'Open Sesame' on Alibaba

China has been the ‘workshop of the world’ since the late 20th century, providing cheap products to global markets, especially to the richer countries. Alibaba is now becoming recognised as an important addition to China’s economic prowess, although in the sphere of commerce rather than in production.

Alibaba’s business has been focused domestically upon the huge and growing Chinese market. It has been able to fend off Google and eBay, important US competitors. It has also benefited from funding by Goldman Sachs and Yahoo – who both provided much-needed cash in its early days – while managing to avoid their control of its operations. Now Alibaba is in a strong position to expand into other countries. So, rather than being prominent only as a big player in one big (Chinese) market, Alibaba could become a major global player too. When commerce is the core of a company’s business, then huge volumes are critical for generating revenues. Alibaba has been able to get these, helped by being based in China, a country with a strong government and also with the largest national population.

Here I do not plan to discuss all of Alibaba’s operations or its historical development.[1] Instead, I want to use the example of Alibaba to weigh up China’s economic challenge to the established order, when imperial economic power today takes on a much more commercial and financial form.

Millions and billions

Alibaba’s operations can most easily be summarised as a combination of Amazon, eBay and Paypal. But that understates the scope of its business as it expands into other areas. Nevertheless, the limit on seeing it as a global giant is that more than three-quarters of its commerce-based revenues derive from China, as does basically all of its profit. Its newer segments of business – including cloud computing, digital media and entertainment – are running at a loss, subsidised by the China commerce revenues.

In terms of stock market capitalisation, the main company, Alibaba Group Holding, was worth $365bn on 26 June. This was not so far behind Amazon’s $475bn value, especially if one also includes the separately managed Ant Financial arm (formerly known as Alipay) estimated at around $60bn. Alibaba’s profitability was also much higher than Amazon’s in the latest financial year, at $6.0bn versus Amazon’s $2.4bn for net income after tax and net interest payments.[2]

Alibaba started out as a business-to-business middleman, facilitating buying and selling, but this failed to generate much revenue. Now retail business (business-to-consumer) dominates its commercial operations. Hundreds of millions of Chinese use its systems to shop online, sell goods and make online payments. Alibaba has two retail sites: Taobao, selling products sold by smaller scale Chinese-based companies; and Tmall, which has attracted three-quarters of the world’s top 100 brand-names to sell into the huge Chinese domestic market. Although China is a poor country, 1.4 billion people and a growing middle class consumer base make it an attractive market for all global corporations.

Merchants on Alibaba’s Taobao site get a free listing; on Tmall, these bigger sellers pay an annual service fee, plus commissions on their sales ranging from 0.4% to 5.0%, depending on the product. However, revenues from these sites derive mainly from companies buying extra marketing services that Alibaba’s system provides, including its analysis of consumer activity to target advertisements. In this respect, it follows what other established companies do, like Amazon, Google and Facebook.

In the year to 31 March 2017, Alibaba had a huge volume of business: 454 million active buyers on its retail platforms and, in March 2017, 507 million active users of its mobile services. This potential for economies of scale is fundamental for a commercial operation, and one that helps Alibaba’s expansion into other countries.

The relatively low retail revenue per buyer deflates the importance of these numbers, and reflects low average Chinese incomes: just $36 per active buyer in retail revenue per year and $26 per person from mobile-based services. Nevertheless, a growing revenue per person multiplied by a very large and increasing number of buyers and users in China leads to big and rapidly rising total revenues. Alibaba’s China-based commercial revenues rose by 40% in the year to March 2017, reaching some $18 billion.

Helped by this position in a market US business would like to penetrate, Jack Ma, the principal founder and the controller of Alibaba, was the first foreign businessman to meet US President Trump in January this year. Playing up to Trump’s ‘America First’ policy, Ma promised that he could add one million jobs in the US if its small companies joined its commercial platform, Tmall, to sell their products into the Chinese market. This no doubt appealed to Trump, but it would also help Alibaba boost its revenues outside China, when its foreign revenues have so far been largely dependent upon regional Asian countries.

Ownership and financing

The ownership and control structure of Alibaba is murky or, more charitably put, difficult to pin down. The Alibaba Group Holding company was registered in the Cayman Islands in June 1999, and there is, in addition, a system of contractual links between its many subsidiaries. Good luck in working your way through its 303-page 2016 annual report, with 74 of them giving ‘Notes to consolidated financial statements’.

Jack Ma started out by being moderately generous with his offering of a (very) small stake in the fledgling company to the initial group of employees, but had later to divest a much larger share of it to important early backers and suppliers of funds. More or less the first was Goldman Sachs, which lent Alibaba $3.3m and later sold its stake very profitably for around $22m, although much too early to realise dramatically higher returns. Sometimes you just cannot be greedy enough.

Another important supplier of early funds was Yahoo, which still maintains a stake after later reducing its holding. The biggest backer of Alibaba, however, was Japan’s Softbank, which has built an important share. According to the 2016 annual report, Jack Ma owned 7.8% of Alibaba Group, other directors owned 4.7%, Softbank had 32% and Yahoo had 15.4%. However, this understates Ma’s position.

At first sight, the ownership numbers would imply that Jack Ma has little control over the company. However, this conclusion is questioned by an important deal, one ostensibly made to get around Chinese government restrictions on foreign ownership of non-financial companies. This was when Ma took control of Alipay.

In the early 2010s, almost all of the payments made through the Alibaba commercial system were transacted through its subsidiary Alipay, which handled $700m per day in transactions. Alipay had an ‘escrow system’ for security of payment, whereby funds were transferred to the seller only after satisfactory delivery of goods to the buyer. This payment system proved very attractive to users, especially given inefficient Chinese bank payments and the low use of credit cards in China, since it improved the chance of getting your money back after being delivered poor quality goods. Although Alipay itself did not necessarily make any charges directly, and so was not an important source of funds to the main company, it was nevertheless a key part of the Alibaba operation, important for keeping the buying/selling/services business model ticking over.

In 2011, news emerged – buried in a quarterly Yahoo earnings report – that Jack Ma had taken control of Alipay in the previous year or two and had transferred it out of the Alibaba group. The price paid by the company owned by Jack Ma was roughly $51m for a business that was seen as then being worth around $1 billion. This was done through a so-called Variable Interest Entity (VIE) structure, something that other companies have also used to get around China’s regulation of foreign ownership of companies licensed to operate payment systems in the country. However, whatever the motivation behind the deal, it meant that a VIE company largely owned by Jack Ma would now control a key Alibaba-related business.[3] After its expansion into other areas, Alipay is now Ant Financial. Today it is estimated to be worth very much more.

Such deals may have been a reason for Hong Kong’s stock exchange to reject the initial public offering (IPO) of Alibaba shares on the public capitalist market, although it appears that the most important issue was the favoured voting positions of Alibaba’s founding shareholders that were seen as being detrimental to new shareholders in an IPO. The New York Stock Exchange nevertheless accepted the deal, no doubt encouraged by the potentially lucrative transaction fees. In September 2014, the IPO sale of some shares in Alibaba Group Holding (ie minus Alipay) raised a record $25bn, with reported fees amounting to some $300m.

Alibaba and Ant Financial

Alipay was renamed Ant Financial in 2014. Based on its 2016 round of fundraising, which brought in China’s sovereign wealth fund and other state institutions, it has been valued at $60bn, but there is no detail of costs and revenue flows in Ant Financial’s 2016 report. Nevertheless, it is certainly big. Ant Financial performs more than 150 million payments per day, 10 times the volume for Paypal; it is the world’s third largest cash management service, lends money to small businesses and offers insurance services.

Alibaba’s own annual report shows the following key fact: 37.5% of Ant Financial’s pre-tax income is due to Alibaba (although I have not been able to find what that income might be!). There are also many other flows of income between the two groups, with Alibaba paying Ant Financial for bank processing costs and operating costs – roughly $760m in the 2016 financial year – and the latter paying Alibaba royalties, fees for software technology and for other services. The impression given in one table of transactions is that Alibaba pays Ant Financial more than it receives, roughly a net $350m in the 2016 financial year, but that will probably exclude the share of pre-tax income Alibaba gets from Ant Financial. More information on the latter’s business will be published when it eventually lists its shares on a stock exchange, an event expected to happen by 2019. In the meantime, both companies are continuing to expand into other markets and other countries with acquisitions and cooperation deals, including in the US and Europe.

Alibaba and global corporate trends

The company’s name comes from the story of Ali Baba and the Forty Thieves, one of the ‘Arabian Nights’ tales. The hero, Ali Baba, finds out the command ‘Open Sesame’ for the cave in which the thieves have hidden their stolen treasure. Jack Ma chose the name as something that would both be recognisable in global markets and encourage consumers to think that they too could find treasure. In the same way, the name of one of the company’s original sites, Taobao, means ‘searching for treasure’ in Chinese. But the company name is more revealing than might have been intended about Alibaba’s business.

In economic terms, Alibaba is not itself stealing or receiving stolen goods, although through its powerful mechanism it is taking a cut from the commercial transactions taking place, including through selling its advertising services. In this, it is at one with key developments in the world economy over the past few decades: don’t produce anything; instead take a share of the value that others have produced by managing the markets in which they operate!

Monopolisation of commercial relationships has been a fundamental feature of global corporations, so much so that most of the leading companies by stock market capitalisation these days are ones that have a strong commercial power, rather than being powerful producers. For example, Amazon is now worth more on the stock market than ExxonMobil, and so is Alibaba. Apple Inc, the world’s largest company in these terms, has the largest capitalisation of a private company, but does very little production itself and relies on its domination of supply chains for assembly and its consumer market power – one should also note its use of the financial system.[4] Alibaba’s business model fits with these important trends and it could well develop into another of these powerful global companies, supported from its strong domestic base in China.

Tony Norfield, 28 June 2017

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[1] For more detail on these I would recommend Duncan Clark’s book, Alibaba: The House That Jack Ma Built, Ecco, 2016, and this article by Louise Lucas, ‘Alibaba bets on do-it-yourself globalisation’, Financial Times, 23 May 2017.

[2] Alibaba does not have Amazon’s system of warehouses for delivering many of its online ordered goods, which saves it some costs. Instead, it delivers most goods within China through the ‘warehouse and delivery network partners’ of its 47%-owned affiliate, Cainiao, which employs 1.7 million delivery personnel and operates in more than 600 cities in China.

[3] See Duncan Clark’s book, pp219-224.

[4] See my review of Apple’s business here.

Rate of Profit, Rate of Interest

The rate of profit and the rate of interest are at the core of capitalism’s dynamic, but there is a huge amount of confusion in what is written on these matters. This article aims to clarify some key points. I outline the relevant aspects of some theories of profit and interest, but focus on how to understand profit and interest rates from the perspective of a Marxist understanding of capitalism. Underlying these abstract concepts are the realities of class and power in the world economy.

Rate of profit calculations

Profitability is obviously important for capitalism. Paying attention to the rate of profit, not just the amount, also makes sense, since this gives the amount of profit per unit of capital advanced, and the more the better. But this simple point hides two important complications.

Firstly, the calculation must be timed. Commonly, calculations are for the rate of profit per year, so that the amount of profit in a year is measured against how much capital is advanced at any one time to achieve it. Other things equal, this also means that the shorter the time period between advancing the money capital, buying the necessary means of production, producing and then selling the commodities at a profit, the greater will be the rate of profit per year. This can make shortening the buying/selling process also appear to be a source of value and profit, not just the production process itself. A quicker method of buying/selling will speed up the circulation process for the producer, raise the amount and rate of profit per year and allow a greater profit to be shared between the producers and the commercial capitalists who are more involved in this process.

Secondly, the rate of profit will be affected by how much of the capital advanced is from the company’s owners and how much is borrowed from banks or other money capitalists providing it with extra investment funds. If we assume a given, annual rate of profit of 10% for the company, then the return on its total investment will also be 10%. But if it has borrowed half its investment funds from banks at a rate of just 5%, or issued bonds with a yield of 5%, then the rate of profit on the funds that the company’s owners have advanced will be higher. For example, for 200 invested at 10%, the annual return is 20. But if the company’s owners have invested only 100 of their own money plus an extra 100 they have borrowed, the company then gets as its profit the 20 total minus the 5 it needs to pay on its borrowings, etc. The result is that its rate of return will be higher: 15 (20 – 5) over the 100 invested, or 15%.

This extra profitability depends on the rate of interest paid on the borrowings being lower than the underlying rate of profit on the total investment. That is not always the case, but it shows how profitability calculations for capitalist owners will tend to change when borrowing funds is taken into account.

What rate?

A company’s borrowed funds raise an ambiguity, one that has not been dealt with well by Marxist theory. If the money is borrowed via bond issues or bank loans, then the payment for the borrowing falls under the heading of interest, so the previous calculation will hold. But if the extra funds come from new money advanced by money capitalists buying any new equity the company issues on the stock market, then how should these extra funds be treated and what is the form taken by the deduction from profits?

If the money capitalists have put their funds into the company’s new equity issue, or even just bought previously issued equity from others, then they own part of the company, just as much as the original owners. To that extent, they will receive a share of the profits in the form of dividends on the equity they own, just like the others. However, there are some distinctions to take into account.

As newer entrants, unless the new equity buyers become big shareholders, they will have fewer claims on the company’s resources through the large salaries they might otherwise get by becoming executives and directors, with special bonuses or other payments. Small-scale equity owners also have little voting power in company decisions, and some of the equity sold and bought may even be devoid of voting rights on these decisions. Insofar as they are in this latter camp, the equity dividends for them are not so different from the interest payments on the company’s bond or bank loan borrowings. But they are still in a different economic situation from bond holders or bank lenders. They benefit from any rise in the price of the equity, and may suffer a loss from a collapse of equity prices. They have none of the usual debt holder or bank lender protection of being first in line for payments, if the company gets in trouble, and their dividends might be zero or very high, while interest and coupon payments are determined at a market level or fixed in advance.

Aside from any possible director benefits, the return on equity for the companies’ owners can be taken to be not only the dividends paid on the value of the equities purchased, but also on the change in the price of the equity itself. So, holding a company’s equity that pays zero dividends may be better than holding one with high dividends, if its equity price has risen far enough above the investor’s purchase price. For example, buying shares in a company at 100 and receiving no dividend for two years will be disappointing for money capitalists. But the outcome will nevertheless look attractive if the company’s share price rises to 150 over those two years, because a large capital gain has been made.

This is accentuated further by the way in which all equity prices (and, indeed, bond prices) tend to rise as interest rates fall, and vice versa, due to the lower, or higher, rates of discount on future earnings by money capitalists. Such calculations show how far capitalist views on what it a profitable investment can become divorced from a measure of the company’s actual return on capital or its underlying profitability.

Company reports usually standardise data with annual rates of profit, and also distinguish the profit due to shareholders after interest on borrowings and other special factors. These commonly lead to different rankings of companies, not necessarily only by their reported profits, but also, especially in recent decades, by the volatility of the returns they get. Extra borrowing usually leads to extra volatility of returns. These are other factors that influence the choices made by money capitalists, and thus the allocation of capital, but they do nothing to change the actual profits produced.

Rate of interest

At first sight, the rate of interest is more easily observable than the rate of profit on industrial or commercial investment. After all, the central bank’s key interest rates are published daily or intra-day, as are the yields on 3-month Treasury bills, 5-year or 10-year government bonds or rated corporate bonds. Nothing similar really happens for measures of company rates of profit. While there are many rates of interest – interbank borrowing rates, government Treasury bill or bond yields, corporate bond yields, borrowing rates for consumer loans or mortgages, etc – they are publicly observable in ways that a rate of profit on corporate investments is not.

How is this problem of many rates of interest dealt with in economic theory? Mostly, not at all. Instead, a sacred ‘rate of interest’ is often used in mainstream economic theory, with few, or no questions asked as to what kind of interest rate is meant. Financial theory may, for practical calculations, distinguish a corporate bond yield or government-borrowing yield, in order to determine the relevant price of a financial security, but there will be no serious investigation as to why this is at a particular level and not at any other. Instead, tautological assessments of ‘risk’ are offered, which make the banal observation that a more risky investment will probably have to offer a higher interest yield. But this does little to get around the problem that much mainstream financial theory, especially for financial derivatives, is based on the idea of there being, at bottom, a ‘risk-free’ interest rate, one that exhibits a zero, or negligible credit risk of not getting repaid by the borrower.

What rate is ‘risk free’? Usually this is assumed to be a government security yield, ignoring the inconvenient fact that governments have also been known not to repay in full. In the case of the US government’s security yields, the nec plus ultra of ‘risk free’ in financial theory, it is conveniently ignored that on several occasions the US government has run close defaulting on its debt repayments, owing to political turmoil in Congress. How far government yields can be seen as objective arbiters of the rate on ‘risk free’ debt is also questioned by a significant bias lower for this rate, especially in financial markets dominated by the major powers. Structural demand for the key government securities, from the domestic banking system, from international investor demand for the global currency security, and sometimes from their taxation policies (for example, exempting capital gains from tax), produces lower yields than would otherwise be the case.

The upshot is that ‘the’ rate of interest is as nebulous as ‘the’ rate of profit. Both sets of rates are determined in a chaotic capitalist market. Are there any laws determining these?

Relationships between interest and profit rates

A common view in mainstream economic theory is that the rate of profit and the rate of interest are either the same, or tend to equality over time. The logic is straightforward, but this logic also highlights the deficiencies of the argument. It is an example of the errors that arise when a focus on appearances is allowed to obscure the underlying processes of the capitalist economy. This happens when the social content of the relationship is ignored, with little attention paid to what the terms in an equation actually mean.

To illustrate this point, and even to make a mild concession to the argument, cast aside the messy reality that there are many rates of profit and many rates of interest, determined by all kinds of market pressures. Instead, assume that there is, in fact, one capitalist market rate of profit (r), available to industrial and commercial capitalists, and one market rate of interest (i) available to those putting funds into banks, buying bonds, etc. The basic case made by modern economics is that there is a tendency for r to equal i.

The rationale for this view is usually given from the perspective of the money capitalist. Let us call him (it is rarely her) Moneybags, and imagine him just sitting there with $1m in cash to play with. So what does Moneybags do with the cash when viewing the opportunities available?

            if i > r, just lend money in the market rather than invest directly in production

            if i < r, then invest in production rather than lend on the money markets

The actions of Moneybags supposedly tend to equalise the two rates, by investing or lending. How? The logic is rarely spelled out, but the mechanism assumed is as follows. If the rate of interest is above the rate of profit, the effect of offering more funds into the money market will tend to depress the rate of interest on loans towards the (lower) rate of profit. Alternatively, if Moneybags invested more in the higher rate of profit available on capitalist production, then that would tend to decrease the rate of profit on that activity towards the (lower) rate of interest on loans. Abracadabra, in a free market the rate of interest will therefore tend to equality with the rate of profit!

There is so much wrong with this argument, despite it often being taken as self-evident, or at least plausible. The problems can be seen in several steps.

Investment and ‘interest’

A money capitalist investor with funds of M can put them into a bank deposit, equity or bond investment, try to start up a business, or invest in someone else’s business. Assuming the investor is attracted by the relative yields, then this looks like a mechanism for equalising r and i, and the previous argument would hold.

However, that assumes there are diminishing returns on the M invested in industry and commerce, or in ‘financial’ ways, so that the flow of M into the different applications of funds will equalise the returns on the funds in each case. Rates of return may not initially move lower when M is applied a number of times to a particular type of investment, but eventually the extra supply of commodities produced, or of funds into an investment area, should presumably lower prices and reduce the rate of profit and also, in the alternate case, the interest return. Yet this seemingly valid logic ignores the nature of the investment that produces the return.

In one case, it is an advance of M to invest in means of production and labour-power to get a surplus value that results in a corresponding rate of profit. In the other case, it is an advance of M on the money markets, into bonds, etc, to get back a value of M plus interest. In the first case, the M may be advanced to expand the circuit of production. This could even raise the rate of profit if it boosted the productivity of a company versus its competitors, although, taken for the economy as a whole and over a period of time, probably not. The real problem for this proposed mechanism occurs for the advance of M for the ‘financial’ investment.

Moneybags wants to get back the invested funds, M, plus interest. But is Moneybags literally a bag of money hovering in the air, having no costs of investment that need to be deducted from the interest received? Also, what if Moneybags also borrows money from others to help fund the investment? Then the net investment return will depend on the difference between the borrowing and lending interest rates, as well as the deduction of his relevant costs. This means that the ‘rate of interest’, seen as a return on money capital advanced, is not as straightforward for Moneybags as the economists’ assertion of the letter i for interest would suggest.

Neither is the ‘r’ for the profit rate unambiguous. Industrial and commercial companies will borrow funds for investment as well as using their own funds. This means that their net profit is reduced by their interest payments; to give what Marx called the ‘profit of enterprise’. This latter profit is best measured over the money advanced by the industrial and commercial capitalists to get their ‘rate of profit’, but that will generally be a different number from the rate of return on the investment as a whole, as explained earlier.

The industrial and commercial capitalists will tend to borrow more, the lower is the rate of interest on borrowing versus the going rate of profit. They might also stop any extra borrowing when the rate of interest rises to equal the rate of profit that extra investment funds could generate. Yet, while that looks like a possible market mechanism for tending to equalise the rate of interest and the rate of profit, it is at best only a partial one. For example, companies would not borrow indefinitely with a lower rate of interest than the rate of profit. To do so would greatly increase their ‘leverage’ and expose them to the risk of having to service debt and pay interest even if the conditions of profitable production deteriorate. For such reasons, stockmarket investors usually frown upon highly leveraged companies.

In addition, there is the point, explained in my book, The City,[1] that the ‘profit rate’ of financial firms, such as banks who can create their own financial assets, or who depend upon attracting funds from other money capitalists and savers, such as asset managers, cannot sensibly be compared with the profit rate of industrial and commercial corporations advancing capital for their business. It is not comparing like with like.

Conclusions

In Marxist theory, there is no law determining the rate of interest, while profits are determined by the surplus value extracted from productive workers. That profit is measured over the capital invested, to determine a rate of profit for the system as a whole, and the profit remaining to the productive capitalists is determined after paying the amount of interest. [2] The only barrier to the rate of interest is that it cannot be sustained at a level that eats up all the profit of productive capital. In recent years, ‘real’ rates of interest have been negative (when compared to inflation levels), and have even been negative for some rates in nominal terms, but no statistician has so far claimed that corporate profitability has become close to zero or negative for the economy as a whole. This gives empirical support to the argument in this article that there is no equalisation of the rate of interest and rate of profit.

Developments in capitalist society mean that the 19th century picture of the industrial capitalist versus the money capitalist and, correspondingly, the rate of profit versus the rate of interest have taken on a new form today. While it is possible to identify capitalist entrepreneurs who have founded companies, from James Dyson (vacuum cleaners) to Mark Zuckerberg (Facebook), most of these have also evolved into being financial entrepreneurs, using borrowings from capital markets and financial operations to boost their market status and power. It is commonly the case that ‘entrepreneurs’ these days cannot readily be separated from ‘financiers’, given their often multiple shareholdings and other financial interests; still less can the initial investors in their projects from the financial elite be considered under the same heading as Marx’s industrial capitalists.

So there is not any longer, even if there once was in Marx’s time, a distinct class of ‘money capitalists’ versus the rest of the capitalist class. Individual capitalists will often have a portfolio of more important and less important holdings in companies, ones they pay more attention to and others, ones that are industrial, commercial or financial, together with the additional assets they hold in the form of government and corporate bonds, money market securities, bank deposits and so forth.

The activities of asset managers, insurance companies and pension funds complicate the situation further. In the rich countries, where financial operations are more prevalent, a significant proportion of the population indirectly owns a large share of corporate equity. No individual among these feels in control. Rightly so, since their monthly payments or accumulated savings are used to boost the corporate elite. But they nevertheless also benefit from and have a stake in the fortunes of the capitalist corporations in which they have invested. This has an impact on the politics of the populations concerned. But I do not cite this as the only political problem faced, since in the richer, imperialist societies the poorest will also commonly be among the most aggressive supporters of their state’s power.

Tony Norfield, 26 August 2016

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[1] See here.

[2] Even this simple summary ignores the question of rent on land ownership, dealt with in the latter parts of Volume 3 of Capital. In this article, I do not cover the separate question of the tendency of the rate of profit to fall. My book, The City, discusses how measures of the rate of profit are impacted by financial developments, state intervention and, especially, by the position of a country in the world economic system.

Commercial Capital and 'Finance'

This note is to record an interesting comment on my new book, The City, and my recent blog post 'Value Theory, Finance & Imperialism' on 3 July 2016, and to give my reply that may otherwise be somewhat hidden at the end of that article.

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Comment from 'Kumiko':

You are on the right track generally as far as the theoretical framework goes. But I'd note that in Vol II, where the analytical assumption of the identity of individual with total social capital is still in place, Marx 1) divides the total productive capital into productive-, commodity-, and money-capital circuits, and regards each independently. Here Marx arrives at the conclusion that the commodity-capital circuit can be excluded from further consideration for the purpose of the analysis, that purpose being the determinations of the sources and destinations of surplus value, the source being found in production, the destination necessarily being found in money under capitalism. But Marx also notes the peculiarity of the commodity-capital circuit in that it is the only circuit of the three to both begin and end "bearing" surplus value. In practice that could give rise to various interesting arbitrage possibilities for independent commerce, once the assumption of identity is dropped.

And that brings me to Vol III Part IV. This is limited to the regard of commercial capital in independent form. Note also Marx's assumption that independent commercial capital is scheduled for extinction in the course of the development of capitalist industrial production. This may be true enough, but the question begged here concerns the *combined* forms of industrial, commercial and financial capital, these being the common social aliases for the three circuits mentioned above. You are correct to dismiss the traditional counter-position of "industry" with "finance" as if these still exist only in independent form. Further, one could go on to critique the classical Hilferding formula for "finance capital" that combines banking with industrial capital as perhaps only applicable to Germany in a certain historical period, as only a specific combination of the three circuits. Even if we agree that modern capital nearly always appears in combined form, we could go on to question the "balance" in the combination of the three circuits, where one or another "dominant", with that dominance also fluctuating with the other circuits over the course of history. And finally we can also question the "inevitability" of the rise to "dominance" of industrial capital, particularly in the three different cases of the United States, Britain and France. Otherwise we would not be speaking of "deindustrialization" today.

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My reply:

I agree with your remarks more than might appear at first sight. My focus in the book (and the logic of the book’s exposition as outlined in this blog post) was on how to understand ‘finance’ in a value framework. I saw this as necessary, given the prevalence of shallow, ‘radical’ critiques of finance that usually boiled down to a call for a regulated capitalism. In other words, I wanted to explain how to understand the evolution of the form of value and the key role of finance in the imperialist world economy. This was the subject of my PhD thesis, from which the book, after much rewriting and updating, was derived.

In the book, I do have a critique Hilferding’s concept of ‘finance capital’, both as being too Germany-centric and as a one-sided, nationally-based understanding of how the form of value evolves. I argue instead to analyse how finance develops in the world economy, in particular the role of financial securities and the banking system, to get a clearer view of how the world works.

I take your point that the ‘commercial capital’ aspect of modern capitalism is also a critical one. My priority in the book was different, but it has been on my mind for a while now that commercial capital deserves more attention. For example, major corporations like Apple, Google, Facebook and Amazon are more in the commercial than the industrial sphere. Most of their activities are buying/selling what other companies produce, or getting advertising revenues from these sales. This is also linked to the financial and market power they are able to use. William Milberg and others have looked at this from a ‘value chains’ perspective; John Smith, in his new book Imperialism in the 21st Century, explains well how this amounts to ‘value capture’ in his focus on the globalisation of production.

The latter point also brings out how commercial capital still depends upon production, and how production companies can turn themselves into more commercial ones by getting others to do the producing in markets that are dominated by the powerful corporations. Even in the late 19th century, Britain was more the ‘warehouse of the world’ than the workshop of the world, with huge revenues from maritime transport, shipping, insurance, trade finance, etc, adding to those from its foreign investments.

Does that show how industry was not the ‘dominant’ force in capital accumulation? Not really. Industry (which Marx considered the main form of productive capital) conditioned the developing role of commerce and finance from at least the early 19th century, moulding it into a form that would suit industrial capital. However, it is true that other developments need to be considered. Marx was wrong if he thought that industry had to be the dominant form of capitalist enterprise, but this does not necessarily follow from the logic of his argument if one allows for the development of the world economy, which he had not fully analysed.

While a huge commercial capital sector (or financial sector) could not exist within a single economy taken out of its relationship with others, it is a different question when a small number of powerful capitalist countries dominate the world economy. Britain, for example, could have an outsized commercial/financial sector because Britain dominated world trade and its surplus value was sourced worldwide, not just from within the national economy. This example can be used to understand what has happened today, where domination of world commerce and finance benefits particular countries that, in value terms, produce relatively little themselves. This is explained more fully in my book regarding finance; analogously this is true of commerce as well today, when others do the producing.

Tony Norfield, 16 July 2016

Sitting on the Dock of the Bay

(This is a guest article)

That millions of workers in Asia on minimal wages produce a huge amount of consumer goods for the West is such a well-established and undisputed fact that it does not require much further comment. These goods are often so cheap that their price astonishes us. Of course, once we consider the economics of the lives of the people who produce these goods, there is no mystery in this. Yet we rarely ponder such issues for long, because the inevitable conclusion can only be that living standards in the West are supported by the toil and sweat of millions of others.

But the systematic exploitation of what used to be called the ‘Third World’ - and is now fast becoming the First World in terms of industrial organisation and manufacturing competence - is not restricted to production. Every aspect of this production and trade is parasitical and hugely exploitative. Consider, for example, maritime shipping - the main way these goods get from the hands of distant toiling masses into the hands of consumers in the rich countries.

Almost all goods produced in Asia for the West are transported in large container ships. Airfreight accounts for less than 7% of the total. Despite the West’s clear technical superiority, not a single developed western nation builds container ships. They are all built in Asia, mainly in South Korea. So, it is not only the goods, but also the ships they travel in that are produced in Asia. What little shipbuilding of any kind remains in the West survives only because of the most stringent protective barriers or due to social policy protecting employment (the disparity in wages is so great that a global free market in shipbuilding would wipe out what is left of this protected industry).

The exploitative and parasitical nature of Western consumption even determines the design of container ships because of the unequal loading on the forward and return journeys. Ships stacked up with containers on the outward East-West journey can be the equivalent of a 10-storey building above the water line. A ship is stable when a proportion of it is below the water line, but a ship built to handle such huge capacities would be unstable in rough seas when unladen. Because we give Asia practically no goods in return, container ships have to return empty. So, to maintain stability the ships have to be built with huge ballast tanks to take on seawater. The ships are designed on the assumption that the West takes but does not give and that this will continue to be the case throughout the working life of the vessel!

A large container ship has a crew of around 30. The captain is almost always a very-well-paid European. The crew is invariably staffed by ratings from extremely poor countries that command extremely poor wages (mostly from the Philippines, Bangladesh and Malaysia). Were merchant seamen paid decent wages these would be reflected in a higher price for the goods transported.

Considering that 80% of world trade is from ‘East to West’, and that all container ships are built in the Far East, it would not be unreasonable to expect Far Eastern operators to dominate world maritime business. Not a bit of it. For 120 years very powerful Western companies, backed by monopoly practices of linked banks and insurance companies, and supported by port authority regulations, ensure that a whopping 90% of world shipping is controlled by a dozen Western cartels. Only 8% of shipping is in the hands of Far Eastern operators, the people who build the ships, who sail them, who make the goods transported in them, and who dispose of the ships at the end of their working life. Cartel shipping fees represent another transfer of income from Asia to the West.

A container ship has a working life of around 20 years. The cost of disposal is also a cost that must be reflected in the price of goods transported. Ship breaking is a very labour intensive and extremely dangerous activity. There are no breaker’s yards catering for large ships in the West. They are all located in countries where wages are extremely low (Bangladesh, Pakistan), where health and safety legislation is non-existent or not enforced, and where the compensation for death and injury at work is a pittance. Another sign of how cheap goods are bought on the exploitation of others.

O Redding, 13 December 2013