By Kumar David –
How finance-capital has transformed the basics of capitalism: Structure of 21-st Century Capitalism
America is the model for this essay for the same reason that most classical economists used England as the model for their discourses in the eighteenth and nineteenth centuries. The post-2009 US economy is now in the one hundred and thirtieth month of growth; the longest continuous such run since record keeping started 175 years ago. The cycle of recession and growth has continuously lengthened, but the rate of growth has become ever shallower. In the 35 years from the end of the war to 1980 the business cycle, or years between recessions, was about 6 to 9 years averaging about 7 years. Subsequent to the 1981 recession engineered by Regan and Volker to overcome stagflation recessions occurred in 1990-91, the dot-com investment bust of 2001 and the 2008 Great Recession. Since then the anticipated next recession has stayed away for over 10 years.
Though cycle periodicity has extended to about 10 years the rate of GDP growth has declined steadily. In the 80 years before WW2, making allowance for the WW1 years, the GDP growth rate averaged about 4.5%, then from 1945 to 1980 the average fell to about 3.5% and from 1980 up to the present the average has been just 2.8%. Starting 1980 is the epoch in which finance-capital moved to the front taking a hegemonic position now. Although the continuous expansion from 2009 to 2019 has been long, GDP growth has subdued averaging about 2.6% and nearer 2% at this time of writing. The objective of this essay is to advance the theses that these observables – longer cycles, falling GDP growth, lower wages, higher inequality, low inflation paradoxical in the context of full-employment, and the very different character of cycles themselves – follow from a transformation of capitalism from production-capitalism to finance-capitalism.
These and other remarkable changes have their roots in a fundamental transformation of the structure of capitalism, most notably American capitalism since 1980 and most remarkably in the 21-st Century. The focus of savants of classical capitalism, Smith and Ricardo, Malthus, Marx, Mill, Keynes, and the Austrian School was production-capitalism, capitalism rooted in industry and the production and consumption of goods; the capitalism of supply-demand, of labour-land-money. The central pivot of capitalism now is different, it is finance-capital (FC). To keep it simple, let me say FC is about financial transactions, investment banking, mutual and hedge funds, stocks, bonds, currency, and an alphabet soup of ‘derivatives and instruments.’ It is about these transactions not directly about industry, agriculture, mining and physical consumption. The odd ones holding up their heads are technology and intellectual property (patents and research in a range of fields) IT, health-care, social media and entertainment, which have emerged as big players. But FC is eating them slowly.
Keynes is best known for advocacy of government intervention at times of protracted decline in output and employment. He held that during major recessions the government should intervene as capitalism is incapable of pulling itself out of the rut and it should spend on public works, creating employment and expand credit to industry, agriculture and services and so initiate a forced march. Keynes was a classicist, no populist and was confident and events proved him right that properly managed intervention would spur growth and not be inflationary. He wanted state intervention to end as soon as capitalism recovered.
Keynesianism ruled from the 1930s to the late 1970s then collapsed because of ‘stagflation’ – stagnation and inflation at the same time, impossible in classical or Keynesian theory. It gave way to Milton Friedman’s monetarism, and Friedrich Hayek and IMF neoliberalism. Inflation was said to be because too much money was in circulation. Cut welfare, slash wages, break up unions (Thatcher and Hayek), shoot workers and leftists (Pinochet, IMF and Chicago School) and impose austerity. Kick the state out of the economy, end deficit budgets and hey presto money supply can be brought under control, inflation tamed, capitalism will plough the fallow fields and growth will resume. This did happen under Regan, Thatcher, JR and their neoliberal ilk for a while. If class opposition is crushed it drives down the share of income accruing to the lower orders; if an open-door policy is enforced on weaker nations in the name of free-markets, metropolitan economies prosper.
Then something unexpected happened in the 1990s. Western, mainly American industries shifted abroad on a big scale, mainly to China. Globalisation spun round and mauled its trainer. Second, the power hub of capitalism shifted from production (industry, agriculture and services like transportation) to finance (banks, investment banks, mortgage funds, monopolies, real-estate and aggregators of bonds and equities). The dominance of finance-capital over production-capital, the heartland of classical analysts Smith, Ricardo, Malthus, Mill, Marx and Marshal, was established. And with this inequity became a norm; never in modern history has wealth been so polarised.
A third thing that happened is even odder and buried Friedman, monetarism and the Chicago School. This is best seen after the 2008 crash. A truly gigantic amount of money (a cumulative $4.4 trillion to date in the US and not much less in Europe – ECB and Bank of England) has been pumped into finance; for a decade interest rates have been held to near zero and at times real rates even pushed negative. But where’s the inflation!? Oft times the big economise have experienced de facto deflation! And simultaneously global debt (government, corporate and household) has ballooned to well above a staggering $150 trillion – reliable estimates are unavailable. What the hell is going on?
Essentially interest represents a payment for deferring consumption or utilisation of monies, and therefore intrinsically positive. Interest rate logically cannot fall to zero, let alone below zero. A new ‘negative interest rate theory’ which says that it can be negative has found its way into monetary policymaking because it justifies what desperate central bankers forced to accept. Live with finance capital and astronomical public and corporate debt.
Many market interest rates in the euro area are already in negative territory. The German bond yield is the most important and is orchestrated by the ECB. The consequence is a spectacular inflation of asset prices. What the rich own, stocks and prime real estate and houses become more expensive because low interest rates increase the present value of future payments and thus of assets. Not only does it make the “one percent” richer to the disadvantage of the “ninety-nine per cent” but it also stores up trouble for capitalism itself since it is the forerunner of a giant speculation bubble. The rich bid up the prices of stocks and houses until the expected future return collapses to zero and leads to economic chaos.
Then we have the huge debt crisis which is a direct result of the dominance of finance-capital. The astounding scale and provenance of the global debt crisis has made the debt crisis universal; governments, enterprises and households all over the world are in the same trap. The post-2008 global economy has been restructured, intentionally or otherwise, to transfer wealth created in the productive economy to finance capital as bonds and funds, or through asset-price inflation (real-estate, bonds and equities) and a surge in unpayable compound-interest. More indebtedness of institutions and individuals is the other side of the same coin. Though the rhetoric 1% and 99% is used the truth is easier to remember. The richest 8.6% owns 86% of global wealth. It’s time to invert this pyramid and enforce global debt cancellation.
The asset-price inflation story solves two riddles. First, why despite billions spent bailing out banks, insurance houses and mortgage lenders and trillions in quantitative easing (QE) injections, there is no consumer price inflation? Why, because nothing goes to the everyday economy or spent on plant, wages and state infrastructure. No! That would be Keynesian; this time money is released to purchase bonds from banks and investors. Therefore bail-out and QE money goes to those who use it to enhance the activities of finance capital such as leveraging purchase of stocks, real estate and to bond market activities. “Too much money is not chasing too few goods”; no, money is chasing financial instruments. Ten million households facing foreclosure were allowed to go to the wall by the Obama Administration. Consumer prices did not inflate but prices of finance capital’s assets like stocks, bonds and commercial property rose; the rich became richer, the 99% remained marooned and the production side of the economy stayed in the dumps.
How does asset-price inflation transfer wealth, created in the productive economy, the social surplus, into the clutches of finance-capital? A simple example will explain. Forget workers, the middle-classes, the government and foreign trade; let’s postulate a world in which only the owners of the means of production (Adam Smith’s and Karl Marx’s capitalists) and the modern breed of finance capitalists (rentiers) exist. Say in a year production-capitalists make a profit of $1 trillion (surplus value) globally, but in the same year the Fed, ECB, BoJ and BoE pump $1 trillion into the financial economy. Money is money, once printed (electronically these days); the two $1 trillions are indistinguishable. The real surplus, net of “inflation”, of the owner of production capital is only half what it would have been in the absence of this game. Furthermore, asset-price inflation, crucial post-2008, supplements the explosion in compound-interest leveraged ‘rent’, and profiteering from monopoly privileges. It too consolidates the dominance of finance capital in modern capitalism.
To sum up, the huge growth of finance-capitalism induces a rise in the value of assets held by the rich, exacerbates income and wealth inequality, plays havoc with interest rates and will eventually send capitalism to the wall. Watch this space for a few more years!