Cooking the Books: A ‘Factual Point’
Lord Young is an adviser to David Cameron on ‘enterprise’. In a report presented to the Cabinet in May, he wrote:
‘The rise in the number of businesses in recent years shows that a recession can be an excellent time to start a business. Competitors who fall by the wayside enable well-run firms to expand and increase market share. Factors of production such as premises and labour can be cheaper and higher quality, meaning the return on investment can be greater’ (Observer, 11 May).
The TUC was outraged, but a Downing Street spokesman said that Lord Young was merely stating a ‘factual point’. We have to agree. He was merely describing what happens in a slump.
Growth under capitalism is not in a steady upward line but in fits and starts. The overall trend is upwards but through cycles of boom and slump in which booms create the conditions for the succeeding slump and slumps for the next boom.
A slump is a fall in total production due to overproduction, in relation to its market, typically in a key sector of the economy which has a knock-on effect on other sectors. The only way production will start to grow again is if the prospects for making a profit increase and spread. This is a slow process and does involve, among other things, what Lord Young describes.
Like he says, inefficient firms go to the wall. Their customers pass to the more efficient firms that survive so that the sales – and profits – of these firms grow. The assets of the inefficient firms pass cheaply to their rivals too or even to some new firm as Lord Young points out. Cheaper premises and equipment mean that, even with a smaller amount of profit, a higher rate of return can be anticipated. The downward pressure on wages exerted by increased unemployment has the same effect.
Other factors, not mentioned by Lord Young, also help the move to recovery, such as the clearance of unsold stocks and the lower rate of interest due to the supply of money-capital exceeding the demand for it.
Eventually – but there’s no telling how long it might take – all these factors together restore profit prospects and the recovery begins.
In Marxist terms, what happens in a slump is that capital is devalued; this raises the rate of profit since any profits that are made are compared to a smaller amount of capital, the rate of profit – what Lord Young calls the ‘return on investment’ – being the ratio of profits to the value of the capital invested.
In a boom the opposite occurs. The demand for money-capital, premises, equipment, materials and workers increases leading eventually to an increase in their price; this exerts a downward pressure on the rate of profit even though the amount of profit is increasing. Eventually the boom bursts and capital accumulation falls.
Quite apart from overproduction in a boom in one key sector of the economy precipitating a slump, Marx saw slumps as an inevitable part of the process of long-term capitalist growth. Slumps, by eliminating inefficient firms and by devaluing capital, restored the rate of profit which boom conditions had reduced, so allowing capital accumulation to resume.
It’s a continually repeating cycle that has gone on ever since capitalism became the dominant form of production (the first recognised slump was that of 1825) and will continue until capitalism is abolished. That’s another factual point.