Sunday, 3 July 2016

Value Theory, Finance and Imperialism

The following text consists of notes from a lecture that I gave in London on 27 June at an IIPPE conference on ‘Imperialism Today’. This set of notes is in the form of bullet points, ones that I elaborated on in the talk and discussion. To that extent, they will not necessarily be completely clear to new readers. But I do not plan to extend these into a full article. Instead the notes are a summary of the underlying value logic that is part of what is explained more fully, discursively and straightforwardly, with examples, in my new book The City: London and the Global Power of Finance. I hope these notes will help as a concise summary of my developed argument, and also give some guidance points for others interested in drawing links between Marx’s theory of value and contemporary financial developments.

Tony Norfield, 3 July 2016

1. What is Imperialism?

Marx showed how capitalism develops a world economy.
‘Imperialism’ describes a stage when particular countries cannot be understood outside of their world relationships.
Focus of analysis: examine how social relations are shaped by the capitalist world economy.
Example: the US$ is ‘world money’, given the international power of the US economy, not just the local US currency.
Lenin also formulated how economic and political perspectives must change with the emergence of imperialism.
Marx’s analysis of imperialism?
- Marx analysed world developments, but only in a limited way in Capital Volumes 1, 2 and 3
- Vol 3 analysed ‘many capitals’, and their different forms, but not relationships between countries in the world market
- Later volumes planned to cover the state, foreign trade and the world market more systematically
Hence, in Capital there is:
- No real discussion of colonies (just brief mentions)
- Nor much on monopoly, national differences in wages, etc
Obviously, the world also developed further from the 1860s!
‘Imperialism’ as in Lenin’s 1916 pamphlet: 
- decisive role of monopolies in the world economy
- bank/industrial capital merges, producing ‘financial oligarchy’
- capital export (and revenues from it) much more important
- territorial division of the world is complete among key powers
- changes in division of world power increases propensity to war
- division of world into oppressed/oppressor countries, with the oppressors benefiting economically (his focus was on the ‘labour aristocracy’)
A century-old analysis still relevant?
Monopolies dominate world economy - yes
Bank/industrial capital & ‘financial oligarchy’ – not this form
Capital export – different kinds of international links today
Territorial division of the world – yes, but also changes
Propensity to war – yes, although now many wars by proxy
Oppressed/oppressor country division – yes, some changes
Benefits of the oppressor – yes, but not just a ‘labour aristocracy’
Politics of imperialism:
Conflicts/rivalries between major powers by end-19th century
Wars began to involve the whole population, not just military
Social unrest with the growth of the working class
Ruling class gains loyalty of workers via welfare reforms, extra voting rights, etc (UK, France, Germany, especially)
By 1914, the main European socialist parties backed their own states in war
Development of a loyalist working classes in many rich countries that will fight to defend their nation state and their related privileges! So, it is not just a very small portion of the working class in these countries that becomes pro-imperialist. This is a major political issue today!
Summary definition of imperialism:
A division of the world that results from the exercise of monopoly power by corporations and their states.
Big corporations may have economic advantages, eg better technology, but they have a powerful position in the world economy due to their links with particular states.
States back property rights (from expropriation by rivals, also via patent laws) & extend economic power in international trade and investment deals.
Economic power and ability to exploit is reinforced by these privileges, ones that also include access to finance.
The balance of power is not fixed. Relationships are likely to change with the different accumulation of capital and power-competition successes of different countries.

2. Imperialism & Financial Power

Financial markets show what the world economy allows!
Marx’s ‘law of value’ for commodities has evolved:
- Equity prices, bond yields, FX rates are critical for companies and governments
- For example, the US uses the $ as ‘world money’ to isolate non-favoured countries (eg Iran, Russia)
- Major companies dominate world markets, via stockmarket takeovers, ownership links, etc
- Access to capital occurs via major financial centres, especially New York and London
… in addition to trade/investment deals run by major states
This is a regular, daily mechanism, and does not rely upon crises to work, although such crises often give the major powers an extra ability to gain influence.

3. A ‘Real’ versus a ‘Financial’ Economy?

All big capitalist companies are tied into ‘finance’
- FX deals to buy imports / sell exports
- Borrowing for purchases, or to invest
- Use financial derivatives to insure against price moves
- Mergers & takeovers to monopolise markets
Financial operations are integral to modern capitalism, and it is a liberal, reformist delusion to make a big distinction between 'real' and 'financial' companies.

4. Theory of Finance - Overview

‘Finance’ is big because it is driven by governments, corporations, banks and other financial institutions.
- Value relationships take on a financial form, so ‘finance’ pervades the system as a whole and is a means of gaining wealth and power!
- Note the prominence of the US and the UK, and how the workings of the global financial system are of particular benefit to them.
-  This is not ‘complex financial dealing’ by dangerous speculators, who disrupt the otherwise solid workings of the capitalist economy.

5. Finance & Marx’s Value Theory

Marx’s theory of value is about the capitalist organisation of social labour.
It is an analysis of the forms that arise from capitalist production and the exploitation of labour, the tendency to crisis and the limits of this mode of production.
Capitalist finance in Marx’s theory:
- a means by which existing surplus-value is circulated
- ‘finance’ = money dealing + interest bearing capital
- interest bearing capital (and banking) create new forms of value, and appear also to create new value
Interest, banks, fictitious capital, etc, are dealt with first in Volume 3 of Capital. This is a ‘logical-historical’ development of the earlier analysis.
The first page of Vol 3 of Capital: Marx notes that Vol 1 analysed the immediate process of capitalist production ‘with no regard for any of the secondary effects of outside influences’. Vol 2 studied the circulation process of capital, which must be added to the immediate process of production to complete the ‘life span of capital’.
Vol 3 went beyond this synthesis to ‘locate and describe the concrete forms which grow out of the movements of capital as a whole’.
Vol 3 develops those forms of capital which:
‘approach step by step the form in which they assume on the surface of society in the action of the different capitals upon one another, in competition, and in the ordinary consciousness of the agents of production themselves’.
Vol 1 & Vol 2 do not examine how competition might affect different capitals, nor the forms of capital that arise from that process.
Vol 3 examines ‘many capitals’ and competition, but not in concrete detail. For example, Marx excludes the analysis of the world market, different values of labour-power, etc, except in occasional remarks.
Industrial capital, and its circuit of  M – C … P … C’ – M’, has almost complete attention in Vols 1 & 2:
‘Its existence implies the class antagonism between capitalists and wage-labourers …. The other kinds of capital, which appeared before industrial capital amid conditions of social production that have receded into the past or are now succumbing, are not only subordinated to it and the mechanism of their functions altered in conformity with it, but move solely with it as their basis ….’
But Vol 3, Parts IV & V are critical for an understanding of finance. These show how the ‘M’ and ‘C’ components of this circuit become transformed under the influence of industrial capital. In turn, they have an impact on the forms of value accumulation by the system as a whole.
a) The basic M – C … P … C’ – M’ circuit includes market exchange and changes of value form (M - C, C - M)
b) This circuit implies surplus funds, or demands for funds, arising for productive capital at different times. Merchant capital (commerce, etc) develops in this context
c) The form of value in the circuit changes not only between M, C and P (Vol 2). The forms taken by M also evolve.
d) A key stage in the analysis is where M is an advance of capital outside the basic circuit, as in M – M’. This is the basis of Marx’s concept of ‘interest bearing capital’.
Step 1: Distinguish M – C – M’ from M – C … P … C’ – M’
This is not simply a logical (or functional) separation, but one that develops in reality.
Buying/selling by merchant capital is separate from the part of the circuit of capital that produces surplus value.
The specialist buying/selling function can be done more efficiently by merchants. It shortens circulation time, lowers costs and allows more surplus-value production per year.
Merchant capital produces no value or surplus value itself, but enables more surplus value (per year) to be produced by others.
Step 2: Focus on specialist monetary aspects of merchant capital (eg FX deals or loans for operating capital which assist the circuit of industrial capital, promoting M–C and C–M).
This is ‘money dealing capital’ (MDC), distinct from the previous ‘commercial capital’ part of merchant capital.
Marx’s theory has productive, commercial and money dealing capital as separate, but related, parts of the original circuit of industrial capital dealt with in Vol 2.
Each part of MDC is involved in averaging the rate of profit, assuming each section of capital could move into other areas. Capital advanced for production may be advanced for merchant (MDC) functions, or vice versa.
Money dealing operations are only an advance of money to industrial and commercial capitalists - an exchange for a different form of money (as in FX) or for a security (eg advance money against bills of exchange that are redeemed later). They are not an advance of capital.
Step 3: Another form of capital develops out of this money dealing – Interest Bearing Capital (IBC)
Up to Step 3, Marx examined forms arising out of the circuit of industrial (or productive) capital.
With Step 3, there is a new form of capital, IBC, outside that circuit. It has its own special circuit: M – M’.
With IBC, money is advanced as money capital (by money capitalists) to the 'functioning capitalist' who later returns the money back to the owner with interest.
Marx includes both the merchant and industrial capitalists as potential recipients of IBC from the money capitalist.
In both cases, it is assumed that the loaned funds are invested as capital and (could) gain a surplus value.
Even if the funds are not invested profitably, then the money capital still has to be repaid with interest.
Marx's concept of IBC does not include all loans of money capital for whatever purpose. This is consistent with Vol 3 analysing 'the process of capitalist production as a whole'.
So, bank loans to workers, for mortgages, for personal consumption, etc, are treated differently, or not at all, in Capital. These are just advances of loanable money capital, not of IBC.
The latter loans are still paid back with interest, but the concept of IBC is determined outside this relationship.
However, in all cases, the interest is still a deduction from surplus value deriving from the productive sphere.
Key points on this topic
a) ‘Finance’ is not confined to the operations of banks; monetary advances and transactions pervade the whole capitalist system! ‘Industrial’ companies also conduct many financial operations.
b) For IBC in particular, the advance of money capital in the M – M’ circuit can also be performed in a number of different ways, and by different institutions.
c) This also means that other forms of ‘M’ can develop outside the M – C … P … C’ – M’ circuit.
d) This takes us on to fictitious capital and bank credit, key forms of capital, and of value in modern financial systems.
Bonds, Equities, ‘Fictitious Capital’
‘Fictitious capital’ (basically, the term means financial securities)
The prices of these securities do not represent any value created and are determined differently from commodities.
Bonds have a higher status than equities regarding terms of repayment; but a lower status, usually none, in ownership of corporate assets.
There is a legal differentiation of ‘pure’ money capitalists (bond owners) from owners of companies (via equities).
The securities are tradable, potentially translated into money. They can be used as collateral for loans. Equity securities are often used as a means of payment in takeovers.
Bond prices: the discounted present value of future coupon payments and the principal repayment.
Key plus/minus factors: risk of non-payment (credit risk);  interest rate level at which future payments discounted.
Prices move independently of value created. A bond ‘worth’ $1m need not relate to any sum of capital invested.
Equity prices: an equity represents a share of ownership and future company profits, and the price reflects that.
Key plus/minus factors: expected future profits; interest rate level at which future payments are discounted.
The prices of both kinds of security are also influenced by speculative buying/selling!

6. Economic power, financial securities and bank credit

Creditors can set terms for company or government behaviour, especially in a crisis, when a question of writing off debt (privatisation, policy, etc) or access to new funds.
Ownership, of course. But voting rights on company decisions are not the same as the equity holding! Control of society’s resources via centralising capital and creation of monopolies.
Bank credit is a distinct mechanism of finance!
This topic has been very badly dealt with in Marxist theory.
A bank does not simply use existing sums of money from depositors to lend to borrowers, whether they are companies or individuals.
It does not act simply as a ‘go between’.
Banks can create new funds within the banking system: they grant loans to borrowers, who then use the funds (not usually as cash, mainly bank transfers) to buy things.
Banks make up any shortage of funds from other banks, or via the central bank. This credit creation can boost expenditures and demand from consumers and investors.
‘Stretching’ the law of value creation
The credit creation process is unique to banks. It depends on a (national) banking system and a central bank if it is to work well.
It also allows a bank’s ‘assets’ (loans) to grow far beyond its capital (funds due to shareholders). This can boost demand in the economy and also the potential for a crisis.
The ratio of assets/capital = leverage ratio.
When bank loans/credits run beyond the ability to pay back, a bank’s loan ‘asset’ becomes a loss! With high leverage ratios, a relatively small scale of losses can destroy a bank's capital and lead to bankruptcy.
(Note: Bank loans are not securities, but they may be ‘securitised’, as with Mortgage-Backed Securities.)

7. Conclusions: Imperialism and Finance

The role of ‘finance’ reflects the operation of the law of value on a world scale and the influence of dominating powers.
The form taken by social labour under capitalism (especially imperialism today) is not simply a ‘value’ form based on commodity production and socially-necessary labour time.
It is dominated by financial forms of value that accentuate the concentration of ownership and control of social wealth.
Financial securities (equities & bonds) and bank credits are the dominating forms of value today.
Equity and bond markets act as regulators of corporate decision-making and government economic policy.
Social resources are controlled via mergers & takeovers, assisted by the system of credit and trading in financial securities.
Major banks provide funds to the global economy, especially via the role of the US dollar.
This how capitalist economic discipline is imposed and value is appropriated by those countries and companies with privileged positions in the global capitalist market system!


  1. Congrats on your recently published book, "The City". It is written in an admirably clear and easy to read style that all of us who aspire to reach beyond a specialist or academic audience should seek to emulate.

    You are on the right track generally as far as the theoretical framework goes. But I'd note that in Vol II, where the analytical assumption of the identity of individual with total social capital is still in place, Marx 1) divides the total productive capital into productive-, commodity-, and money-capital circuits, and regards each independently. Here Marx arrives at the conclusion that the commodity-capital circuit can be excluded from further consideration for the purpose of the analysis, that purpose being the determinations of the sources and destinations of surplus value, the source being found in production, the destination necessarily being found in money under capitalism. But Marx also notes the peculiarity of the commodity-capital circuit in that it is the only circuit of the three to both begin and end "bearing" surplus value. In practice that could give rise to various interesting arbitrage possibilities for independent commerce, once the assumption of identity is dropped.

    And that brings me to Vol III Part IV. This is limited to the regard of commercial capital in independent form. Note also Marx's assumption that independent commercial capital is scheduled for extinction in the course of the development of capitalist industrial production. This may be true enough, but the question begged here concerns the *combined* forms of industrial, commercial and financial capital, these being the common social aliases for the three circuits mentioned above. You are correct to dismiss the traditional counter-position of "industry" with "finance" as if these still exist only in independent form. Further, one could go on to critique the classical Hilferding formula for "finance capital" that combines banking with industrial capital as perhaps only applicable to Germany in a certain historical period, as only a specific combination of the three circuits. Even if we agree that modern capital nearly always appears in combined form, we could go on to question the "balance" in the combination of the three circuits, where one or another "dominant", with that dominance also fluctuating with the other circuits over the course of history. And finally we can also question the "inevitability" of the rise to "dominance" of industrial capital, particularly in the three different cases of the United States, Britain and France. Otherwise we would not be speaking of "deindustrialization" today.

  2. Hi Kumiko: Thanks for your appreciation of my book, and for your perceptive and intelligent comments. Because these comment items and replies tend to get hidden at the end of an article in this blog format, I have decided to put your main comments and my reply in a new blog post, dated 16 July 2016.