Sunday, 20 July 2014

Ukraine, Gaza, Imperial Hypocrisy

Widely reported evidence suggests that pro-Russian rebels in Eastern Ukraine shot down Malaysian flight MH17 with a missile, resulting in the loss of nearly 300 lives. Even if that turns out to be true, nobody would claim that this was done on purpose. It was a stupid, incompetent by-product of a civil war. It was not a plan to kill tourists. This event results in western powers rounding on Russia, with resolutions tabled at the UN and all the major country media unified in condemnation.

Contrast this reaction with the past week's attack on Gaza by Israel's forces. Blasting children off the beach, widespread destruction of homes and hospitals, absurd orders from the Israeli military to 'evacuate' when there is nowhere to go - these events, resulting in the loss of far more than 300 lives, lead western governments to affirm Israel's right to 'defend itself'! No US, EU or UN sanctions counter Israel's genocide against the Palestinians, but nobody could claim that these murders are an accident.

The scales are set like this: one life lost that can be used in support of imperial policy weighs much more than hundreds whose recognition would be politically inconvenient.

Tony Norfield, 20 July 2014

Tuesday, 15 July 2014

BRICS Building

Nobody wants to be one of the PIIGS, but membership of the BRICS is highly valued. Both acronyms were devised in the City of London, the former by analysts describing a group of crisis-hit euro countries, the latter by Goldman Sachs in a 2001 paper that identified several countries that had come to prominence in the global economy. The Goldmans formulation came at an opportune time: slower growth in the major capitalist powers was being outpaced by developing countries that also appeared to have brighter economic prospects. Its author called for including Brazil, Russia, India and China more formally in global economic decision making (South Africa was added later), and this was an adept investment bank marketing tool to attract business both from and into the relevant emerging powers, ones that craved recognition.

The BRICS are evidently diverse countries, geographically, socially, economically, politically and in terms of their potential power in the world economy. However, they share some common interests that the original Goldmans formulation did not anticipate. Rather than them all simply wanting to be included in the current hegemonic structure of global decision making - being included in forums like the G7, for example - what has happened over the past decade is that they have recognised that the game is rigged against them. So, instead, they have made halting attempts to set up another game.

The latest move is the new BRICS development bank, finally agreed in Brazil on 15 July. After much negotiation, and the usual scepticism from the western press that a deal could be agreed, the new bank will have its headquarters in Shanghai and the first president for the bank will come from India. This reflects the relevant economic power distribution, with China and India having both the largest GDPs and populations among the BRICS, but with China in first position. The first president will have the position for five years, followed by a Brazilian. However, the real money will be advanced by China, some 40%.

Initial reports suggest that the new bank will have $100bn of starting capital, plus a 'contingency reserves arrangement' of the same size. The latter will help developing nations avoid 'short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements'. This is a major challenge to the IMF- and World Bank-dominated system of country support and reflects a desire among these up-and-coming countries to assert their position versus the established imperialist powers.

This is one of the most important economic challenges to the position of the major powers since 1945, in particular to the US and its domination of IMF and World Bank policy. As outlined in an earlier article, the US has already faced important competition from China. This new institution will likely offer many trade and investment deals that are outside the orbit of the Anglo-American system, ones that do not depend upon using the US currency. In May, Russia and China did a bilateral deal whereby Russia will supply China with oil and gas over many years for hundreds of billions of dollars, but it is reported that the transaction will not be settled in the US dollar. Over the past 18 months, the Chinese government has also set up swap deals with central banks in all the major financial centres that will make the Chinese renminbi a far more important currency for international transactions and trade finance.

The end result is that the BRICS will likely end up being a mechanism for the evolution of China as a major world power, not necessarily a single group of alternative powers jointly challenging the existing structure. Just note the levels of 2013 nominal GDP and population, in particular with China well ahead of India's GDP, despite having a similarly large population (the BRICS are in bold):

                        GDP (US$, trillion)             Population (millions)

US                   16.8                                            318
China                9.2                                          1367
Japan                 4.9                                            127
Germany            3.6                                              81
France               2.7                                              66
UK                     2.5                                              64
Brazil                2.2                                            203
Russia               2.1                                            146
Italy                   2.1                                              61
India                 1.9                                          1247
Canada              1.8                                              35
South Africa      0.4                                             53

These developments put the position of China in quite a different perspective from that offered by Panitch and Gindin in their recent book, The Making of Global Capitalism. Their view is that China is so ingrained in the post-war US hegemony as to be more a supplicant than a challenger. They dismiss China as a potential rival to the US by arguing that it is embedded in the US-designed system, for example by owning a huge volume of US dollar-denominated debt in its foreign exchange reserves that effectively cannot be sold. They question whether China has 'the capacity to take on extensive responsibilities for managing global capitalism' (p. 336), as if that were the issue at stake! The real issue is, as Lenin noted a century ago, is one of the changing balance of strength among the key powers. As the new BRICS bank indicates, there are changes under way.

Tony Norfield, 15 July 2014

Friday, 6 June 2014

Bitcoin: a Digital Alternative?

I first paid little attention to Bitcoin, thinking that there are probably more Elvis Presley impersonators than there are people in the world who have traded or owned it. But seeing that central banks have issued policy statements on Bitcoin, that the FBI has 'seized' Bitcoin assets used by drug dealers and that tax authorities have given guidance on capital gains liabilities, while financiers are planning to offer exchange traded funds denominated in Bitcoin, I decided to take a second look. This article gives my assessment of this digital, alternative 'currency'.*
Bitcoin emerged from the rubble of the international monetary system in 2008, when numerous banks had a near-death experience and some were actually buried. It was devised by a team of software specialists, led by one Satoshi Nakamoto. In March, Newsweek claimed to have unmasked this international man of mystery as an unassuming, Japanese-American retired engineer, but the latter denies this and lawsuits are pending. However, it is possible to analyse Bitcoin without going into the personalities involved.

There are two key aspects of Bitcoin: an Internet-based payments system and a special currency unit for payment between different Internet accounts. The first is reasonably innovative; the second is bizarre. Although they are closely linked, it is useful to consider them separately.

The system
With Bitcoin you can make payments between individual accounts on the Internet in a way that does not use the banking system. This raises a number of questions about account access, identity and security that the software developers have tried to, and mostly have, solved (see Wikipedia's 'Bitcoin' article for an extended discussion of the technicalities, pitfalls and scams). Bitcoin claims a number of advantages over the normal bank payments systems. First, there is no charge for the transaction, unless you decide to leave a 'tip' in order to speed up the process. Second, 'tip' or not, it will probably be more rapid than many bank payments systems, especially across national borders. Third, making a payment between countries in terms of Bitcoins does not involve other bank charges. Fourth, the payments made to other system users can remain anonymous. All of these factors can appeal to those with less than a happy experience of dealing with their bank, especially those who wish to transact in secret. The belief that Bitcoin is a challenge to the banking system, even to the Fed and other central banks, has some popular appeal.
Ben Lawsky, New York's Superintendent of Financial Services, has praised the technology behind the payments system (interview on Fox Business News, 3 February 2014). He thought that some version of it might in future be used as a cheaper, more efficient method of transferring money. In this sense, Bitcoin, or a similar technology, could eventually offer a challenge to some banking services and would be a threat to this particular source of bank revenue.
However, although finding an alternative to the banking system might seem like a good idea, the problem is that the Bitcoin payments system can only transfer Bitcoins from one account to another. This raises the next question: what is a Bitcoin and what is its relationship to the normal money we use? This is where the bizarre aspects of Bitcoin come in, ones that are interesting for also highlighting some equally odd aspects of the monetary system that we take for granted.

The money
Bitcoins are created by a computer algorithm that allocates 'coins' to those who have the computing power (and energy resources) to do the relevant 'mining'. Coins only exist as entries on a ledger in the computer system, not as physical articles. The algorithm determines the pace at which coins can be created. This pace diminishes over time so that, ultimately, the total number of coins available will be limited to 21 million. So far, there are a little over 12 million coins.
If the genesis of Bitcoins seems weird, consider by comparison what happens with 'real money'. The Federal Reserve is the monopoly issuer of dollar currency, as are central banks in other countries, and a $20 bill, for example, costs only 10 cents to produce. However, the vast bulk of what we call money is created via the banking system. This happens through banks making loans to consumers and companies. For example, a bank creates money by making a $100,000 mortgage loan to a household, crediting its account with the funds. After the purchase, those credited funds end up in the seller's bank account, and are balanced against money transactions that the second bank has with the first. The first bank doesn't need $100,000 in cash to make the loan. If it did need extra money, it can rely on the central bank (here, the Federal Reserve) providing funds to the banking system. You might suspect that a few things could go wrong here! So, do you prefer to trust the workings of an algorithm or the workings of the monetary system? In the wake of the 2008 crisis, with bad debts, successive financial scandals, 'quantitative easing' and the bailing out of banks at taxpayer expense, Satoshi Nakamoto's algorithm has, not surprisingly, gained some ground.
However, Bitcoin enthusiasm overlooks what determines the value of money. Such an omission is easy, because a dollar token of money or its representation in a bank account might seem to have as much value as the digital signals from a computer. If anything, the limit on the supply of Bitcoins (but don't believe all you read) might promise a more solid future value than the potentially unlimited supply of dollars. The rise in the price of Bitcoins from less than a dollar at inception, to more than $1,000 in 2013, then at $440 in early May this year, has been a roller coaster. But this can still leave enthusiasts feeling that, as with gold, there is some kind of 'intrinsic value' determined outside the influence of the government or the banks.
There are nevertheless key differences between the determination of the price of Bitcoins and the purchasing power of the dollar. These highlight the dollar's role as money and Bitcoin's role as essentially a speculator's plaything, even if we leave aside the huge volatility in Bitcoin's price.
Pricing and payment in dollars, or other currencies, is the means by which transactions are done and accounts are settled within the borders of a monetary system. In principle, anything else could be agreed by parties to the deal, from bottles of whisky, to tickets for a football game, to organic vegetables, to Bitcoins. But the universal means of pricing and payment is in currency, and the currency chosen is determined by the national state. The state gives the social stamp of approval and makes a currency legal tender, acceptable for pricing, payments and calculations of wealth according to a set of commercial laws.
But what determines the value, or purchasing power, of currencies? The answer has many dimensions, although two are critical: the productive power of the national economy issuing the currency (more than one in the case of the euro), and the position of that economy in the world system. Productive power will influence the prices of goods and services, rates of inflation and competitiveness in international trade, in turn influencing the exchange rate of a currency in the market. Global status has an important impact too. Foreign investors buy US dollar-denominated securities because the US is top dog in world finance, and this usually keeps the dollar's exchange rate higher than it would otherwise be. The US gains revenues from the world economy via the role of the dollar, and the US government's political power is also boosted by its financial power, as when it imposes sanctions against Iran, Syria, Russia or other countries that act against its wishes. However, that global status would not long survive if the productive power of US capitalism declined significantly compared to its rivals. So, while the value of a national currency might seem to be arbitrarily determined, there is a close link to a country's productivity.
For Bitcoin, however, there is no such link. The most one could argue is that there is some relationship to the amount of effort to create another unit of Bitcoin, since the price might settle at levels higher than the cost of 'mining'. But even then, the mining work is not organised as part of social production: resources are not applied according to competition in the capitalist market, with the price tending to reflect that. Bitcoin miners can decide to spend a lot of time on their hobby and pay little attention to the electricity and computing bills: this is essentially private production, not social production of commodities by capitalist companies.

The cigarette card
Probably the best analogy to pinpoint the economics of Bitcoins is that they are like Babe Ruth cigarette cards, or special edition stamps, that attract collectors. A limited supply is weighed against a hyped up (or deflated) demand to determine the price. The result is that Bitcoin's price is basically determined by speculative demand: it might jump or slump. A limit on supply is supposed to create a scarcity value, but the demand for Bitcoins could easily get much scarcer. While Bitcoin is the leading 'digital currency' at present, there are also more than 170 others being traded, so in future it could be eclipsed and the price could drop back to less than a dollar.
Don't get misled either by reports of Bitcoin ATMs appearing all over the world to think that its growth could dislodge the banking system. The machines are real enough, with something over 100 already set up in a dozen countries. But that is hardly one on every street corner. Also consider that the transaction costs on the machines are reported to be around 8%, which is worse than you would get from a foreign exchange bureau (and at least they give you a form of money). Nevertheless, it is good business for the machine installers. Always remember: you can be cool and alternative, but also a sucker.
Bitcoins are likely to remain digital Babe Ruth cigarette cards, at best. Even if one imagined that at some point the government would accept tax payments in terms of Bitcoins, or a wide range of businesses would accept it for payments for goods and services, the amount of the Bitcoin payment would be set on the basis of the relevant dollar, euro, sterling, etc, price that you need to pay. It would not be set purely in terms of Bitcoins simply because they are not money, backed by the state.
Bitcoin is intriguing as a use of modern technology. However, an alternative economic system is not built by a different technology. It is built by people who recognise that the power of capitalism rests upon the state's maintenance of the capitalist economic system and who want an alternative to that. Many millions of people around the world are finding that the economic system does not work for them, and that it is increasingly perverse to argue that capitalism is the best way of organising social production. Yet Bitcoin is no answer to that problem.

Tony Norfield

Note: This article first appeared on 5 June 2014 in the 'Field Notes' section of BrooklynRail.

Tuesday, 3 June 2014

Robots and the Organic Composition of Capital

This week, London's Financial Times has decided to get back to what it is good at and report on some interesting economic developments: robots. The articles in this series promise to have much more value for those analysing the world than the FT's editorial line on Ukraine, Russia, Syria, Iran and other issues; opinions that simply reflect the discomfiture of the Anglo-American elite about things that are moving outside their control.
Robotisation of manufacturing processes has been under way for many years, but it seems to have accelerated recently. In the case of Foxconn, already reported on this blog, one pressure for robot innovation was the rise in wages among assembly line workers. However, in an effort to cut costs a number of production processes require not only a speed and accuracy that manual labour cannot achieve, but also a physical scale of operations that only robots can manage. Try carrying a 2.5 metre glass panel used for producing LCD displays that is only 0.5mm thick without breaking it. Or try to measure to an accuracy of 0.05mm. There is also a development in lightweight 'collaborative' robots that are used more directly by workers, and that are less likely to crush their human counterparts.
Here are some key points:
  • South Korea had the largest number of robots per manufacturing employee in 2012: 396 per 10,000. Japan's figure was 332, Germany's 273 and China's only 23.
  • Japan has the most industrial robots in total with more than 310,000 in 2012. The US had 168,000; Germany, 162,000; South Korea, 139,000; China, 96,000; Canada, 18,000; UK 15,000; India, 7,800; Brazil, 7,600.
  • China is growing fastest, however, with robot sales increasing at an average annual rate of 36% from 2008 to 2013.
  • The automotive industry accounted for some 70,000 of the overall 179,000 robot sales in 2013, followed by the electronics industry (35,000) and food (6,200).
  • Lightweight robots cost around $35,000 each; the big guys cost more like $100,000 or above.
  • Robotics companies from Japan, Switzerland and Germany dominate the market, with some important companies also based in the US, UK and Denmark.
One implication of these developments is an increase in manufacturing productivity. Another is the increase in what Marx called the 'organic composition of capital': where there is not only a rise in the mass of machinery and raw materials compared to labour power employed, but also a rise in the value of such machinery and raw materials compared to the value of that labour power. The result in recent years has been evident for South Korea, as shown in the following chart, taken from a McKinsey Global Institute report.

From 1995-2010, Korean output grew dramatically, at more than 7% per annum, but productivity grew still faster, at more than 9%, so that employment actually fell. Korean companies, like others, also shifted their operations overseas to take advantage of lower wages elsewhere.

Tony Norfield, 3 June 2014

Saturday, 10 May 2014

Pfizer's Bid for AstraZeneca

A huge US pharmaceuticals company, Pfizer, wants to buy a huge UK pharmaceuticals company, AstraZeneca, for £63bn, possibly more. Is there a side to take in the battle? Or is it more revealing to consider what each company represents?
Consider these points:
- Both companies operate in markets heavily protected by patents that keep the prices of proprietary drugs high.
- Both companies have lucrative deals with public sector purchasers of their drugs, financed by taxation.
- Both market many branded drugs whose effect is little different from generic and much cheaper products (eg Pfizer's Anadin is basically a combination of aspirin and caffeine, but at a price that roughly equals a regular aspirin plus a cup of coffee at Starbucks).
- Both operate in a sector that is infamous for producing research on the efficacy of medicines that is biased by deliberately distorted evidence (see the valuable work by Dr Ben Goldacre, in Bad Pharma and elsewhere).
In the UK, opponents of the Pfizer takeover argue that it buys up other companies rather than investing in new pharmaceuticals research itself, and that it cuts back research operations. In Sweden, home of the Astra part of AstraZeneca, there are opponents of the Pfizer bid too. But they need to take account of AstraZeneca's actions before they press their case.
Zeneca is an offshoot of the former British monopolist, Imperial Chemical Industries, and its takeover of Astra in 1999 also led to a shift of corporate power and decision making to the UK from Sweden. Like Pfizer, AstraZeneca has also been involved in many takeovers of other companies to boost its ownership of pharmaceutical products. It has not been immune from the high cost of research, which, for example, led it to close research facilities, most recently in Loughborough in December 2011 with the loss of 1,200 jobs.
For every jobs-related worry on the European side about the deal, there is an equal concern in the US. However, while understandable, to get a more grounded view as to what is happening one needs to see the bigger picture of the economics of imperialism today.
Take tax. Pfizer admits that a key factor in its bid for AstraZeneca is the tax regime in the UK that it can use to boost its corporate profitability. On the bid being accepted, the formal corporate location will probably be changed to the UK, something that has led British Prime Minster Cameron to be favourable, despite other UK opposition. It is probably only this tax deal that stops Pfizer, like many other corporations, from otherwise using the alternative infamous 'Double Irish' or 'Dutch sandwich' tax tricks to achieve the same result by locating elsewhere.
Corporations, and their owners, always want to avoid tax. But the more significant point is that scientific ingenuity is used under capitalism as a means for private appropriation not social gain, something exacerbated by the power of monopolistic corporations. This would be true even if the corporate executives were not, on the whole, a bunch of useless bastards.

Tony Norfield, 10 May 2014

Wednesday, 16 April 2014

Marx and the Princess

I thought I knew a lot about Karl Marx's life, having read several biographies detailing his genius, his carbuncles, his scrounging and procrastination. However, one event was reported in a book I have been reading recently that I had not come across before.
In 1879, Queen Victoria's eldest daughter was curious to find out more about Marx, the famous émigré living in London. Some reports suggest that she had even read Das Kapital. Rather than getting the police to drag him in for questioning, Princess Victoria used the subtle tactic of asking a British politician to check him out, the splendidly named Sir Mountstuart Elphinstone Grant Duff. An invitation for free drinks at the Devonshire Club in London was something Marx could not refuse, and they had a three-hour meeting on 31 January 1879.
It is hard to know how far Marx might have edited his views in such a discussion, although he was not particularly known for letting discretion be the better part of valour. Much of the talk concerned European politics, especially developments in Germany and Russia. This reflected not only Marx's interests but also those of British foreign policy. Duff reported back to the Princess the following day, noting that his impression of Marx was 'not at all unfavourable and I would gladly meet him again'. The letter is here.

Tony Norfield, 16 April 2014

Wednesday, 2 April 2014

Rational Paranoia

The old joke has it that you may be paranoid, but that doesn't mean that people are not out to get you. In Russia's case, a look at the historical map of the western side of the country, especially from 1999, would show a growing group of countries aligned with NATO. This is not the only explanation for Russia's intervention in Crimea, but it puts in context their opposition to the EU's (and the US's) overtures to Ukraine.

The table shows the current memberships of NATO and the EU, each coincidentally of 28 countries. Membership overlaps are striking. Twenty-two of the EU's 28 countries are formal NATO members, five others are part of NATO's 'Partnership for Peace' programme that was set up in 1994 (shown as PfP in the table). This means that they can cooperate with NATO 'on their own terms'. In Sweden's case, for example, it means taking part in 'peacekeeping' in Bosnia and Kosovo, and in advancing 'political and economic stability' in Afghanistan. Only Cyprus is in neither group. However, there is a British military base on Cyprus ...

Tony Norfield, 2 April 2014