Finance, Imperialism and Profits

Last Friday I took part in a panel to launch a new book, World in Crisis: A Global Analysis of Marx’s Law of Profitability, published by Haymarket Books, edited by Michael Roberts and Guglielmo Carchedi. The presentation was at this year’s Historical Materialism conference in London.

My presentation was on ‘Finance, Imperialism and Profits’, in which I stressed the need to develop Marx’s theory in order to explain the world today. I argued that an accurate measure of a rate of profit (in Marx’s sense) could not be gleaned from official statistics and that, among other things, this was because of the nature of the imperialist world economy. Also I noted that for some adherents of Marx’s ‘falling rate of profit’ theory, this theory was somehow consistent with their calls to nationalise banks and regulate finance. This expunges the revolutionary content of Marxist theory, shows a naïve faith in the capitalist state and makes concessions to nationalism.

This was a lot to cover in the twenty minutes available, so could only be done in summary form in the presentation (see below), but there was more time in the Q&A.


Tony Norfield, 12 November 2018

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What is Marx’s Value Theory Worth?

At a recent talk I gave on imperialism, there was an interesting question raised on what I thought about Marx’s theory of value. This seemed to be prompted by my reference to Marx’s theory, while I spent little or no time using the terminology in Capital. So the logic of the question was: what is the point of Marx’s theory if one can do without it when explaining what is going on in the world?

Partly, the question is answered by saying that one does not always have to use specialist terminology to express ideas. For example, I have found it to be simpler in presentations to avoid Marx’s term ‘fictitious capital’, because that concept would take some time to explain properly and most people are not familiar with it. Even those who are commonly misunderstand it. Instead, I usually develop the same ideas more directly through discussing the role played by equities and bonds and their relationship to what the economy produces. However, the question needs to be put in a broader context.

Marx’s value theory analyses social labour under capitalism and the increasingly odd forms that it takes as capitalism develops: from being represented in the prices of commodities, to being the source of interest, profits, dividends, rents and tax revenues, to underlying, in an even more distorted fashion, the prices of financial securities. Marx’s theory shows how the capitalist market gives the system a particular dynamic, one that leads to the monopolisation of production and the creation of a world market as capital accumulates. The labour embodied in commodities may not tally directly with the prices they command in the market, but those (relative) prices remain strongly influenced by changes in social productivity. Furthermore, we get a longer-term process by which barriers to capitalist production are set by the tendency of the rate of profit to decline. Since the logic of capitalist production is to make a profit, this is the key underlying problem for capitalism as a social system. It is one that the (sometimes) well-meaning reformers of the system do not want to contemplate, so they exclude this from their analysis or go out of their way to deny this does, or even could, happen.[1]

These fundamental features of capitalism analysed by Marx remain in place, although the system has of course developed a great deal in the 150 years since Capital was written. The changing forms of capitalism have led many to argue that Marx’s theory is outdated or invalid today. But a proper Marxist analysis examines the dynamic of the system and the new forms that evolve out of the old, rather than simply to judge whether contemporary capitalism fits completely with an earlier conception of it.

In Capital Volumes 1, 2 and 3, Marx did not investigate relationships between countries in the world market. Some of this was done outside the three volumes, and plans for later volumes included a more systematic coverage of the state, foreign trade and the world market. So, for example, in Capital there was no real discussion of colonies, just brief mentions, nor much on monopoly or national differences in wages.

Lenin updated aspects of Marx’s work in his 1916 pamphlet Imperialism, drawing on other analyses. He correctly put greater emphasis on the division of the world economy between oppressed/oppressor nations, the territorial division of the world between the major powers, the propensity to war, on monopolies, bank/industrial capital and a ‘financial oligarchy’. This was a key advance in the analysis, and consistent with the idea of Marx’s value theory as being a theory of the evolution of and barriers to the capitalist system – hence Lenin’s term ‘moribund capitalism’. Many aspects pointed out by Lenin remain relevant today, even though these century-old forms have, of course, also developed. There is now a largely post-colonial world, although most countries are still clearly underdogs in the imperial hierarchy. There remains a propensity to war, but now with many wars by proxy, sponsored by the major powers.

I have some differences with Lenin’s analysis, as explained in my book, The City: London and the Global Power of Finance, especially on his understanding of finance, which was taken largely from Hilferding. However, perhaps Lenin’s greatest weakness was his analysis of the ‘labour aristocracy’, the unconvincing notion of how a labour elite getting the benefits of imperial privilege influences the broader working class with their pro-imperialist views. Even in Lenin’s time it would have been more convincing to have taken into account how the mass of people in rich countries were patriotic for their own reasons, ones that had a strong basis in reality rather than a supposedly infectious ideology. They saw, and still see, their economic interests tied up with that of their own states, and they benefit in their wages and welfare conditions from this imperial privilege. That is another sign of how it is important to conduct a thorough analysis.

I rely on Marxist concepts as starting points for understanding the world today because they provide the best way to explain what is going on. However, this is not to say that one can find the detailed answers in a particular volume of Capital. To think so would be almost as bad as believing in the prophecies of Nostradamus. Instead, the significance of Marx’s theory is that it so clearly spelled out the dynamic of capital accumulation that, much more than one might think plausible, his analysis provides key building blocks from which to understand major features of the world economy today.

Whether I use terms from Marx’s value theory in my analysis, and which terms, depends on the context in which I make my argument and how much time there is to do so. In any case, Marx’s work is used as just described. His concepts, like Lenin’s, might need to be amended – perhaps even rejected – according to an assessment of how the world has developed since they wrote.

The observation that capitalism in various forms has been around for several hundred years is commonly seen as an argument that it will go on forever; that it is an eternal, natural system for organising the economy. While economic crises are an undeniable reality and sometimes bring protests, there remains little understanding or acceptance of the Marxist conclusion that capitalist social relations are an increasingly dysfunctional, reactionary way in which to organise the affairs of humanity.

Tony Norfield, 1 March 2017

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[1] I have little confidence in being able to track movements of the rate of profit through official statistics, although one does get indications of the underlying movements from the behaviour of major capitalist companies and reports of investment that suggest a rising organic composition of capital. Official data are focused on an individual country, and do not fully allow for international influences, something especially important for the US. Statistical conventions for counting the ‘value added’ by the financial sector make things worse, as exemplified by UK GDP income data in 2008 showing a higher operating profit for UK banks when the company reports, and Bank of England data, showed a very sharp drop, often into losses! This is apart from the multitude of accounting tricks that large corporations use to relocate the origin of their profits, including through tax havens.

The City of London: Parasite of the World Economy

This article examines the City of London. My focus is on its international trading, bringing together some important material on British imperialism and finance. I will not be discussing whether banks based in the UK are ripping off consumers, failing to lend cash to struggling companies, mis-selling financial products or manipulating LIBOR. These matters are mere bagatelles. The bigger story is how tens of billions of pounds are extracted every year from the labour of others in the world economy by the regular daily mechanism of British finance.

1. Economic decline, but financial power

Most people know that the City of London is a big financial centre. However, the large scale of its operations is striking given that the British economy is a second-tier economic power at best, ranking well behind the US, behind China, Japan and Germany, and even behind France and Brazil, according to GDP data for 2011. When it comes to finance, the UK moves from being an also-ran to one of the major global medal winners.

Britain first achieved the position of being the world’s premier centre of commerce, credit and finance in the 19^th century. This was a natural complement to its domination of trade and its rule of a global empire. Some historians have characterised Britain as being more the ‘warehouse of the world’ than the ‘workshop of the world’ at this time. However, even when Britain’s position was challenged by rivals and weakened by two cataclysmic imperialist wars in the 20^th century, the prominence of commerce, and particularly of finance, continued as a critical dimension of the British economy. From a relatively weak position as a major power post-1945, British governments took every opportunity to prop up British economic privileges. First this happened by bleeding the colonies to help pay for the ‘welfare state’ and to subsidise British living standards. Then, until the 1970s, it was by using privileged trading and financial deals with ‘Commonwealth’ countries to protect British economic interests. But, it was clear to British governments that competition was tough, even in the post-war boom years, and that Britain’s economy was falling behind and losing market share to more successful countries. This was the backdrop for a succession of policies that promoted – or at least did not impede – the growth of the City’s international financial business.

From the late 1950s, this City business developed not on the back of UK sterling, as in the glory days of Empire, but by using the US dollar. American corporations were dominating world trade and the dollar was now the key currency for international transactions and most financial deals. However, government restrictions on financial markets in the US and elsewhere – but far less so in Britain – enabled the City of London to build up a strong business in dollar lending and borrowing. It was not as if the City was starting from scratch; it was already an international bank dealing centre. However, the eventual impact of this new development of the ‘eurodollar’ market – transacting in dollars outside the US, and outside the jurisdiction of the US government – was dramatic. It was a major step in the growth of global financial markets. By the early 1970s, the gross size of the eurodollar market in loans had already exceeded $500bn, exploding to some $3000bn by the end of the 1980s, helped by huge current account imbalances worldwide and credit expansion by international banks. By the 2000s, the eurodollar market’s size, some 75% of the total eurocurrency market, had reached $5000bn. These expansions of credit helped underpin a boom in all kinds of international financial deals.

Such developments should not be understood in narrow financial terms. They reflect firstly the chronic problems that capital accumulation encountered by the early 1970s, depending more and more upon credit expansion to keep the system ticking over, although this entailed more frequent financial crises. Secondly, the opening up of financial markets worldwide, promoted especially by the US, but in close cooperation with Britain, meant that the already limited scope for national-based policies had diminished to vanishing point. Hence, the minuscule differences in economic policy among political parties in all countries. Thirdly, this new financial system helped put the powers at its centre in a surprisingly strong position, at least in a position much stronger than would seem consistent with their not-so-competitive economies. The two powers at the centre of the world financial system are the US and Britain. Most analysts focus on the US as the hegemon of global finance. While this is an understandable bias, it overlooks the role played by the UK, imperialism’s broker-dealer.

2. Uptown Top Ranking

The size of the financial system in Britain compared to the national economy is far bigger than it is in the US. One measure of this is to look at the size of bank assets compared to GDP. In the UK, total bank assets were roughly four times GDP in 2011; in the US they were only a little larger than GDP. US bank assets were still larger than those in the UK in absolute terms, reflecting the much bigger US economy. However, other measures of absolute financial weight put the UK in a top ranking position. These measures are not all based on British-owned financial companies, but on financial companies with operations based in the UK. Nevertheless, this UK-based business is vital for the fortunes of British imperialism.

In summary, before giving the statistical details, the City of London is:

-         the world’s largest international money market

-         the largest foreign exchange market

-         the largest ‘over-the-counter’ interest rate derivatives market

-         the 2^nd biggest issuer of international debt securities (after the US)

-         the 4^th largest location for the listing of equities (after the US, China and Japan)

-         one of the two largest net earners of revenues on financial services

While there are diverse ways in which to measure such things, these results are persistent features that emerge in many different methods of calculation. They reflect the structural privilege that Britain has in world finance, privileges that bring significant rewards (see section 3).

Table 1 details the UK’s international banking position compared to other countries. The totals in the table are for 44 countries that report to the principal body that collates these figures, the Bank for International Settlements, based in Basel, Switzerland. Notably, the UK has by far the largest total of claims (loans to) and liabilities (deposits from) other countries. The data are for banks located in a particular country, including these countries’ so-called ‘offshore’ banking facilities. The UK has 20% of total outstanding business; the US is in second place with a 12% share. UK-owned banks do not all this business; foreign banks in the City do a large share. However, a separate table compiled by the BIS on the business done by banks according to their nationality does show that British banks have a larger volume of international business than the banks of other countries. The listed UK figures in the table exclude the separate banking business of a variety of tax havens outside the UK, including the Cayman Islands, the Bahamas, Bermuda, Jersey, Guernsey and the Isle of Man. While these islands are not technically part of UK territory, they all sing ‘God Save the Queen’ and are each given a special status by the British authorities. Together, they would rank third in the table, making up 9% of international bank business.

Table 1:           International positions of banks by country, March 2012

                        ($ billion, amounts outstanding in all currencies)

Country	Claims + Liabilities	Share of Total
UK	12,171	20.2%
US	7,147	11.9%
Germany	4,613	7.7%
France	4,602	7.6%
Japan	4,303	7.1%
Cayman Islands	3,089	5.1%
Netherlands	2,631	4.4%
Singapore	1,816	3.0%
Hong Kong	1,672	2.8%
Switzerland	1,583	2.6%
Italy	1,447	2.4%
Luxembourg	1,345	2.2%
Belgium	1,269	2.1%
Spain	1,237	2.1%
Bahamas	1,179	2.0%
Other	10,118	16.8%
Total	60,220	100.0%

Source: BIS

Table 2 details another dimension of global finance: the foreign exchange market. Banks in the UK (basically, London) have a clear and persistent lead in terms of market share. Foreign exchange dealing is not bank lending or borrowing; it is exchanging one currency for another. Banks make money on these deals by taking a dealing margin. The margin can look very small – for example, one or two hundredths of a percent of the value of the deal for widely traded currencies. However, given the huge volume of dealing – 5 trillion dollars daily in 2010 - this can add up to big earnings! In the latest BIS triennial survey, London had by far the biggest share of the global FX market in spot, forward, swaps and options transactions. This might not seem surprising, given London’s historical role that grew out of international commerce. However, Britain has twice the volume of currency dealing of the US despite being only in sixth position in world trade in goods and services, compared to the US’s top position in trade. The size of London’s foreign exchange market is the clearest sign of British imperialism’s role as the broker for global capitalism, taking a cut of more than one-third of the value of foreign exchange deals in the world economy.

Table 2:           Foreign Exchange Turnover By Country, 1995-2010

                        (Daily averages for April in each year, $ billion)

	1995	2001	2007	2010	% of 2010 Total
UK	479	542	1,483	1,854	36.7
US	266	273	745	904	17.9
Japan	168	153	250	312	6.2
Singapore	107	104	242	266	5.3
Switzerland	88	76	254	263	5.2
Hong Kong	91	68	181	238	4.7
Australia	41	54	176	192	3.8
France	62	50	127	152	3.0
Denmark	32	24	88	120	2.4
Other	300	362	735	756	14.9
Total	1,633	1,705	4,281	5,056	100.0

Source: BIS

Table 3 shows an even stronger picture of London dominance in the so-called ‘over-the-counter’ (OTC) interest rate derivatives market, which comprises direct deals between banks and their customers. OTC trading is the biggest part of the derivatives market, principally made up from trading of interest rate swaps. Other trading of derivatives takes place on exchanges, and the US is home to the biggest exchanges for derivatives, mainly based in Chicago. However, the volume of trading on exchanges is a small fraction of that in the OTC market.

Table 3:           Over-the-Counter Interest Rate Derivatives Turnover, 2010

                        (Single currency derivatives, daily average for April 2010, $ billion)

	FRAs	Swaps	Options	Other	Total	% World Total
UK	382.0	738.6	113.9	0.3	1,234.9	46.5
US	268.4	309.3	64.1	-	641.8	24.2
France	46.4	128.2	17.7	1.0	193.3	7.3
Japan	2.0	82.3	5.7	0.0	89.9	3.4
Switzerland	20.1	58.7	0.1	-	78.8	3.0
Netherlands	0.9	60.0	0.4	-	61.3	2.3
Germany	15.1	31.6	1.8	-	48.5	1.8
Canada	6.5	34.6	0.6	-	41.7	1.6
Australia	6.7	33.6	0.3	-	40.6	1.5
Singapore	4.7	28.6	1.3	-	34.6	1.3
Spain	3.6	24.8	2.3	-	30.7	1.2
Italy	8.4	17.0	1.9	-	27.3	1.0
Hong Kong	1.3	15.8	1.3	0.0	18.5	0.7
Other	24.7	70.5	16.5	-	111.7	4.2
Total	791.0	1,633.5	227.9	1.3	2,653.7	100.0

Source: BIS

UK and US financial centres together account for 70% of the world market, once more illustrating the concentration of global financial trading. The US authorities have been angered by the way that trading derivatives in London has led to big financial scandals hitting their own pockets, from the collapse of AIG in 2008 to the recent loss of $6 billion by JP Morgan’s ‘London Whale’. However, this overlooks the fact that an Anglo-American partnership designed this system, with implicit and explicit government approval, and it has been mutually beneficial to both powers. The US and the UK are also the leading issuers of international debt securities (to which a lot of this derivatives trading is linked), giving them easy access to investment funds from across the world.

Another means of getting access to global funds – and also to the revenues from trading in securities – is via the equity market. Here, the UK is less able to compete with the US in terms of equity market size, since the US economy is around six times bigger than the UK’s and nationally-owned and controlled companies tend to list their stock on national stock exchanges. Nevertheless, the market capitalisation and volume of trading on the UK stock exchange is high, and is the largest in Europe. Companies listed on the London Stock Exchange do not have to be UK-owned or controlled, and stock exchanges compete with each other as markets for attracting international funds and international company listings. My calculations indicate that around 30% of the capitalisation of the FTSE100 index is made up from companies that are principally foreign owned, eg Glencore and Kazakhmys.

Table 4 details the countries with the largest stock exchanges, ranked in order of market capitalisation. The ups and downs of share prices affect the data, but the relative sizes do not change much over time, with the exception of one country that has risen to prominence in this area of global finance: China. I have added together the two ‘mainland’ exchanges to Hong Kong to give a total for China, but even without Hong Kong, China would have the second rank in terms of global market capitalisation of companies. The London Stock Exchange ranks behind Tokyo’s, but is far bigger than the exchanges for other European countries, including the combined Euronext exchange figures for Belgium, France, the Netherlands and Portugal.

Table 4:           Equity Market Capitalisation and Turnover, 2012

                        (All figures in $ billion)

Country	Exchanges	Capitalisation1	Turnover2
US	NYSE Euronext (US) plus NASDAQ	17,503	12,588
China	Shanghai plus Shenzhen plus Hong Kong Exchanges	5,936	3,703
Japan	Tokyo Stock Exchange	3,385	1,810
UK	London Stock Exchange	3,332	1,190
Belgium, France, Netherlands, Portugal	NYSE Euronext (Europe)	2,460	853
Canada	TMX Group	1,860	672
Germany	Deutsche Börse	1,212	698

Notes: (1) Market capitalisation for end-June 2012. (2) Electronic order book volume of trades for first half of 2012. Turnover data for Hong Kong estimated by the author.

Source: Calculated using data from the World Federation of Stock Exchanges.

There are other dimensions of global finance than those noted above, including commodities trading and pricing, fund management and insurance. I will not risk drowning the reader in a further torrent of data, however, and just note that the UK ranks at the top end of these global tables too, usually second only to the US as a base for these operations.

3. How to make money by making nothing

The term ‘finance’ in this article has been used to encompass all the lending, borrowing and trading operations of financial institutions. In Marx’s theory of value, two important dimensions of such activities are identified. The first is ‘money-dealing’ activities that are part of the process of buying and selling commodities, and of providing the liquidity that may be necessary for industrial and commercial companies to continue their business. This money-dealing includes discounting bills and providing foreign exchange transaction services. The second is borrowing and lending of money by banks, especially for investment, which comes under the heading of what Marx calls ‘interest-bearing capital’. Out of this form of interest-bearing capital, capitalist financial markets also create various securities that attract forms of interest payment – bonds and equities. One step beyond this is to create derivatives, securities whose value is derived from the prices of bonds, equities and other financial instruments. The demand for derivatives initially arises out of a need for a form of insurance against the volatility in prices of these securities, but this soon builds a momentum for speculative, leveraged trading, especially when capitalist profitability is under pressure.

Issuing these financial securities (bonds, equities and derivatives) can attract investment funds from around the world – especially if pressure has been brought to bear on countries to relax any controls they may have on capital flows! Furthermore, the trading in these securities, the exchange of currencies that may be a part of such trading, and the provision of legal, advisory and custodian services that come with the investment in financial titles, all amount to the build-up of a huge financial infrastructure that can demand its cut for the ‘services’ rendered.

There is a problem, though. All these financial operations are not producing anything; they are simply dealing in titles to things that others have produced. All the costs of such operations are a deduction from social output. Even if one person’s financial deal makes a profit, that profit is offset by a market trading loss for someone else. The most that these financial services can do is to be more efficient, and so waste less money. In capitalist market terms, this is seen as being ‘productive’, and the more efficient financial services company would gain market share. Nevertheless, the financial sector is an economic burden and this fact puts a limit on how big it is likely to grow in any particular country.

However, such limits are greatly relaxed for an imperialist power like Britain that can use its privileged position in the world economy to be the banker, broker, dealer, securities trader and derivatives provider for everybody else. That is why financial services in Britain are so outsized compared to the domestic economy. Of course, having a large financial services sector does not make sense if it does not absorb money from elsewhere. But that is exactly what the UK financial services sector does.

Table 5 details the UK’s net earnings from financial services. These are the summary revenues from overseas for each sector, minus the foreign payments made by these sectors. In total, the net financial services earnings amounted to nearly £40bn in 2011. This covered almost 40% of the UK’s £100bn trade deficit in goods in that year and was roughly 2.5% of UK GDP. The UK has the second biggest surplus on financial services in the world, usually just behind that of the US. If insurance services are added to the reckoning on this account, then the UK surplus is the highest, given that the UK has steady net revenues on insurance (around £8-12bn per annum, not included in Table 5) while the US has a large deficit. These net foreign revenues are a good measure of what value is deducted from the world economy by financial operations based in Britain.

Table 5:           UK Net Earnings from Financial Services, 2009-2011

                        (All figures in £ billion)

	2008	2009	2010	2011
Monetary financial institutions	31.7	26.9	23.3	29.0
Fund managers	4.2	2.9	3.5	3.3
Securities dealers	9.0	7.1	4.9	5.5
Baltic Exchange	0.9	0.7	0.7	0.8
Other institutions	-6.2	-0.7	0.9	0.0
Total	39.6	37.0	33.4	38.7

Source: UK ONS

‘Monetary financial institutions’ are what normal people call banks, and they account for the bulk of the revenues. In 2011, the banks’ net interest income on loans made up only about a third of their net foreign income, with fees and commissions about a quarter. The bulk of their earnings, nearly half, came from dealing spreads – amounting to £14.3bn in 2011. Securities dealers outside the banks gained almost all of their income from commissions and fees, rather than from dealing margins. Fund managers based in the UK are less important in the totals, as is the Baltic Exchange, which is linked to dealing in ‘freight futures’, and is the main broker for dry cargo and tanker fixtures, including the sale and purchase of merchant vessels.

The striking thing about the earnings data on financial services is that they have shown little sign of being affected by the financial market slump. In the immediate pre-crisis years 2006 and 2007, the total UK net earnings were close to £24bn and £33bn, respectively, and in the five years before that the figures were in the range of £15-20bn. These are below the numbers seen in 2010 and 2011. The figures give one indication of the material basis for successive British governments backing financial market trading.

4. Conclusion

The legacy of the financial crash has led to recriminations against banks in the UK and elsewhere. However, in the UK the focus has been on the stupendous salaries and bonuses of the lords of finance, and on how to regulate banks in order to avoid economic trouble. There is little investigation of the system itself, and no acknowledgement that the British financial system is a parasitic leech on the world economy. It provides services for the functioning of the capitalist market, taking a cut of the value of every deal. This pays not only for the bank executives and traders, not only for those in other financial operations, but also for a myriad of other functionaries in legal, accounting and other jobs that depend on this huge financial services centre. The ‘City’ also pays the UK government tens of billions in taxes and, as the previous section showed, revenues from its services cover a large portion of the UK trade deficit.

Marx once famously summed up capital as ‘dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks’. To continue the metaphor, British imperialism has developed a financial system that acts like a blood bank for the value produced worldwide, one that takes a sip of every value flowing through it.

Tony Norfield, 3 October 2012