On May 31, at the 2014 Left Forum held in John Jay College (CUNY), I participated in a discussion on Financial Parasitism: Understanding the “Great Vampire Squid” along with my respected colleagues Michael Perelman and Michael Hudson, chaired by my friend David Laibman. I neglected posting my prepared remarks at the time. However, my presentation came out somewhat different than I had planned it. So, it may also be worth publishing the notes I wrote in preparing my remarks. All genuine comments will be welcome. (It is amazing the amount of fraudulent spam that is now coming in the form of “comments” to this blog.)
Remarks on Financialization: the Nature of the Vampire Squid
As I understand it, Michael Hudson argues that modern capitalism has experienced a transformation whereby industrial capitalist production has been subordinated to, or dominated by, finance. This, Michael argues, goes contrary to Marx’s expectations that, as capitalism develops further, industrial capitalists would become the dominant group among the capitalists, whereas banking and finance would become merely subservient to the industrial capitalists.
Jerry Epstein, from Amherst, Tom Palley, and others have made similar claims. Finance — portrayed (more or less adequately) as a bundle of largely unproductive, largely wasteful, if not outright criminal activities, that consist of trafficking with legal promises, pieces of paper (or pdf files) that entitle people to future economic benefits — may provide gains to a few wealthy individuals, but at the expense of greater macroeconomic fragility and risk for the rest of us.
And, in the context, the notion of finance advanced is that of fraudulent activities that violate not only the alleged norms of market competition, but also basic legal and ethical standards — and that being the case when and if the increasing power of finance does not manage to reshape legislation and policymaking and even the ethical and aesthetic views of the populace to their advantage. So, finance capitalism is associated with, to the point of being undistinguishable from, swindle, fraud, white-collar criminal behavior.
I am not going to argue here that finance capitalism is not all that. In one of the last pages of the volume I of Capital, Marx has a quote, perhaps from one of those obscure English political economists, saying that “capital eschews no profit.” Give me 20% and I’ll do things eagerly. Give me 50% and I will be audacious. Give me 100% and I’ll be ready to trample on any and every human law. With a 300%, there’s no crime, earthly or heavenly, I will not be willing to commit, even at the risk of execution or hell. Amen, brother. But that applies to any capitalist activity, whether productive of wealth or not.
No social order, no economic regime, can be entirely based on theft, forceful appropriation, fraud. Capitalism has proved the be the most exploitative mode of production in history, but the essential characteristic of capitalism is not exploitation: it is not the appropriation of someone else’s wealth. The essential characteristic of capitalism is the particular way in which exploitation is carried out: through market exchange, massive and systematic exploitation under the guise of a volunteer exchange of equivalent commodities between legally equal individuals. And indeed, this “normal” form of exploitation is always accompanied by excesses, abuses, fraud, and other “anomalies.” Furthermore, these abuses, excesses, etc. will be magnified, turbocharged by the explosive energy that capitalism unleashes (guns are more effective in killing people than sticks or stones), by the increasingly powerful hardware that capitalism makes available to the swindlers, but the real problem of capitalism is not its abuses, but its uses. The real problem of capitalism is not its excesses, but its normal modus operandi.
One must consider that if finance has gotten fat in modern times, it is because there’s a lot of fatty and carbo ladded food around. That fatty food — the actual material wealth that feeds financial capital — has to be made, built, maintained, stored, produced, and reproduced anew recurrently or continuously. Let us not lose sight of that fact. If the rentiers can live off their rents, dividends, and capital gains, and these rents, etc. are getting bigger, it is because somebody is producing the expanded wealth the rentiers are appropriating in the form of rent, dividends, and capital gains.
If theft and fraud can fetch ever bigger masses of wealth, it is because people, working people, are producing that much increasing wealth. This tends to get hidden from view when we focus on finance, monetary phenomena, etc. Wealth cannot be produced by shuffling and reshuffling claims of ownership (money, stocks, bonds, and other forms of legal ownership). Wealth can only be redistributed that way. Wealth has to be produced the hard way — it takes time, and physical means of production, and the sweat and concentrated attention and effort of workers: actual human beings. The more formidable finance appears as a device to extract and appropriate wealth by the few, the more we should infer that wealth is being produced and reproduced at a massive and expanded scale.
Let me clarify here that, if we are in the business of exposing capitalism, because we want it overthrown, then it is fair to denounce its abuses, its excesses. Because those excesses are inherent to capitalism, as inherent (as a part of it) as its normal modus operandi. This is fair material for agitation. However, if we are in the business of understanding the true nature of capitalism, so we can build a better society, then the focus on the excesses of capitalism is excessive, and — more importantly — it leaves the impression that normal capitalism is okay. What we used to call “our propaganda” (or, better yet, our theoretical work) should emphasize this. Because this is the misleading, populist message that I get from the stories various authors tell about financialization: If only we could remove the abuses, the excesses, the pathologies, if finance could be contained, if banking could be made a boring business again, if Main Street is left alone, if we keep Wall Street from strangling good, decent industrial and commercial capital, then we will have a workable social order.
I strongly disagree with this.
In my view, finance is parasitic, because all capital is parasitic. All capital is parasitic, whether involved in productive pursuits or not, because the source of all property income is what Marx called surplus value: unpaid labor.
Regarding the facts of what some authors call “financialization” — the disproportionate growth of the financial sector, at the expense of productive activities — I will limit my remarks to the following:
1. All individual capitals are required to conduct a series of operations involving money, funding of activities, the management of its assets, including the most “liquid” ones (the ones closer to money). Just like John Jay, having to provide schooling to young people, needs to manage its physical facilities, its building, which requires dealing with electrical systems, boilers, walls, roofs, plumbing, air conditioners, etc. It can be a hassle. One point that Marx made in Capital, which I find very reasonable, is that — in part, at least — the development of modern banking consists of centralizing, streamlining, rationalizing those functions. Thus, individual capitals can largely farm out those activities to specialized centers, banks, fund managers, etc. At the macro level, this process actually reduces a lot of the unproductive activities that, otherwise, individual capitals would have to carry out anyway, at the micro level. Though the economic statistics clearly show the expansion of the financial sector, its share in the entire economy, these statistics may not reflect the reduction of hassle and unproductive pursuits at the micro level that financial organizations, enjoying scale economies, can manage in a more centralized and thus efficient manner. Not for the benefit of society, but for the benefit of capital — i.e. to reduce the wasteful expenditure of surplus value. So, we may see the tip of the iceberg, the FIRE sector going from 10% to 20% of GDP in a few decades, but we don’t see the submerged part. (This is not to deny that the concentration of these money-management and credit functions in banking capital entails a concentration of capital, and hence a concentration of power, capable of reshaping legislation and politics. But that is the result of any kind of concentrated capital.)
2. Capitalism is a global system. Just because we see finance in New York or London or Frankfurt or Zurich expand dramatically, that does not mean that we should link it only with industrial production in the U.S., the UK, Germany, or Switzerland alone. No. In the last few decades, some large massive countries (like China, India, Brazil, etc.) have experienced an extraordinary expansion in their productive activities. Finance is global. Financial capital in these metropolises may result from the farming out of myriad micro-level unproductive activities the world over. Taking into consideration the previous point, considering things globally: Has global finance in the last fifty years expanded faster than other branches of the global economy? Has “financial” capital, as conventionally categorized (e.g. the FIRE sector under the BEA NIPA system), grown faster than other concentrated forms of capital (e.g. industrial and commercial capital)? This is a question that needs to be settled empirically. However, my conjecture is that — once we frame things the right way — the answer is “No.” The growth of financial capital in metropolitan areas — I argue — is only the most visible (phenomenic), but not necessarily the most essential, manifestation of a process of massive expansion of capitalist production at a global scale.
3. This disproportionate expansion is to some extent not unique to finance, but also characteristic of other “services” in the economy. In fact, if we look at the BEA NIPA statistics, one will notice that the growth of the weight of finance in aggregate GDP or employment or gross output, or whatever measure you wish to use, in the last fifty years, has been more modest than the expansion of nonfinancial services (education, health care, arts, entertainment, hospitality and restaurant industries, professional business services). How come? I believe that the explanation is the so-called “Baumol cost disease,” though if you give me time and google I can fetch you a quote in volume I of Capital in which Marx refers exactly to this phenomenon. [Update: See the last few paragraphs of Capital I, chapter 15, section 6.] [Update 2: Related to the “Baumol cost disease” broadly understood, one should also note that the expansion of real-estate wealth has much to do with the increase of rents that results from the expansion of industrial and commercial capital. See the volume 3 of Capital for how one should view the “value of land” as capitalized surplus value, which before it is appropriated in rent form must be produced by actual workers.]
4. We should not lose sight of which type of human activities are truly productive and which nonproductive. Certain functions that appear under the official rubric of finance (again, e.g. FIRE under the NIPA) are in fact productive and essential to any type of society. They are not only productive of surplus value (productive in the capitalist sense), but productive of value (productive in the commodity-production sense) and also productive of use value (productive in the general human sense). Even perfect communism would require “insurance” provision against hurricanes, it would require housing, reserve against contingencies, the provision of resources to activities that will only yield fruits many years down the road, etc. This is why, in fact, we should view the hypertrophy of finance just like we view the hypertrophy of the U.S. private health care and private education industries, i.e. as a social failure, a failure of the economic (market) and political institutions of our capitalist society. Our capitalist society is failing to provide for those basic necessities of people in the most rational way, and instead we have private capital taking over these functions and running with the booty.
In conclusion, when we take all that into account, then financialization becomes a cyclical phenomenon, an issue of competition among the capitalists, certainly important to us in the left, in its consequences, etc., but not the key structural aspect in the modern development of capitalism that some thinkers deem it to be. [Update: I do not mean that financialization is “cyclical” in the sense of the short “business cycles” but in the sense of longer “waves” in the historical development of capitalism. Cf. David Laibman’s Deep History for a good description of these longer fluctuations that coincide with broad, global technological changes as well as drastic shifts in the global class balance of forces. The process of “financialization” is largely, I argue, a phenomenon linked to the phase that some authors called of “neoliberal capitalism,” e.g. the period between the 1970s and up to the recent crisis.]
Update: When I was preparing this talk, I downloaded the Forbes world billionaire list and coded each wealthy individuals by sector of fortune origination (“finance” vs. “nonfinance”). Any individual who owed her/his wealth even partially to any industry related to money dealing, credit issuance, banking, insurance, real estate, financial market wheeling and dealing, venture capital, etc. I coded as “finance” and the rest as “nonfinance.” I found that the percentage of billionaires that made their riches in broadly categorized “finance” sector was significantly smaller than the proportion of FIRE in US GDP today (around 20%). It seems clear to me that the true “masters of the universe” are not the Blankfein, Dimon, Lewis, and Cohn types. No, in fact, the true “masters of the universe” are the Gates, Slim, Ellison, and Walton types. (I included people like Bloomberg as being in “finance” when he clearly made his fortune out of the news media, communications, and data analysis businesses.)