Costas Lapavitsas, Profiting Without Producing: How
Finance Exploits Us All, London: Verso, 2013, 352 pages
This book aims to provide a
Marxist interpretation of the global crisis, putting it in the context of a new
phase of capitalism, one that is characterised by 'financialisation'. There are
many definitions and uses of this term, and the book's back cover claims that
it is 'one of the most innovative concepts to emerge in the field of political
economy in the last three decades, although there is no agreement on what
exactly it is'. In Lapavitsas’s view, however, 'The transformation of the
conduct of non-financial enterprises, banks and households constitutes the
basis of financialisation' (p. 4). In this review, I will assess the arguments
made in favour of such a definition and Lapavitsas’s view of modern finance,
both of which are problematic.
Key theoretical issues
After opening with a brief
chapter on the rise of finance, noting especially the explosion of derivatives
trading, Chapter 2 of the book ('Analysing financialisation') discusses the
literature of recent decades, both Marxist and mainstream. This is very useful
for providing a review of diverse approaches to the topic while also indicating
Lapavitsas's own perspective. His discussion of the Monthly Review
School, which was among the first in more recent times to focus on the rise of
finance, is interesting because it opens up his own theoretical position. He
notes that Monthly Review basically has an under-consumptionist view of
capitalist crises, similar to a Keynesian one, and that it sees the move into
finance as a result of non-financial companies escaping from a stagnant
productive sector (p. 17). His critique of this view is that it cannot explain
the changed behaviour of non-financial corporations, banks and households from
the 1970s and he suggests that this change of behaviour rests upon economic
reasons (pp. 17-18). But then he only promises an examination of the
three changed behaviours, not of the economic reasons behind these changes:
'the examination of non-financial enterprises, banks and households takes up
much of the rest of this book' (p. 18). As will be discussed further below,
this sidesteps identifying a causal explanation for the broad financial
developments from the 1970s. It is also worth noting that it is odd to exclude
a wide range of financial institutions outside the banks - pension funds,
insurance companies, hedge funds, stock exchanges, etc - from his general definition
of 'financialisation'.
Another
indication of his theoretical stance comes when he criticises Arrighi, making
the point that the world market is 'a creation of industrial, commercial and
financial capitals that have become dominant in their respective national
economies'. The latter statement is not the self-evident proposition it might
seem, however, and would not account for those companies whose operations are
based on the world market, rather than emerging from the national economy, as
is the case for BP, for example. However, the bigger problem is when he turns
this into an argument for saying that the 'logic of theoretical analysis ought
to run from the national economy to the world market' (p. 19). Apart from being
a non sequitur, it is an argument that also contradicts, without
comment, the analyses of Marx and Lenin, and of the Marxist tradition more
generally. Of course, Lapavitsas recognises that the world market has an impact
upon national economies, and he also states that 'financialisation is
inherently bound up with the US dollar operating as the dominant form of world
money since the 1970s' (p. 19). But the issue is more fundamental: the world
market is the platform on which global capitalism operates, and one cannot
understand 'world money', for example, unless one starts from a world market
perspective, not a national one.
In Chapter 2,
Lapavitsas also rejects the idea that the development of financialisation has
anything to do with Marx's law of the tendency of the rate of profit to fall,
or that falling profitability in capitalist production was a key factor
behind the rise of finance. Instead, he stresses that 'the processes of
finance should be analysed in their own right' (p. 37). However, this is a
strange counterposition of arguments. Analysing finance would be necessary whatever
the underlying dynamic of developments might be, but analysing financial
‘processes’ does not necessarily reveal that dynamic. Having rejected the
profitability cause, he has not furnished another one in its place and is
basically left with a descriptive approach to the phenomenon: analysing the
processes of finance. This lack of need for one or more causal factors might be
justified in his view because 'historical and institutional variation is a
necessary feature of financialisation' (p. 39). However, even the most concrete
developments, especially ones that dominate society, are liable to have been
driven by a more general and systemic social dynamic.
I have a more
positive assessment of the book's Chapter 3, which deals with the rise of
finance at the end of the 19th century and the response of key Marxists to
these developments, especially Hilferding and Lenin. Lapavitsas discusses
Hilferding's theoretical innovations in the examination of new forms of finance,
while bringing out the limitations of his Austro-Germany centred analysis. This
chapter is also used to note that some issues are different for today's global
capitalism: for example, whereas Lenin argued that the rich imperialist powers
lived off rentier incomes from their loans to other countries, today rich
countries, particularly the US, are more commonly borrowing from
poor countries (p. 67). That is a reasonable observation to make, but also
one-sided. Lapavitsas does not discuss the broader issue of how such borrowing
helps finance higher-yielding foreign investment from the US (and the UK), nor
the fact that the US and other rich countries do still earn rentier
incomes. In 2012, US gross investment income from abroad was $770bn, while the
net figure after income payments was $232bn. Not bad for a country that has a
huge net debt position! Neither does he pay much attention to the
commercial power of the major countries in the world market. Chapter 4 on the
'monetary basis of financialised capitalism' is also a useful review, covering
Marx's theory of money, fiat money, private credit money, state-backed central
bank money and the US dollar's role as 'quasi-world money'.
Chapter 5 on
'finance and the capitalist economy' is a further discussion of theoretical
issues, including mainstream theories of finance. He makes a key point that a
financial system is 'a specifically capitalist phenomenon, although
sophisticated financial practices can be observed in a wide variety of other
social formations' (p. 109). For me, the points of interest in this chapter are
Lapavitsas's discussion of Marx's concepts of interest-bearing capital (IBC)
and loanable money capital (LMC), and the issue of whether capital invested in
banking/finance would tend to have the same rate of profit as for industrial
and commercial capitalists. There is a good discussion of IBC on pages 112-118,
which clarifies that Marx's concept relates to a (money) capitalist advancing
funds as capital to a productive capitalist for investment purposes. Here, the
money capitalist gets a return in the form of interest, where the interest is a
deduction from the surplus value produced from the investment. This is not to
say that surplus value is necessarily always produced.
LMC is a more
general concept that includes IBC plus the spare funds arising from the
industrial-commercial circuit of capital and the idle funds of all social
classes (usually deposited in banks). As Lapavitsas puts it, 'the money market
is the site where loanable [money] capital is traded' (p. 131). Such trading
will result in a rate of interest for the loaned funds, but this can give the
impression that basically the same thing is going on with every deal, which is
incorrect. Some transactions are advances of IBC, but others will come under
the heading of money-dealing capital, where money is loaned to industrial and
commercial companies as a means of payment. For Marx, IBC receives a distinct
category of interest, one that is determined quite differently from the average
rate of profit. By contrast, while the second transaction involves an interest
payment, it is one that will tend to generate an average rate of profit for the
money-dealing capitalist. These operations in banks are often combined in one
business, but the conceptual distinctions are still important for Marxist
theory.
Lapavitsas
appreciates these points, but then proceeds to confuse matters. In a response
to an article of Ben Fine's from the mid-1980s (p. 127, footnote 45),
Lapavitsas seems to be arguing that the rate of profit for banks should be the
same
as for other capitalist companies. This was also Hilferding's view, but it is
not present in Marx's analysis because of the distinct position of IBC compared
to industrial and commercial capital. Fine argued that profitability for banks
is different (using 'banks' as a generic term for capital engaged in finance),
because banks are not liable to provide funds for new entrants into banking as
they would into other sectors (banks being agents of competition elsewhere, not
between themselves). Competition in banking/finance for Fine does not establish
a normal, equalised rate of profit, but gives rise to interest as a claim on
surplus value prior to the distribution of profit of enterprise. Lapavitsas
misrepresents Fine's view on this question.
I agree with Fine that profitability for banks is conceptually different, but
would also stress that the licensing system for setting up a new bank helps
maintain a monopoly over access to deposits. This also leads to a different
form in which both profitability and interest appear for banks compared to
other capitalist companies.
This might
seem to be a side matter, but it reflects a tendency in Lapavitsas's argument
to gather a wide range of phenomena under the heading of 'financialisation' and
in the process to obscure some important Marxist concepts that would otherwise
throw more theoretical light on what is really happening in the world. This is
true in Chapter 6 on 'financial profit', for example, a chapter that discusses topics
rarely covered in any detail in other Marxist literature.
Financial profit
In Chapter 6, Lapavitsas begins
his discussion by revisiting a term that he has used in other publications:
'profit from alienation or expropriation'. This is not the standard form of
exploiting workers in capitalist production, but 'exploitation in financial
transactions', which, in the case of workers, amounts to a 'direct transfer of
value from the income of workers to the lenders' (p. 143). This is the basis
for his notion that finance 'exploits' the working class, and not only the
other capitalists, so that it 'exploits us all', as in the subtitle of the
book. He has been criticised a number of times for this concept of 'financial
exploitation' because the term exploitation has a particular meaning for
Marxism, based on the appropriation of surplus value from workers in capitalist
production, but he continues to use it here.
The argument
against the notion that finance exploits the working class by taking a share of
wages can be put simply. If one source of financial profit is a cut out
of workers' incomes, in interest payments, fees, etc, then there are two
alternative implications. Either this implies that workers are receiving
a net income below the value of labour power once these deductions are
accounted for, or these deductions are part of the value of labour
power, paying for the 'socially necessary' goods and services, some of which
are delivered on credit. In the former case, where such deductions were
persistent, this would imply that a lower value of labour-power was in place
than otherwise. But, over time, this lower level would become the new norm. In
the latter case, if workers are not being paid below the value of
labour-power, then the cost of consumer credit, mortgages, etc, is a part of
the regular wages that workers are paid. In neither case is there a systematic
'financial exploitation’ of workers. Instead, the financial profits are a
deduction from the profits of productive capitalists.
While there
may be instances of predatory lending that eat into workers' disposable
incomes, if the interest payments, fees, etc, take the widespread,
persistent and systematic form that Lapavitsas assumes under
'financialisation', then ultimately the deduction is from surplus value, not
from the value of labour power. Lapavitsas attempts to justify this theoretical
inconsistency with some citations from Marx's writings that have no direct
relationship to the point of criticism, being based on a misreading of Marx or
by a false analogy with rent (pp. 144-146).
The point
Lapavitsas essentially makes is that 'financial profit … could also emerge from
expropriating the income and money stocks of others through the operations of
the financial system', and not just from a division of surplus value produced
(p. 145). However, in particular for the working class, this confuses the form
of payment with the value relations underlying the payments. He makes things
worse by arguing that contemporary financial expropriation 'represents a throw-back
to ancient forms of capitalist [
sic] profit-making that are independent
of the generation of surplus value' (p. 146), a statement that leads into five
pages of tangential discussion of Aristotle's views on predatory finance! This
completely misconstrues modern developments. Rather than today's financiers
rediscovering old methods for gouging profit from the vulnerable populace,
their operations have evolved alongside the demands of contemporary capital
accumulation, from the euromarkets to financial derivatives, as will be
discussed further below.
After
Aristotle, Lapavitsas discusses the important question of leverage. Here, a
capitalist company might borrow funds from a bank, something that will alter
its 'rate of profit of enterprise' compared to the average rate of profit,
depending on the level of the interest rate (pp. 151-155). This is an issue
often overlooked when considering capitalism and finance. The surprising thing,
however, is that Lapavitsas does not discuss the fact that
bank leverage
ratios are a large multiple of those for industrial and commercial companies,
based on the banks' position in the credit system.
That would have been a far more pertinent angle for the discussion of financial
profit. The banks do not merely gather up society's idle funds and lend
these
out - they also create
new deposits and loan assets, and can do so up to
(and beyond) prudential limits. This fact stands in stark contrast to
Lapavitsas's view, expressed later, that the 'owners of loanable capital as well
as the institutions that handle its flows have a limited capacity to augment
its magnitude through their own actions (p. 203).
Bank assets are commonly more than 20 times a bank's equity capital and the
ratio can be expanded as required. Rising leverage ratios were a major boost to
bank profits during the credit bubble, and bank profits collapsed as assets
were written off (loan defaults, etc) when the bubble burst.
Lapavitsas
also discusses 'trading financial assets' (p. 163), and how financial profits
can be derived from fictitious capital values. The aspect he focuses upon is
capital gains, as in Hilferding's conception of founder's profit. Here, shares
in a company are floated on the stock market for a total sum that exceeds what
is needed for investing in the company (assuming the rate of discount/interest
is less than the company's rate of profit). The excess value is realised by the
founders/owners when they sell shares to others, or can be accounted for as
more wealth in the form of the higher fictitious capital value of their own
shares. He follows up this basic example of founder's profit and argues that
the process is essentially the same for all kinds of capital gains on financial
assets, when the seller makes a profit in a rising market and the 'final buyer'
obtains rights to the 'entire flow of surplus value from the project but at a
greater expense than each previous owner of shares' (pp. 164-165).
When it comes
to financial securities that are the liabilities of workers not
capitalists, however, as in mortgage bonds or consumer debt, Lapavitsas returns
to the notion that the source of this financial profit is (future) wages (p.
167). He also argues that the creation of mortgage bonds from mortgage payments
means that the 'money revenue of workers is transformed into loanable capital'
(p. 167). However, it is loanable money capital that is advanced to the
workers, and the securitisation of the mortgage payments as a bond does not
create loanable money capital. Secondly, while mortgage payments deducted
from workers’ incomes do go to financial companies, in general these are not
deductions from the value of labour power, as explained above.
A final point
on financial profit is worth making here. Lapavitsas has built his exposition
around capital gains on financial securities. While he mentions the fees
and commissions that are part of the trading in such securities, he does not
deal with the financial 'profits' that result from such trading. These profits
result largely from bid-offer spreads for dealing in securities, currencies,
etc, and from the privileged market-making position of bank dealers versus
other dealing counter-parties. Such profits have no relationship to changes in
the price of the security traded, as they do in the example of capital gains.
Profits from financial trading are very important for the banking sector,
especially in a major centre of global financial trading such as London.
Financial developments and
data
Chapter 7 on 'financialised
accumulation' introduces section 3 of the book, one that deals more closely
with the empirical and historical features of financialisation. The underlying
theme remains the altered conduct of non-financial corporations, banks and
households, but Lapavitsas argues that it should not be a surprise if 'the form
of financialisation varies greatly between countries' (p. 171). This statement
is consistent with his theoretical approach of going from the national economy
to the world market (see above). However, it means that he cannot explain the relationship
between the world market and the forms taken by financialisation, since it is a
country's position in the world market that will determine the financial
options available to it. Chapter 7 is mainly a repetition of the common view in
radical literature that financialisation was responsible for lower economic
growth (at least, lower real wage growth) and rising inequality. In this
chapter, Lapavitsas also notes a variety of other issues - from attacks on
trade unions, to central bank policy, to the role of the US dollar, to measures
of productivity - but it is not clear what relationship these developments have
to his main arguments.
Chapter 8
examines the 'tendencies and forms of financialisation' over sixty pages. Here
Lapavitsas discusses developments in four major capitalist powers, the US,
Japan, Germany and the UK, comparing and contrasting trends in the financial
sector data and their relationship to the domestic economy. The value of this
chapter to the reader depends on what the reader already knows, but that is not
to say it is necessarily valuable for those with little knowledge of financial
trends. One should be cautious about accepting a mass of empirical evidence as
giving a good outline of the full picture: it may simply stress particular
dimensions and exclude other important ones. Four examples are relevant here.
Firstly,
Lapavitsas argues that financial profits have risen a great deal in recent
decades as a share of total profits, but his charts are not very supportive.
Figure 8 for the UK (p. 215) notes the profits of financial corporations as a
share of total profits. But the line dips sharply from 1989 to 2000 before rising to a new peak by 2007-08. Figure 9 for Japan (p. 217) shows a
slightly declining share between 1994 and 2007. Only the US chart looks like a
longer-term upward trend.
Secondly, who
receives the financial profit from financialisation? Lapavitsas notes that new
social layers have been created, 'receiving finance-related income and bearing
only a passing resemblance to the rentiers of old' (p. 217). However, he does
not discuss who these people are. If they are not, or not only, a social
stratum of the rich, moneyed capitalists living off interest, as depicted in
classical Marxism, then who are they? Later, he notes that household assets
have been 'a source of financial profit both in terms of fees earned by the
institutions involved but also in terms of capital gains and transactions in
financial assets for both intermediaries and final holders' (p. 243). This
formulation avoids stating clearly the fact that a large number of households
in rich countries - owners of financial securities and pensions - are also
recipients of financial profit, either in the form of capital gains or as
interest-related income. But then finance is supposed to 'exploit us all’.
Thirdly,
despite the extensive data coverage for the four countries, Lapavitsas gives no
data for the financial benefits each receives from other countries, neither in
terms of foreign investment income nor on the financial services revenues that
accrue to them. These are key issues for British imperialism, and also for the
US, but they do not come into his coverage of 'financialisation'. At most, the
benefits are noted summarily for the US, mentioning subsidies from dominated
powers via the build up of foreign exchange reserves (p. 252). Furthermore,
since 'finance exploits us all', there is no coverage of the huge property
assets
of many households in the rich countries. In the UK at least, these more than offset
the total of mortgage debt
liabilities to the banking system.
This is not to deny that many people have large mortgage debts that might
exceed the value of their residential property, but the omission of these
important assets is consistent with the absence of any consideration in
Lapavitsas's work that a mass of people in the rich countries - not just
financiers or capitalists - have economic privileges.
Fourthly, the
view that 'financialisation' has gripped all the major countries may seem
plausible, but it is not backed up by all the charts that Lapavitsas includes
for the four countries covered. For example, commercial bank assets (pp.
234-235) in the form of household mortgages and loans to individuals did rise
as a share of total assets in the US, but were still only around 25% of assets
by the mid-late 2000s. In Japan, the share rose too, but only to around
10% of bank assets, while in Germany the share was flat at around 10%. In the
UK the share of such loans fell from around 23% to around 15% in the
decade to 2009. Not exactly a substantial or pervasive change.
A general
problem with this approach to financial developments is that it leads to a very
restricted view of what is going on in the imperialist world economy. This is
also true when he discusses 'subordinate financialisation' among countries
dominated by imperialism. His focus is on the incursion of foreign banks that,
he argues, changed their domestic financial systems and mimicked selected
trends in the rich countries, such as bank lending to households (p. 246). This
perspective follows from his overall view of financialisation, but it hardly
does justice to the real tribulations faced by subordinate countries. To give
some appreciation of these, he does note a quite different point, that poor
countries lent funds to rich countries (especially the US) at low interest
rates via foreign exchange reserve accumulation (p. 252). But, while important,
this fact does not fit into the theoretical framework that he has constructed
about what is new in 'financialisation'.
Chapter 9,
'tending to crisis', begins with an interesting review of Marx's theory of
finance and crises before moving on to how the financial form taken by
capitalist crises is different in conditions of modern capitalism than in
Marx's day. The objective of this chapter appears to be one where he wants to
explain 'finance as a factor of capitalist crises' (p. 260), but as a factor
that can operate separately from one or more fundamental causes. The subsequent
discussion of the financial bubble and bust from 2001-2009 repeats the standard
view that it was a sub-prime crisis emerging from the US. He does not discuss
why the US Federal Reserve had kept interest rates so low in the early 2000s,
except to see it as a policy response to the bursting of the dot.com bubble of
1999-2000 (p. 271). Nor does he discuss why the toxic mortgage securities
emerging from the bubble were so easily distributed around the world, and
whether this too might have had some relationship to problems of capital
accumulation and low returns on investment. The key point emerging from the
first half of this chapter is that Lapavitsas sees the crisis as resulting from
a malfunctioning of the financial system (a 'Type 2' crisis, p. 271), rather
than having any relationship to capitalist profitability.
In the second
half of the chapter, Lapavitsas focuses on the euro area financial crisis. This
draws upon his other (co-authored) published work and makes some good points
about the systemic problems faced by the euro countries.
Much of the ground covered is very familiar, but there is a nice turn of phrase
summing up the euro sovereign debt crisis: the weaker countries had found that
they 'had borrowed in a currency - the euro - which appeared to be domestic but
was in effect foreign' (p. 298). My question, however, is why these
developments should be considered a 'crisis of financialisation' in
Lapavitsas's terms. Essentially what had happened was simply that the weaker
euro countries had borrowed excessively at the low interest rates on offer, and
had also lost competitiveness. When the credit bubble burst after 2008, they
were left high and dry. Overall, his view is to look upon the euro project as
having benefited German capital by providing it with a stable, internal market
(pp. 290-291, p. 293). A better assessment would have put the euro project in
the context of a longer-term attempt by the major European capitalist powers to
meet
'le défi américain'.
The irony of more recent developments is that most of Germany's trade surplus
now originates from
outside the euro-17 countries (64% in 2012).
Controlling finance
The final Chapter 10 on
'controlling finance' draws together the previous themes, but it reaches a
conclusion that is at first sight surprising for a book within a Marxist
perspective. Yet, if one follows through the logic of the previous arguments,
especially the view that the current crisis results from a malfunctioning of
the financial system, then this is not so much of a surprise. Lapavitsas
considers at length a number of mainstream and radical proposals on regulation
to deal with the malfunctioning and then comes up with his own solution. He
calls for the creation of a public sector bank! Not a demand for more
regulation, since his analysis has shown that the financial system - and
pervasive financialisation - will find ways around any new rules (pp. 323-324).
Nor a simple demand for bank nationalisation, of course, because most of the
equity of some big banks in the UK and elsewhere has already been taken
into state ownership. Instead, he advocates ‘publicly managing the flow of
credit to households and non-financial enterprises to achieve socially set
objectives as well as to eliminate financial expropriation’ (pp. 324-325). He
adds that these public banks ‘would be able to adopt a longer-term horizon in
lending, helping to strengthen the productive sector and to reverse
financialisation’ (p. 325).
I was tempted
to compare these views with those of the Archbishop of Canterbury, who last
year called for splitting up big banks and making them good for society. But it
is more telling to give some further details of the Lapavitsas plan.
He admonishes
the banks for their failure to monitor credit quality, so he decides to take
the issue seriously in the case of his proposed public institution. After all,
strengthening the capitalist productive sector cannot be achieved by giving
cheap loans to dodgy prospects; that would waste social resources. So, there
would be ‘publicly determined rates of interest’, varying among different
borrowers, and public banks would ‘deploy the techniques of information
collection for income, employment, and personal conditions, including credit
scoring and quantitative risk management’ (p. 325). Thus, we can see how scientific
calculation will overcome the evils of financialisation and capitalist markets!
As an
exercise in utopianism, this is hard to beat. Let’s leave aside the fact that
there is a global monopoly network of huge corporations that has control of
distribution channels and supply chains, technology patents and product
licences, quite apart from the backing they get for international trade and
investment deals negotiated by their states. But this policy proposal shares
the common superstition among radicals, one alien to Marxism, that the
capitalist state is a neutral bag of tools that can be utilised in favour of
the masses. Lapavitsas had already noted that large corporations do not really
depend on banks for loans, so presumably he envisages offering loans to small-
and medium-sized enterprises, ones that have not already been crushed by
monopoly power and which often already depend on state support for their
products and services. But one does not take a peashooter to a gunfight.
Lapavitsas
also sets aside the fact that banks already monitor credit risks and so are
reluctant to lend to such companies by arguing that they are not very good at
it, confident that his proposed public bank would do a better job. He does not
consider the fate of failed versions of his more 'social' banking, for example,
the Spanish Cajas and the UK's own Co-operative Bank. In the next sections, I
will discuss further some theoretical and empirical issues in the analysis that
Lapavitsas has offered.
What is, and what led to,
financialisation?
Earlier I noted that
Lapavitsas's approach to the question of financialisation was essentially
descriptive, leaving unclear the reasons behind the changes in financial
markets since the 1970s. The explanation has many dimensions, but these are not
to be found in the book. His description, based around the changed behaviour of
the three elements of the economy he identifies, consists of the following
elements:
·
Non-financial companies shifted from borrowing directly
from banks and undertook their own borrowing from capital markets, in the
process gaining financial expertise;
·
Banks responded to this by shifting business to more
financial trading and to lending to households in various ways (mortgages,
credit cards);
·
Households found that, after neo-liberal economic
reforms, they were more engaged in providing for themselves pensions, health
care and housing, all of which increased their involvement with financial
markets.
I would query
a number of these points. Firstly, large corporations have always, and
especially in the US and the UK, depended for the bulk of their investment
financing on internal funds, ie retained profits. Their relationships with
banks have been most active in money-dealing services, including foreign
exchange and short-term credit provision. Secondly, while it has been true that
non-financial corporations have in recent decades raised more capital from bond
and equity markets at the expense of long-term borrowing from banks, the banks
have, in turn, made a growing business from floating these bonds and equities
for a fee. The corporations do not sell their securities themselves. This has
been one of the reasons behind many 'commercial banks' turning themselves into
'investment banks', or at least opening up an investment-banking arm. Thirdly,
the data do suggest that there has been a growth of household mortgage debt and
also more personal investment in private pensions, so increasing the
involvement of households in financial markets. However, as argued earlier,
this does not support Lapavitsas's claim that household incomes have been an
ultimate source of financial profit.
Lapavitsas
notes the important role of the state, saying that: 'As far as financialisation
is concerned … the transformation of mature economies would have been
inconceivable without the facilitating and enabling role of the state'. He then
argues that there are three features of the state's role: the command over
state-backed central bank money (especially since the break with gold from
1971); enabling the global spread of financialisation through command over
world money (via the role of the US dollar); and by smoothing the path of
financialisation by altering the regulatory framework for finance (pp.
192-193). These are the factors often included in accounts of capitalism since
the 1970s, but he offers no causal dynamic to explain these changes. For
example, he does not explain many governments' implicit and explicit support
for financial deregulation from the 1970s when there had in previous decades
been far more controls in place. Did governments spontaneously embark on this
new policy? Or were there more fundamental trends to which they responded and
which led to financial deregulation, etc?
More
importantly, missing from Lapavitsas's account is an assessment of what drove
the boom in financial transactions and other forms of 'financialisation'. I
think there are two key factors here: an underlying problem of weak
profitability and the particular financial form that this took.
In my view,
the greater role of financial transactions and international flows of capital
in the world economy over recent decades was not such a sharp break from the
previous 1945-1970s period as many proponents of the 'financialisation' concept
maintain, although these developments were, of course, accelerated after the
breakdown of the Bretton Woods monetary system. But that breakdown was a result
both of the changing balance of power in the world economy, as US hegemony
weakened, and of the increasing difficulties faced by capital accumulation as
profitability fell on a world scale. Even prior to the Bretton Woods collapse,
there had been a dramatic growth of the euromarkets and other international
financial flows from the late 1950s, based on the demands of major world
corporations for finance.
These led many governments, particularly those under pressure, to complain
about the increased 'hot money' flows, as with UK Labour politicians' attacks
in the 1960s on the 'gnomes of Zurich' (a phrase that conveniently excluded the
parasites of London). The law of value operating internationally - what are you
producing and what is it worth in the world market? - which also led to the
evolution of new forms of finance, was behind the collapse of Bretton Woods.
The
stagnation-inflation turmoil of the early 1970s brought about further financial
developments, including the removal of most of the international capital
controls in the US, Canada and Germany, together with industrial restructuring,
higher unemployment and austerity measures as governments and companies tried
to deal with the crisis. This is the backdrop to what is termed the
'neoliberal' period from the late 1970s, epitomised by Reagan and Thatcher. The
policy actions of the latter governments, including a sharp rise of interest
rates after 1979 to control inflation, are more accurately described as further
attempts to try and restore conditions for profitable accumulation rather than
as shocking new developments. Still less can they be described as measures to
support the 'ascendancy of finance' (p. 194), unless it is also admitted that
the parasitic form of capitalism in the key powers also meant that the
'financial' option seemed a lucrative one when they had such difficulty in
making domestic production profitable. The US and British states, in
particular, boosted the financial sector as a deliberate policy to improve
their ability to appropriate value from other countries, especially after 1979
but also before. Market pressures forced other countries to adapt to these
moves from the major, financially oriented powers. This is the real substance
of the phenomenon labelled 'financialisation'. In contrast to Lapavitsas, I
would argue that problems of profitability and capital accumulation,
particularly as these issues affected the US and UK, do lie at the root of what
he calls financialisation.
Capitalist profitability and
financialisation
Almost all measures of the rate
of profit for major countries show a trend
decline from the 1950s into
the early 1970s. As a result, there is little dispute about falling
profitability as the underlying cause of the 1970s economic and financial
turmoil, at least among those who claim to base their views on Marxist theory.
For the period from the 1980s into the mid-2000s, the consensus in the
literature is that the rate of profit was on a
rising trend, at least as
measured for the US. There is far from universal agreement that this is
correct,
but the
common view is that the crisis starting in 2007 in the rich countries was a
result of financial excess, rather than having any relationship to a capitalist
profitability crisis. The financial form of the latest crisis - a massive build
up of debts, speculation, fraudulent deals, etc - has encouraged this
perspective.
In line with
this latter view, Lapavitsas characterises the latest crisis as emanating from
a 'malfunctioning of the financial system', what he calls a 'Type 2' crisis,
rather than one that originates in the industrial and commercial circuit of
capital (p. 266, p. 271) or one that can be said to be an accumulation crisis
based in any way upon profitability. In particular, he dismisses the opinion
that treats 'financialisation as the flight of capital from a stagnating
productive sector' (p. 18).
My views on
the current crisis, the question of capitalist profitability and the growth of
finance are different. On the question of data, I think it is not possible to
get a good approximation for the rate of profit in the capitalist system as
understood by Marx. Apart from anything else, there are problems of allowing
for productive and unproductive labour, the impact of a monopolistic world
market on value calculations, data inaccuracies, tax havens and the methodology
of compiling the data.
Despite this, it is a natural urge for many, especially those analysts
interested in Marxism, to use the available data to examine profitability
trends. I sympathise with this effort, but remain sceptical about whether it is
possible to make a good job of it. That said, I would agree that it would be
odd if there were a major crisis, as we have today, and the available data
showed that the rate of profit in the years ahead of the crisis had been
relatively high. Some measures of US profitability do indeed show relatively
high rates of profit ahead of the crisis and that would appear to give support
to the 'financial malfunction' thesis of Lapavitsas and others. However, one
does not need to accept the available data on profits uncritically, especially
for the US.
I would note
three factors that put any calculation of rising US profitability from the
1980s in a different light, whether one measures it for the overall corporate
sector, or whether one tries to make a separate measure for industrial and
commercial companies.
The first was the attack on working class living standards by the US government
and business, the use of migrant labour and the marginalisation of labour
unions. To some extent, this effect can be measured, although there are debates
on what productivity, price, wage and benefits data to use, and this factor was
probably significant. However, it was likely to have been more of a one-off
factor, and most measures of US rates of profit show lower rates into the end
of the 1990s.
The second
factor has arguably been more important, but it does not directly appear in
any
US data: the impact of low cost products available to US capital through
trading relationships with low wage countries, particularly China. These
reduced the cost of living for most workers and also provided cheap inputs for
business. Lapavitsas notes the so-called 'Great Moderation' (p. 194), the term
used to describe the apparent success of US policymakers in achieving
reasonable growth together with lower inflation. But he does not mention this
crucial point that helped underpin that success, one that relied upon the
introduction of many tens of millions of new, super-exploited workers into the
world economic system from the 1980s. Some Marxists dispute this factor,
implicitly assuming a similar rate of exploitation for all workers - otherwise,
it might seem to be strange why capitalists invest in the richer countries at
all, and why they do not fully migrate to the low wage areas. However, one
should also consider the stratification of global production between rich and
poor countries,
and the
political factors behind immigration controls in rich countries, including
working class support for these, something that has prevented an equalisation
of rates of exploitation. Overall, this factor was a significant boost to
global profitability, but its incremental impact will now be much less.
The third
factor boosting US corporate profitability for industrial and commercial
capitalists was progressively lower nominal and real interest rates.
This development was based on an unwinding of the previous very high rates that
followed the tightening of Fed policy in the early 1980s, on the success of
capital in attacking the US working class, on the low cost of imports and on
Asian countries accumulating huge foreign exchange reserves (buying US securities
and so
reducing their yields) as an insurance against financial trouble
after the crisis of 1997-98. The end result was a sharp rise in US consumer
borrowing, a relative decline of interest income for the banks, a rise in the
price of financial securities, more financial trading and credit-fuelled demand
for the products of industry and commerce in the 2000s.
The problem now is that nominal US interest rates cannot really be pushed any
lower.
This was the
real world backdrop for the 'financialisation' phenomena. As these summary
points indicate, financial developments are multi-faceted and their
relationship to the rate of profit is complex. However, at the very least, one
should not look upon any data showing credit-fuelled profit rates for the
period up to 2007 as being a sign of healthy capitalism!
It should also be noted that the recorded profitability of US companies (such
as Wal-Mart and Apple) might not necessarily have much relationship to the
profit arising from their
domestic US operations. That would help
explain the apparent paradox that US corporate profits might be high while
(domestic US) investment remains weak.
Conclusion
Lapvitsas's book has raised many
issues and gives valuable food for thought in coming to an understanding of the
global crisis. The financial form of the crisis is a challenging phenomenon to
unravel, but Lapavitsas’s approach is wrong on several counts. He rejects what
he would judge as a simplistic, or simply invalid, ‘falling rate of profit’
explanation of the crisis and financial developments, but then only proceeds to
describe the (autonomous) development of financial processes. Even here, as I
have argued, there are serious gaps in his coverage. He also sets up the
concept of ‘financial exploitation’, particularly of workers’ incomes. This is
not only at odds with a standard Marxist understanding, despite his exaggerated
claims to the contrary drawing upon usury. It is also used to make a
distinction between the financial capitalists who exploit without
producing and those capitalists who exploit in the process of production.
The reader cannot come away without getting the impression that the latter is
fine, or at least the lesser of two evils, especially when his conclusion is
that 'public banks could support the provision of banking services to real
accumulation as well as to households' (p. 324).
Finance is not a simple, parasitical outgrowth of
the 'productive' capitalist economy, as Lapavitsas has argued well when looking
at the operations of big corporations and their relationship with the financial
system. However, this insight does not prevent him from counterposing the two.
His 'national to world economy' perspective has also led him to overlook
important features of finance that would have elucidated the role of finance
for the major imperialist powers, in particular the US and UK. Identifying
different forms of capital, especially the financial ones, is important for
understanding the workings of capitalism. But, despite the Marxist guise, this
book ends up as yet another form of anti-finance populism that, despite being
critical of capitalism, seeks to restore the health of the capitalist economy.
Tony Norfield, 6 January 2014
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