polarisation of capital

this talk is somewhat more advanced than my last few it's on Marxist political economy but it's on a topic which is not widely understood within Marxist political economy it's what I call the polarization of capital the talk is going to cover the laws of motion of finance capital what determines the rate of interest and the process of formation of financial crises the context of this work is research that was done way back in 1977 by a study group looking at the conjunction crisis of the British economy at the time it was a group of Marxist economists and activists set up by communist formation and it aimed to fill in a theory of the rate of interest and the origins of the Ron TA class both these things were missing from Standard Marxian economics at the time it was initially an internal report of the organization we belong to and the working group included myself own cultural and Greg Michaelson and some others who I won't mention now since they are no longer active as far as I know a PDF of the original 1997 is available and it's in a form that I typeset from the original hand sorry mechanically typed document I typeset it in in 1993 to make it more readable and it's on academia.edu with the link as shown what does this research link into well among the concepts are the concept of profit of enterprise which is the concept Marx introduces in volume 3 of capital in the paper though not so much within the this short presentation I'm giving it relies on Collette's keys aggregate theory of profit it relies also on the work of the 1950s Marxist Stein --dl who did work on the maturity in stagnation of American capitalism and in particular we drew on his work on the theory of gearing ratios our work also prefigures this stochastic or thermodynamic Marxism or fahren and Mac over which was published about seven years after this was worked out we make explicit conceptual borrowing from thermodynamics or statistical mechanics just as version and Mac overdo and it's an analysis of capitalism as governed by laws of particle motion if you look at the full paper it more or less gives you forces acting on the particles why do we need this in order to have a theory of crises you need a theory of investment and in all the type of theory of investment you need a theory of interest rates and if one wants to understand the history of British capitalism during the 20th century you need to understand why financial policy was so dominated in many circumstances by the ranty a interest particularly in the period between the the two world wars and again it has come to be dominated by their own to your interest in the early 21st century and in order to understand that you have to know how how are on tier class arises in the first place one of the problems is that there is no Marxian theory of the rate of interest there's no marks in theory of the rate of interest in capital in this paper we introduced a theory of the rate of interest and I'll present it here the basic hypothesis we have is that the interest rate is determined by the ratio between the mass of bank deposits and the reserves that these banks have of state money which can be used to meet withdrawals from these deposits and it can be deduced on purely actuarial grounds assuming daily withdrawals are a random variable it's a very simple stochastic theory at the rate of interest well it's a stochastic theory whether it's simple as another matter we start off with the daily bank failure probability function now we know the probability of banks failing is actually quite low it does happen but there is a low probability of it if we look at this diagram we see probability is on the vertical axis along the x axis is the quantity of deposits banks have this variable Q this function Q W is the expected from the the probable level of reserve oh sorry the probable level of withdrawals it shows strictly speaking it is the probability that were withdrawals will exceed W now these are daily withdrawals now if the quantity W is very small it's quite likely that withdrawals will exceed W but as W gets greater the probability that withdrawals will be more than that false lower and lower law and by the time you reach the total number of deposit total deposits q it's practically zero now at any one time a bank only actually has a certain quantity of money that it has available to meet these withdrawals his reserves which I'm showing by M here and the probability to bank will run out of money is given by the area of this curve to the right of M and we know that's going to be small because banks really actually run out of money but they may run short of money without actually failing the last time a bank failed in Britain was about ten years ago when the Northern Rock Bank failed and one day more people were trying to pull money out than the available reserves the bank failed and had to be rescued however before they normally reach that stay they'll start borrowing from other banks to try and meet their obligations if it's forced to borrow to meet its obligations not suffer if northern rock was forced to borrow to meet its obligations it has to take out a loan from another Bank and pay interest on that now if you once you accept that you can calculate the probable cost to a bank of making a loan on the one hand if it makes a loan l1 Hunt has to make pay interest on the deposits which it normally held for that this assuming it's making a loan from ordinary depositors money on the other hand there is the probability that making that loan will cause it to run its reserves down to the point where it has to start borrowing to remain liquid and that that is that the second part is given by this term here where R is the rate of interest it'll have to pay other banks if it has to to borrow from them and therefore we can say that the rate of interest that the bank will charge industrial borrowers which will indicate by our prime must be greater than the rate of interest on deposits plus the rate of interest on borrowings to other banks times the the probability function at that point probability function Q at that point okay now that actually gives us a formula for the rate of interest and we've run simulations of this and we've built models of the catalyst economy which we'd ran through simulation models shortly before the 2008 crisis actually at the 25th anniversary conference or fashion and makeovers book coming out we deduce the rate of interest is determine by the ratio of reserves to deposits now given that the reserves M asked which is stake money is and money this issued outside the private banking system by the state what determines the mass of deposits because given M is the mass of deposits that will give the weighting of the function Q and therefore the probability that the the individual banks will have to borrow from other banks and therefore meet a higher cost for making loans so the next thing is to analyze what governs the growth of deposits in a banking system now the following basic relationships must halt the growth and deposits plus bank profits must be the growth in loans plus the growth of monetary reserves now if we assume that all of banks probe profits are distributed I they're transferred to the accounts of the Ron tears who had the nominal owners of the bank capital and that the total reserves are fixed by the action of the state then the growth in bank deposits is going to be made up of two components the growth in Ron T's deposits and the growth in enterprise deposits ie the growth in deposits by the ranchers who just leave their money in the bank and the growth in deposits by firms now this makes the enterprise deposits the free variable because the growth and Ron tears deposits is just equivalent to the savings of the on tier class but enterprises are more complicated some firms have borrowers and some firms are lenders in what follows will divide them into four categories borrowers and this assumes they are already in debt and of borrowing further once that are in debt but repaying their loans those that have net positive deposits and are building up the deposits and those who have positive deposits but are running them down so those the four possible conditions the enterprises can be in I'm now going to introduce a concept from physics which is called a phase plane diagram phase plane diagrams are technique borrowed from dynamical systems in particular the theory of gas molecules just as follow shown and Mac over did we viewed the set of all enterprises as a gas but we looked at how this gas was distributed in the phase plane and attempted to analyze its dynamics in classical dynamics we normally have a position and a momentum for every particle or a position and the velocity and the axes of our phase plane diagrams will be for example position axis or a momentum axis and what I'm going to do in what follows is develop monetary analogues for position and momentum in order to do this I define the enterprise phase space axes which are I call j & g first i introduce the variable E which is Marx's rate of profit of enterprise now the profit of enterprise is the profit after paying interest its the profit that the firm has after it's paid interest on its loans and cares the capital stock so II will typically be less than the total rate of profit now alpha is the rate of investment as a function of capital stock sorry rate of investment is a portion of capital stock and J which is going to be one of my axes is alpha minus e now that is investment taking away the rate of profit of enterprise so if the rate of profit of enterprise is greater than alpha a firm will have a negative J that is to say it will not be building up debts if on the other hand it is accumulating faster than its rate of a profit of enterprise it has to borrow to meet it so J is a variable which denotes velocity in debt space and the other variable we take fraught is when we take from Stein Ville which is gee the gearing ratio which is affirms the ratio of a firm's debt to its capital stock so here's the enterprise phase plane and the four groups of categories of firms that I mentioned earlier are shown here in quadrant one we have the firm's that are carrying out borrowing now they have firms with a positive J & JS velocity in debt space that means they're building up that and G shows their total current debt this is a standard feature of a phase plane diagram one is velocity one's position quadrant two are firms that are repaying their loans they have positive debt I they're gearing ratios above zero but their J is negative which means they're repaying their loans firms down here have negative G and negative J that is to say they hold their negative gearing ratio means that their deposits with the bank's exceed their borrowing from the banks so these firms are net creditors and they're accumulating deposits firms here are net creditors who are running down their deposits I'm treating enterprises gas molecules in this phase space now something we can deduce is the center of gravity of the entire mass of these gas molecules and the center of gravity is shown as J bar and g / and we assume a positive a probability density function which gives the probability of an enterprise being at position J and G as I said we have done numerical simulations showing the evolution of the enterprise gas in this phase space the original paper gives analytic solutions to the dynamics of the system now what what are the dynamics of the enterprise gas the distribution of the enterprise population across the phase plane is what determines the growth of bank of bank deposits and this is in bushwick and always seen as what determines the growth sorry it determines what is called the money supply in bushwah economics but the term money supply is misleading what it actually shows is the amount of deposits held by the banking system and basically it's determined by how much of the bank population is in quadrant three here I've said quadrant four there that's a mistake that should be three let me just correct that and this distribution tends to be unstable and that's the critical thing from the point of view of understanding how a Ron tier class arises and how financial crises arise there exists a set of positions where the gearing ratio is stable and for enterprises whose gearing ratio is stable we you can show that it are those enterprises with an equilibrium gearing ratio given by I by J over alpha and these actually fall along a straight line here in this face space if firms move too far along here the gearing ratio the equilibrium gearing ratio is above 1 and therefore they would be bankrupt so this is a zone of bankruptcy ones over here on the other hand our equilibrium net creditors and therefore there is a limit set in this quadrant but there's no limit set in in the quadrant number 3 firms can move down into this quadrant as far as they like building up surplus deposits firms which build up surplus debts taking them above gearing ratio 1 become bankrupt because their liabilities exceed their assets and their there they're insolvent in general capitals with a profit rate P greater than the rate of interest will have a positive equilibrium gearing ratio and capital that is to say it pays for them to borrow money to expand because they will make more profit on that than the interest they have to pay capital so the rate of profit below the rate of interest and low initial gearing ratios become net creditors by accumulating bank deposits capital so the rate of interest below rate a profit below are and high gearing ratios move over to bankruptcy the equilibrium point is on the y-axis of the phase diagram which is unstable cattles to the left of the y-axis move down and to the left capitals to the right of it move up and to the right towards bankruptcy simulations show that if you start off with a population of capitals like this it develops into a tadpole shape with a Ron t8 tail growing down into this area but because the total mass of deposits and total mass of sorry the total assets and liabilities of the banking system must balance and since we have the center of gravity given by the external savings of the Ron th class relative to the center of gravity any movement down here must generate an equal and opposite movement in this direction so you get an inherent polarization process because of the conservation laws governing accounting of money in the banking system there is a deep relationship between conservation laws and monetary phenomena in in physics we have conservation laws which determine the dynamical properties of systems and in the financial system the actual practices of the banks and of accounting introduce conservation laws now if the rate of interest Rises what happens is it tends to disperse the forum's along the pseudo Ron TA and Bancroft polarization axis that in term accelerates the growth of bank deposits q this results in further rises in the rate of interest which accentuates the process and precipitate dates a crisis and that's what happened in 2008 incidentally the fact that it hit the Northern Rock first is an interesting property of the law of large numbers the variance of a ran of a sample depends on the size of the sample now the northern rock was in an unusual position in that a large part of its deposits were coming from other banks rather than small depositors now a probability distribution over a small sample will tend to have a larger variance and therefore the Northern Rock was a bank whose Q function had a long tail to the right compared to other banks and it was therefore the one most likely to fail this process of polarization means that given an initial population of capitals with their individuals or firms that population will polarize into volunteers and productive capitals and this is a necessary consequence of the dispersion of profit rates between capitals and the existence of an interest rate it's important not to use the concept of a money supply money is not a supplied commodity it's a system of Records it's an information structure that records the entropy of the enterprise gas in phase space rises in interest rates that are intended to curtail the growth of the money supply have the perverse short-term effect of increasing Q the mass of bank deposits this was very evident in the measures that Geoffrey Howe took in the early 1980s raised interest with the intention of curtailing the growth and money supply but what actually happened is that QE the massive deposits increased so what have we covered we covered a Cana physics type theory of financial crisis the rate of interest and the dynamical motion of firms in a phase space this is a I know this is a relatively complex and sophisticated piece of marks in political economy compared to my previous talks so I expect the number of people who will be interested in it to be smaller but financial crises are a critical factor in the development of capitalism they occur periodically and to understand them you actually need to know the laws of motion of Finance capital not simply the laws of motion of industrial capital thank you

Channel: Paul Cockshott

Views: 2,735

Rating: 4.9384613 out of 5

Keywords: finance, econophysics, marx

Id: tJsHbqdZ6zs

Length: 28min 56sec (1736 seconds)

Published: Tue Feb 27 2018