxes will be enough to cover this without requiring a reduction in other government spending. If, on the other hand, the economy is not expanding, as regularly happens from time to time, interest payments will eat into other spending.

The Tory and Labour spending promises both assume a continuously expanding economy; Labour’s is even supposed to bring this about. When, as proposed, a government spends money on infrastructure there will be some initial economic expansion through construction firms and other contractors having money to extend their business and take on workers. However, there is no guarantee that this will be sustained as the capitalist economy is not driven by government or consumer spending, but by capitalist investment in profitable productive activity. This is not something governments can control as, among many others, the last Labour government discovered.

Because the economy happened to be expanding, Gordon Brown assumed that this would continue indefinitely. He even proclaimed the end of the boom/slump cycle. He was wrong and, when the boom inevitably ended, his and subsequent governments found themselves in financial difficulty and, to protect profits, had to cut back their spending.

Aware of how capitalism works and of past experience of how it has worked, we can confidently predict that neither the Tories nor Labour will be able to honour their election promises. Eventually, for reasons beyond their control, the capitalist economy will stall and they will be forced to renege on them. History will repeat itself.

Battering down all Chinese Walls (1994)

From the October 1994 issue of the Socialist Standard

The last remaining bastions of the doomed "Socialism in One Country" experiment, are finally facing up to the reality of the world capitalist market to which they are, and have always been, inextricably linked.

China’s government has now pretty much given up any pretence that it is operating a non-capitalist economy, with the current slogan "Socialism with a Chinese Face". This involves opening up the economy to international capital while retaining tight control over the apparatus of state repression.

The Chinese have been much bolder in opening up the fenced-off Economic Zones, where multinationals are free to exploit a cowed labour force without the unpleasantness of needing to account for their actions either to an elected government or to a strong union movement — increasingly the case in the other rapidly developing economies of east Asia.

Western multinationals recognise a good business partner when they see one, and the Chinese "Communists" are some of the best around. Nobody on the boards of US constructions companies like Parsons Brinckerhoff or Brown and Root wanted to see Western governments raising awkward questions of human rights on the recent anniversary of the Tiananmen Square massacre, and indeed the Clinton administration was quiet as a mouse on the subject.

The rewards are now being reaped. Between the 28 and 30 August, a US trade mission initialled over $5 billions-worth of new business in China in the key power, automotive and communications sectors.

No wonder that Commerce Secretary Ron Brown, who led the trade mission with the heads of some of America’s biggest corporations, proclaimed himself "exhilarated” by the warmth of his reception from Chinese officials.

And this is a mere taster for the $250 billions-worth of infrastructure projects coming up before the end of the century in China. "We intend to compete in this market and we intend to win", Brown warned his western rivals.

So important are these contracts to the ailing US economy — rivalling in size those in the halcyon days of the Shah's untrammelled spending with US heavy industry — that the "moral”and liberal Bill Clinton has bowed to the inevitable and "delinked" trade and human rights issues.

The key indicator of this was the renewal by his administration of China’s Most Favoured Nation trading status after US corporations argued that the administration's focus on human rights was jeopardising US business interests in China and benefiting competitors in Europe and Asia. US exports to China are growing at four times the rate of exports to the rest of the world, and now provide a living for around 150,000 Americans.

Commerce Secretary Brown says he will resume a “dialogue" on human rights issues this month. The Chinese contemptuously broke them off during a tense visit by Secretary of State Warren Christopher to China earlier this year.

As an interesting footnote, the contracts signed by Brown’s mission include an agreement between TRW in the US, Suman group of Guandong province and Beijing Cable TV Network to supply one million descrambler units for television programmes in Chinese households. We eagerly await the tortured explanations of Chinese state ideologues as to how this actually brings the day of universal access to the means of communications any nearer.

Andy Thomas

Cooking the Books: A Thirst for Profits (2015)

The Cooking the Books Column from the April 2015 issue of the Socialist Standard

A study has confirmed that you can bring a horse to water but you can’t make it drink. Or, rather, its modern equivalent that you can reduce interest rates but you can’t make capitalist firms invest.

The study, published last year by three US business studies academics, found that over the period from 1952 to 2010 there was no consistent relationship between interest rates and corporate investment. Corporate investment did not go up when interest rates were low and did not go down when interest rates were high (LINK).

So, what did influence business investment? ‘It turns out’ said the press release on the study, ‘that healthy profits and stock prices are the strongest predictors of corporate investment.’ To Marxian socialists this is rather obvious: the capitalist economy is driven by the quest for profits; so capitalist firms invest when they consider that their investment will bring them a profitable return; an indication that good profitable investment opportunities exist will be that the economy is growing and that firms are already making good profits. Or, as the press statement reported the lead author saying:

  ‘“What corporations really respond to is what sort of profit outlook they face, and the general environment for growth,” Kothari says, noting that investment also closely correlates with gross domestic product growth. Practically speaking, the results make sense in that companies have more money to invest, more investment opportunities, and more pressure to spend from investors when things are good; all those factors dry up when the economy slows down.’

But there is a downside to this, as the study also found. When the profitable investment outlook is good, capitalist firms act as if this is not going to stop, with the result that they come to invest too much in relation to market demand, so provoking an economic downturn and a consequent fall in profits and profitable investment opportunities:

  ‘The research reveals that corporate executives have their own foibles, including a propensity to over-invest at exactly the worst time in the economic cycle. While profits and stock prices rise before a spike in corporate investment, both decline almost immediately afterward.’

The authors are at a loss to explain this apparently irrational behaviour:

  ‘The main reason for the negative relationship between capital expenditure spikes and business performance, Kothari believes, is a behavioural one: irrational exuberance. “As stocks and profits go up, corporations keep investing,” he says. “But rather than stopping at an appropriate point in time, they go a bit too far. If they had stopped at the right point, it could have been great.”

But is this behaviour – keeping on investing while the prospects for profit-making are good – really irrational? Capitalist firms are all competing against each other for profits. For one firm to stop investing when the profit-making outlook is good would be to risk letting its rivals take a share of its potential market. It is that that would be irrational.

In any event, how could capitalist firms know when to stop investing and, if they did, how could they reach a collective decision to all do this. Given the anarchy of capitalism they can’t do either. Once a capitalist horse has started drinking you can’t stop it.

So They Say: For Ever England (1973)

The So They Say Column from the August 1973 issue of the Socialist Standard

For Ever England

The petrol companies have agreed to stop competing with “free gifts" to customers: no more soup-bowls, Famous Paintings, one-size tights, or the sets of imitation medallions which looked like becoming the successors to cigarette cards.

Texaco’s series of reproduction Army badges is therefore the last of its kind, and it is almost worth the 25p for the album to find a cat let out of the bag in an unexpected place. “Great British Regiments” has an introduction by Lieut.-General Sir Brian Horrocks, and he says:

  In my opinion, however, their greatest contribution to the British Empire which is rarely mentioned has been the protection they have given to our indomitable British merchants who, in search of fresh markets, spread our influence all over the world. For some this has involved spending many years in distant garrisons where their casualties from disease were often far greater than those suffered in active service.

Young collectors may find that enlightening. They should remember it when they are being told the Army is there to defend freedom and combat oppression, and dulce et decorum est pro patria mori.


If Things Don't Alter . . .

Sir Geoffrey Howe, Minister for Consumer Affairs, has been trying to impress with a muscular posture. On the front of the Observer on 24th June, under the headline “Minister’s Warning on Profits”, it was reported that he had

  yesterday warned businessmen that they would be wise to remember that if they were making good profits the Price Commission could compel them to reduce their prices.

The same issue of the Observer shows, elsewhere, plenty of scope for Sir Geoffrey. On page II Weston Pharmaceuticals, who have 197 retail branches, reported that their profits rose from £459,070 in 1972 to £1,872,586 this year. The dividend was 27.3 per cent., and the “earnings” per share went up from 5.6p to to 8.1p. On page 13 Lead Industries Group Ltd. state an increase in profit before tax from £6,585,000 in 1971 to £7,040,000 in 1972, and in gross dividends from 11.5 per cent, to 12.075 per cent.

Both these companies appear to be making “good profits”. Are they alarmed by Sir Geoffrey’s warning? The annual report of Lead Industries Group says:

   There must inevitably be uncertainties as to the effects on profitability of the Governments’ anti-inflation policy and fluctuating currencies, nevertheless the present picture is a cheerful one overall and prospects for the current year look good.

In other words, they are “being wise” — and expect to go on doing well.


. . . they'll Stay as They are.

The strongest uncertainties, in fact, appear to be Sir Geoffrey Howe’s — as to what is going to happen anyway. The report of his speech ends:

  He quoted the view of the National Institute of Economic and Social Research that commodity prices would fall back from their recent high levels . . .  if the national institute was right, he said, ‘we can certainly expect a significant reduction, in the months ahead, in the pace of inflation that has beset us all’.

This recalls the classic headline-question: Did She Fall Or Was She Pushed? What the Minister says, summarized, is that he could try to make prices come down, but if they do it will be of their own accord.

The inability of governments to control the economic working of capitalism could hardly be demonstrated more clearly. While Sir Geoffrey waits for the answer, anyone with £25,000 can try phoning Bevington Lowndes Ltd. (20 lines, 24-hour service) — who, in the Sunday Times the same day, were advertising “the lifelong investment that beats inflation”. That sum will bring you £2,500 a year tax-free, and to heck with the Price Commission.


Into Europe

We recently reproduced an item from The London Property Letter, which tells its subscribers how to play the regulations and exploit the housing situation. Its publishers, Stonehart Publications Ltd., are now launching The European Property Letter, again with Robert Troop of the Sunday Times as editor. The annual subscription is £25.

The introductory leaflet is headed 1975: The Year of the Property Gold-Rush, and begins:

  Over these past months British property companies have taken a quickening interest in Europe. Samuel Properties spent £8,000,000 on an office block in Frankfurt. Abbey Life £7,500,000 on one in Brussels. This is clearly the right moment for UK investors, large and small, to begin exploring the EEC — not simply because Britain has now joined, but because there is bound to be a huge rush of funds into European property and a consequent rise in prices when exchange controls are lifted, somewhere about 1975.

They promise to present:

  Street-by-street profiles of cities and towns where property is still underpriced.
  How to exploit the many investment anomalies that still exist in European backwaters.
  Advice on land: where to buy, what to pay, whether you’re permitted to hold.
  Planning: where it’s easiest to get it and why.

And other good things — for capitalists. Thrilling to be in Europe, is it not?


Meanwhile, back at Mon Repos —

Still in property, The Guardian had something cryptic in its house-market page on 6th July. Stating that mortgage repayments have gone up on average from £19.75 a month at the end of 1970 to £32.74 at the end of 1972, Nicholas Heman wondered how people were finding the money “when wages and salaries have not risen by anything like the same amount". His view was that

   the greater number of first-time purchasers may be explained by the fact that they are now regarded much more favourably by building societies who previously would have been more demanding in their requirements.

Which sounds like saying that building societies lend money to people who cannot afford to repay it with interest. And on 11th July The Guardian reported “the whole chilling picture" given by Shelter Housing Aid Centre, headlined “Shelter Finds Better-Off Have Housing Problems". It said:

   In this situation, people are more willing to commit themselves to higher mortgage payments than they can really afford. SHAC encountered one example of a 37½ per cent rate of interest. One man was paying a £140 a month mortgage on a £200 a month salary . . . “In 1973, a family needs an income of at least £2,500 and savings of £1,000 minimum before house purchase in London becomes a possibility."

There is something wrong with The Guardian’s headline. These people are not “better-off”: they are living in crippling poverty.

Give the Fellow a Break

“What you've got to remember about Prince Philip is that he is in a dead-end job.” — A Pressman in “The World at One”, 11th July.

Robert Barltrop

Must wages come down? (1931)

From the January 1931 issue of the Socialist Standard

A most deadly weapon in the armoury of the politicians who defend the interests of the employing class is the assertion that wages must come down because the present rates of pay are “more than industry will bear.” It is put forward by Liberals and Tories, and has been supported by the expert advisers called in to help the Labour Government. It is accepted by large numbers of workers, and is more than half-believed by the Labour leaders themselves. It is not true.

The Capitalist class are not poor, nor are they becoming poor. The powers of wealth production are not declining, but increasing. The Seventy-second Report of Inland-Revenue (Table 47) tells us that the gross income assessed to income tax (excluding weekly wage-earners) amounted, in the year ended March, 1929, to an estimated total of £2,765,000,000. That figure is the largest amount in any year since the War. It is £41 million more than the highest preceding year, and is £650 million more than the first complete year after the War (1919-1920). Sir Herbert Samuel, in a letter to The Times, published on December 1st, stated, on the authority of Professor A. L. Bowley, that in spite of the so-called depression the total national income in 1930 would probably be £100 millions more than the national income in 1924, the year when the last comprehensive calculation was made by Professor Bowley and Sir Josiah Stamp. This will put 1930 only slightly below 1928 and about on a level with 1927.

The vast surplus wealth of the rich minority, at a time when about two and a quarter million workers are jobless and dependent on unemployment pay or relief, is well illustrated by the huge sums of money seeking investment. The Daily Express on December 11th drew attention to the fact that “bank deposits are very considerably higher than they were this time a year ago. People are hoarding instead of investing. Money is so cheap as to be almost unlendable.” The Financial Times on November 10th gave details of one recent loan after another which had been heavily over-subscribed. A typical example is the London Electric Railway issue. The company wanted to raise about £3,500,000. They received offers totalling nearly £140 millions, or forty times as much as they wanted. It is true that some applicants would apply for more than they expected to receive, but they would do this only because they were aware of the superabundance of money seeking investment. This is nowhere denied. Mr. Snowden, in the House of Commons on October 30th, stated categorically, in reply to a question, “There is no shortage of credit.” The Evening Standard's City Editor (November 25th) estimated that about £1,000 millions had been offered for investment in response to invitations to invest less than a quarter of that amount. This had all happened in the first ten months of 1930, the year of “depression.” In Australia, another “depressed” country, a £28 million Government loan in December was promptly over-subscribed.

What, then, is this “ trade depression ”?

It is a condition which arises normally and inevitably out of Capitalism. It is a crisis of over-production. Millions of the world’s workers are suffering want because the world is glutted with goods which no one will buy. In spite of what was described by the Observer on June 22nd as ”frantic efforts to limit production,” the competing combines which struggle for control of production are faced with bursting grain elevators, overflowing oil tanks, over-stocked warehouses, and shops filled with unsaleable goods. Ships lie idle, farmers are burning wheat in Manitoba, and South America is convulsed with political upheavals owing to the suffering caused by vast quantities of unsaleable coffee, grain, nitrates, etc.

The owners of industry have allowed the workers they employ to produce more food, more fuel, more ships, more raw material, more machinery and more of everything than they can sell. Not that there are no people in need—far from it. Three-quarters of the population have never known the pleasure of satisfying their modest desires to the full. It has been estimated by American Trade Unions that this winter will see one-sixth of the men, women and children of the U.S.A. on the verge of starvation. Contrast that with the American Standard Oil Companies’ estimated record profit in 1930 of £57 millions.

Those who are in need lack money to buy. Those who have surplus money have no more needs left unsatisfied. That is the key to the depression. That is why prices are forced down and workers are thrown out of work by the hundred thousand. There they will stay until the accumulations of goods are slowly disposed of. Then the anarchic system of producing faster than the market can absorb will begin again.

Lower wages will not remedy this evil. Lower wages aggravate it. With less money to spend, the working class buy less than before of the goods offered for sale. The employers increase their incomes as a result of the reduced wages bill, but much of the increase merely goes to swell the fund of money which is surplus to their requirements. They seek to invest it, but find fields for investment limited. Nobody will extend plant and factories at a time when the existing ones are shut down because the owners cannot find buyers for their goods.

Since 1921 the total annual wages of the workers have been reduced by over £550 million. That has not solved the unemployment problem. It has merely served to make the rich richer than before.

There is, then, no economic necessity for lower wages, but is it possible in the existing situation for the workers to resist demands made by the employers for wage reductions?

Let us first make clear what wages are. The owners of the means of production (the land, factories, and so on) are the owners of all the wealth which the workers produce. They give to the workers wages which cover their cost of living. Nevertheless, there is, for most workers, a margin between the standard of living and the cost of providing the bare physical necessities of life. The  employers seek constantly to reduce the level of wages in keeping with any fall in the cost of living, and to press wages down still further towards the bare physical minimum. If there were no resistance, they would do this. The workers’ economic organisations, their Unions, can be centres of resistance. They may, as happened in Germany only a month or two ago, play the humiliating role of inviting wage reductions. On the other hand, they may put up a stiff resistance. If they do this, the employers will pause and count the cost before embarking on an attempt to force acceptance of their terms. It is true that the employers have behind them their wealth and the forces of the State to starve the workers into submission, but it is also true under certain conditions that they will hesitate to launch out on this costly and provocative course. It is admitted that increases of wages give the employers added inducement to employ more labour-saving machinery. But here, again, it is worth noticing that the vast accumulations of capital which to-day are sunk in plant and machinery make a factory re-organisation scheme more expensive than it was when the amounts of capital so invested were less.

The first essential is that the workers should clear their minds of the employers’ propaganda which harps continually on the so-called depression. The Capitalist class as a whole are not depressed. They are richer than they have ever been.

Ever since 1920 we have had it drummed into our ears that industry is depressed. But the Economist newspaper’s index of the rate of dividend on ordinary shares shows a remarkable stability at about 10 per cent. The average rate in 1919 was 10.7 per cent. Since then it has never risen above 11.1 per cent, or fallen below 8.4 per cent. In 1929 it was 10.5 per cent., in spite of falling prices. We have been solemnly warned that the unfortunate Capitalists were living on their capital. But Sir Josiah Stamp (Times, November 20th, 1930) estimates the total national wealth in 1928 as being over £18,000 millions, as compared with only £14,310 millions in 1914. He has deducted from his 1928 figure the National Debt of £6,400 millions,: the gross total being £24,445 millions.

Again, the workers must not be deceived by the specious argument that if they refuse to accept lower wages they will lose their employment altogether. If the Capitalist class have need to preserve any industry or branch of industry which is in financial difficulties, they will themselves find excuses for protecting it with tariffs or for giving it subsidies. They will keep it on its feet, whatever the level of wages. Thus we see the Capitalist class prepared to give State grants to air service companies and (in Australia) to gold-mining companies. In 1926 we saw the Conservative Government heavily subsidise the mines. And we have seen the inland telegraphs maintained permanently at a big annual loss because the Capitalist class have need of that service. Millions of pounds were paid as subsidies to overseas cable companies.

On the other hand, if the Capitalist class have no need to maintain a particular branch of industry, they will let it close down in spite of lower wages. Where combination is far advanced, it is now quite common for the federated employers to buy out particular units simply in order to close them down. “National Shipbuilders’ Security, Ltd.,” is a company formed for the express purpose of buying and dismantling redundant shipyards on behalf of the shipbuilders in general.

The arguments referred to. above are used by the employers to make their wage reduction policy easier of attainment. The arguments need only to be examined for their purpose to be understood.

But something more is required of the workers. Even the most effective action on the economic field, i.e., that action which is based on an appreciation of the common interests of the workers as a class, cannot solve the fundamental problem. Only Socialism can do that.

And if the workers would turn their attention to Socialism, the whole form of the struggle with the employing class would change. So far, despite heroic fights by Trade Unionists against wage reductions, the employing class have never had reason to fear that the working class were turning away from their belief in the Capitalist system. But when a considerable body of workers learn the lesson that no reformist policy or party is of any use, and begin to understand and support the demand for Socialism, we can confidently anticipate a less aggressive and less cheese-paring attitude on the part of employers. They will, when that time comes, be anxious to surrender part of their wealth in the hope that by so doing they may stave off the day when they must yield it all. We shall then be well on the way to the acquisition by society of the means of wealth production now privately owned by a privileged class.

Edgar Hardcastle

Cooking the Books: Cash Mountains - Why? (2012)

The Cooking the Books column from the April 2012 issue of the Socialist Standard

In his City column in the London Evening Standard (21 February) Anthony Hilton commented on the fact that at the moment “firms are awash with cash”:

“It is certainly highly unusual for companies to be in such surplus. Over the past half-century in both Britain and America, companies have shown themselves far more likely to be borrowers than savers. It is different now because they are behaving differently. Companies are sitting on mountains of cash because they have decided no longer to invest it. The ratio of investment in GDP in the developed world is about the lowest it has been for 60 years. What we now see – in Britain and the Unites States in particular – are corporates running themselves for cash rather than growth.”

This is indeed how many capitalist corporations are behaving at the moment, but the way Hilton puts it makes it seem that this is a deliberate change of policy objective on the part of those in charge of them: in the past they aimed at growth by re-investing the profits they made; now they have decided to use them to build up their cash reserves instead.

But why? This doesn’t make sense in terms of capitalism as a system where capital is accumulated out of profit and then reinvested in production, (i.e. growth), and where those who Marx said “personified capital” (today the top executives of capitalist corporations more than the individual capitalists of his day) are “merely a cog” in a social mechanism which obliges them to “keep extending his capital, so as to preserve it, and he can only extend it by means of progressive accumulation” (Capital, Vol 1, ch. 24, section 3).

Hilton’s explanation is that a target for building up profits that are not necessarily re-invested is attained more easily and quickly than a target for growing the size of the business; so top executives prefer to set such targets as easier for them to achieve and so claim their bonuses. “The bonus culture,” he says, “is destroying the system. The focus on the short term has led to a calamitous fall in investment which has unbalanced the entire national economy.” In short, it has even caused the present crisis.

The present crisis has been caused by a lack of investment; in fact, that’s what it is, a fall in investment which has had knock-on effects, on consumer demand and government debt as well as on output and employment. So Hilton is not entirely wrong when he writes:

“Conventional wisdom holds that the mess we’re in is the result of governments spending too much. But it could also be thought of as the consequences of firms spending too little.”

This, in fact, is how it should be thought of. The present slump has been caused, and is continuing, because of the reluctance of companies to re-invest any profits they are still making to expand production. But not for the reason Hilton suggests. It’s not because companies have decided to deliberately build up their cash reserves. It’s because they have calculated that they won’t make any or enough profit if they do invest. So they don’t, and as a result their cash reserves build up. Hilton has got it the wrong way round.

Cooking the Books: It isn’t over till it’s over (2009)

The Cooking the Books column from the October 2009 issue of the Socialist Standard

When the latest figures for business investment were published at the end of August, pro-capitalist commentators were shocked:

“From April to June businesses spent £29.9 billion on investments, from new computers to vehicles, down 18.4 per cent on last year – the biggest annual drop since records began in 1967. Against the first quarter of the year, investment tumbled 10.4 per cent from £33.3 billion – the steepest quarterly decline in 24 years” (London Times, 28 August).

Times journalist Ian King commented:

“Normally sober economists, such as Michael Saunders of Citi, reached for the history books as they pointed out that, in terms of total investment, the annual decline this year is likely to be about 18 per cent – the biggest fall, outside wartime, for more than a century. Judging from these numbers, businesses are simply not spending enough to haul the UK out of recession”.

Even though it only amounts to between 10 and 14 percent of GDP business investment – essentially what businesses spend, except on wages and land, on renewing production – is what drives the capitalist economy. It is an increase in this, resulting from the reinvestment of profits not just in maintaining but in expanding production, that results in an increase in GDP.

Business investment falls either because profits are down (so businesses don’t have the money to spend) or because they are not prepared to reinvest all of them as they don’t see themselves making a profit from doing so. Both these factors will have contributed to the current fall.

Marx analysed capitalism as a system of capital accumulation where the amount of capital invested increased over time through profits made out of past production being invested as new capital. However, this was not a smooth process but one that proceeded in fits and starts due to fluctuations in business investment.

GDP does not measure capital accumulation directly, but it is the source of income from which new capital is accumulated. In any country where there is no longer any subsistence farming, GDP can only go up if there has been some capital accumulation. If GDP falls this is a sign that capital accumulation has faltered.

The official definition of a recession is a fall in GDP for two consecutive quarters. The initial fall will be the result of a fall in business investment but, as business investment is only about 10 percent of GDP, a relatively big drop in this will be reflected only as a small fall in GDP. Thus a fall of 10 percent in business investment will reflect itself as a fall of only 1 percent of GDP. (In fact it will be larger as businesses will also be reducing their outlay on wages, another component of GDP).

When quarterly GDP increases again (as it will) politicians and the media will proclaim the end of the recession. But this will only mean that the bottom has been reached, not that it is over. It won’t really be over until business investment and GDP reach the levels they were at before the recession began. As GDP has fallen 5.7 percent since the recession began this will be many quarters later.

At the moment the big argument amongst economists and business analysts is what shape the whole episode will turn out to have. The optimists are hoping that it will be V-shaped (i.e. a fairly rapid return to pre-recession levels). Others see it as being more like a tick (i.e. a slower recovery). The pessimists see it like a W (i.e. a double dip, a initial small recovery followed by second fall).

Cooking the Books: Abnormal behaviour (2006)

The Cooking the Books column from the November 2006 issue of the Socialist Standard

The Bank of France is worried. Capitalist enterprises, it seems, are not behaving normally.

In an article entitled "Is the investment behaviour of enterprises 'normal'" in the August issue of its Bulletin , the Bank notes that enterprises in the G7 countries (US, Japan, Germany, Britain, France, Italy and Canada) are registering "very strong profitability" and that "as a percentage of GDP enterprise profits are at their highest level for decades", but that an unusually high proportion of these profits are not being reinvested in production. Some (most in fact) are of course but what is not normal, according to the Bank, is that in 2005 the enterprise sector of the economy was a net lender to other sectors, which is "disconcerting as one would normally expect enterprises to be in general net borrowers" (i.e., to be borrowing money to invest in production), adding "in fact this has always been the case up till now" and that "it is particularly surprising to note that investment is not more dynamic when long-term real rates of interest are at their historical lowest level".

Two questions arise. If they are not investing enough, what are enterprises doing with the extra profits? And, more fundamentally, why are they not investing them?

The Bank identifies a number of ways in which enterprises are using the profits that they are not investing. First, holding them as liquid assets (placed on financial markets in forms that can be readily be converted into cash): "liquid assets represent 9 percent of their total assets, a level that is difficult to explain by any historical precedent or traditional economic approach". Second, distributing them to shareholders. Third, spending them on taking over other enterprises.

As to why, the Bank offers two scenarios. In the "optimistic" one, the current underaccumulation of physical assets is seen as the other side of the coin to the overaccumulation that took place in the 1990s; in other words, as one phase of the capitalist business cycle; sooner or later the profit hoards will disappear as they are absorbed by rising wages and interest rates when the cycle moves on to its next phase.

In the "less optimistic" scenario, the unusually high level of uninvested profits is seen as the result of investment in physical assets being more risky than placing the money on financial markets. The Bank lists three reasons as to why investment is currently regarded as being too risky: geopolitical uncertainties, anticipated inevitable exchange rate adjustments, and the threat of protectionism.

At the moment, the Bank says, this can only be conjecture, but:

"A situation where the risk premiums of physical assets are very different from those of financial assets cannot go on for ever. In the long term financial assets only reflect an underlying 'real' economic reality. These two categories of risk premium can in time only converge".

The Bank says that it is "of the greatest importance for the world economy that this process [of convergence] should take place in an orderly manner" (i.e., without a financial crash and its consequences), but doesn't seem too optimistic that it will. It might of course. We shall see. In any event, what sort of economic system is it in which it is normal to have to rely on whether or not a big enough profit can be made to get things produced?