Cooking the Books 1 – Guns before butter, 2 – Blowing bubbles
Guns before butter
‘National security’, admirals, generals and air chief marshals are telling us, is ‘the first duty of any government’. In a sense they are right. The first duty of a government is to ensure security, though not of the population it rules over; it’s the security of its capitalist class, to protect them from being taken over by the armed forces of a rival capitalist state.
To do this, the government has to equip, train and maintain a military force armed with the most up-to-date weapons of individual and mass destruction that it can afford. This has to be paid for out of taxes that ultimately fall on the profits of the capitalist class. As the government’s ’first duty’, such spending takes priority over other government spending, as summed in the saying ‘Guns before butter’.
That was the heading of the editorial in the Times on 19 February. ‘To underpin Europe’s security’, it thundered, ‘Sir Keir Starmer must expand defence spending in a time of economic difficulty. That means taking an axe to the bloated welfare system.’ A week later Starmer announced that the Labour government would increase military spending to 2.5 percent of GDP by 2027 and later to 3 percent. Labour intended to take an axe to the welfare system anyway, so Starmer said that it was ‘overseas aid’ that would be cut to pay for this.
Paul Mason, the former Trotskyist who once wrote a book called PostCapitalism but now works for a thinktank financed by the Ministry of Defence, welcomed this as something he had been calling for. His job requires him to think up reasons why defence spending should be increased and one that he has deployed is that it will stimulate growth. Last July he wrote an article headed Rearm, And The Economy Will Grow (tinyurl.com/mrxezm3j ). His evidence for this was pretty thin:
‘Anecdotally, where defence investment is actually happening it is a major driver of growth. Barrow-in-Furness, according to one senior trade union contact, is starting to boom. The old Debenhams store, which shut down in 2021, is set to reopen as an apprentice training centre; hundreds of apprenticeships a year are being lined up.’
Given the way that GDP is calculated, any increase in government spending will increase GDP but this doesn’t mean that this will lead to growth in the longer term. In another simplistic propaganda piece last July, Defence spending: A waste of money? (tinyurl.com/7p7j7vbe ), Mason attempted to refute the argument that ‘defence spending reduces economic growth’. Since defence spending is paid for from profits and profits are the source of finance for growth in the sense of capital accumulation, it would seem obvious that defence spending tends to reduce growth.
Mason’s counter-argument was that extra defence spending would act as a better ‘fiscal stimulus’ than other forms of government spending but this assumes that the capitalist economy can be stimulated by government spending, as taught by Keynes but refuted in practice. In essence, he is advocating what has been called ‘military Keynesianism’. When he was a Trotskyist he might have called this a ‘permanent arms economy’. Only then he would have opposed it. Now he is advocating it.
Government spending on arms is a drag on capital accumulation but it is a necessary expense, and so not a waste, for capitalism. In that sense capitalism is a permanent arms economy.
Blowing bubbles
In a Communist Party of Britain supplement in the Morning Star (18/19 January) one of its leaders, Alex Gordon, ex-president of the RMT, set out its theory of economic crises:
‘Beyond profits extracted from surplus value, capitalists amass capital via bank credit and stock markets. Fractional reserve banking creates new credit many times the original deposits. Stock markets likewise multiply the value of the original means of production. Marx called this fictitious capital, since it separates from and achieves value far beyond the original productive capital. Fictitious capital feeds the economy and finances debt out of all proportion to the means of production it is based on. When this bubble bursts this is a crisis’.
The first sentence is correct. Capitalist firms acquire additional money-capital to invest in production for profit by borrowing from banks and/or selling new shares on the stock market.
The second sentence is incorrect. Banks can’t lend more than they have as their own capital, deposits and what they themselves borrow, so they cannot — and so do not —artificially inflate credit in the way Gordon suggests. It’s a bit surprising that the Communist Party should have fallen for that old currency crank myth.
The third and fourth sentences are incorrect. Stock markets do not ‘multiply the value of the original means of production’.
The fifth sentence is incorrect. ‘Fictitious capital’ does not ‘feed the economy’ in the sense of providing more money-capital that can be invested in production. If anything, it feeds off the economy.
By ‘fictitious capital’ Marx simply meant what actuaries call ‘capitalisation’, or the conversion of an income stream into a notional capital sum which, if loaned, would yield over a given period of time interest of the same amount.
Shares are a form of fictitious capital calculated from the expected future stream of income coming from the profits made by a capitalist firm and entitle their owners to a share in these profits. They are subsequently traded in their own right independently of the capital originally invested in production, whether to share in the profits or to sell later at a higher price. But, as Marx noted:
‘The independent movement of these ownership titles’ values, not only those of government bonds, but also of shares, strengthens the illusion that they constitute real capital besides the capital or claim to which they may give title …. In so far as the rise or fall in value of these securities is independent of the movement of the real capital that they represent, the wealth of the nation is just as great afterwards as before’ (Capital, vol. 3, ch. 29, Penguin, pp. 598-9).
A recent example is ‘China’s cheap AI chatbox wipes billions off Silicon Valley shares’ (Times, 28 January) where a part of the fictitious capital was wiped out without affecting value of the real capital invested in the corporations’ tangible assets. Conversely, contrary to Gordon’s claim, an increase in share prices is not an increase in real capital (though it may reflect this).
Gordon is offering an essentially financial theory of crises, based on a boom in stock exchange prices (and on banks supposedly creating credit by a stroke of the pen) generating additional money-capital that is invested in expanding productive capacity; eventually too much in relation to paying demand is produced and the bubble bursts.
The stock exchange crash is indeed a consequence of such overproduction. It’s when stock market traders realise that the fictitious capital represented by shares is over-priced due to the future income stream of profits on which it is based becoming less than anticipated. But the question is: what causes the overproduction? Marx looked for the explanation in the ‘movement of real capital’ not in what happens in the world of finance.
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