Monday, 1 February 2016

Capitalism, Imperialism, Profit and Finance

The following notes are designed to assist anyone who has tried to analyse developments in global capitalism. Even if the reader has not, then the points made will highlight some issues that should be borne in mind when examining what is written or discussed on these topics.

1. Imperialism and world economy

Any attempt to understand things from the perspective of a national economy is bound to fail. Even the US, the world’s largest economy, can only be understood by looking at how it fits into the world economy. For example, the US dollar is world money, not just the national currency of the United States. Its importance and role depends upon the scope of US power versus other countries, both in economic and political terms. However, even the position of the dollar can be challenged by international developments. It is not an unchanging hegemony; nor has it been in place for all time. Signs that US power has limits are seen in the collapse of ‘The Project for the New American Century’ in 2006 and the political shambles of US policy in the Middle East and North Africa. However much destruction might be in US interests from a tactical perspective, it is hardly a recipe for continued hegemony.
Far less can the UK, France, Germany, China, Iran, Turkey, Brazil, etc, etc, be understood unless their positions in the world economy are taken into account. Their government and corporate policy choices are decided with this in mind. Nevertheless, a key point is that a small number of countries have a monopolistic position in the delivery of most key goods and services and, of the 200 or so countries in the world, there are only around 20 who count for anything in the hierarchy.
For this reason alone, Keynesian economic theory is useless for an analysis of the world economy (see here for a fuller discussion). Quite apart from its errors in understanding the profit-driven nature of capitalism, it focuses only on flows of income, rather the origin of that income and, at most, allows only for international trade balances. Almost always, a Keynesian approach is tied into a nationalist outlook, something that underpins so many apparently radical policies. ‘International’ Keynesianism might appear to be an exception to this, but it is a utopian technocrat’s toolbox. The OECD, or G7 meetings, might recommend changes in economic policy by different countries to benefit world economic growth, but everything still comes down to whatever is in the interests of the capitalist countries concerned.

2. Nationalism and imperialism

Attempting to ‘save’ the national economy to make things better for its inhabitants, for example, by calling for import controls or other forms of government regulation, is a reactionary policy. Firstly, it endorses the existing power of the national capitalist state to determine what will happen. Secondly, it raises national salvation above solidarity with people in other countries who are facing similar problems. This is particularly an issue for progressive people in the imperialist countries that have a dominant position in the world economy. If radicals make any concessions to those who are seeking to defend their privileges in a bankrupt system, rather than to show how the system is indeed bankrupt and must be overthrown, then they have only a short step from this to supporting imperialist aggression. The records of many wars stand in evidence.
I would possibly make one exception here. If, following a popular seizure of state power, that new government enacts policies to defend itself, then it could be seen as a legitimate, though temporary means of securing progressive gains. But if a radical in a rich country calls for such measures, while not mentioning the precondition of a popular seizure of state power before, then you know you have found an apologist for imperialism.

3. The ‘real economy’, finance and profit

There are different kinds of capitalist company and different ways in which they try to make a profit. All profit, rent or interest derives from the surplus labour performed by workers, but the process of capitalist market exchange hides this and makes it appear as if ‘making money’ in business is simply a result of special talent or, perhaps, luck, irrespective of the kind of business concerned. So, producing a good or service as a commodity in the market, buying and selling these commodities, being a real estate agent, lending money or dealing in foreign exchange, bonds and equities can all look, from a capitalist market perspective, as much the same kind of profit-making business. That view upsets common sense. So economists have come up with the notion of a ‘real economy’ of making things versus the rest of the economy, especially versus a ‘financial economy’. However, this distinction ignores both how capitalism is not bothered about making anything except profit and how all the major ‘real economy’ companies are heavily involved in the financial sphere, from stock market takeovers to financial dealings of all kinds.
The modern economy has a pervasively financial form, and the key signals for what is profitable, acceptable or viable to capitalism are transmitted through the financial markets – as reflected in a company’s share price, or a company’s or government’s ability to borrow money. This is basically a more developed form of the traditional ‘laws of supply and demand’ for the commodities a company might produce. It remains the case, nevertheless, that it is capitalist production that produces the profit that is shared, in various ways, among the different types of capitalist company.
Imperialism casts a new light on this process too. Access to funding, access to markets, the ability to use super-exploited labour, the ability to close off markets to competitors, or to use the legal system to protect property and patents, are all special privileges of the major countries, to which the weaker, poorer countries have far less recourse. This affects the profits appropriated by capitalist companies. If the analysis you read takes little or no account of it, you are reading the work of an ignoramus or, more likely, an apologist for the imperialist system.

4. Forms of profit and finance

In recent years, one area of my research was capitalist profitability, the rate of profit, etc. The more I looked into it, the trickier it got. Firstly, the available data do not necessarily measure what they claim to measure. For example, if a company registers a large profit, then that looks like what it has ‘made’, when the reality is that its profit is what its market position has enabled it to appropriate, perhaps by depending upon super-exploited labour from its suppliers, or from a monopolistic position in the world economy defended by patents and commercial laws. Secondly, even if these things were not a problem, then there is still the important question of the different ways in which different kinds of capitalist company generate their profits.
Marxist theory makes a big distinction between capitalist companies in the industrial and commercial sphere and those operating in finance. Ironically, government statistics do a similar thing, although legions of mainstream economists do not. This distinction is based upon the nature of the capitalist investment taking place. The investment by industrial and commercial capitalist (ICC) companies is different from financial investment.
ICC companies largely advance their own money, or at least do not borrow much. This is shown in their low borrowing ratios, with borrowing commonly well below the equity investment of the capitalist owners. However, advancing capital in the financial sector is a very different matter, one that has been poorly covered, or understood, by Marxist writers (except, perhaps, for Suzanne de Brunhoff in her Marx on Money, and one or two others).
Financial companies, such as insurance funds, pension funds, asset managers, hedge funds, banks, etc, advance money they are given by others. Banks also have an ability to create their own assets, via the banking system, as another way to ‘advance’ capital. All of this is a very different form of securing a profit than in the case of ICC companies, despite the fact that all of them rely upon the surplus labour performed by the working class.
For the financial companies, the revenues they gain are commonly in the form of interest on loans made or bonds purchased, or as dividends ‘earned’ from the equity securities they own, or as rents from their investments in property assets. For Marxist analysis, this is technically different from ICC profits earned – after paying interest, etc – from the advance of capital by the owners of such corporations.
The distinction is most simply seen by comparing the leverage of financial companies with ICC. Often, the borrowing ratios of the former are more than twenty times higher than the latter. As a result, with the same advance of the owners’ capital, the amount actually invested/lent, etc, by a financial company can be dramatically higher than for ICC investments. This is a practical expression of the fact that the rate of interest, or such ‘financial’ returns, is not the same as the rate of profit. They have very different roles in the capitalist system, as I argue in my new book.
Any notion of financial ‘investment’ gets even more complex with financial derivatives. Here, what is recorded in accounting practice as an ‘asset’ is simply a derivative with a positive market value. If the derivative market price changes so that it is a loss to the holder, then it becomes a liability.
What appear initially as clear concepts of investment, and the rate of profit on that investment, are complicated by the reality of modern finance. Just consider, for example, that corporations quoted on the major stock exchanges pay most attention to their ‘return on equity’ or their ‘earnings per share’, rather than to a rate of profit due on the invested capital. This is the case, even though the capitalist system’s underlying rate of profit ultimately drives the ‘return on equity’, etc.

5. Economic history

The subject of economic history has more or less disappeared from academic prospectuses. However, it is an indispensable for any understanding of the modern world. Luckily, there are books still being produced that delve into archives and bring to light hidden aspects of important past events, ones that usually contradict the standard mythology, whether on the funding of the welfare state in rich countries, the dealings between major powers or of the road to war and oppression. It may seem perverse that the most enlightening critiques of imperialism can come from what would appear to be mainstream or even conservative writers, at least the ones with their wits about them who do not blindly accept what ‘everybody knows’. By comparison, many radicals often just embellish the mythology with invented stories of ‘struggle’ and ignore inconvenient facts, notably the chauvinism of the masses in the major countries. Rather than a ‘struggle’ by the working class for reforms, a story that appears to be anti-capitalist, often the reality was instead that the ruling elites did a deal with the bureaucracy of trade unions and popular political parties to secure a national consensus that would support imperialism.

Tony Norfield, 1 February 2016


Jojo said...

Tony I ordered your book and will read it. Before that I would like to ask you What you make of those analyst influenced by Von Mises school, like Hugo Salinas, Rob Kirby, Jim Willie who are saying that despite $1 trillion dollars in US Treasury Bills have been returned by Foreign Central Bank in the last 17 months, the price of petrol falling below $30 dollars per barrel the the dollar is rising against others currencies and commodities when it should be falling and the bonds yield is always in the range of 2% to 2.4" when it should be risen?

Tony Norfield said...

Jojo, here are some comments on your questions:

For example, if the US Fed buys Treasury securities from banks, all this does is to replace the banks’ security assets with cash. What happens to those funds depends both on the banks’ ability to lend – how solvent they are – and banks’ willingness to lend – what are the prospects they will get their loans repaid. It also depends on the demand for loans from companies and households. Data show that the latter have huge levels of debt already. Some companies and households might be ‘good prospects’ for the banks, but not many, and even the good ones will be hindered by the broader economic crisis. So, the actions of the US Fed have not produced higher prices in the economy (inflation) as demand has not been boosted by the extra ‘liquidity’ held by banks, contrary to the usual monetarist prediction of events.

If a central bank directly finances government bond issues, as under the Weimar Republic in Germany after World War 1, then, if done on sufficient scale, that is likely to cause inflation and debase the currency’s value. However, what has happened in recent years, from the Fed, the ECB, Bank of England and others, has been where the central bank buys securities (not only government securities) from the banks. This is buying in the secondary market, not directly financing government bond issues, and has the effect noted in the previous paragraph.

The latter central bank policies have boosted security prices and lowered yields, especially on bonds. That is one big reason why bond yields have fallen, despite what a simple-minded monetarist view would expect. Of course, the gloom about economic prospects and deflation has also had an influence. There has been some impact on equity securities from the central bank actions, but these prices are also determined by likely profitability.
On the value of the US dollar: this has to be seen both in the context of what is happening in other major countries, and on the role of the dollar in the global system. With the Fed expected to raise interest rates, and with there looking like some kind of recovery in the US economy, the dollar rose in value from early 2014 until recently. By comparison, other central banks were locked into zero rates and their economies were weak. The stronger value of the dollar will have lowered the prospects for US export growth to some extent, weakening US economic growth. But the main impact comes from elsewhere: from the fact that much international debt is denominated in dollars. A stronger dollar raises further the high debt burdens faced in a wide range of countries (assuming that their currencies weaken versus the dollar, which has often been the case as their growth rates have fallen).

Oil prices have fallen mainly because growth in demand for oil has been weak, given the sluggish world economy, while supply has been stronger. It is not only the Saudis failing to cut back their output, but also the production from new shale producers and expected extra volumes on the international market from Iran that have led the slide in oil prices. US Fed monetary policy has also played some role in the price fall, given that a higher value of the dollar will tend to depress dollar-based oil prices. In addition, the slightly higher interest rates on dollars made investors shy away from all commodities as speculative investments.

Tony Norfield