Tuesday 31 July 2012

Olympic Imperialism

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

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:

      D(iA – iD)

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

      FC = FC1 + FC2


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:

      D2 = FC2 +CC2 + V2 + B2 + K2 + L2

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

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 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.