The London 2012 Olympics (here I am possibly breaching copyright, just using the term) offer the usual sporting rivalry that is mixed with a wide range of national prejudices. Most interesting is how major powers look upon the medals table as a signal of relative strength in the wider world, with all the risk that the ranking upsets their view of who is really in charge.
This is the backdrop to the western media attack on the 16-year old Chinese girl swimmer, Ye Shiwen, who swam 'too fast'. A US coach made a big point of doubting that her speed could have been achieved by normal training methods. The implicit suggestion was that there had been the use of performance-enhancing drugs, despite the fact that the Olympics now enforces strict testing and, in the latest (and previous) tests, she has been declared 'clean'. So then the UK media discussion turned to the possibility that the inscrutable and devious Chinese were using special drugs that had escaped the testing regime. This is an excellent ploy - the fact that you cannot find the drugs used only shows how devious they are! The lack of evidence is evidence. In the event that this ploy does not work, one news programme today on the BBC included a report suggesting that 'genetic manipulation' might have been used to enhance her performance, and this cannot be picked up by the tests on athletes currently used. Some sports commentators have pointed out that it is common for teenagers, like Ye Shiwen, to improve their performance dramatically over a year or two, given good training, but this gets little coverage.
In my view, this is another sign of imperial anxiety: by the US at China's rise, and by the UK because its fortunes in the world economy are tied very closely to US power. After the Beijing Olympics in 2008, the US media promoted the idea that they had won because they had won the most medals. This was true because the US had a tally of 110 medals versus China's 100, except for the awkward fact that China had won 51 gold medals versus 36 for the US. So far in London, China has the same number of medals, but still more golds. With the size of the Chinese economy now rivalling that of the US - depending on how you count the GDP! - it is not such a wonder that a 16-year old girl has become the focus of imperial propaganda.
Tony Norfield, 31 July 2012
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Tuesday, 31 July 2012
Monday, 30 July 2012
The Rate of Profit, Finance & Imperialism
What role do banks play for the major imperialist powers?
Everyone knows that the rich countries own the big banks, and that the big
banks are in a powerful position in the global economy. Despite this, there has
been little attempt to examine the relationship of finance to imperialism,
still less to analyse the financial system as part of the every day
operation of the imperialist world economy. Here I offer a framework for
understanding this role of finance, which is part of a project that I am
researching.
The points outlined are based on a paper I presented at the
5-7 July 2012 conference of the AHE/FAPE/IIPPE in Paris. Since that conference,
I have revised and further developed the analysis, and here I present some of
the results (I plan to get a full paper published). These summary points
exclude the more detailed analysis, documentation and references. I welcome any
comments.
I start with the standard formula used to represent the rate
of profit on capital investment. By examining how this formula needs to be
modified, if it is to reflect the workings of the capitalist economy, I show
not only where the financial system fits into this formula, but also how the
formula can be developed to highlight important aspects of the role of finance
for imperialism.
First, a warning! Running through a series of definitions
and equations can be a little dull. I have not yet figured out how to do this
with witty literary allusions, nor by using cartoon characters, but I hope that
the content of what is being explained is engaging enough to offset the dry
form of presentation.
1. From the ‘basic’ rate of profit to a system rate of
profit
The familiar expression for the rate of profit on capitalist
investment that is taken from Volume 3 of Marx’s Capital is:
where S is the total surplus value produced, C is the
constant capital advanced (on machinery, raw materials, etc) and V is the value
of the variable capital advanced on living labour power.
However, strictly speaking this expression refers only to
the rate of profit for productive capital, excluding any allowance for
non-productive expenditures. Neither does it allow for the rate of turnover of
the invested capital. Both these factors can have a big influence on the rate
of profit for the capitalist system as a whole and below I will incorporate
them into an expression for the system rate of profit.
Investment that is productive of value and surplus value
extends beyond purely industrial activities and the production of physical
goods. However, for simplicity I shall call productive capitalist operations
those of ‘industrial’ capital. Expenditures that are not productive of
value or surplus value may be broken down into expenditures made by the state
or government and non-productive expenditures made by private capital. State
expenditures have become very important for the capitalist economy, but are
excluded from this analysis because I wish only to focus on the role of private
capital. Private capital’s non-productive activity is in what Marx called the
‘sphere of circulation’. Here there is no production of any new value, but only
a change of the form of value (the buying M-C, or selling C-M, of commodities),
the borrowing or lending of money, or the trading of financial claims. For
simplicity again, I shall call the buying and selling of commodities an
operation performed by ‘commercial’ capital and the remaining functions those
of ‘financial’ capital or ‘banks’.
The non-productive expenditures of private capital might
indirectly boost productive capital. For example banks could provide funds for
investment, or commercial capital could buy or sell commodities more quickly or
in a less costly manner than the productive capitalist could do on its own.
However, even if the total value and surplus value produced in a year increases
as a result, this is a function of the value produced in the productive
sphere only. The costs incurred by the non-productive sphere still have to be
accounted for as a capital advance, and as an expense to be deducted from total
surplus value produced.
On the second issue, the turnover time of capital
investment, this describes how quickly the value of capital advanced returns
back to the capitalist after the periods of circulation and production. Marx
distinguishes for productive capital two types of capital employed when
he analyses turnover: fixed and circulating capital. Fixed capital (machinery,
tools, buildings, etc) lasts for more than one production process and gives up
its value to the product in a piecemeal fashion; circulating capital (the value
of labour-power employed, raw materials, etc) adds or transfers its value in
full in one production process. Only a portion of fixed capital is used up in a
year, but it all has to be advanced at once – you cannot work with half of a
machine. Circulating capital will usually be turned over several times per
year, so the total capital advanced to buy circulating capital at any one time
will be less than the total used in a year.
These distinctions are used in what follows. A further note
is that, for capital advanced by both commercial and financial capital, while
only the depreciation of their ‘fixed assets’ needs to be set against the total
surplus value produced, all of their ‘circulating costs’ in the year
represent a deduction from surplus value.
2. The rate of profit including commercial capital
The rate of profit, taking into account both productive and
commercial capital, can be derived by considering firstly the total value of
the commodities produced in a year and the surplus value contained in them.
Then this surplus value is measured against the total capital advanced in the
year by both industrial and commercial capital.
In this expression for the rate of profit, the terms are
defined as follows:
FC the total advance of fixed capital by
productive capitalists, with β being the proportion that depreciates in one year
CC the advance of
circulating capital for one period of production
V the advance of variable capital to hire
productive workers for one production period
B the advance of money capital by
commercial capitalists to buy commodities from and sell to industrial capital
(this element of capital is not a cost that needs to be deducted from surplus
value, because it is returned on the sale of the commodities)
K the advance of capital by commercial
capitalists for fixed assets, with β being the proportion that depreciates in a year
L the total
circulating capital costs of commercial capital in a year
S the surplus
value produced in one period of production
n the number of turnovers of circulating
capital employed by productive capital in a year
Using these terms, the formula for the rate of profit that
includes both industrial and commercial capital is then:
Clearly, the system rate of profit now looks much lower than
that implied by equation 1, since it has to allow both for a deduction from
surplus value of the annual costs of commercial capital in the numerator and
for the extra costs of capital advanced in the denominator. In Marx’s
exposition in Capital Volume 3, these extra deductions and costs are not
always evident, although it is noted that a faster rate of turnover (a higher
value for n) will increase the mass of surplus value produced in a year.
3. The rate of profit allowing for financial capital
In order to show how financial capital can be
included in our calculations of system profitability, it is necessary to define
some additional variables. Let E be the value of bank equity capital, or
‘shareholders’ equity’ and let D be the value of customer deposits and other
borrowings. It is important to note that these deposits include not only the
surplus cash resources of industrial and commercial companies. They will also
be boosted by the banking sector’s own creation of money.
The value of D plus E is used to fund the bank’s total
assets, which I will designate as A. In standard accounting terminology, the
bank’s total assets equal its liabilities plus its equity capital, so the next
formula is:
A = D + E
I shall assume that, of the bank’s total assets, a value
equivalent to E covers the bank’s fixed and circulating capital costs
(buildings, technology, infrastructure and salary costs, etc) and its core
reserve capital. This is a reasonable simplification, and it leaves a value
equivalent to D to be lent out. The lending can be to industrial and commercial
companies, or to other financial companies (including buying any financial
assets in the secondary market). This value D can then be divided into D1,
where it is lent ‘internally’ to other financial companies, and D2,
where it is lent ‘externally’ to industrial and commercial companies (I exclude
households and the government in this analysis).
If the average interest rate paid on deposits is iD,
and the average return on bank loans is iA, the bank’s net interest
income (before deducting other, non-interest costs) can be written as:
The sum D2 represents the funds for investment
that industrial and commercial companies have borrowed from banks. These funds
are for their extra investments in constant capital, variable capital, plus a
proportion of commercial money capital advanced and a proportion of the fixed
and circulating costs of commercial capital. For the total constant fixed
capital, FC, this can be broken down into FC1, advanced by the
industrial capitalist directly, and FC2, that portion borrowed from
the bank. Hence
similarly,
CC = CC1 + CC2
V = V1 + V2
and likewise for the commercial capitalist,
B = B1 + B2 and so on
Since, by assumption, all
the borrowed funds equal one portion of the total deposits of banks, then:
The logic behind these
formulations is straightforward and it can be developed to derive some
interesting and intuitively reasonable results.
Firstly, total surplus value remains nS, as noted before,
but the surplus value is not only shared between industrial and commercial
capitalists and the financial sector. For both the latter two sectors, their
depreciation costs of fixed capital outlay for buildings, technology, etc, and
their personnel and other circulating costs are not transferred to the values
of commodities. Hence these latter costs must be recovered from the total
surplus value produced in society. If we assume that the depreciation of the
fixed assets of financial capitalists in one year is equal to γE, and that the
total circulating costs in a year (including wages paid) amount to M, then the
total profit appropriated by the three sectors is lower still than in equation
(iii) above. It is expressed as:
nS – L – βK
– M – γE
The total capital advanced
by all three sectors can be given as the sum of that belonging to the
industrial and commercial capitalists, the funds they have borrowed from the
financial sector plus the financial sector’s own equity (which here we assume
also covers their circulating costs M). Hence the rate of profit on total
social capital can now be written as:
While a little unwieldy, this result highlights the impact
of the commercial and financial sectors on the total system rate of profit. It
shows in particular how the rate of profit is much lower than suggested by
simply looking at the ratio of the total S in one year to the C + V advances of
productive capital. I believe this kind of formulation to be original. Although
some elements of this type of formula have been discussed in the literature, it
is notable that in Volume 3 of Capital Marx only discussed the division
of the surplus value accruing to industrial and commercial capital between
‘profit of enterprise’ and interest. Marx did not discuss the rate of profit of
the system as a whole once the costs of commerce and finance had been included,
and neither did Hilferding in Finance Capital.
The methodology used here excludes financial assets
from the calculation of the capitalist system’s rate of profit, except to the
extent that the value of these assets reflects investments in the operations of
industrial, commercial and financial companies. In those cases, the assets may
be considered as capital advanced, whether or not the funding goes to
productive or unproductive (commercial or financial) capitalist enterprises.
Otherwise, the large volume of assets recorded by financial companies will
simply reflect a potentially huge sum of value that is based on loans made
(largely based on deposit creation by the banks), or financial securities and
derivatives purchased. The only common element between the former invested
assets and the latter assets is that they will, in general – except for
derivatives – accrue interest or dividend payments. But while all such payments
remain deductions from the total surplus value produced by the capitalist
system, only the former assets can be considered as real capital advanced.
4. The profitability differences between banks and other
companies
It can be shown (as explained in the main paper) that the
system rate of profit described here drives the movement of some important
profitability targets of industrial and commercial companies such as the ‘return
on equity’. As the system rate of profit trends higher or lower, so will the
industrial and commercial companies’ return on equity.
However, the relationship between the system rate of profit
and the return on equity for banks is far more tenuous. This is because the
banks can expand their assets dramatically through their ability to create
deposits. These assets are multiplied by the interest rate
differential (and fees) that they gain, boosting their profitability. Banks are at the centre of the capitalist financial system, able to
gain access to far easier sources of funding than other companies, both from
other private banks and from the central bank’s liquidity operations. As a
result, it is considered ‘normal’ for them to have a leverage ratio of 20,
whereby their borrowings are 20 times their equity base. Other types of company
normally have leverage ratios of less than one. This creates a different
dynamic for the return on equity for financial companies compared to that for
industrial and commercial companies, and there is no clear mechanism for the
equalisation of such a profit measure between banks and other companies.
Another issue arises from the fact that bank costs and
profits are a deduction from the surplus value produced by the system as a
whole. This should place a constraint on how far the banking sector can grow,
but that constraint appears in a different way for different countries. If a
country is an imperialist power with a strong financial system, then it can
derive surplus value from other parts of the world, enabling its
financial sector to grow dramatically and nevertheless remain a profitable area
of business!
5. Imperialism and finance
The UK stands out in this respect. Not only is it a major
imperialist power with a GDP in the top 10, but it has a banking sector that
has liabilities more than five times national GDP.[1]
Surprisingly, this simple point receives no coverage in the Marxist literature.
But this omission is consistent with that literature analysing neither why the
UK financial sector is so big, nor how the financial sector operates as a
functional part of imperialist economic power.[2]
It is not open to every country to establish a major international banking and
financial network. The growth of the UK financial sector is based on its status
and privileges in the world economy, one that has been promoted by successive
UK governments, in particular from the late 1970s and in cooperation with the
US.
There are three important ways in which the financial sector
can play a key role for the economic livelihood of an imperialist power:
(a) By drawing on (relatively low cost) funds from abroad to
lend to domestically based capital and to the state: this happens largely via
the FX reserve role of the dollar in the US’s case, and via the London-based
banking system in the UK’s case.
(b) By financing the foreign operations of domestic corporations,
whether from domestic or from foreign funds, so that they can exploit foreign
labour: this can happen via bank finance or via the stockmarket enabling the
centralisation of capital. across national borders.
(c) By taking a share of globally produced surplus value:
this takes place through the banking centres providing loans and other
‘financial services’ to foreign businesses and governments.
Each of these financially derived benefits for the
imperialist power concerned depends on a privileged relationship with other
countries, one that it is determined to protect. Hence the attitude of the UK
and US governments to any measures to constrain the financial sector beyond
what they might also agree is necessary to prevent further damaging excesses.
Tony Norfield, 30 July 2012
[1] See
‘Imperialism by Numbers’ on this blog, 1 May 2012, for more information on
imperialist country rankings.
[2] An exception
to this rule is David Yaffe, although I disagree with his analysis of the role
of finance. See his article ‘Britain: Parasitic and decaying capitalism’,
Fight Racism! Fight Imperialism!, 194, December 2006-January 2007, http://www.revolutionarycommunist.com/
Saturday, 21 July 2012
Global Working Class
Here is a chart produced by John Smith that sums up the changes in the global industrial workforce from 1950 to 2005. It was produced as part of his PhD thesis, completed in 2010, and illustrates in a striking fashion the way in which, since the late 1970s, the distribution of the global working class (defined here as industrial workers) has changed.
The key features are the absolute decline in the industrial workforce in the 'more developed regions' since the early 1980s and a persistent and dramatic rise in the size of the workforce in 'less developed regions'. By 1980, the absolute size of the latter exceeded the former, a development exacerbated by the absolute decline of the industrial workforce of the developed countries (indicated by the dashed line) from the early 1990s.
The source of the thesis is given in an earlier note on this blog ('Imperialism and the Law of Value', 3 December 2011), and this chart is on page 141, together with notes on where the data came from.
The working class does not simply consist of industrial workers, but these figures give a clear indication of where the bulk of workers producing value for, and being exploited by, capital is located.
In the past three decades, developments in the imperialist world economy have seen the centre of gravity for capitalist production shift towards the poorer countries. Now we have a situation where most products consumed in rich countries are made in poor countries, by super-exploited labour. Any working class movement in the rich countries fighting against austerity measures imposed on them needs to confront this cardinal fact, both in order to be taken seriously as opposing capitalism, and to be in a stronger position to oppose imperialism and the role their own states play in the global system of exploitation.
Tony Norfield, 21 July 2012
The key features are the absolute decline in the industrial workforce in the 'more developed regions' since the early 1980s and a persistent and dramatic rise in the size of the workforce in 'less developed regions'. By 1980, the absolute size of the latter exceeded the former, a development exacerbated by the absolute decline of the industrial workforce of the developed countries (indicated by the dashed line) from the early 1990s.
The source of the thesis is given in an earlier note on this blog ('Imperialism and the Law of Value', 3 December 2011), and this chart is on page 141, together with notes on where the data came from.
The working class does not simply consist of industrial workers, but these figures give a clear indication of where the bulk of workers producing value for, and being exploited by, capital is located.
In the past three decades, developments in the imperialist world economy have seen the centre of gravity for capitalist production shift towards the poorer countries. Now we have a situation where most products consumed in rich countries are made in poor countries, by super-exploited labour. Any working class movement in the rich countries fighting against austerity measures imposed on them needs to confront this cardinal fact, both in order to be taken seriously as opposing capitalism, and to be in a stronger position to oppose imperialism and the role their own states play in the global system of exploitation.
Tony Norfield, 21 July 2012
Thursday, 19 July 2012
Loving Lehmans
The following quotation is taken from a Lehman Brothers press release in April 2004. This was the occasion when Gordon Brown, then UK Chancellor, officially opened the new Lehmans European HQ in London.
Brown's remarks on the event are quoted next. They are nauseating on so many levels that I will leave them for you to ponder:
I had forgotten about this particular event until a recent press report reminded me. However, the sentiments expressed by Brown about the wonders of the financial markets reflected the appreciation shown by all spokesmen (and women) of British imperialism. Today it is embarrassing for them to be reminded of what they said in the years when the financial bubble was still being inflated. Yet the economic interests of British imperialism are closely bound up with the fortunes of the City of London, as articles on this blog have explained. So, while today's UK politicians will hesitate to be so fulsome in praise of finance, they will continue to protect the status of the City of London.
Tony Norfield, 19 July 2012
Brown's remarks on the event are quoted next. They are nauseating on so many levels that I will leave them for you to ponder:
"I would like to pay tribute to the contribution you and your company make to the prosperity of Britain. During its one hundred and fifty year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential. And it is part of the greatness not just of Lehman Brothers but of the City of London, that as the world economy has opened up, you have succeeded not by sheltering your share of a small protected national market but always by striving for a greater and greater share of the growing global market."
I had forgotten about this particular event until a recent press report reminded me. However, the sentiments expressed by Brown about the wonders of the financial markets reflected the appreciation shown by all spokesmen (and women) of British imperialism. Today it is embarrassing for them to be reminded of what they said in the years when the financial bubble was still being inflated. Yet the economic interests of British imperialism are closely bound up with the fortunes of the City of London, as articles on this blog have explained. So, while today's UK politicians will hesitate to be so fulsome in praise of finance, they will continue to protect the status of the City of London.
Tony Norfield, 19 July 2012
Monday, 2 July 2012
Fixing LIBOR
Last week Barclays Bank was fined close to $450m (£290m) by
three government agencies for manipulating the benchmark level of market
interest rates. This is a record fine for such a misdemeanour, although still
very small in relation to the bank’s financial resources.[1]
The affair has caused a furore in British media politics, adding to the
populist anti-bank sentiment that ignores what is really going on. By
manipulating the interest rates, Barclays was not ripping off consumers, it was
questioning the ‘integrity’ of British-based international financial markets.
That is a mortal sin, and that is why Prime Minister David Cameron and Bank of
England governor Mervyn King are concerned.
The interest rates at issue were the London interbank
offered rate (LIBOR) and the euro interbank offered rate (EURIBOR). The former
is far more important, since it covers not only US dollars but also a range of
other important international currencies, from UK sterling to the Japanese yen
to Swiss francs, and also the euro. LIBOR measures the prevailing level of
interest rates to borrow funds of different maturities from banks operating in
London; EURIBOR is a comparable rate for euros only, and is set by banks
operating throughout the euro area. While this may seem a technicality, it
reflects the fact that the London international money market is the biggest in
the world, and the location for the largest concentration of international
banks. As noted before on this blog, this provides many important advantages
for British imperialism, from the provision of cheap funds to a variety of
revenues derived from surplus value produced in the global economy.[2]
For the British government, it is bad enough having to fight
off the latest euro area plans for Europe-wide banking supervision and
regulation, plans which threaten to cramp Britain’s room for manoeuvre and
which could even raise barriers to London’s ability to penetrate European
financial markets. Having the British-based financial system undermined
internally is even worse. ‘Light regulation’ makes London attractive for global
finance, but if it looks like the market is dishonest that undermines its
status. In this game, the big players can, and do, act like monopolists, using
their power to influence market prices. That is part of the game of being in
imperialist finance. But they are not allowed to lie about the market prices
that have been determined.
Barclays’ crime was therefore against principle. In terms of
quantitative impact, the crime was nevertheless trivial. The
FSA's report documents what happened, complete with hilarious citations from emails
and internal communications that only serve to confirm that most traders are
greedy, arrogant, irresponsible juveniles, rather than ‘masters of the
universe’. However, it also makes clear that Barclays’ actions of pitching its
rate above or below the market could have shifted interest rate settings by, at
most, only one or two basis points (one basis point is one-hundredth of
a percentage point). This is because the LIBOR setting was made from input from
a panel of 16 banks. The official rate setting agency discarded the top four
and bottom four rates received by banks, and then averaged the remaining eight.[3]
A couple of basis points higher or lower for the interest
rate makes a measurable difference to the absolute level of interest payments
on debt securities, on interest rate swaps, or to the net gain/loss on a
futures or options position, when the value of these payments is already huge.
Even then, for an interest rate level of, say, 5%, two basis points up or down
will only change the annual interest paid by 0.4%. It is not a matter of
concern for normal human beings, certainly not when compared to other issues in
the economy. It is an issue for wholesale financial markets, where data for the
first half of 2011 show that the notional amount outstanding of OTC interest
rate derivatives contracts was $554 trillion, and that the total value of short
term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion
euros, including over 241 trillion related to the three month EURIBOR futures
contract. But even then, a higher or lower interest rate represents a gain for
one party at the expense of another. Not everyone is a loser. In the case of
Barclays, the evidence suggests that they were more often in the business of understating
interest rate levels, both to benefit their own trading book and to give the
impression that they were not finding it as difficult to secure funds as in
reality they were. Hence, it is absurd to use this case as an example of banks
exploiting mortgage holders. That is innumerate populism, not real analysis.
This case highlights an interesting feature of British
critiques of the banking system. UK politicians, banking officials, journalists
and media pundits can attack the greed of banks and the damage caused to the
economy (usually meaning the national economy) by their actions. Some even
think that the financial sector is, perhaps, a little too large, given that UK
bank assets are five times UK GDP! But nobody wants to question the role of
Britain’s own giant vampire squid in the global economy. People who get worked
up about the Barclays interest rate scam are usually those who want
imperialism’s financial system to work ‘properly’.
Tony Norfield, 2 July 2012
[1] The UK
Financial Services Authority (FSA) levied the lowest fine of £59.5m, a trivial
amount for Barclays. The US regulator, the Commodity Futures Trading Commission
(CFTC), levied a fine of $200m, the biggest it has ever issued and the fraud
department of the US Justice Department's Criminal Division fined the bank
$160m.
[2] See ‘The
Economics of British Imperialism’, 22 May 2012. The latest data show the City
gained net foreign revenues on financial services of £35bn in 2011.
[3] Even if
Barclays’ low (high) quotations were discarded, this would still tend to have
the effect of biasing the average for the remainder of the sample down (up). If
a number of other banks also gave low (high) rate inputs, then there would be a
bigger effect, but overall the banks would usually have offsetting positions
and would not all be quoting with the same bias.
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