Monday, 12 November 2018

Finance, Imperialism and Profits

Last Friday I took part in a panel to launch a new book, World in Crisis: A Global Analysis of Marx’s Law of Profitability, published by Haymarket Books, edited by Michael Roberts and Guglielmo Carchedi. The presentation was at this year’s Historical Materialism conference in London.

My presentation was on ‘Finance, Imperialism and Profits’, in which I stressed the need to develop Marx’s theory in order to explain the world today. I argued that an accurate measure of a rate of profit (in Marx’s sense) could not be gleaned from official statistics and that, among other things, this was because of the nature of the imperialist world economy. Also I noted that for some adherents of Marx’s ‘falling rate of profit’ theory, this theory was somehow consistent with their calls to nationalise banks and regulate finance. This expunges the revolutionary content of Marxist theory, shows a naïve faith in the capitalist state and makes concessions to nationalism.

This was a lot to cover in the twenty minutes available, so could only be done in summary form in the presentation (see below), but there was more time in the Q&A.


Tony Norfield, 12 November 2018

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Monday, 5 November 2018

Japan’s SoftBank: Tech Parasitism


The two Sons shake on $45bn
Masayoshi Son faced a dilemma in October: should the Japanese businessman go to an investment conference in Riyadh, Saudi Arabia? The guy running that conference had promised Son’s Vision Fund $45bn – that’s not a misprint, that’s forty-five thousand million US dollars – so not showing up would look more than a little ungrateful. He was also the Crown Prince of Saudi Arabia, next in line for the Saudi throne, and a person not known for taking lightly any lack of due respect. Yet the same guy had just been implicated in the murder and dismemberment of a journalist he did not like. While you and I would let this go as being just one of those things, the media and the political class of some powerful countries had shown themselves to be unhappy with the event. If Son attended the conference it could put his investment company SoftBank, and its Vision Fund, in an unfavourable light.
It was all so unfair. Nobody of any importance had complained about Crown Prince Mohammad bin Salman’s exploits in Yemen that were killing off a whole population! Why make a fuss about a minor journalist being disappeared in the Saudi Consulate in Istanbul? It was evidently all a matter of big power politics, and who was allowed to do what to whom and when. But the dilemma was nonetheless real for Masayoshi Son, given the risk of negative publicity for his investments in projects for the tech-wonderland future. After much consideration, he decided on a diplomatic compromise. He travelled to Riyadh to talk to the oil oligarch, but did not attend the conference itself.
Most people will not have heard of the Vision Fund, or of SoftBank, not least because both names sound like they were suggested by a bored publicist suffering business cliché indigestion on a dull afternoon. But it is worth paying them attention for the light they throw upon today’s imperialist world economy and how innovation becomes entrapped by a parasitic machine. SoftBank itself does not rank highly in the list of global corporations, with a stockmarket capitalisation of just $82bn at end-October. Yet its Vision Fund is the world’s largest ‘venture capitalist’. It specialises in investments in the technology sector and is reported to have investment funds available of nearly $100bn – of which more below.



The rising Son

In 1981, Masayoshi Son founded SoftBank in Japan, but for many years the company was almost unknown outside the country. It began as a distributor of packaged software, also getting into computer magazine publishing and running business events. By 1998, it had become big enough to have its shares listed on the First Section of the Tokyo Stock Exchange, and in 1999 it became a pure holding company aiming to expand its presence in other areas of the Internet and mobile technology sector. From the mid-1990s, SoftBank did a number of very profitable deals in Japan with US web services provider Yahoo, including one with Yahoo Japan of around $9bn which gave SoftBank 43% of the company. It also bought Vodafone’s Japanese mobile operation for $15bn in 2006 and, from the late 1990s, it began to make its first significant deals outside Japan.
SoftBank’s most successful investment has been in Alibaba of China. In 2000, SoftBank advanced a mere $20m for a 29% stake in Jack Ma’s fledgling company, plus a modest later investment. The value of this holding soared to $60bn when Alibaba went public in 2014, and is now valued at around $100bn. Other major SoftBank investments have been in 2012, when it invested $23bn in Sprint, the fourth largest mobile network operator in the US, in 2016 with the $31bn takeover of ARM Holdings, a UK-based chip designer for smartphones, and in 2017 with the $9bn or so put into the US ride-hailing company Uber for a 15% stake.
None of these have gone anywhere near as well for SoftBank as Alibaba. For example, Sprint, 83% owned by SoftBank, after losing market share and subscribers is now in the process of being rescued by a merger with T-Mobile US, owned by Deutsche Telekom. If that goes ahead, SoftBank will own 27% of the new business.
There have been many reorganisations and name changes of companies in the SoftBank group. Its portfolio of holdings has also increased dramatically in recent years, with investments ranging from a complete or near-complete takeover of another company to deals that involve SoftBank owning perhaps only 5-10% of its shares. The prices SoftBank paid for these have not always been clear, since it has often been part of a consortium of other funds that have bid for a stake in the particular venture.
Given SoftBank’s promoted image, a natural assumption is that all of its investments are in the ‘technology’ sphere. This would suggest e-commerce, mobile communications, online services and so forth. But often the investments extend into other areas that have little or no connection with these and may be just an online application to contact a service. Although the latter is a pervasive feature of the economy today, it is not so far removed from telephoning a company to make a booking, rather than being a sign of ‘hi tech’. Notable in this respect is WeWork, a US company leasing out office space in which SoftBank (and its Vision Fund arm) has already invested more than $4bn, and the $300m invested in the US-based Wag, a dog walking service! I will not mention SoftBank’s investment in a Japanese baseball team, the Fukuoka SoftBank Hawks.
Elements of this that remind me of the dotcom equity market bubble of the late 1990s. One anecdote from that time was that a laundry company saw its share price soar once it had changed its name to laundry.com or something similar. SoftBank is not the laundry company, but its share price had also boomed in that market bubble, to around ¥19,000 in early 2000, but by November 2002 it had slumped to just ¥300. Happily for Mr Son and his shareholders, SoftBank’s equity price has since risen and was at around ¥9,000 by end-October. But the vulnerability of the company to changing fashions is seen in the 20% drop through that month, partly prompted by the declining fortunes of another ‘son’, Mohammad bin Salman. Such volatility is not uncommon in the markets for financial securities, but an examination of SoftBank’s accounts, and the new Vision Fund, shows that there is a lot going on behind the headlines.

No, not this robot dog, a real dog!
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Assets, debt liabilities, income

SoftBank’s annual report for the year to end-March 2018 gives the basic picture for its assets, liabilities and income that still holds today. Two features stand out. Firstly, the company’s cash revenues have derived mainly from its telecom operations in Japan and the US; secondly, it has a lot of debt.
The telecom operations have the advantage of generating an inflow of cash, with regular subscriber payments and sales of mobile phones, and in the annual 2018 report these accounted for just over 70% of net sales and over 90% of adjusted earnings before interest, tax payments, etc, for the group as a whole. This cash comes in handy for SoftBank’s appetite to invest in other companies, but most of SoftBank’s requirements are instead met by its loans from banks or its issue of bonds. This has led Softbank to accumulate an unusually high level of debt, amounting to $160.4bn by the end of March 2018.
Financial markets focus on a measure of how much interest-bearing debt that the company has outstanding and compare that to the equity investment of the company’s owners in the company itself. This ‘debt-equity ratio’ is one indicator of a company’s ability to pay back its debt liabilities if its operations get into trouble. Outstanding debt levels and also the debt-equity ratio will be different for different kinds of company, but industrial and commercial companies rarely have a debt-equity ratio above 1 or 100%. In other words, their outstanding debt is not greater than how much equity the owners have invested in the company.
The debt-equity ratio is not necessarily high for companies in the tech sector. Even startups usually get funds from equity investors, rather than depending much, if at all, on long-term bank loans and issues of bonds. For example, in 2017 Alphabet-Google’s debt-equity ratio was less than 3% while Amazon’s, although higher, was still below the 100% level at 89%. In 2015, the year before SoftBank took it over, ARM Holdings had no outstanding debt at all. By stark contrast, SoftBank’s own debt-equity ratio in March 2018 was 271%, and a still high 220% counting only the long-term debt of $130.1bn.
This level of debt is a problem for SoftBank because the funds have been used to invest in a wide range of tech (and not so tech) companies, as already noted. As their market value changes, so will the value of these assets on SoftBank’s books, which makes the company very vulnerable to a change in financial market sentiment on the outlook for these ventures. Meanwhile, the debt remains until it is paid off, and until then it has to be serviced. In the year to March 2018, SoftBank’s net income from continuing operations was $11.7bn, but this figure had been reduced by the interest paid on its debt of $5.1bn.
How could SoftBank continue to expand its investment in tech companies when it already had high levels of debt? One way was to sell off some existing assets as a means to raise cash. An example earlier this year was the $4bn sale of its holding in Flipkart of India to the US giant retailer Wal-Mart, registering a gain of some $1.5bn. Back in April, SoftBank also used its stake in Alibaba as collateral for a bank loan of $8bn. Furthermore, there is a plan for the public sale of some shares in SoftBank’s mobile business in Japan, hoping to get as much as $30bn, although that hope is undermined by Japan’s regulator forcing mobile companies to cut their charges by as much as 40%. But the real scope for expansion lies with the venture noted at the beginning of this article: the Vision Fund.

Double Vision: $28bn becomes $72bn

SoftBank’s Vision Fund was set up in 2017 after being announced the previous year. It is included in SoftBank’s reports as a division that aims to target ‘long-term investments in companies and foundational platform businesses that seek to enable the next age of innovation’. While there are many other hyperbolic statements with which the Fund describes itself, and details of its structure can be confusing, I would recommend keeping the following points in mind to clarify what is going on.
The logic behind the fund’s existence is the limit on expansion that SoftBank faced with its high level of debt. Otherwise there would have been little reason for SoftBank to make big efforts to attract outside investors. Related to this, an important aspect of the Fund is that it has now given Masayoshi Son huge resources from these outside investors over which he has complete control. Meanwhile, SoftBank has not limited itself from undertaking any investments it likes outside of the Vision Fund set up.
SoftBank’s investment in the Vision Fund is reported as $28bn, with the other, external investors providing $72bn, to make up the $100bn when all funds are committed. That makes a good headline, but all is not what it seems. Not simply because most funds are committed rather than having yet been allocated, and the number does not yet quite add up to $100bn anyway. Let us assume that all the commitments will turn up. Instead, the main issue to puncture the headline bubble is that more than $15bn of the capital, and perhaps as much as $25bn or so, is not a pile of new cash waiting to be invested. It simply represents the value of existing investments held by SoftBank that the company has transferred from its main accounts to sit now under the Vision Fund heading.
At end-September 2018, the value of Vision Fund investments was $35.8bn, with an acquisition cost recorded at $28.1bn. A big chunk of this, represented by acquisition cost, consists of previous investments made by SoftBank. For example, a little over $8bn for 25% of SoftBank’s ownership of ARM Holdings, $5bn from its stake in Nvidia, a couple of billion from its stake in WeWork and some smaller investments, including in Wag. SoftBank’s $9bn holding of Uber will also be transferred to the Vision Fund, but this had not happened by end-September.[1]
These SoftBank ‘investments’ in the Vision Fund are not new cash that it can use to invest in other things. So its firepower is significantly less than the $100bn number promoted in the headlines, although it is still clearly a big number. The key point, however, is that by establishing the Vision Fund, SoftBank can get control of up to around $70bn more from the funds committed by other investors.
Under refurbishment: Vision Fund London office

Vision investors, debt and equity

SoftBank’s 28% of the Vision Fund would appear to give a higher weight to the external investors, who have 72%. But there is another complication: whether the investors have an equity stake in the fund or whether they buy the ‘preferred’ units of the Vision Fund that will pay them an annual coupon, as if they owned a debt security. According to a Financial Times report in June, the Vision Fund set up is where the external investors have 62% of debt and 38% of an equity stake in the Fund for every billion they put in. SoftBank therefore has a majority equity stake in the Vision Fund, given that all its 28% investment is for equity.
External investors in the Vision Fund are of two kinds, and each has a different motivation that I will give myself the freedom to speculate upon.
The first kind is the Gulf investors with $60bn of commitments: $45bn from the politically-devalued Crown Prince, allocated from Saudi Arabia’s Public Investment Fund, and another $15bn from Abu Dhabi’s Mubadala Investment Company. These are funds that aim to boost the wealth of the already rich Gulf states by investing in something other than the low-yielding government bonds issued by the major powers.
It is not difficult for the Gulf investors in this venture to feel they are smart money capitalists when all they have to do is get a better return than on US Treasuries. The Vision Fund will have looked an attractive option, one full of a high tech optimism that helps obscure the reactionary reality back home, and doing so with a promised high return – for details of which see the next section.
The second kind of external investor is a group of four companies not new to the world of tech exploitation – Apple, Qualcomm, Foxconn and Sharp . They will offer $5bn in total to the Fund. For them, the amount is trivial, but it may give a reasonable return and it will also give them a valuable overview and early insight into developments that could impact their businesses.

‘Eat yourself’ returns and SoftBank upside

So what is the return for investors in the Vision Fund? These investors, and SoftBank itself, get paid in different ways, and this highlights that it is called the Vision Fund for a good reason.
Those who have equity stakes in the fund get the relevant portion of the returns from the portfolio of investments made, but that is after money has been deducted to pay for the annual 7% coupon on the Vision Fund debt securities purchased by external investors. While this 7% coupon looks attractive compared to other debt securities in the financial markets today, it may have escaped the external investors’ attention that this coupon payment will also reduce the return they will get from their equity stake. If the Vision Fund debt component amounts to $44.6bn (62% of the external $72bn), then around $3bn per annum will be deducted from the profits made on Vision Fund assets to deliver the external investors their coupon payments. They look to be protected from any downside in the equity and revenue performance by their fixed 7% coupon, but that leaves the tricky question of who will pay them the coupon money if the Fund’s return is insufficient.
The external investors will have noticed that they are paying SoftBank a management fee of around 1% for the privilege of running the Vision Fund, which could be up to $720m per annum. SoftBank will also cream off 20% of any return on investment over 8%. In the world of ‘venture capital’ investment funds, however, these conditions are, if anything, low cost.
Overall, the Vision Fund gives SoftBank a vast amount to finance future tech investments, and it gets around some of the constraints posed by SoftBank’s high debt levels. If there are difficulties paying the fixed 7% coupon, then that may be a Vision Fund problem with its investors, not a SoftBank problem of default on its bond liabilities.
Another important point is that the Vision Fund’s investments have delivered it very little in operating profit. Its recorded ‘income’ from its assets is overwhelmingly made up from capital gains on their market value, including unrealised gains. In the six months to end-September 2018, the operating income from the Vision Fund was around $5.5bn, but $1.5bn was from the gain on the sale of Flipkart and another $4bn or so was from increases in the value of Nvidia and some other assets. This points to problems that Mr Son’s venture will have in generating enough income when the market turns down.

Parasitic vision

In an interview with TechCrunch in September, a Vision Fund managing director set out the Fund’s investment policy. He explained that it was a ‘late stage growth fund’. It did not aim to give early advice to tech startups, but instead wanted to see how far they could become a key player in the market. If they were happy with a company’s plans, they would invest a minimum of $100m to finance its growth.
This reveals perhaps more than he realised. Yes, the Vision Fund provides a tech company with funds, but only after it has passed the difficult, uncertain, early stages of growth when survival is at risk, and when it now looks like the only barrier to dramatic expansion is a lack of funds. This is not so different from what a regular bank would do, except that the Vision Fund will make sure that it has an equity stake in what it hopes will be a rapidly growing business, rather than a bank that simply sees good market prospects as giving it confidence that a loan will be repaid. Far from being the daring investor backing ‘the next stage of innovation’, the Vision Fund is more like a money capitalist bean counter that will first ensure that all its boxes are ticked.
Another aspect of the Vision Fund shows that it understands the nature of the imperialist world market today, at least as it applies to the technology sector. The minimum $100m investment is to finance a big increase in the scale of which one of its chosen tech companies will operate, both within its national sphere and internationally. A key feature of businesses that have communications technology as a core element is economies of scale. Here, much the same cost infrastructure is needed to service tens of millions of customers as for tens of thousands, except perhaps the need for a bigger computer server and some better software. Costs per customer will tend to fall rapidly and net revenues can rise sharply.
This is also something that leads to monopolisation of markets. Companies that are backed with funds to invest and expand when they have no operating profit and, like Uber, may be running at a loss, can still invest to sideline competitors. SoftBank and the Vision Fund are involved in this process. One example is the likelihood that SoftBank will play a part in carving up the ride hailing market, given its stake in Uber and in a number of other companies in that area, notably DiDi of China, but also Ola in India and Grab in Singapore. Recent business media reports suggest that these companies, which are often rivals in the same markets as well as having stakes in each other, could decide to ‘cooperate’.

Tech in the machine

What we find today are many examples of technical inventions and innovation, but all of these get bound up in the monopoly machine of imperialist economics and finance. Rather than communications technology being developed to benefit humanity, any good outcomes that may result depend first upon whether the innovation can meet the machine’s demands.
Paradoxes also abound, highlighted especially by how some of the most reactionary regimes in the world put up many billions of dollars to fund ‘progress’. One acute observer of the tech world, Evgeny Morozov, speculated that the ‘disruptive innovation’ backed by Saudi Arabia would include killer robots and the ability to smoothly dispose of dissidents’ bodies. But one must not lose sight of how these regimes are also part of the imperial money-go-round, with full backing from the US and the UK.
The tens of billions of dollars allocated to SoftBank’s Vision Fund are only a small sample of the massive funds potentially available worldwide to address everything from debilitating diseases, to malnutrition and environmental destruction. Instead they are advanced with a beady-eyed parasitism to find the right profitable niche in the market and monopolise it. Even then, the decisions on how the world’s resources will be used rest with a small number of multi-billionaires and the states that back them.

Tony Norfield, 5 November 2018


[1] In 2016, Saudi Arabia’s Public Investment Fund had already invested $3.5bn in Uber, which faced strong competition from one of SoftBank’s other ride-hailing investments, in DiDi (which eventually took over Uber’s China operation, but also gave Uber a stake in the merged company). It has been reported that to avoid Saudi embarrassment of funding a competitor to Uber when it put money into the Vision Fund, SoftBank made sure that the DiDi holding was kept in a separate fund. This is shown in SoftBank accounts as the ‘Delta Fund’, but DiDi is its sole component as a $5bn investment.

Sunday, 4 November 2018

Artificial Intelligence & Images of the Real World



I have long had some scepticism about machines, having been frustrated many times when PCs, vending machines and mobile phones failed to work, so I was in the right frame of mind to see a recent BBC report on ‘machine learning’ and artificial intelligence (AI).[1] Touted as the next Big Thing in the hyped world of technology, the missing element of many reports on AI is that a fundamental building block is often taken from the bottom rungs of the world economy.
Especially in image-related applications, such as needed for driverless cars, the ‘machine learning’ can only work because a human teacher tells the machine what something is. For example, to learn that a set of pixels is a tree, or a road sign, or a pedestrian crossing the road, or a building or another car, the machine is fed many millions of tagged images of trees, signs, pedestrians, buildings and cars taken from the road environment. Now, where does this input come from? Surely the geniuses of Silicon Valley do not sit up all day and night staring at screens and tagging the images?
That’s right, they don’t. Instead, the countries and people that normally provide low cost raw material to the rich nations and their corporations also provide this low cost data raw material.

The BBC Click programme highlighted a case where a San Francisco-based NGO, Samasource, employs hundreds of people from a slum area of Nairobi, Kenya, to tag images for companies such as Google, Microsoft, Ebay, Walmart and Lyft. The head of Samasource, Leila Janah, said that they pay a ‘living wage’, $9 per day, and this means that on average their employees’ household income is increased to more than five times what it was before. Questioned about this still pitiful wage, she said ‘if we were to pay substantially more than that, it would throw everything off’.
Janah’s explanation of things going ‘off’ was that higher wages would have the effect of raising local living costs for housing and food. Although this was an evident implication, she did not mention in the broadcast interview that much higher wages would not fit the business model of those tech companies at the forefront of ‘innovation’ that were using the data from Kenya.
It is progress for impoverished slum dwellers to have a better living from being engaged in the world economy. But at the same time they are being fed into the machine that provides the main benefits for the rich corporations. This is how capitalism manages technical progress, and is another example of the way the imperialist world works.

Tony Norfield, 4 November 2018


[1] The points noted below are from a BBC Click programme broadcast in the UK on 3 November. The series is on Youtube, but I cannot find a link yet for this ‘Kenya’ episode.

Monday, 22 October 2018

Big Tech & Global Finance


Last week I attended a two-day DECODE Symposium in Barcelona on digital capitalism. It was an interesting and informative conference, with speakers giving perspectives from Europe, Asia, North America and South America. One somewhat predictable theme of comments from many Europeans was their concern that Europe, or their ‘own’ country, had a weak position in modern developments. They seemed to be more worried about US and Chinese competition than about how imperialism channels technical progress into an oppressive system of exploitation. For those interested in this topic, I would recommend taking a look at the readings listed on the DECODE website here. Over the next week or so, videos and presentation material from the Symposium should be available on the same site.
My talk at the Symposium was on the subject of ‘Big Tech and Global Finance’, the slides of which are reproduced below:

































Note: the table on page 9 was corrected on 19 November to give the correct years, 2015-2017















 Tony Norfield, 22 October 2018

Wednesday, 10 October 2018

Perspectives on Digital Capitalism

A conference in Barcelona on digital capitalism next week will discuss the ‘geopolitics of technology and data’ on Day 1 and getting ‘beyond surveillance capitalism’ on Day 2. It is on 16-17 October 2018.
I will be speaking at the conference in Session 2 on the first day, covering the topic of ‘Big Tech & Global Finance’.
The conference is open to all and it is free to register – details here. There are many speakers with different perspectives on these important issues. A useful selection of readings on this topic is here.



Tony Norfield, 10 October 2018

Monday, 8 October 2018

Finance, Power & Brexit


Here is an interview I did recently with Esteban Mercatante for the Argentine-based Spanish language journal Ideas de Izquierda and which I believe will also be published in the near future at leftvoice.org. His questions centred on my book, The City. My answers give some background to the analysis and comments on recent developments, including Brexit.
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Q1       You show in your book that the City of London is the pre-eminent international financial centre for the world economy, despite the fact that the UK's own currency, sterling, is not so important on a global scale as it used to be before WWII. What are the main global transformations in the flows of capital that London could take advantage of to maintain its international status? And in what way has it been favored by geopolitical processes?
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A1       The financial business of the City of London was damaged by WWII and the disruption to international trading and investment in the immediate years afterwards, in addition to the weaker economic position of the UK. However, the City had many established international links, arguably more than New York, despite the very powerful position of the US in the world economy. These links evolved in the 1950s to use the US dollar rather than sterling as a financing mechanism, and this was helped by the restrictions the US government placed on the domestic US financial system at the time.
Big corporations demanded access to funds on a scale that was not easily available in the domestic banking markets, and by the end of the 1950s a ‘eurodollar’ market had evolved to supply this new form of credit. It was mainly located in London, but it could draw upon US dollar funds from around the world. A ‘eurobond’ market was also established in the early 1960s. Both types of euromarket grew very rapidly and the City of London benefited most from this. So the business of the City changed from the pre-war forms of dealing and it also became less directly dependent upon dealing with the British Empire/Commonwealth countries. Britain’s close political links with the US undoubtedly helped this process, limiting the risk that there would be any constraint on US companies and banks dealing in the London euromarkets.


By the early 1970s, the operation of global financial markets was in turmoil, as international imbalances and the changing positions of the major powers were no longer compatible with the previous Bretton Woods exchange rate system. The City of London’s position benefited further from these disruptions and from the later removal of nearly all restrictions on international financial dealing.

Q2       You have elaborated a power index that includes five measures to define the relative status of each country (GDP, FDI, Banks, FX, Military). As expected, US is at the top of the list, followed among others by Germany, China, and Japan. But it is surprising to see Great Britain in second place. To what extent does this index reflect the effective global power of the UK today?
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A2       My Index of Power is a summary measure that brings out significant features of the distribution of power in the world economy. It is a very simple tool based upon publicly available data. While it cannot capture everything, especially the relationships between countries, it throws an interesting light on where each country stands in the global system. I was also a little surprised to see that the UK ended up in second position, and you will have to take my word that the index was not planned to give this result! The UK’s position reflects the international investment, trade and finance components of the Index, but these are also very important in the world system. I think it is also an endorsement of the value of the Index that the highest ranking countries benefit from other aspects of international power that are not directly measured. For example, the UK is a key political partner of the US and is also a permanent member of the UN Security Council.
Relative positions in the Index of Power have changed over time and will change further, for example with the rise of China. The UK remains in a prominent position now, but its status will be damaged by Brexit. Brexit’s impact is likely show up in at least one of the Index components, that for the volume of international banking conducted from the UK base.


Q3       In your book you criticize the notion of ‘finance capital’ as developed by Hilferding because it misrepresents how the rule of capital is expressed. What are the risks you see in this notion that the banks are in control of the whole national capital as it was assumed in Finance Capital?
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A3       While Hilferding’s Finance Capital was an important work, ironically, it showed a poor understanding of the relationship of finance to the power of capital. It discussed new forms of finance in the capitalist economy, and was far ahead of other Marxist work in this respect. Yet when Hilferding examined aspects of the financial system, especially the role of banks in Germany, he drew the conclusion that these could be taken over – by a progressive government, of course – for the benefit of the mass of people. In this respect, Hilferding’s ideas continue to have resonance today, when we see some leftists call for banks to be nationalised, or for there to be a ‘radical’ national economic policy that would take more control of the credit system and investment.

There are several big problems with these views. First, they all operate in the framework of national capitalism and pay little attention to how the international system works. Second, they assume that controlling banks is the same as controlling finance, when actually the banks play only a limited role. Third, they ignore how the financial system necessarily pervades all capitalist market relationships. The financial system is not something external to ‘good’ capitalist production or a mechanism that could be managed by a progressive government to produce better economic results.

It is true that capitalist policy makes mistakes and there have been many stupidities. However, it is not the job of socialists to offer less stupid capitalist policies. Those who get into this game end up betraying the people they claim to represent and endorsing capitalist solutions.

Q4       You say that Marx’s analysis in Capital described interest-bearing capital as being parasitic, while other aspects related to the financial sector (like money-dealing) are not. However, your argument is that “All forms of financial operation can potentially assist in the transfer of surplus value from one country to another and so contribute to increasing the power of the dominant countries”, and are then a form of parasitism. Which are today the main mechanisms of this parasitism and how do they benefit London and other financial centers of the world?
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A4         My discussion of parasitism in The City showed the different ways in which this term was used by Marx and Lenin and related this to the forms of finance that we have today. I would not see ‘finance’ as being something narrowly defined and to include only banks or other financial institutions. I think that it is best to understand finance as an important aspect of what Marx called the ‘form of value’ and to analyse how it has evolved. To understand the forms of capitalism today, one has to go well beyond the notions of commodity production, buying and selling. For example, many large corporations use their equity as a means of payment when they take over other companies in a ‘share swap’. They do not necessarily use a bank loan or pay in cash, and they may not even use a financial institution to broker the deal.

If a country has an internationally important financial centre, then it can get revenues from dealing with capitalists from all over the world, not just in its national sphere. It can provide all capitalists with short-term or long-term funding, or with a market for their financial securities (bonds, equities). These may often look like specialist financial operations, but they are also closely tied in with the commercial and productive power of big companies, as reflected in trade relationships, investment deals, control of intellectual property and patents, and so forth. 

New York has the world’s biggest bond and equity market, but much of it is US-based. London has the world’s most internationally-linked financial centre. These and other centres generate big revenues for the country concerned – through dealing profits, high paying jobs, government tax revenues, etc. However, it is difficult to pin down where this money originally comes from! A French bank in London might gain commissions from dealing with a German company. But the German company’s transaction might be related to revenues from goods supplied by factories in Asia and sold in North America.

Q5       In March 2019 Brexit is supposed to conclude. But the negotiations with EU are at a deadpoint and May's government is in crisis. What perspective do you see for the process?
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A5        The Brexit process has been a complete mess, and I have been astonished at how stupid the British ruling class has been. It is amazing how the current political establishment does not seem to understand the EU political mechanisms, ones that British advisers had played such a big part in developing over the previous 45 years.

What makes this an unresolvable problem is also what makes it interesting politically, although it can be tedious to follow all the details. Brexit is clearly bad from the point of view of British business and it is also damaging for the UK’s political status. That should have made it avoidable, but the Conservative government made an unusual mistake and put a major decision of foreign policy up for a popular vote in the 2016 referendum. A narrow majority Leave vote resulted. This was made up of many working people who blamed the EU for their economic problems, especially those who were against the immigration of workers from other EU countries. Leave voters also included the more traditional anti-European British nationalists, and some misguided leftists who thought that reactionary popular sentiment could somehow be given a positive, anti-capitalist gloss.

Both major political parties in the UK, the Conservatives and Labour, probably have a majority of Members of Parliament who think Brexit is a mistake. But they cannot easily turn their back on the referendum result and snub the electorate without risking a big drop in support at the next election. It would even be difficult for them to try and organise another referendum to get the result overturned, by arguing that the circumstances have changed since 2016 and there is now a clearer idea of what Brexit will actually entail.

There is a different problem for big business. Despite growing signs of concern now that there will be trouble if the UK’s access to the EU single market is not maintained, companies had been reluctant to get involved in the political debate much earlier. They have now probably left it too late to have much influence. Previously, the British business elites were confident that their interests would be secured by the major parties, and they could keep aside from taking any public positions and just have a quiet word with the relevant minister. That view has now been shattered, but it is not clear what they can do about it.

Britain’s political idiocy is shown by those pro-Brexit UK politicians who imagine a marvellous world outside the EU, one that will more than make up for the losses borne by having less access to the European market. Political leaders in Europe and elsewhere cannot believe they are witnessing this unprecedented act of self-harm from what had previously been considered as the most sophisticated ruling class in the world!

Q6       So far, has the Brexit vote had any impact on the business of the City of London?
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A6      There has been little impact on the City of London so far, but many banks and other financial institutions have made plans for relocating some of their business operations to elsewhere in the EU. I cover this question in the Afterword to the paperback edition of my book, The City. Apart from Brexit, the City’s business has in any case been impacted by a general downturn in European financial dealing over recent years, a result of the broader economic crisis. Brexit will make this worse, especially if British-based banks do not get a ‘passport’ to deal with other banks in the EU. However, the City of London has a range of skills that is not easy to replicate elsewhere, at least not for some years. There are also less visible items, such as the English commercial law that underpins many financial contracts, which make leaving the City of London more complicated than it might at first seem.

In the pre-Brexit years, London had rivals elsewhere in Europe, and some were bigger in certain areas of finance, such as Luxembourg in fund management. But London has been the biggest, or one of the biggest, in a very wide range of operations, from banking, to venture capital funds, to financial derivatives and foreign exchange dealing. If, post-Brexit, London’s position is greatly reduced, then no one centre elsewhere in Europe really stands out as a likely winner to take on London’s former role. Paris and Frankfurt each have some advantages, but so do Dublin and Amsterdam.

Q7       Besides Brexit, what are the most important challenges for the preeminent position of London and how is British imperialism responding to them? In your book you consider Islamic finance and China as the most important avenues of parasitism to pursue. Are there any others worth mentioning?
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A7       There has been little new of significance reported on the City and Islamic finance in the past year, but developments continue. In early September this year, there was an ‘Islamic Finance Week’ held in the City, while in late September the Lord Mayor of London visited Istanbul to boost Turkey’s business links with the City, in particular on Islamic finance. Regarding China, City foreign exchange dealing in the renminbi has grown by some 30% in the year to September and it remains the biggest hub outside Asia, while there are plans to develop links between the London Stock Exchange and Shanghai. I am not aware of anything important outside of these developments.

Q8       In your book you point out that the development of financial assets and derivatives is closely related to what happens in profitability. Ten years after Lehman's bankruptcy, we can observe that global debt is much higher than it was in 2008, and there are several stress factors (rising rates by Fed, the trade war instigated by Trump). What do you consider is the outlook for world economy? May we be heading another global slump?
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A8        Yes, debt levels are higher now than they were in 2008, not just in absolute terms but also as a share of GDP. This is the clearest sign of a continuing structural problem for the global economy that has not been overcome. Whereas 10 years ago the debt was very much concentrated in the major economies, now it is far more widespread, having risen sharply in ‘emerging’ economies too.

While this indicates a vulnerability of the world economy, for the major economies the outcome may be stagnation or slow growth rather than a dramatic slump. The banking system is less over-extended now and there is probably a smaller number of high-risk debtors, so that there is less chance of a wave of defaults causing a credit crunch. Debts in the major countries are more concentrated in the government sector, which means there is less risk of a series of defaults and the related panic, although this means there will be continued pressure to curb government spending.

For the emerging economies, there is far more risk of a serious economic setback, which is already occurring in several. The level of foreign currency-denominated debt can be a high proportion of GDP for some countries, notably Argentina, while the tightening of US monetary policy is both raising interest rate levels and boosting the value of the US dollar versus their domestic currencies. At the end of September, the US Federal Reserve raised the Fed funds rate to 2.00-2.25%, the first time it had been above US consumer price inflation for 10 years, and five-year US Treasury yields had also risen to just under 3% from less than 2% 18 months ago. These are low levels still, but they remain a big problem given the high level of debt.

Tony Norfield, 8 October 2018

Tuesday, 2 October 2018

Murdering Europeans


Europe has a long history of violence. Against the advances in philosophy, science and the arts, one must weigh the prolonged episodes of war, massacres, pogroms, colonial terror and oppression. The latter do not look good, so there is often a convenient framing of events in Europe’s historical memory, one that finds no place for the bad stuff. For example, every European country has its own mythology about the Second World War. Although the myths usually cannot withstand the slightest collision with facts, they nevertheless continue as persistent reference points for the mass of people in a particular country.
The UK has a particular weakness for this, with images of how the Dunkirk spirit, squadrons of spitfires and Churchill’s wartime speeches saved the day and led to victory over Nazi Germany. For some reason the historical ‘memory’ does not consider how it was that British deaths in the Second World War numbered only some 300,000, less than 1% of the population, compared to more than 25 million killed in the Soviet Union, 14% of its population. In the biggest confrontation with Germany that turned out to be the turning point for the whole war – the Battle of Stalingrad from August 1942 to February 1943 – the Soviet Union suffered nearly 500,000 killed or missing.

The main course

A record of how many people died in a long and extensive war is difficult to pin down with any precision, but the following map gives an interesting picture of the order of magnitude for different European countries in the 1939-1945 period. Brackets below the totals for each country show another chilling statistic for the murders of Jewish people. The bulk of the figures are from Germany, Austria, Central and Eastern Europe and the Soviet Union, but it is also worth comparing the absolute numbers with the sizes of the relevant populations to get an idea of the scale of the human destruction. While Poland’s number is large in both absolute and relative terms, six million dead (of which three million Jews) and around 17% of the population, Latvia’s and Lithuania’s figures are much smaller but still more than 12% of their populations. A Wikipedia tabulation here gives a fuller record.[1]

The dessert

With its topic being World War Two, the previously cited Wikipedia article and tables do not spell out that the human carnage in Europe continued until well after 1945. That is the focus of a book by Keith Lowe, from which the European map is taken: Savage Continent: Europe in the Aftermath of World War II (Penguin/Viking, 2004). To read Lowe’s review of post-war Europe is shocking, even if one first allows for the fact that it is unlikely that violence completely stops when formal hostilities cease.
Among other things, Lowe’s book details the continued attacks on Jewish people from 1944-45, especially in Central and Eastern Europe. Discussing the anti-Semitism and pogroms in Poland, he notes that
‘Poland was easily the most dangerous country for Jews after the war. At least 500 Jews were murdered by Poles between the German surrender and the summer of 1946, and most historians put the figure at around 1,500.’
It was not only murder, but also looting and theft:
‘In Hungary many peasants came into possession of decent clothes and footwear for the first time when the property of expelled Jews was shared out in 1944. In Poland, where the Jews had made up a substantial portion of the middle class, a new, Polish middle class rose to take their place.’
As you might imagine, any Jewish people returning home did not have much success in getting compensation.
But don’t think the violence was limited to anti-Semitism. The immediate post-war years had to deal with the aftermath of the destruction, with famine and millions of ‘displaced persons’ across the continent. Although some former collaborators with the German occupation found a way into the post-war establishment, they also risked humiliation or summary execution. Under the cover of revenge by resistance fighters, personal scores were settled. More importantly, there was a dramatic trend of ‘ethnic cleansing’ in the immediate post-war years.
In terms of numbers, the most striking development was the expulsion of over 11 million Germans from countries in Central and Eastern Europe. These were the so-called Volksdeutsch, the long-established populations of expatriate German speakers. Many also suffered forced labour in camps in Poland and Czechoslovakia.
Often the attacks on different groups were linked to their supposed role in the war. But the motive of revenge easily came to embrace all those in the ‘wrong’ community. Referring to developments in 1944-46, Lowe notes the tens of thousands killed in Poland and the Ukraine: ‘Poles and Ukrainians slaughtered one another and burned each other’s villages with an enthusiasm that far exceeded any of their actions against the German or Soviet occupiers’.
There was an attempted genocide of Serbs in Croatia, and Hungarians were expelled from Slovakia. Summing up on the Central and Eastern Europe dimensions, Lowe puts it like this:
‘These were the kinds of actions that were taking place all across Europe. Hungarians were also expelled from Romania, and vice versa. Albanian Chams were expelled from Greece; Romanians were expelled from Ukraine; Italians were expelled from Yugoslavia. A quarter of a million Finns were forced to leave western Karelia when the area was finally ceded to the Soviet Union at the end of the war. As late as 1950 Bulgaria began expelling some 140,000 Turks and Gypsies across their border with Turkey. And so the list goes on.’
‘As a result of all this forced population movement, Eastern Europe became far less multicultural than it had been at any time in modern history. In the space of only one or two years, the proportion of national minorities more than halved. Gone were the old imperial melting pots where Jews, Germans, Magyars, Slavs and dozens of other races and nationalities intermarried, squabbled and rubbed along together as best they could. In their place was a collection of mono-cultural nation-states, whose populations were more or less ethnically homogeneous.’
These events, barely 70 years ago, are something to consider when you observe the reactionary developments in European politics today.

Tony Norfield, 2 October 2018


[1] The Wikipedia article lists casualties from a wide range of countries, not just in Europe. Notable is the huge number of deaths in China, some 15-20 million and 3-4% of the population. China is little covered in films and books on the Second World War, but a good source is Rana Mitter’s Forgotten Ally: China’s World War II, 1937-1945, First Mariner Books, 2013.