Cultural Analysis in an Age of Globalization

Benjamin Lee

• Publisher: Simon & Schuster
• Year: 2014
• ISBN:
  9781476774954
• Topic: Literatur
• Subtopic: Literarische Essays

Cultural Analysis in an Age of Globalization draws upon contemporary work in anthropology, philosophy, linguistics, and literary theory to analyze the rise of "speculative capital" and its role in a global shift from production-centered to circulation-centered capitalism.

Lecture Four: The Risks of Circulation

Overview

In the last lecture, we examined how the notion of performativity can help us understand Marx's analysis of capitalism as a dynamic social totality based on the production of value and surplus value. In classic Marxist accounts, the commodification of labor creates a dialectic of temporality and meta-temporality, between concrete labor and abstract labor time, which possesses an intrinsic dynamic of self-valorization and self-expansion. This directional dynamic expresses itself as a drive for totalization, a striving to subsume and minimize indigenous forms of kinship and community relations and to encompass other societies to transform them in its own image. The result is that modern capitalism has created a form of objectification founded on abstract sociality in which social forms (such as financial instruments) mask the underlying character of their sociality as a condition of their production for circulation.

However, as Marx argued, capitalism is also a thoroughly historical phenomenon. Toward the final quarter of the twentieth century, the global expansion of state-based production-centered capital entered a new era characterized by the emergence and growing autonomy of circulation. The major capitalist powers deregulated the global currency markets, in the process privatizing risk and setting the stage for the explosive growth of globalized financial instruments. The internal dynamic of capitalism which compels it to drive towards higher and more globally encompassing levels of production has created such progressively ascending levels of complexity that connectivity itself is becoming the significant structuring value; this has led to the emergence of circulation as a quasi-autonomous sphere now endowed with its own emerging interpretative culture and socially mediating forms. These global cultures of circulation are based upon, and give rise to, an increasing inventory of new forms of objectification (epitomized by financial derivatives) and new forms of sociality mediated by risk. This circulatory system fractures production-centered capitalism, setting in motion a new process in which circulation is now its animating force. This process of creative destruction also necessarily fractures or disassembles the dual performative subject of capitalism. The process localizes and compresses the deep performative subject of capitalism constituted by value (abstract labor time) even as it erodes the fetishized surface forms of the nationally regulated market, the citizen-state, and the public sphere. From this perspective, globalization, postmodernism, postcolonial, etc. are the names given to the surface expressions of the realignment of the relationship between the character of objectification and that of the performative subject under what we call ‘circulation-centered’ capitalism.

Even though Marx did not explicitly discuss what have today become known as ‘derivatives’ (commodity futures were already in use when he wrote Capital), his account makes clear the difference between his production-centered account of circulation, and the circulation based capitalism underlying the contemporary globalization of financial capital. For Marx, commodities have value because they are the products of labor. Things that may be the source of wealth in that they can be bought and sold for a profit may not have value because they do not involve productive labor. These include rent, interest, and various forms of financial capital. Derivatives, which are financial instruments whose ‘value’ is derived from some underlying asset, would be ‘valueless’ from the standpoint of a labor theory of value. Yet it is precisely these new forms of finance capital that are creating a new, globalized culture of circulation that is replacing production-centered cultures of circulation as the leading edge of capitalism. The rise of what might be called ‘circulation-centered’ capitalism involves a new objectification, that of the pricing of risk, which, not unlike labor, has both its ‘concrete’ (the directional risks associated with a particular asset) and ‘abstract’ (volatility) dimensions.

While the underlying asset can be almost anything that could be bought and sold in quantifiable units, the common examples of common derivatives are commodity futures, stock options, and currency swaps. A future is a promise to buy or sell an asset at some determined price at some specific time-point in the foreseeable future. To take a well-known example, a farmer who decides to hedge against a possible decline in the price of his crops at harvest, could prospectively agree to sell them at a fixed price at some future time-point. The farmer is thus willing to forgo the prospects of higher prices and hence higher profits in the future in exchange for a certain reduction in the risk of there being lower prices (especially prices lower than the costs of production that would thereby imperil the process of reproduction). While the farmer is hedging his risks and thus guaranteeing a rate of profit, the counterparty to the trade is speculating that the price of the commodity will be higher at the expiration date. One side of the same trade may be the soul of prudence, the other a purely speculative wager.

Options differ from futures in that they afford the options buyer the right, but not the obligation, to buy or sell some underlying asset at a fixed price at a future date. For example, someone might purchase an option on a stock, such as IBM or even a firm that specializes in derivatives trading. This kind of option, referred to as a call, might give the buyer the right to purchase one hundred shares of the stock at a price of $50 per share anytime over the next six months. The price of the option on that stock is $5 per share or $500 for the contract on one hundred shares. If at the end of six months the price of IBM has risen to $60/share, the options buyer could exercise his right to buy 100 shares at $50, thereby garnering a profit of $5/share or $500 ($60×100-$50×100-$5×100). Ignoring transaction costs, the original $500 investment in buying the options would yield a profit of $500 and a rate of return of 100. If, alternatively, the buyer had instead purchased 100 shares of IBM at $50 and then sold them at $60/share, he would have made $1000 on his original $5000 investment, for a rate of return of 20. The difference in rates of return represents the leverage that the option provides. The pricing of an option turns out to depend on the riskiness or volatility of the underlying stock in question.

While the effects of the rise of a circulation centered speculative capitalism are seen in public fiascos such as the collapse of Enron or currency devaluations in Argentina, Thailand, and Turkey, the explosive development of derivatives has its origins in what seems to be almost the opposite concern: risk management. Classic economic accounts have always placed primacy on production. Commercial and credit capital are seen as enabling the production and circulation of commodities, but the prime engine is manufacturing with its long term outlook and planning. The main purpose of derivative instruments such as commodity futures was to hedge against the risks of weather and delivery problems; speculation seemed parasitic on ‘real’ production, and thus publicly derided as immoral and dangerous. The focus on production and the long term form the backdrop for Marx's concerns about labor; he viewed his labor theory of value as having solved a problem that had bedeviled classical economists such as Adam Smith and David Ricardo. The result is that commercial and credit capital helped to distribute value but themselves were valueless. At the same time, Marx replaced Smith's benevolent hidden hand with a theory of crisis; capitalism was doomed to cycles of creative destruction.

Yet it is from the realms of valueless capitals that a circulation-centered capitalism would arise. Marx's account of production-centered capitalism depended on the commodification and objectification of production's key component: labor power. The rise of a circulation-centered capitalism would take another century, but it ultimately rests on a similar commodification and objectification, only it would be of risk. Its evolution would depend on the confluence of two historical developments. The first was the creation of liquid markets for derivative instruments and a concomitant ability to price or commoditize risk. The second was a global increase in risk and uncertainty that made risk management a key concern. Although economists at first focused on the role of derivatives in hedging risk, it soon became apparent that it was their speculative potential that would provide the impetus for their explosive development. Cash settlement, clearing houses, and liquid markets (both institutional and over the counter) provided the institutional underpinnings for their development, but derivatives also filled a temporal gap in the long term orientation of production-centered capitalism.

Since derivatives were financial instruments that expired before their underlying assets, their temporal orientation faced the opposite direction from that of the underlying asset. Instead of the long term, derivatives pointed to the short term, with the instantaneous riskless profit of arbitrage as its goal. The result is the contemporary mix of production-centered and circulation-centered capitalism, and a realignment of the global capitalist system along these lines. China has become the center of a global production-centered capitalism, but plays a relatively minor role in its circulation-and speculation-centered counterpart. The United States and its G-7partners are increasingly the centers for a speculative, circulation-centered capitalism, even as they downsize and outsource production. The rest of the world is squeezed between these two trajectories, with local manufacturing competing with cheaper labor markets in China, even while their currencies are buffeted by derivative-using speculators.

If there is any date that this new financial order might be said to begin to come into being, it would probably be 1973. It was the end of Bretton Woods and the gold standard, allowing currencies to float; the Gulf oil crisis that signaled the end of the Fordist period of the U. S. economy; the creation of the Chicago options exchange, the first institutionalized market in the United States specializing in options trading; and the discovery (invention) of the Black-Scholes equations to price options and other derivatives. Before 1980, derivatives trading probably did not exceed a few hundred million dollars annually; from 1983to 1998, daily trading in currency markets grew from 200million to 1. 5trillion, with 98of the 1998figure intended for speculation and the growth in great part due to the use of complicated currency derivatives. Trading in derivatives grew 215per year from 1987to 1997, and by the time of the Asian market crash in 1997, the annual notional value of traded derivatives was over 100trillion dollars or over three times the world's GDP.

What does this explosive development indicate? The geometrically accelerating use of derivatives reflects the rise of what has been called ‘speculative capital’, which is now in competition with the more traditional forms of manufacturing, commercial, and credit capital. Derivatives are financial instruments that derive their monetary value from some underlying asset such as stocks, bonds, currencies or commodities. Some are relatively familiar, such as stock options; others are considerably more esoteric, such as swaps and strips. Some, such as commodity futures, seem to be have been mentioned by Aristotle; options were behind the Dutch tulip mania. When derivatives are used to hedge risk they are a form of insurance. For example, a homeowner might buy insurance in order to protect or ‘hedge’ against some risk, such as a fire. Similarly, a farmer might set up a commodity future by agreeing to sell his crop to some trader at some fixed price and date in the future, thereby protecting himself against price fluctuations caused by weather conditions. The insurance company and trader are speculating against the homeowner and the farmer. The former bets that the actual payout will be higher than the collected premiums (or less than what he can earn by investing the premiums); the latter speculates that the actual crop price at the time of delivery will be higher than the agreed-upon price, allowing him to turn a profit. Hedging and speculation appear as mirror images of one another.

The development of derivatives intersects with what has become a mantra for speculators: arbitrage. In its broadest terms, arbitrage is simply buying low in one market and selling high in another; at this level, it is synonymous with turning a profit. From the standpoint of production-centered capitalism, the capitalist purchases the means of production, raw materials and labor power, uses them to produce commodities that he later sells for a profit. This requires both long term planning and the coordination of manufacturing, commercial, and credit capitals to minimize the risks engendered by both production and circulation. The key to the present fascination with arbitrage and the rise of speculative capital is the possibility of reducing risk via short-term speculation, thus creating the capitalist dream: riskless profit.

The idea of a riskless profit comes from reducing the temporal exposure to risk. If one could discover pricing discrepancies across markets and simultaneously buy low and sell high, there would the possibility of a simultaneous riskless arbitrage. If the yen sells at 100/dollar in Tokyo and 110/dollar in New York, and a trader could buy yen in New York at the same time he sold yen in Tokyo, he could make a riskless profit. The fall of Bretton Woods created foreign exchange risks for companies dealing in international manufacturing and trade. This necessitated the development of currency derivatives and led to the simultaneous expansion of both currency hedging and speculation. Riskless arbitrage became the goal for the speculator who would try to take advantage of differences in exchange rates across the various currency markets. For example, IBM might need 900,000,000 in yen six months in the future. It might arrange with a bank such as J.P. Morgan a currency future with a fixed rate of 90yen/dollar in six months, thereby fixing its future dollar exposure at the $10,000, 000 it pays J.P. Morgan. J. P. Morgan might want to hedge its exposure and sell a future; if it could find a counterparty and set the future at a rate of 100yen/dollar at six months'time, then it could fulfill its obligation to IBM, and pocket a riskless profit of 1,000,000 dollars.

Of course, such speculation depends on discovering arbitrage opportunities. Since these pricing differences tend to be relatively small and quickly close as soon as they are discovered, arbitrage tends to involve the use of leverage to make the investments worthwhile. As the economist and trader Nasser Saber points out, speculative capital is ‘refined, mature speculation...pushed to its limit’ (Saber, 1999, 74). Since the acts of buying and selling are simultaneous and arbitrageable differences are fleeting, speculative capital has to be mobile, nomadic, short-term, and flexible. In its very nature it is the antithesis of the long-term capital strategies associated with production-centered capitalism. Derivatives become the financial instrument par excellence for speculative capital. They satisfy the needs of both hedgers and speculators; the leverage built into their very structure allows them to take advantage of small abitrageable differences with less capital outlay; by coordinating different financial flows in a variety of time frames they can be custom crafted to meet the flexible, short-term demands of speculation. Their second order status means that the principal or underlying asset is not exchanged and such transactions thus remain off the balance sheet, which is why they are so extensively used to hide losses as in the case of Enron.

Speculative capital emerges from existing forms of capital, first as its surplus and then as its competitor. Since it facilitates the availability and pricing of derivative and is thus instrumental in creating a market for corporate hedging, speculative capital appears to be an indispensable aspect of contemporary finance. More significantly, although capital used speculatively has long existed, its embodiment in derivatives leads to a qualitative change in its basic character. To understand how this qualitative change might come about, it is necessary to contrast forms of capital.

In a capitalist economy, the manifestations of capital have three principal surface forms. They correspond to the various dimensions of the production process, each contributing to capital's primary objective of increasing the rate of return. For most of the history of capitalism, the central figure in the production process was industrial or manufacturing capital. This refers, of course, to the monies spent on plant, equipment, and people to increase productivity and thus the rate of return. So, for example, a manufacturer of cellular phones plows its capital into new factories and machines in the hope that it can successfully distribute and profitably sell enough phones to generate a positive return on capital. But manufacturing cannot by itself generate a return on capital. This requires the labor and intervention of some ensemble of wholesalers, distributors, and retail merchants in order to ‘move’ the product. The capital they use to finance their operations is commercial in the sense that its goal is to interconnect supply with demand. Commercial capital depends on its industrial cousin, for it siphons off a portion of the surplus value embodied in a commodity at the time of production in exchange for allowing manufacturing capital to turn over and hence expand. Moreover, due to a division of labor in which wholesalers, distributors, and retailers are understandably more efficient at their respective tasks than manufacturers, the use of commercial capital permits its industrial counterpart to turn over more rapidly, thereby increasing its rate of return. To continue the example, a cellular phone manufacturer (such as Motorola) will use distributors (such as Arrow Electronics and Avnet) to supply retail outlets (such as Radioshack).

The use of capital in another capacity, as credit, adds further efficiencies to the objective of augmenting the rate of return. Credit capital functions as leverage to industrial and commercial capital, providing them the means of increasing their productivity and profits. So long as the manufacturer can successfully deploy more capital and the yield on the use of that capital is greater than the interest rate charged by the lender, credit capital will augment the rate of return of industrial capital. Whereas commercial capital tends to spur the speed at which industrial capital turns over, credit capital tends to increase the quantity of capital turned over. Thus our cellular phone producers may borrow capital from corporate banks and by issuing bonds in order to buy more and more efficient equipment than would be possible by relying on internally generated cash alone. If, as is now the case for many of the metropole's manufacturing sectors (e.g.steel), producers cannot successfully deploy more capital or even earn the cost of existing capital, there will be the over-accumulation of capital in the metropole and the outsourcing of much production to the multipolar periphery. These are, of course, the socio-historical conditions for the problem of global connectivity and the rise of speculative capital.

Both commercial and credit capital feed off of industrial capital, and for this reason share its characteristics. Their profitability is either directly or indirectly rooted in and determined by commodity-producing labor. The system works on the premise that each of us will sell our labor in order to buy from others what we cannot produce ourselves. In this respect, the profitability of these forms of capitals is invariably mediated by labor, however circuitously. These forms of capital are directly situated within and internally organized in terms of the sphere of production: thereby constituting the financial bedrock of production-centered capitalism. That industrial, commercial, and credit capital all share the same final objective exemplifies the point. A brief glance at the history of business, with the rise and demise of so many industries and enterprises, is enough to convince us that the quest to increase the rate of return on industrial capital invariably faces an array of serious risks. The elements of nature, such as hurricanes and blizzards, may destroy or idle plant and equipment, distribution centers and retail outlets. The critical executives of a company may perish suddenly. Newer, more profitable, industries may hire away the most innovative designers and productive workers. There is always the great risk that, given the time lag between the conception and consumption of a product, consumer tastes may change. And the list of course goes on indefinitely. What is common about these diverse risks is that they are all concrete and external to the production process. If they did not exist, production would not only go on; it would be the better for their absence.

All of the forms of industrially related capital operate on the premise that the best way to counterbalance these risks is to take a long-term perspective. Harmful causes, such as hurricanes and general strikes, happen episodically rather than routinely or assuredly. So entrepreneurs assume that fluctuations in these risks will iron themselves out over the long term and that insurance is available to guarantee that the business can continue to produce or distribute despite a serious harmful event. Speculative capital, by contrast, focuses on the fluctuations themselves. It thus bets on the odds that individual events and processes will disrupt, if only temporarily, the long term continuities. In taking this perspective, speculative capital becomes entirely distinct from both the substance and trajectory of the underlying assets.

This has several immediate effects. The first is that the connection between the wager and the underlying asset becomes completely arbitrary. Traders can use any derivatives contract to hedge or speculate :whether or not they own the underlying asset is material only inso...