A Political Economy of Contemporary Capitalism and its Crisis

Demystifying Finance

Dimitris Sotiropoulos, John Milios, Spyros Lapatsioras

• Publisher: Routledge
• Year: 2013
• Topic: Business
• eBook ISBN:
  9781135037918
• Subtopic: Business General
• Index: Business

The recent financial meltdown and the resulting global recession have rekindled debates regarding the nature of contemporary capitalism.

This book analyses the ongoing financialization of the economy as a development within capitalism, and explores the ways in which it has changed the organization of capitalist power. The authors offer an interpretation of the role of the financial sphere which displays a striking contrast to the majority of contemporary heterodox approaches. Their interpretation stresses the crucial role of financial derivatives in the contemporary organization of capitalist power relations, arguing that the process of financialization is in fact entirely unthinkable in the absence of derivatives.

The book also uses Marx's concepts and some of the arguments developed in the framework of the historic Marxist controversies on economic crises in order to gain an insight into the modern neoliberal form of capitalism and the recent financial crisis. Employing a series of international case studies, this book will be essential reading for all those with an interest in the financial crisis, and all those seeking to comprehend the workings of capitalism.

Part I
The long tradition of finance as a counter-productive activity in heterodox thinking

A Marxian appraisal

1
The parasitic absentee owner in the Keynes–Veblen–Proudhon tradition

1 Introduction

This chapter is an introduction to the main theme of this book. It discusses how the workings of finance are treated within the non-Marxist heterodox tradition of Keynes, Veblen and Proudhon. It returns to the original sources in order to sketch the general outline of their analytical problematic.

The idea of “the absentee owner who appropriates income from the productive industrial community in the form of rent based on the legal condition of private property” summarizes the basic insight that is common to the above-mentioned interventions. This insight is also widely accepted in contemporary discussions of the nature of capitalism that do not explicitly refer to or draw upon the above authors. At the same time, the very same idea can be easily ascribed to the approach of Ricardo. In this sense, Veblen, Keynes and/or Proud-hon can be seen to apply already established arguments in the field of political economy to the analysis of financial development and innovations of the first quarter of the twentieth century.

The argument of this chapter also points out that many of today’s radical ideas, both in theory and politics, may simply be trivial replicas of much older patterns of thinking. It also summarizes the trains of thought, which cannot be considered as particularly Marxian in origin. This will help clarify the analysis of the subsequent chapters of this book.

2 Reloading Ricardo

Not many scholars in the history of economic thought have been proved to be so seductive as David Ricardo. He continued a line of reasoning which was first developed by Adam Smith, based on the labor theory of value (we should mention that the work of Smith was richer and more integrated as theoretical intervention but with more contradictions and ambivalences with regard to the labor content of value).¹ To be brief, the concept of value in its Smithian version of “labor expended” (on the production of a commodity) can be summarized in the following theses.

• Thesis 1: Labor is the only source of value (throughout the history of humankind).²
  The Ricardian interpretation takes labor to be the transhistorical source of social wealth (see Postone 2003: 59). This insight is analytically substantial and has many crucial implications for the organization of the discourse of classical political economy. Value is considered as an organic property of all commodities (a qualitative feature of them), which derives from the fact that they are the products of human labor. This has an immediate outcome:
• Thesis 2: The possessing classes (i.e., capitalists and landowners) appropriate a part of the value produced by the laborer.
  Smith was indeed more explicit than Ricardo about this consequence.³ The incomes of the possessing classes are derived from the value of the totality of commodities produced by the laborers during a certain period of time. This suggestion implies a critique of the capitalist system (a critique that neither Smith nor Ricardo was brave enough to push it to its limits), which focuses on the mode of distribution and appropriation of labor and its products. This is so because both capitalist profit and ground rent have the same social nature: deductions from expended labor to the benefit of an economic agent external to the production process. Like Smith, Ricardo devoted many pages in his writings to analyzing the different distributional economic mechanisms and “laws” that characterize the magnitudes of profit (uniform rate of profit) and rent (absolute or differential rent).⁴ Nevertheless, the social base of both profit and rent remains apparently the same: the expropriation of labor. Neither does the landowner nor the capitalist make any “real” contribution to the production process. If rent is created by a monopoly over a scarce factor of production, then in quite the same manner, profit is created out of the monopolization of the means of production. It turns out that the criteria that distinguish capitalist profit from ground rent are much less evident than is normally believed. In an alternative formulation we can thus remark that:
• Thesis 3: Capitalist profit has the form of an absolute rent expropriating a share of the wealth produced by others.
  Absolute rent is the potential economic outcome of the landowner’s legal proprietorship of the land. In this sense, capitalist profit is indeed a form of absolute rent since it can be seen as the potential economic outcome of the capitalist’s legal proprietorship of means of production. It is quite clear that in this line of reasoning, “the social relations that characterize capitalism are seen as extrinsic to labor itself” (Postone 2003: 58). The power of capitalists emanates from, and is kept in place by, the particular legal structure of the property relations. The core of the capitalist organization of society is the legal institution of private property. In this sense, profit and rent are the results of the income (labor) redistribution that characterizes the era of private property (and every form of it):
• Thesis 4: The essence of profit and ground rent emanates from and is interlinked with the institution of private property.
  To finish our general sketch of the Ricardian problematic,⁵ there still remains a final point. It is rather evident in the above remarks that capital and land have become scarce resources, from the very fact that they bear a price. We have to stress that this category of “scarcity” is different from the neoclassical one. Capital and land are scarce due to the institution of private property, which enables the possessing classes to appropriate as income a part of total social labor. The greater the social strength of these classes, the greater the quantity of expropriated labor, and the greater the scarcity of capital and land. This is a form of scarcity that stems from the conflicting nature of income distribution and from the fact that social relations are conceived as extrinsic to labor. Smith and Ricardo never explicitly refer to this type of scarcity. This is not a natural scarcity but a socially acquired one, regardless of whether capital or land are limited in quantity or subjected to other subjective restraints (willingness to save etc.).⁶ This is our final remark:
• Thesis 5: Rent and profit (itself a particular kind of rent) render the means of production (capital and land) scarce. This is a socially imposed type of scarcity, which results from the conflicting nature of income distribution.

The outline of this section demonstrates, to some extent, the intentions of our analysis in this book. In Ricardo’s intervention it traces patterns of thinking and lines of reasoning, which were to be rediscovered by Veblen and Keynes in the light of the new institutional developments that accompanied capitalism during the Great Depression of 1929. The same outline also sums up an interpretation of capitalism that characterizes many recent radical approaches, such as those of Negri (2010), Hardt (2010) and Zizek (2012) (according to these, contemporary capitalism is marked by a shift from profit to rent). It seems that the Ricardian framework in its most general reading is far more influential in the field of political economy than is usually thought.

3 Veblen and Keynes in the era of common stock finance

3.1 The “cult” of common stocks

What is actually missing from the above Ricardian framework is some explicit reference to the workings of the financial system. Ricardo was actively engaged in the monetary debates of his time regarding the Restriction Act of 1799 on the side of the bullionists (the monetarists of the period).⁷ Nevertheless, his general problematic, as presented above, can be easily detached from his monetarist arguments. It is not at all accidental that the majority of his faithful followers (many of them under the name of neo-Ricardians) explicitly adopted the Keynesian conception of effective demand.⁸ It is not our intention here to get involved in the details of the relevant debates on Ricardo’s thinking. We want, rather, to emphasize that his general problematic fits easily with other heterodox interpretations of finance. In this sense, both Veblen and Keynes were not left untouched by his theoretical seductiveness.

The financial system in the first decades of the nineteenth century was highly developed, especially in Great Britain. It contained a variety of characteristics, financial products and innovations that still dominate contemporary markets. For instance, stock options were not unusual contracts in trades and in fact concentrated a significant part of the financial transactions on the stock exchange; although they “were unenforceable at law, the broker’s pledge – ‘my word is my bond’ − was deemed sufficient” (Chancellor 2000: 97). Indeed, brokers noted that the options trade was so prevalent in 1821 as “to constitute the greater part of the business done in the house.”⁹ The financial markets were powerful and state officials were more or less unwilling to curtail them. In our example, the Committee of the Stock Exchange decided not to ban options trading “after several brokers threatened to establish a rival exchange” (ibid.). Ricardo was certainly aware of these developments. He succeeded in making a real fortune as a famous and respectful financial broker before his early retirement, which allowed him to pursue a second career as an economist and member of Parliament.¹⁰ During the Napoleonic Wars, Ricardo “amassed over half a million pounds” from loan contracting and speculation in the sovereign bond market (Chancellor 2000: 98; Neal 1990: 223–224). He built a delayed theoretical and political carrier upon this professional background, yet he did not focus on the theorizing of financial issues.

Finance found its place at the heart of the discussions of political economy at the start of the twentieth century. This was the era of the so-called big capitalist enterprise, which was associated with a growing interest in corporate common stock trading. Anonymous equity markets emerged in many capitalist centers worldwide. Prior to the twentieth century, US companies relied almost exclusively on bonds and preferred stock for raising capital (Miller 1992: 6; Baskin and Miranti 1997). The new period made clear the difference between shares and bonds as the former turned into a major investment vehicle, especially after the 1920s. This transition to a broader common stock ownership did not pass unnoticed in economic discussions (indeed, it became the main theme in the interventions of Hilferding, Veblen and Keynes). Nevertheless, other aspects of the financial innovation of the same period were left analytically untouched (see Chapter 4).

It was Chandler who coined the term “managerial capitalism” to describe this economic phase (Baskin and Miranti 1997: 167). Some of the data of the New York Stock Exchange (NYSE) highlight this qualitative trend:

the increasing importance of equity is reflected in NYSE statistics: total annual share turnover rose from 159 million in 1900 to 1.1 billion at the height of the 1929 boom; the value of preferred and common stocks under-written amounted to $405 million in 1910 and increased to $9.4 billion in 1929; and Standard and Poor’s Composite Common Stock Index […] zigzagged upward from 6.15 in 1900 to 26.02 in 1929.

(Ibid.)

At the same time, in the developed capitalist world, the labor process underwent a profound transformation. This included: the increasingly widespread application of scientific knowledge in production, the concentration and centralization of capital, the reduction of the specific weight of non-capitalist sectors of the economy (especially in the production of consumer goods), the rise of domestic markets, the growth of big cities, and the numerical expansion of the new lower-middle class. The expansion of capitalist production in all the developed capitalist countries led to a corresponding expansion of foreign trade. All these changes in the labor and production processes were linked to corresponding transformations at the political and ideological level.¹¹

This period was also characterized by the development of financial innovations primarily linked to the stock exchange. As we shall discuss in Chapter 4, developments in the stock exchange were not the only institutional innovation to be experienced by developed capitalist societies; organized derivative transactions were gaining ground but failed to attract theoretical interest, with a few remarkable exceptions. Developments in the stock exchange, combined with the creation of a small number of gigantic industrial enterprises in most industrial sectors (bringing together a large part of the production and in this way acquiring the capacity to function for a greater or smaller period of time as monopolies in the Marxist sense of the term – chiefly artificial monopolies¹²), led to the widespread belief that the high degree of separation of ownership and control in the big corporation had given birth to a brand new social class, the managerial class or the “captains of industry” (to use Carlyle’s famous expression which had become common in that period). The analytical viewpoint that the managerial class comprises a distinct social class still remains a dominant idea in the heterodox discussions.

At the same time, the business world was gradually accepting the idea that developed capitalist economies had entered a new era of limitless prosperity (Chancellor 2000: 191, Hoffman et al. 2007: 57). This “new era” was believed to be solid and based on the ground of new neoclassical economic thinking and related institution building: the business cycle had been effectively tamed by the establishment of the Federal Reserve System in 1913;¹³ a new “scientific” style of corporate management brought improvements in the productivity of the labor process and lowered the levels of inventory stocks;¹⁴ the increase in corporate efficiency and wealth would induce investors to seek profit from these developments by focusing on corporate equities; and new ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of illustrations
• Acknowledgments
• Introduction
• PART I The long tradition of finance as a counter-productive activity in heterodox thinking: a Marxian appraisal
• PART II Financial innovation, money, and capitalist exploitation: a short detour in the history of economic ideas
• PART III Rethinking finance: a Marxian analytical framework
• PART IV The crisis of the Euro area
• Conclusion: a theoretical and political project for the future
• Notes
• References
• Index