Tag Archives: financialisation

15th WAPE panel: ‘A critical review of the Financialisation Hypothesis’ – video

Following below is the video recording of the PANEL 8. ‘Capitalist Accumulation and the Financialisation Hypothesis: a Critical Review‘, that took place during the 15th WAPE Forum.

The chair and discussant of the panel was Lefteris Tsoulfidis (Professor of History of Economic Thought, Department of Economics, University of Macedonia, Thessaloniki, Greece).

The panelists were:

  1. Stavros Mavroudeas (Vice Chair of the World Association for Political Economy, Professor of Political Economy, Department of Social Policy, Panteion University,  Greece) & Turan Subasat (Professor of Economics, Department of Economics, Mugla Sitki Kocman University, Turkey) presenting ‘The Financialization Hypothesis: A Theoretical and Empirical Critique
  2. Michael Roberts (Independent Marxist Economist, UK) presenting ‘The Great Recession: a Marx, not a Minsky moment
  3. Ricardo Gómez Uribe (Universidad Nacional Autónoma de México(UNAM), Mexico) presenting ‘Store of Value and Means of Circulation: an Old Contradiction with New Expression’

The link for the video recording of the panel is the following: https://youtu.be/iqPhjoLmD0A

‘Is the Financialization Hypothesis a theoretical blind alley?’ – S.Mavroudeas & D.Papadatos, WORLD REVIEW OF POLITICAL ECONOMY

The article can be downloaded via the following links:

https://www.researchgate.net/publication/330719577_Is_the_Financialization_Hypothesis_a_Theoretical_Blind_Alley

https://www.academia.edu/42191644/IS_THE_FINANCIALIZATION_HYPOTHESIS_A_THEORETICAL_BLIND_ALLEY

WORLD REVIEW OF POLITICAL ECONOMY

Vol. 9, No. 4 (Winter 2018), pp. 451-476

DOI: 10.13169/worlrevipoliecon.9.4.0451

 

‘Is the Financialization Hypothesis a theoretical blind alley?’

S.Mavroudeas & D.Papadatos

 

Abstract

The Financialization Hypothesis is a popular argument in contemporary heterodox and also mainstream economics. It maintains that capitalism has undergone a radical transformation over at least the past three decades. The financial system, through a series of innovative mechanisms, has conquered the commanding heights of capitalism and has changed the whole system according to its own prerogatives. Concomitantly, the global capitalist crisis of 2008 is considered to have been a financialization crisis. This article disputes the Financialization Hypothesis and argues that instead of casting light on the actual workings of modern capitalism, it misconstrues them and leads into an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead, it represents a familiar capitalist response to periods of weak profitability. This does not preclude the proliferation of new financial instruments, which lend specific new forms to a well-known capitalist process. The Marxist theory of crisis and fictitious capital offers an analytically and empirically superior understanding of this process.

An interview with Bryan and Rafferty and the fallacies of ‘financialisationism’: Some comments by Stavros Mavroudeas

An interview with Bryan and Rafferty and the fallacies of ‘financialisationism’: Some comments by Stavros Mavroudeas

Recently, I came across an interview with Dick Bryan and Mike Rafferty for the JACOBIN magazine. The interview concerns their analysis of financialisation and it can be accessed in the following web-address: https://jacobinmag.com/2019/07/financialization-capitalism-with-derivatives-australia.

The interview has the telling title ‘How Finance Exploits Us’. It is not coincidence that a book on financialisation by Costas Lapavitsas carries the same title (Profiting Without Producing: How Finance Exploits Us All’). This similarity is not accidental but denotes deeper common elements of the different theories of ‘financialisation’. In particular, as it will be shown below, this identical titling exhibits their common departure from the Marxist theory of labour exploitation in work towards a theory of expropriation through usury in distribution. It also exhibits their common dissolution of the working class into an inter-class mass of financially expropriated persons. Unsurprisingly, this mass is dominated by the ‘middle-class’ (that is mainly the petty bourgeoisie).

What makes this interview interesting is that it reveals both the (non-dialectical) contradictions and the empirical errors not only of Bryan and Rafferty but of the ‘financialisationists’ in general.

Bryan et al. set out to (a) innovate Marxist economic analysis by focusing on finance and (b) propose a class politics on the basis of their analysis. They fail utterly in both.

Regarding their first point, they consider financialisation – and especially financial derivatives (which is supposed to be the differentiae specificae of their financialisation theory) – as a new era of capitalism. They argue that derivatives constitute a path-breaking innovation in the 21st century similar to that of the joint-stock company in the 19th century. There is a first inaccuracy here. Financial derivatives in capitalism are quite older. Even their recent proliferation and expansion dates back to the 1990s.

But the analytical problems of their approach are even greater than their empirical inaccuracies. They adopt (a) a Neoclassical understanding of profit (as reward for risk-taking) and (b) a Keynesian emphasis on liquidity. Both are alien to and incompatible with Marxism. But, moreover, they are erroneous as they misrepresented the actual working of the capitalist economy.

 

A neoclassical conception: Risk as a source of surplus-value

The gist of their analysis is that risk (embodied in and managed through derivatives) is a source of surplus-value. The following excerpt is characteristic:

‘We contend that risk-absorption is a contribution to capital’s surplus’.

It is well known that Neoclassicism justifies profit as the reward of (entrepreneurial) risk-taking. Marxism has offered a devastating critique of this fallacy.

 

A Keynesian loan: liquidity

Keynes and the Keynesian tradition founded The Liquidity Preference Theory. This maintains that the demand for money stems not from the need to borrow money but from the desire to remain liquid in the face of future risks. Needless to say, this perspective can be easily accommodated with the conception of risk as source of profits. For this reason, the Liquidity Preference Theory has been easily incorporated in the Hicksian synthesis of Keynesianism and Neoclassicism and also in subsequent neoliberal theories (with significant modifications).

Marxism has a totally different perspective from that. Capital (and not everybody as both Neoclassicals and Keynesians maintain) has a tendency to seek fluidity. This means its ability to move easily – particularly in monetary form – from one activity to the other. But this fluidity has a gear: capital wants to move easily from one activity to the other because it is seeking higher profit. And profit, for Marxism, comes from surplus-value (that is new wealth) creation. This constitutes a generic contradiction of capital. On the one hand, it wants to freely move from one surplus-value producing activity to the other in search of higher returns. On the other hand, it is obliged to tie down itself to the production of value (and surplus-value) in specific productive activities. The preference between fluidity and ‘productive bondage’ depends upon profitability. In any case, at least a significant part of capital has to be in production bondage in order for value to be produced. Of course, the more fluid forms of capital are basically the financial ones.

 

Bryan et al. attempt to marry risk and liquidity with Marxism is a total failure. Marxism explains risk and liquidity with reference to value and profit. Marxism has a production centered analysis whereas Bryan et al. adopt the circulation-centered perspective of Neoclassicism and Keynesianism. See, for example the following excerpt:

‘So capital has become liquid, but labor power stays illiquid’

 

Regarding the second task that Bryan et al. set to themselves – namely to offer a class politics for the ‘new era of financial capitalism’ – they fail even more utterly. First, they do not have a Marxist – let alone a coherent – theory of classes. The last sections of their interview are indicative. Ultimately they consider ‘classes’ as income categories. And they adopt the misleading Mainstream non-class term of ‘households’ as their analytical category. These are typical bourgeois conceptions. Needless to say, Marxism has a totally different theory of classes. Despite their denials (‘In Marxism there is an aversion to defining class in terms of income, but we’re not actually doing that’), this is what they are actually doing. The following excerpt is also characteristic:

‘this surplus-generating role reaches significantly into the “middle class.”

Moreover, despite their class rhetoric, they dissolve labour into capital as they argue that labour has become a form of capital, as the reproduction of labor has become in Financialisation a source of surplus-value transfer in the form of interest payments and the ‘financialization of daily life’. With this formulation, Bryan, Martin, and Rafferty suggest that there lies an exploitation that is not confined to unpaid labor-time but extends to usury. This exploitation does not concern only labour but primarily the ‘middle classes’. The following excerpt is telling:

 

‘We are offering an additional perspective on the surplus-producing class, by extending it into how class relations are transformed by capital. We have shown that this surplus-generating role reaches significantly into the “middle class.”

 

Characteristically, Bryan et al. in their empirical study on Australia discover that it is not the lowest-income people (i.e. a proxy for the working-class) that are subject this new capitalist exploitation mechanism through household absorption of risk but the middle-income people. Again, the following excerpt is telling:

‘We’re just saying if you are interested in the way in which household absorption of risk makes capital look profitable, and you look at where the risk is being absorbed, you find that it is not with the lowest-income people because by and large they’re excluded from finance because they can’t get loans.

Not every working-class person is on a low income but who we call a “working class” remains contentious, especially with the rise of fake independent contracting (like the gig economy). We are offering an additional perspective on the surplus-producing class, by extending it into how class relations are transformed by capital. We have shown that this surplus-generating role reaches significantly into the “middle class.”

 

So, in the end and despite their verbose ‘class politics’, value theory bruhaha and workerist declarations (‘capital ripping off labor by shifting risk in a distributional sense’), Bryan et al. end up by recognizing that it is the ‘middle class’ that is primarily exploited in this new era of financialized capitalism. Nice end for the new class warriors!!!

 

The political programme that they propose is totally idiotic. The ‘strategic non-payment of bills that have been securitized’ is a matter for financial pundits but not the central issue of workers’ trade unions. The refusal to repay rent has been a very old part of workers’ struggles and is nothing new. However, this idiotic political programme has a truly catastrophic consequence for the labour movement. It removes its primary focus from struggles in production and work and transposes it to inter-class distributional issues. Moreover, as Bryan et al. accept, these issues concern primarily the ‘middle class’. Thus, they essentially make the working-class the servant of middle-class’ demands. Nice advice to the trade unions Bryan et al. seek to guide!!!

 

The rest of the interview is full of minor errors.

See for example the idiotic declaration that ‘Given that households are where most wealth lies’. This is not sustainable even in Neoclassical terms.

Another blatant error concerns Bryan et al. understanding of the value of labour-power. The value of labor-power is not ‘basically subsistence’ as it encompasses also a social part. And of course, their argument that ‘subsistence is about household illiquidity’ is totally absurd.

The New Reformism of Financialisation

The errors of the Bryan et al. theory of financialisation are typical of the contemporary breed of the New Reformism of Financialisation. This New Reformism comes from many sides. Post-Keynesianism and its Marxisant fellow-travelers (Lapavitsas, Bryan etc.) is one stream. Another one comes from the Rosa Luxemburg Institute with M.Heinrich etc. D.Harvey is a specie-on-its-own who cherry peaks from all these with astonishing lightness and equally astonishing lack of economic coherence.

Rather unsurprisingly, the common themes of this New Reformism of Financialisation are the following.

First, they shift the analysis from the production-centered Marxian circuit of capital to a Mainstream circulationist perspective. Finance becomes the central locus of this circulationism.

Second, they deform the notion of capitalist exploitation by moving it from surplus labour extracted at the production sphere to exploitation in distribution. This move was also made in the past by Marxo-Keynesian (or rather vice versus) theories. However, this time there is a new element. Exploitation in distribution is conducted not only through economic mechanisms but, to a great extent, through political coercion. This is less evident within an economy as there usury is the mechanism of financial exploitation. However, as Bryan et al. argue in this interview, the state plays a crucial role in establishing this mechanism. This primary political mechanism is more evident in the fallacious theory of New Imperialism.

Third, they blur class analysis by dissolving the working class within the middle strata. In order to do this, they abandon the Marxist theory of classes. Thus, they end up by substituting the working class with an almost post-modern social slop (reminiscent of Negri’s ‘multitude’).

Fourth, they deny the existence of a Marxian theory of crisis (let alone one based on falling profitability) and argue that there can be many types of crisis (some of them even argue that each crisis is a special case). But practically, they see every modern crisis as a financial crisis; thus, agreeing with the Mainstreamers.

Fifth, in terms of politics they practically abandon socialism in favour of a vague anti-capitalism. Instead of the independent from the bourgeoisie political organization of the working class they favour inter-class populist programmes than express mainly the demands of the middle and petty bourgeoisie. There ultimate aim is not socialism but a reformed humane capitalism.

 

  1. For a broader critique of the Financialisation Hypothesis and its many currents see the links below:

 

·       Is the Financialization Hypothesis a Theoretical Blind Alley? – World Review of Political Economy

https://stavrosmavroudeas.wordpress.com/2019/01/31/is-the-financialization-hypothesis-a-theoretical-blind-alley-world-review-of-political-economy/

 

·       ‘The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018

https://stavrosmavroudeas.wordpress.com/2018/05/09/the-financialisation-hypothesis-and-marxism-a-positive-contribution-or-a-trojan-horse-s-mavroudeas-2nd-world-congress-on-marxism-peking-university-5-6-may-2018/

 

·       ‘Financialisation Hypothesis: a creative contribution or a theoretical blind alley?’, QMUL lecture video-recording

https://stavrosmavroudeas.wordpress.com/2018/11/24/qmul-lecture-video-recording/

 

 

Is the Financialization Hypothesis a Theoretical Blind Alley? – World Review of Political Economy

World Review of Political Economy

Journal Article

Is the Financialization Hypothesis a Theoretical Blind Alley?

Stavros Mavroudeas and Demophanes Papadatos
World Review of Political Economy
Vol. 9, No. 4 (Winter 2018), pp. 451-476
Published by: Pluto Journals
DOI: 10.13169/worlrevipoliecon.9.4.0451
Page Count: 26

Abstract

The Financialization Hypothesis is a popular argument in contemporary heterodox and also mainstream economics. It maintains that capitalism has undergone a radical transformation over at least the past three decades. The financial system, through a series of innovative mechanisms, has conquered the commanding heights of capitalism and has changed the whole system according to its own prerogatives. Concomitantly, the global capitalist crisis of 2008 is considered to have been a financialization crisis. This article disputes the Financialization Hypothesis and argues that instead of casting light on the actual workings of modern capitalism, it misconstrues them and leads into an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead, it represents a familiar capitalist response to periods of weak profitability. This does not preclude the proliferation of new financial instruments, which lend specific new forms to a well-known capitalist process. The Marxist theory of crisis and fictitious capital offers an analytically and empirically superior understanding of this process.

QMUL lecture video-recording

Below are two links of the video-recording of the QMUL lecture on financialisation and also links to the lecture’s powerpoint

 

.

OPEN LECTURE SERIES YEAR III

Academic year 2018/2019

Political Economy and Health: ‘Developing a Dialogue Between Political Economy and Public Health’,

22 November 2018, 5.30 – 7.00pm
Michael Mason seminar room, Yvonne Carter Building (Whitechapel Campus) 58, Turner Street E1 2AB

Queen Mary University of London

 

 

Financialisation Hypothesis:

a creative contribution or a theoretical blind alley?

 

Stavros Mavroudeas

Professor

Dept. of Economics

University of Macedonia

e-mail: smavro@uom.edu.gr

 

 

Abstract

The Financialisation Hypothesis is a popular argument in contemporary Heterodox but also Mainstream Economics. It maintains that capitalism has undergone a radical transformation during at least the last three decades. The financial system, through a series of innovative mechanisms, has conquered capitalism’s commanding heights and has converted the whole system according to its own prerogatives. Concomitantly, the 2008 global capitalist crisis is considered as a financialisation crisis with no roots in real accumulation. This paper disputes the Financialisation Hypothesis and argues that it miscomprehends the actual workings of modern capitalism; thus, leading to an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead it constitutes a well-known capitalist reaction in periods of weak profitability. This does not preclude the proliferation of new financial instruments which give new special forms of appearance to a normal capitalist process. The classical Marxist theory of crisis in conjunction with its monetary theory offers an analytically and empirically superior understanding of this process. By employing the notion of fictitious capital, it can both explain the advent of new financial instruments and their dependence upon real accumulation and profitability.

 

 

 

https://www.scribd.com/document/393982858/QMUL-2018-Financialisation-London

 

https://www.researchgate.net/publication/329156468_Financialization_Hypothesis_A_Creative_Contribution_or_a_Theoretical_Blind_Alley

https://www.academia.edu/37838170/_Financialization_Hypothesis_A_Creative_Contribution_or_a_Theoretical_Blind_Alley_

 

“Financialization Hypothesis: A Creative Contribution or a Theoretical Blind Alley?”, S. Mavroudeas, 22nd November 2018, 5.30 pm – Queen Mary University of London

OPEN LECTURE SERIES YEAR III – Academic year 2018/2019

 

Political Economy and Health

“Developing a Dialogue Between Political Economy and Public Health”

 

22nd November 2018| 5.30 pm

Michael Mason seminar room, Yvonne Carter Building (Whitechapel Campus) 58, Turner Street E1 2AB

Stavros Mavroudeas: “Financialization Hypothesis: A Creative Contribution or a Theoretical Blind Alley?”

The  financialization  hypothesis  has  been  interpreted  in  varying  ways.  Mavroudeas  argues  that  it  misrepresents  contemporary developments in capitalism and fails to understand the function of fictitious capital in times of prolonged crisis and stagnation.

 

 Stavros Mavroudeas is a Professor in Political Economy at the University of Macedonia in Thessaloniki-Greece. He holds a Ph.D in Economics from Birkbeck College. He is an expert in Marxist Political Economy and has published extensively on Macroeconomic Policies, Regulation Theory, and Labour Theory. His research interests are in Political Economy, History of Economic Thought, Development Economics, Labour Economics, Economic Growth.

All lectures are free and open to the public.

 

 

For any query, please contact the organising committee of IHPEH Open Lectures:

 Arianna Rotulo (a.rotulo@qmul.ac.uk),

Dr Jonathan Filippon (j.g.filippon@qmul.ac.uk) and

Dr Elias Kondilis (e.kondilis@qmul.ac.uk)

 

 

 

 

 

 

The Financialisation Hypothesis and Marxism: a Positive Contribution or a Trojan Horse? – COUNTERPUNCH May 2018

 

https://www.counterpunch.org/2018/05/11/the-financialisation-hypothesis-and-marxism-a-positive-contribution-or-a-trojan-horse/

 

The Financialisation Hypothesis and Marxism: a Positive Contribution or a Trojan Horse?

Introduction

 The Financialisation Hypothesis (FH) is a popular argument in contemporary Heterodox Economics, Marxist Political Economy but also in Mainstream Economics. Its basic thesis is that modern capitalism has undergone a radical transformation during the last three decades. The financial system, through a series of innovative mechanisms, has conquered capitalism’s commanding heights, became independent from productive capital and has transformed the whole system according to its own prerogatives. This new financialized (or financial or finance-dominated or fiduciary) capitalism operates completely different from traditional capitalism.

The FH proposes four stylised facts as its factual basis:

+ The increased weight of the financial sector in contemporary advanced capitalist economies (share in GDP, profits, new complex financial instruments).

+ Corporate sector’s recent trend to finance itself through retained earnings, capital markets and ‘shadow banking’.

+ The adoption by firms of shareholders’ value maximization policies and the related prominence of institutional investors.

+ The increased indebtedness of working and middle-class households in several advanced capitalist economies.

The combined result of these processes is that (a) productive capital depends totally upon money capital and transforms its modus operandi according to the latter’s requirements and (b) working -class depends directly upon money capital, which exploits it through usury.

This new finance-dominated capitalism is crisis-prone because of its inherent financial instability. Concomitantly, the 2008 global capitalist crisis is considered as a financialisation crisis, caused by financial bubbles and without roots in real accumulation (which was only subsequently affected by finance’s deleveraging).

FH’s shot to prominence made it a leitmotif at the cost of analytical coherence.

This paper discusses the Marxist and Marxisant versions of the FH and argues that they misconceive the actual workings of modern capitalism leading to an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead it constitutes a well-known capitalist reaction in periods of weak profitability. This does not preclude the proliferation of new financial instruments which give new special forms of appearance to a usual capitalist process. Contrary to the FH, it will be argued that the Classical Marxist theory of crisis and fictitious capital offers an analytically and empirically superior understanding of this process.

Τhe FH autonomises completely money-capital (that is the fraction of capital that operates in the financial system) from productive-capital and, furthermore, superimposes it on the latter. On top of that the FH maintains that money-capital acquires also means of existence and operation totally independent from productive-capital. This FH argument creates no problems for Mainstream financialisation theory as Neoclassical economics consider the financial system as an independent creator of wealth. However, it is a big leap for those FH currents that ascribe to Political Economy. Political Economy – both Classical and Marxist – considers productive-capital (that is capital engaged in the sphere of production) as the locus of surplus-value creation. The other two main capitalist fractions (money and commercial-capital) operate in the sphere of circulation. They do not produce surplus-value but reap parts of the surplus-value created under productive-capital as payment for their necessary functions. The FH, by rejecting this perspective, actually signifies not a new epoch of capitalism but a new capitalism with different classes and different functions. This is a scenario far removed from reality.

The FH and its Marxist and Marxisant versions

The notion that there was some structural break in capitalism’s historical evolution after which the financial system conquers the system’s commanding heights is not new. Hilferding’s (1910 (1981)) seminal work contemplated the idea about a new strategic importance of the financial system for capitalist reproduction. He argued that because of the increased concentration and centralization of capital and the augmented financial requirements a new hybrid form of capital (finance capital) has emerged. This is the fusion of productive-capital with banking-capital (a section of money-capital) under the dominance of the latter. Implicitly, Hilferding considered this as a new era of capitalism; although he never ventured to state it explicitly. With the emergence of finance capital, finance has dethroned productive-capital from its dominant position in the total circuit of capital. There are well known deficiencies of Hilferding’s finance capital thesis. First, he implicitly side-steps the Marxian Labour Theory of Value (LTV) and proceeds with a problematic theory of monopoly pricing. Second, the empirical validity of the finance capital concept has been disproved (Bond (2010), Harris (1988)). This fusion of productive with banking capital materialized only in a minority segment of the advanced capitalist world. Indicatively, it did not materialise in several crucial Anglo-Saxon economies where the stock exchange rather than the banking system constitutes the main source of finance for private enterprises.

Hilferding’s thesis was re-launched later by Sweezy (1942). However, it should be noted that neither of them broke from the classical Marxist relationship between surplus-value and interest. For Marxist analysis, surplus-value is extracted by productive-capital at the sphere of production and then it is redistributed between profits (accruing to productive-capital), interest (accruing to money-capital) and commercial profit (accruing to commercial-capital). Hence, money-capital may dominate strategically productive-capital but it cannot live independently of the latter.

Hilferding’s idea of this strategic dominance was taken up by both friends and foes within the Marxist tradition. It was Lenin (1917), in his Imperialism, that took up this and recast it within a formal theory of capitalist stages. He argued that a new stage of capitalism, monopoly capitalism, has emerged. One of its main features is this strategic dominance as he adopted Hilferding’s problematic concept. Nevertheless, Lenin followed the Marxian LTV and always considered money-capital an appendage of productive-capital; as interest is part of the surplus-value and money-capital has no independent source of wealth. On the other hand, Lenin’s theory of stages – despite some shortcomings and ambiguities – offers a coherent and valuable toolbox through which Marxist analysis can conceive transformations in capitalism.

Summarising, Marxist Political Economy within its theory of stages argued that during monopoly capitalism the financial system acquired strategic dominance over the total circuit of capital but also never ceased to depend economically upon productive-capital. In a nutshell it was a dominant and also necessary parasite. This, conception – despite problematic aspects like finance capital – has both realism and analytical coherence.

The theoretical landscape changed once again after the 1973 global crisis that signified the exhaustion of the monopoly capitalism stage. The 1973 global economic crisis and its falling profitability which caused several waves of capitalist restructuring succeeded only partially in restoring capital’s profitability. In other words, the profit rate never managed to reach its prior 1973 levels. This incomplete capitalist recovery led to a flight ahead: the system vigorously employed fictitious capital’s operations in order to sustain and invigorate capital accumulation. The rapid deregulation and internationalization of finance during the 1990s started the process of what has been termed financialisation. Capitals that were over-accumulated in the productive sectors of the economy shifted their activities towards fictitious capital operations in order to improve their profitability. These developments have led to interpretations according to which a new epoch for capitalism arise, where the financial capital is released from the governance of productive-capital and, taking an autonomous course, now dominates the whole of the capitalist economy. These significant changes that took place during the last decades of the 20th century influenced crucially the views on the role of the financial system as well as the ongoing debate regarding the relationship between productive-capital and finance.

The very term ‘financialisation’ was firstly coined by the Monthly Review (MR) school. Sweezy (1994, 1997), in his last papers referred to ‘the financialisation of the capital accumulation process’ as one of the three tendencies at the turn of the century (the other two being, monopoly power and stagnation). Financialisation as such was inaugurated in a collective volume edited by Epstein (2005) that included a paper by Krippner (2005). The latter introduced the term ‘financialisation’ as the trade-mark of recent transformations in the capitalist system. Notwithstanding, Krippner (2005, p.199) had reservations whether financialisation constitutes a new phase of capitalism; arguing that it neither necessarily ‘represents an entirely novel phase of capitalism … [nor] do these data allow us to draw any conclusions regarding the permanency of the trends documented here’.

However, it was not the MR school but the Post-Keynesians those who energetically adopted the term and seldom treated it as their exclusive property.

The incorporation of the term in Marxist and Marxisant analyses followed a bit later. Τhere are four FH versions in Marxist literature. The two of them keep within the Marxist analytical framework (B.Fine, MR) whereas the other two have a rather Marxisant flavour in the sense that they abandon the former and flirt with post-Keynesianism (Lapavitsas, Bryan).

Fine (2009, 2010) considers the growth of finance and the new financial forms of the last thirty years as a special phase of neoliberalism (which he defines more as a policy trend rather than as a stage per se). He theorises this new phase through the Marxian LTV and its theory of money. Financialisation occurs when the accumulation of interest-bearing capital (IBC – to be defined below) in the economy becomes extensive and intensive. ‘Intensive’ growth and proliferation of financial assets signifies their increasing distance from production, while ‘extensive’ means the extension of IBC to new areas of economic and social life in hybrid forms of capital (Fine (2013-2014), p.55). Under such conditions finance can acquire a dominant position as regards capital accumulation only in the structured environment of ‘shadow banking’. In the context of the latter, exchange can be facilitated by the intermediation and dominant presence of fictitious capital. For Fine finance cannot acquire autonomous channels of exploitation of the working class. New forms of operation of money capital and novel institutional arrangements are policies that are used by capital in order to surpass its problems and contradictions. In a nutshell, Fine follows the Marxian logic of relating finance to the sphere of production and considering financial profit as part of the surplus-value. What is missing from his analysis is how the current emergence of financialisation relates to profitability.

The MR, although financialisation was initiated under its auspices, was a latecomer in adopting it (e.g. Foster (2010)). Engulfed in its Marxo-Keynesian underconsumptionism, it strived to prove the latter in the face of overtly negative empirical evidence (as the 2008 crisis was not accompanied with underconsumptionist signs). It adopted financialisation in conjunction with the arguments that (a) increasing income inequalities lead to the increasing indebtedness of private households (which is a form of covert underconsumption) and (b) that increased financial leverage and speculation is part of the neoliberal era of deregulation. It identifies the latter as a new stage of capitalism, branded as Neoliberalism, or Globalisation or later as Financial Globalisation. However, neither the MR argues that financial profit has become independent from surplus-value. The Social Structures of Accumulation (SSA) approach follows a similar to the MR path identifying financialisation with the Neoliberal SSA (Tabb (2010)) and adding their own emphasis on institutions.

Bryan et.al (2009) argue since the early 1980s finance has become commodified through several financial innovations (securitization, derivatives etc.). Although Bryan (2010) avoids to characterise this as a new capitalist stage, he essentially implies so. He claims that (a) increased leverage and derivatives and (b) workers’ financial exploitation through usurious loans change radically capitalism’s functions and class structure. They argue that the wage relationship (i.e. labour-time) and its relationship to money have ceased to be related but separate and that the latter has subsumed the former. Concomitantly, labour became a form of capital as the reproduction of labour is now a source of surplus-value transfer in the form of interest-payments and the ‘financialisation of daily life’. In their very peculiar formulation, behind the Marxist terminology (surplus-value etc.) exploitation is not confined to unpaid labour-time but extends to usury. Moreover, the argument that labour is now a form of capital implies directly a new class structure different from typical capitalism.

Lapavitsas (2008), adopted finacialisation directly from post-Keynesianism. He argues, in the spirit of ‘shadow banking’, that typical banking is almost redundant and that the financial system is becoming totally stock-exchange based. Fictitious capital is a redundant concept and new financial developments do not relate, even distantly, to the sphere of production and have to be analysed independently. Thus, the LTV and its money theory are essentially discarded. He introduces the vague concept of ‘finance’ as the new master of the system. To avoid criticisms of proposing two separate capitalist classes he argues that ‘finance’ subsumes and reshapes productive-capital according to its prerogatives. Consequently, there is no meaningful distinction between them. Additionally, ‘finance’ acquires a channel of direct exploitation of workers through the provision of usurious loans: ‘These practices are reminiscent of the age-old tradition of usury, but they are now performed by the formal financial system’ (Lapavitsas (2009)). He initially branded this new source of financial profit as ‘financial exploitation’. After criticism (e.g. Fine (2009)) for confusing capitalist exploitation with the pre-capitalist exploitation of usury, he made an inconsequential facelift and changed the term to ‘financial expropriation’. He argues that this enables financial institutions to boost their profits independently of surplus-value and possibly to exploit ‘us all’ (Lapavitsas (2014), alluding to other social strata apart from labour. For him this new structure constitutes a new stage of capitalism (or a new ‘social order’ as he brands in more graphical but less theoretically coherent terms). Furthermore, he argues that there is no general theory of crisis (as Marxism argues) but each crisis is historically specific. He maintains that the 2008 crisis was a financialisation crisis with no relations whatsoever to profitability (as the latter remained constant (Lapavitsas & Kouvelakis (2012)).

The Marxisant and Marxo-Keynesian FH, essentially adopt the post-Keynesian endogenous money theory which is highly problematic as its cannot define coherently what is ‘capital’ and, consequently, misconceive the relation between interest and profit. Essentially, their approach is akin to that of the old Banking School and faces similar problems. Thus, the Marxisant and Marxo-Keynesian FH sacrifice – or deform beyond recognition – the crucial Marxian concept of fictitious capital and end up with the same with the Mainstreamers and the post-Keynesian argument: the monetary sector dominates the real sector and has independent from the latter sources of profit. But what strikes exceptionally is the Marxisant FH’s essential confluence with the Post-Keynesian theory of classes. As already analysed, Keynesian and Post-Keynesian thought inherits the notion of the rentier from Classical Political Economy but it actually deforms it. For the former rentiers (in the version of landowners, that is a transformed remnant of feudalism) were a separate class, not doing business but appropriating rent that was subtracted from entrepreneurial profits and, thus, diminished investment. This conflict that characterised capitalism during A.Smith’s and D.Ricardo’s years has long ceased to exist. Landowning has been assimilated into the capitalist class and lost its independent existence and function. Keynesianism redefined this distinction between industrialists and financiers, essentially seen as separate classes. Keynesianism does not have analytical problems with this as it argues that other factors affect savings and other investment. However, Marxism conceives money and productive capital as forms of total capital that both take part in the formation of the general rate of profit (which among others is a process unifying the bourgeoisie against the proletariat). Because interest is part of surplus-value and financial profits depend upon the general rate of profit, Marxism does not elevate the distinctiveness of money and productive-capital to the point of being separate classes.

Last but not the least, the Marxisant FH currents have a weak theory of crisis. They do not offer a general theory of capitalist crisis but instead opt for a conjunctural one. Each historical epoch and each particular crisis has its own specificities. But essentially, as Tome (2011) clearly shows, FH ultimately ascribes to a Keynesian possibility theory of crisis. This a very insubstantial theory of crisis especially from those FH currents that refer even in passim to Marxism. Lapavitsas (2014: 37) is again a typical example. He states that the development of financialisation has nothing to do with Marx’s tendency of the profit rate to fall. Moreover, he asserts that falling profitability in capitalist production was never a key factor behind the rise of finance.

III. Classical Marxism versus the FH

The FH purports that it offers a superior analytical framework in order to comprehend the economic transformations of the recent decades. The empirical side of the FH is beyond the scope of this paper; although there is compelling evidence that real accumulation continues to be the centre of the capitalist system and that falling profitability a-la-Marx is at the core of the 2008 crisis (e.g. Shaikh (2010), Mavroudeas & Paitaridis (2015)). There are also forceful rejections of FH’s empirical applicability for specific economies (e.g. Mavroudeas (2015)). This section offers an alternative to FH analysis of the recent developments in capitalism that is based on the Classical Marxist perspective.

Classical Marxism analyses the relationship between monetary and real accumulation through the lenses of the total capital circuit which reveals the modus operandi of the various forms of capital, in unity in the context of real accumulation. This unified exposition is absent both from the Mainstream and post-Keynesian perspectives and gives Marxism a superior understanding of the relationship between finance and production, where the sphere of production has a structural (and historically permanent) primacy over finance. This viewpoint enables Marxism not to fall prey to questionable stylized facts that create false impressions about new stages and, at the same time, to be able to analyze new phenomena within the contours of the fundamental mechanisms of operation of the capitalist system.

The Marxian total capital circuit presents how capital operates and assumes different forms in order to extract surplus-value:

M       C …. P ……C’    M’

↓                  ↓

c+v             c+v+s

where  M: money

C: commodities (means of production (c) and labour-power (v))

P: production process

C’: commodities of greater value produced (via the inclusion of surplus-value (s))

M’: increased money return (in the form of profit) for the C’

The circuit begins with circulation (the advancement of M for buying C) and ends with circulation (the payment of M’ for C’). Between C and C’ takes place the production process where circulation is interrupted and surplus-value is extracted. The three fundamental forms of capital (money-capital, productive-capital and commercial-capital) function differently but are also entwined in this circuit. Money and commercial-capital, that operate in the sphere of circulation, operate in the beginning and the end. Productive-capital operates at the centre. The sphere of production (and thus productive-capital) has primacy over the others as surplus-value (the aim of the capitalist system) is extracted under its auspices (Fine & Harris (1979)). This surplus-value is subsequently redistributed between productive, money and commercial capital because the former needs the support of the two others.

Money plays a crucial role in this circuit. It is the most mobile element of the circuit. When it represents value (it has not become capital), it has its most fluidity. However, when it enters the production process and becomes capital (which is necessary for claiming surplus-value) becomes less fluid. Capital regains its fluidity when the commodities produced are sold in exchange for M’. Part of that money is reinvested in the production process, becoming less fluid capital whilst another part is consumed or hoarded by the money owner.

There is tension between money’s inherent mobility and its necessary bound in the production process. The money owner views it as a process that takes time and is risky. This makes it undesirable and would only be undertaken if the expected returns are likely to be significantly greater than those of other capitalists involved in the process who retained flexibility, such as money-capital who operates at the M stage or commercial-capital who functions at the C stage. As each capitalist sees himself as a free-rider of the system (that is he tries to leave to its peers the costs for the functional operation of the capitalist system), he seldom tries to disentangle himself from the bounds of production. There are phases of the economic cycles that this tendency becomes stronger and phases that it becomes weaker. For example, greater returns to productive-capital were evident throughout much of the 19th century. But, particularly after the 1873 crisis, this changed and the tendency to fluidity returned. Transferable shares and their commodification became the dominant means through which capitalists tried to reduce the risk of their involvement in the production process.

Marxism grasps the unity and the internal strife of capital and the complex functions of money-capital through the distinction between the use of money as credit and the use of money as capital. Borrowing and use of money as capital is different because money is then used not just to buy a good or to meet a payment but in order to make more money. From the perspective of capitalist production, this occurs when money is borrowed in order to expand accumulation with the expectation of a future profit. Marx distinguishes carefully between money-capital’s functions. Money involved in the lending and borrowing activities of the capitalist financial system, is defined as loanable money capital (LMC). LMC is sub-divided in two generic forms: money-dealing capital (MDC) and interest-bearing capital (IBC). MDC advances credit in general for buying and selling in the sphere of circulation. IBC uses credit relations to advance money capital in order to appropriate surplus-value.

Traditionally the capitalist financial system collects idle funds and channels them to investment through the credit and the capital markets (which operate differently). Credit markets involves both MDC and IBC. Capital markets involve solely IBC. The novelty of recent hybrid forms (such as ‘shadow banking’) is that they combine in complex ways the operation of both banking and capital markets. Hence, they combine MDC and IBC.

The credit system begins with trade credit, which arises through trade relations mostly tied to similar and/or related sectors and geographical proximity. Next comes Banking credit (collection and advance of LMC by banks), which arises in the discounting of trade bills and is based on the collection of idle money from several sources and thus overcomes some of the particularities of trade credit. By collecting idle money from several sources in the economy, banks partly homogenize credit and begin to give it a less individual character. The next instance is the money market (where LMC is traded among banks). The top of the credit system is the central bank (the leading bank of the money market).

The capital market accompaniments the credit system. Contrary to the latter, it mobilises idle money on the basis of property (equity) rather than credit (debt). Nevertheless, the credit market is connected with the stock market, as both draw funds from the same pool of LMC and as lending by the former sustains the operations in the latter.

Because IBC is money-capital traded as a commodity commanding interest, it has a dual character in the context of the total circuit. On the one hand it is immediately related to the sphere of real accumulation for interest payment and on the other hand it is immediately related to the form of credit-money. Hence, it has certain degrees of freedom towards the sphere of real accumulation, as the interest rate which determines IBC is formed outside the total circuit by the supply and demand for LMC. This gives to IBC a second duality. First, because it is a relationship between a capitalist possessing money (‘monied’ capitalist) and a capitalist possessing an investment project (‘functioning’ capitalist) it can give rise to speculation (i.e. rent-seeking). Secondly, IBC comes out from the generation of sums of money in the turnover of total social capital, which are transformed subsequently into LMC by the credit system.

IBC differs from productive-capital because its owner through lending claims part of the surplus-value (in the form of interest) without any direct involvement in production. In cases of unwelcomed developments (conflicts between labour and capital in production and distribution, falling profitability etc.) IBC’s lender withdraws it and invests in other sectors instead of having to intervene directly in the industry. This characteristic of IBC is crucial for money-capital (banks) because it enhances the liquidity of their liabilities. Their deposits, which (for commercial banks at least) form the basis of their money-dealing operations are highly liquid since depositors are not tied to any particular bank. In well-developed banking systems personal knowledge and trust do not enter the relation so that deposits and other monetary instruments are non-specific and anonymous forms in which capital can be held. The money-dealing that banks carry out, and competition within banking facilitates this distancing of money and deposits from specific ties. However, IBC’s freedom has limits because by lending directly to industry it cannot be totally indifferent to the latter’s outcomes.

Fictitious capital is a form of IBC. IBC is already defined as money-capital which is loaned in order to be used in the sphere of production for extracting surplus-value, in contrast to the simple loan of money (money as such) which simply facilitates transactions in general. However, since there is an obligation to repay a loan (which takes the form of debt), it is possible for this debt to acquire a life of its own. Consequently, the obligation (which takes the form of securities, e.g. shares, bonds), can autonomously be bought and sold at some money value, which might or might not correspond to the ability of its sum of money (if used as capital in the production sphere) to realize enough surplus-value. This autonomous circulation of IBC in the form of securities is called by Marx fictitious capital. ‘Fictitious’ does not imply that it does not exist or it is artificially created. It denotes that its circulation is distinct from the circulation or the yield of capital which it represents (Fine (2013-2014), pp.49-50). Therefore, fictitious capital is related to the financial activities of capital in general and becomes more crucial when the financial system becomes more complex.

Practically, fictitious capital represents an uncertain bet on surplus-value that might be extracted in the future but which it is being discounted in the present. Its operation is closely related to the expansion of joint-stock companies, the negotiation of their assets in the stock exchange and the expansion of credit-money (that facilitates to a great extent their transactions and their valuations). Periods of economic euphoria usually foment high expectations about the future and, thus, can engineer waves of robust economic growth (as they influence positively investment). These expectations-led booms have usually the tendency to overshoot; that is to create increasingly over-optimistic future expectations. But as soon as the ‘real economy’ cannot keep pace with those expectations (i.e. investment does not lead to the expected profits) then its growth starts faltering. In other words, the so-called ‘fundamentals’ recall to reality the unsustainable growth engineered by fictitious capital. The busts that follow have also the tendency to overshoot; but this time to the downside. These usually lead to the eruption of an economic crisis because of the burst of the so-called ‘bubble’.

This role has been recognized long ago by Marxist economists. H.Grossmann (1929, p.158) showed that “among the factors that counteract the breakdown Marx includes the fact the progressively larger part of social capital takes the form of share capital:

‘…these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, once costs have been deducted … These do not therefore go into levelling the rate of profit, because they yield a lower than average rate of profit. If they did not enter into it, the general rate of profit would fall much lower. (1959, p.240)’

This pinpoints the credit system’s ability to continue making profits when real accumulation starts facing difficulties in a way which delays the fall of the general profit rate. However, despite the relative autonomy of the credit system, ultimately, its operations broadly comply with the essential motion of capitalist accumulation. Thus, the crisis phase of capitalist business cycle typically begins with the collapse of speculation in stockpiled commodities by wholesale merchants, and the rise of the interest rate which affects the debt structure at some point causing its collapse, bringing the crisis phase to be followed by depression.

Itoh (1988, pp.303-342), following the Uno school of Japanese Marxism, embedded this function within the phases of economic cycles. He argued that towards the upswing’s end and in the beginning of over-accumulation the profit rate declines and commodity prices tend to rise. Then, speculative trading and stockpiling of commodities take place in expectation of further price rises. Speculative trading also appears in the stock exchange as the share prices of some industries begin to rise in response to the increase in their commodity prices.

Summarising, Classical Marxism has a coherent and sophisticated framework to grasp the phenomenon of prolonged financial euphoria without separating it from real accumulation. This framework can also explain satisfactorily the recent financial innovations.

The most dramatic cotemporary change is that the bill of exchange (with its direct links to the financing of production and trade) is substituted as the dominant financial asset by the ‘repo’ (‘sale and repurchase agreement’). In a repo, a borrower of cash sells a bundle of securities for an amount of money to a lender with the agreement that the former will repurchase the securities for another amount of money after a fixed period. The securities thereby act as collateral for the cash loan. In the event that the cash borrower defaults on repayment, the cash lender owns the securities to keep, sell or use again as collateral. In this context institutional developments led to the notion of ‘bank’ to become elastic and the phenomenon of ‘shadow banking’ emerged.

This trend tends to merge the two pillars of the financial system (credit and capital markets) mainly through securitization. However, securitization transforms property into tradable financial assets against a promise for repayment; that is into fictitious capital. In this way the contemporary financial system became more unstable as traditional institutional mechanisms and trust were disturbed.

All this contemporary financial house of cards depends upon the extraction of surplus-value in the sphere of production. In the aftermath of the 1973 profitability crisis, the subsequent waves of capitalist restructuring failed to resolve the overaccumulation crisis. Despite the dramatic increase of labour exploitation (that is the increase of the rate of surplus-value), they shied away from a decisive destruction of unviable capitals. Thus, profitability never recovered sufficiently. The last trick, together with the ‘globalisation’ (that never extinguished the national economy but increased pressure on both labour and unviable capitals), was the expansion of fictitious capital operations. Nevertheless, as argued above, this stratagem has definite limits. Expansion through financial doping soon met its limits set by the real accumulation. Thus, the 2008 crisis erupted. The financial collapse was strictly geared to the problems of the real accumulation.

With regards to the other pillar of the Marxisant FH currents, namely that finance acquires an independent from surplus-value mechanism of ‘direct exploitation’ through usury, there is a robust rejection. Fine (2009) argued accurately that it misinterprets the Marxist analytical framework. The financial revenues from loans given to workers can be (a) an additional appropriation of a part of the value of their labour-power or (b) a part of the value of their labour-power that is being expended for the acquisition of socially necessary commodities. In the first case, if this appropriation becomes permanent, then it will lead to a new lower value of labour-power. In the second case, the current value of labour-power is actually lower than what it appears. In both cases there are no extra – and moreover independent from surplus-value – financial profits. To argue otherwise means that these Marxisant FH currents propose a different theory of the determination of the labour-power and of the operation of the labour market than that of Marxism. In such a theory, direct power relations instead of indirect economic mechanisms are the only mechanism that can enable the financial system to garner extra profits. Again, this view misinterprets capitalism as a pre-capitalist system.

Conclusions

The Marxist and Marxisant FH currents, with the notable exception of B.Fine’s rather peculiar interpretation, err on five counts.

First, they interpret short-run and conjunctural phenomena as long-run structural changes. In methodological terms, the FH is a middle-range theory (for a critique of this methodology see Mavroudeas (2012), Ch.3).

Second, they promote the false perception that the post-1990s financial expansion was a totally new phenomenon without any previous historical precedent.

Third, their argument about the financial system’s novel ‘direct exploitation’ mechanism equates unwarrantedly capitalism with the pre-capitalist era of transition from feudalism to capitalism.

Fourth, they propose an unrealistic class analysis.

Fifth, they lead to unjustified analytical fuzziness as they obscure the understanding of capitalism’s fundamental economic and social processes.

In a nutshell, FH’s grandiose proposition about a new stage of capitalism or even a new brand of capitalism fails to account both analytically and empirically for the evolution of contemporary capitalism. On the contrary, Classical Marxism offers a superior analytical and empirical perspective.

REFERENCES

Bond, P. (2010), ‘A century since Hilferding’s ‘Finanz Kapital’ – again, apparently, a banker’s world?’, Links International Journal of Socialist Renewal, November 19.

Bryan D., Martin R. & Mike Rafferty M. (2009), ‘Financialization and Marx: Giving labor and capital a financial makeover’, Review of Radical Political Economicsvol.41 no.4.

 Bryan, D. (2010), ‘The Duality of Labour and the Financial Crisis’, Economic and Labour Relations Review, vol.20 no.2.

 Fine, B. (2009), ‘Financialisation, the Value of Labour Power, the Degree of Separation, and Exploitation by Banking’, SOAS Research Students, Summer Seminar Series.

 Fine, B. (2010), ‘Locating financialization’, Historical Materialism vol.18 no.2.

Fine, B. (1985-1986), ‘Banking Capital and the Theory of Interest’, Science and Society vol.40 no.4.

Fine, B. (2013-2014), ‘Financialization from a Marxist Perspective’, International Journal of Political Economy vol.42 no.4.

Fine, B. & Harris, L. (1979), Rereading Capital. London: Macmilan.

Foster, J.B. (2010), ‘The Financialization of Accumulation’, Monthly Review vol.62 no.5.

Harris, L. (1988), ‘Alternative Perspectives on the Financial System’, in L.Harris, J.Coakley, M.Groasdale & T.Evans (eds), New Perspectives on the Financial System, London: Croom Helm.

Hilferding, R. (1910 (1981)), Finance Capital, London: Routledge & Kegan Paul.

Itoh, M. (1988), The Basic Theory of Capitalism, London: Macmillan.

Itoh, M. (1988), The Basic Theory of Capitalism, London: Macmillan.

Grossmann, H. (1929), The Law of Accumulation and Breakdown of the Capitalist System, Leipzig: Hirschfeld.

Krippner, G. (2005), ‘The financialization of the American economy’, Socio-economic Review vol.3 no.2.

Lapavitsas, C. (2008) ‘Financialised capitalism: direct exploitation and periodic bubbles’, SOAS.

Lapavitsas C. (2009), ‘Financialised Capitalism: Crisis and Financial Expropriation’, Historical Materialism vol.17 no.2.

Lapavitsas C. & Kouvelakis St. (2012), Crisis and Left Vent, Athens: Livanis [in Greek].

Lapavitsas, C. (2014), Profiting Without Producing: How Finance Exploits Us All, London: Verso.

Lenin, V.I. (1917 (1948)), Imperialism, the Highest Stage of Capitalism, London: Lawrence and Wishart.

Mavroudeas, S. (2012), ‘The Limits of Regulation: A Critical Analysis of Capitalist Development’, Cheltenham: Edward Elgar.

Mavroudeas, S. (2015), ‘‘Financialisation’ and the Greek case’ in Mavroudeas S. (ed.), Greek capitalism in crisis: Marxist Analyses, London: Routledge.

Mavroudea,s S. & Paitaridis, D. (2015), ‘The Greek crisis: a dual crisis of overaccumulation and imperialist exploitation’ in Mavroudeas S. (ed.), Greek capitalism in crisis: Marxist Analyses, London: Routledge.

Shaikh, A. (2010), ‘The first Great Depression of the 21st century’, Socialist Register 2011.

 Sweezy, P. (1942), The Theory of Capitalist Development, New York and London: Monthly Review.

Sweezy P. (1994), ‘The Triumph of Financial Capital’, Monthly Review vol.46 no.2.

Sweezy, P. (1997), ‘More (or Less) on Globalization’, Monthly Review vol.49 no.4.

Tabb, W. (2010), ‘Financialization in the contemporary social structure of accumulation’, in Contemporary Capitalism and its Crises: Social Structure of Accumulation Theory for the 21st Century, edited by McDonough, T., Reich, M. & Kotz, D., Cambridge: Cambridge University Press.

Tomé, J.P. (2011), ‘Financialization as a Theory of Crisis in a Historical Perspective: Nothing New under the Sun’, Working Paper Series 262, PERI.

This paper was presented at the Second World Conference on Marxism, ‘Marxism and the current world and China,’ Peking University, 5-6 May 2018.

More articles by:

Stavros Mavroudeas is a Professor of Political Economy in the Economics Department of the University of Macedonia.

‘The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018

The paper of my contribution (‘The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’) in the 2nd World Congress on Marxism (Peking University, 5-6 May 2018) follows below.

Alternatively, it can be downloaded from:

https://www.researchgate.net/publication/325038293_%27The_Financialisation_Hypothesis_and_Marxism_a_positive_contribution_or_a_Trojan_Horse%27

https://www.academia.edu/36594283/SECOND_WORLD_CONGRESS_ON_MARXISM_Marxism_and_the_current_world_and_China

 

https://www.scribd.com/document/378694807/The-Financialisation-Hypothesis-and-Marxism-a-positive-contribution-or-a-Trojan-Horse

 

 

 

 

SECOND WORLD CONGRESS ON MARXISM
‘Marxism and the current world and China’
Peking University, 5-6 May 2018

 

 

 

‘The Financialisation Hypothesis and Marxism:

 a positive contribution or a Trojan Horse?’

 

 

Stavros D. Mavroudeas

Professor (Political Economy)

Dept. of Economics

University of Macedonia

156 Egnatia

54006 Thessaloniki

Greece

e-mail: smavro@uom.edu.gr

 

 

ABSTRACT

The Financialisation Hypothesis is a popular trend in contemporary Radical Political Economy. It maintains that capitalism has nowadays entered a new stage where money capital dominates the whole circuit of capital dethroning productive capital. More ambitious versions of the Financialisation Hypothesis uphold that money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives. This paper argues that the Financialisation Hypothesis is a false turn for Marxist analysis. It misrepresents contemporary developments in capitalism and in particular it fails to understand the function of fictitious capital in times of prolonged crisis and stagnation. Moreover, it deforms Marxist economic analysis by adopting post-Keynesian arguments that lead to the abandonment of the Labour Theory of Value and the associated with-it theory of money. This paper argues that the classical Marxist economic and monetary analysis has better explanatory power than the Financialisation Hypothesis and thus can grasp more realistically developments in contemporary capitalism.

 

 

  1. Introduction

 The Financialisation Hypothesis (FH) is a popular argument in contemporary Heterodox Economics, Marxist Political Economy but also in Mainstream Economics. Its basic thesis is that modern capitalism has undergone a radical transformation during the last three decades. The financial system, through a series of innovative mechanisms, has conquered capitalism’s commanding heights, became independent from productive capital and has transformed the whole system according to its own prerogatives. This new financialized (or financial or finance-dominated or fiduciary) capitalism operates completely different from traditional capitalism.

The FH proposes four stylised facts as its factual basis:

  • The increased weight of the financial sector in contemporary advanced capitalist economies (share in GDP, profits, new complex financial instruments).
  • Corporate sector’s recent trend to finance itself through retained earnings, capital markets and ‘shadow banking’.
  • The adoption by firms of shareholders’ value maximization policies and the related prominence of institutional investors.
  • The increased indebtedness of working and middle-class households in several advanced capitalist economies.

 

The combined result of these processes is that (a) productive capital depends totally upon money capital and transforms its modus operandi according to the latter’s requirements and (b) working -class depends directly upon money capital, which exploits it through usury.

This new finance-dominated capitalism is crisis-prone because of its inherent financial instability. Concomitantly, the 2008 global capitalist crisis is considered as a financialisation crisis, caused by financial bubbles and without roots in real accumulation (which was only subsequently affected by finance’s deleveraging).

FH’s shot to prominence made it a leitmotif at the cost of analytical coherence.

This paper discusses the Marxist and Marxisant versions of the FH and argues that they misconceive the actual workings of modern capitalism leading to an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead it constitutes a well-known capitalist reaction in periods of weak profitability. This does not preclude the proliferation of new financial instruments which give new special forms of appearance to a usual capitalist process. Contrary to the FH, it will be argued that the Classical Marxist theory of crisis and fictitious capital offers an analytically and empirically superior understanding of this process.

Τhe FH autonomises completely money-capital (that is the fraction of capital that operates in the financial system) from productive-capital and, furthermore, superimposes it on the latter. On top of that the FH maintains that money-capital acquires also means of existence and operation totally independent from productive-capital. This FH argument creates no problems for Mainstream financialisation theory as Neoclassical economics consider the financial system as an independent creator of wealth. However, it is a big leap for those FH currents that ascribe to Political Economy. Political Economy – both Classical and Marxist – considers productive-capital (that is capital engaged in the sphere of production) as the locus of surplus-value creation. The other two main capitalist fractions (money and commercial-capital) operate in the sphere of circulation. They do not produce surplus-value but reap parts of the surplus-value created under productive-capital as payment for their necessary functions. The FH, by rejecting this perspective, actually signifies not a new epoch of capitalism but a new capitalism with different classes and different functions. This is a scenario far removed from reality.

 

 

  1. The FH and its Marxist and Marxisant versions

The notion that there was some structural break in capitalism’s historical evolution after which the financial system conquers the system’s commanding heights is not new. Hilferding’s (1910 (1981)) seminal work contemplated the idea about a new strategic importance of the financial system for capitalist reproduction. He argued that because of the increased concentration and centralization of capital and the augmented financial requirements a new hybrid form of capital (finance capital) has emerged. This is the fusion of productive-capital with banking-capital (a section of money-capital) under the dominance of the latter. Implicitly, Hilferding considered this as a new era of capitalism; although he never ventured to state it explicitly. With the emergence of finance capital, finance has dethroned productive-capital from its dominant position in the total circuit of capital. There are well known deficiencies of Hilferding’s finance capital thesis. First, he implicitly side-steps the Marxian Labour Theory of Value (LTV) and proceeds with a problematic theory of monopoly pricing. Second, the empirical validity of the finance capital concept has been disproved (Bond (2010), Harris (1988)). This fusion of productive with banking capital materialized only in a minority segment of the advanced capitalist world. Indicatively, it did not materialise in several crucial Anglo-Saxon economies where the stock exchange rather than the banking system constitutes the main source of finance for private enterprises.

Hilferding’s thesis was re-launched later by Sweezy (1942). However, it should be noted that neither of them broke from the classical Marxist relationship between surplus-value and interest. For Marxist analysis, surplus-value is extracted by productive-capital at the sphere of production and then it is redistributed between profits (accruing to productive-capital), interest (accruing to money-capital) and commercial profit (accruing to commercial-capital). Hence, money-capital may dominate strategically productive-capital but it cannot live independently of the latter.

Hilferding’s idea of this strategic dominance was taken up by both friends and foes within the Marxist tradition. It was Lenin (1917), in his Imperialism, that took up this and recast it within a formal theory of capitalist stages. He argued that a new stage of capitalism, monopoly capitalism, has emerged. One of its main features is this strategic dominance as he adopted Hilferding’s problematic concept. Nevertheless, Lenin followed the Marxian LTV and always considered money-capital an appendage of productive-capital; as interest is part of the surplus-value and money-capital has no independent source of wealth. On the other hand, Lenin’s theory of stages – despite some shortcomings and ambiguities – offers a coherent and valuable toolbox through which Marxist analysis can conceive transformations in capitalism.

Summarising, Marxist Political Economy within its theory of stages argued that during monopoly capitalism the financial system acquired strategic dominance over the total circuit of capital but also never ceased to depend economically upon productive-capital. In a nutshell it was a dominant and also necessary parasite. This, conception – despite problematic aspects like finance capital – has both realism and analytical coherence.

The theoretical landscape changed once again after the 1973 global crisis that signified the exhaustion of the monopoly capitalism stage. The 1973 global economic crisis and its falling profitability which caused several waves of capitalist restructuring succeeded only partially in restoring capital’s profitability. In other words, the profit rate never managed to reach its prior 1973 levels. This incomplete capitalist recovery led to a flight ahead: the system vigorously employed fictitious capital’s operations in order to sustain and invigorate capital accumulation. The rapid deregulation and internationalization of finance during the 1990s started the process of what has been termed financialisation. Capitals that were over-accumulated in the productive sectors of the economy shifted their activities towards fictitious capital operations in order to improve their profitability. These developments have led to interpretations according to which a new epoch for capitalism arise, where the financial capital is released from the governance of productive-capital and, taking an autonomous course, now dominates the whole of the capitalist economy. These significant changes that took place during the last decades of the 20th century influenced crucially the views on the role of the financial system as well as the ongoing debate regarding the relationship between productive-capital and finance.

The very term ‘financialisation’ was firstly coined by the Monthly Review (MR) school. Sweezy (1994, 1997), in his last papers referred to ‘the financialisation of the capital accumulation process’ as one of the three tendencies at the turn of the century (the other two being, monopoly power and stagnation). Financialisation as such was inaugurated in a collective volume edited by Epstein (2005) that included a paper by Krippner (2005). The latter introduced the term ‘financialisation’ as the trade-mark of recent transformations in the capitalist system. Notwithstanding, Krippner (2005, p.199) had reservations whether financialisation constitutes a new phase of capitalism; arguing that it neither necessarily ‘represents an entirely novel phase of capitalism … [nor] do these data allow us to draw any conclusions regarding the permanency of the trends documented here’.

However, it was not the MR school but the Post-Keynesians those who energetically adopted the term and seldom treated it as their exclusive property.

The incorporation of the term in Marxist and Marxisant analyses followed a bit later. Τhere are four FH versions in Marxist literature. The two of them keep within the Marxist analytical framework (B.Fine, MR) whereas the other two have a rather Marxisant flavour in the sense that they abandon the former and flirt with post-Keynesianism (Lapavitsas, Bryan).

Fine (2009, 2010) considers the growth of finance and the new financial forms of the last thirty years as a special phase of neoliberalism (which he defines more as a policy trend rather than as a stage per se). He theorises this new phase through the Marxian LTV and its theory of money. Financialisation occurs when the accumulation of interest-bearing capital (IBC – to be defined below) in the economy becomes extensive and intensive. ‘Intensive’ growth and proliferation of financial assets signifies their increasing distance from production, while ‘extensive’ means the extension of IBC to new areas of economic and social life in hybrid forms of capital (Fine (2013-2014), p.55). Under such conditions finance can acquire a dominant position as regards capital accumulation only in the structured environment of ‘shadow banking’. In the context of the latter, exchange can be facilitated by the intermediation and dominant presence of fictitious capital. For Fine finance cannot acquire autonomous channels of exploitation of the working class. New forms of operation of money capital and novel institutional arrangements are policies that are used by capital in order to surpass its problems and contradictions. In a nutshell, Fine follows the Marxian logic of relating finance to the sphere of production and considering financial profit as part of the surplus-value. What is missing from his analysis is how the current emergence of financialisation relates to profitability.

The MR, although financialisation was initiated under its auspices, was a latecomer in adopting it (e.g. Foster (2010)). Engulfed in its Marxo-Keynesian underconsumptionism, it strived to prove the latter in the face of overtly negative empirical evidence (as the 2008 crisis was not accompanied with underconsumptionist signs). It adopted financialisation in conjunction with the arguments that (a) increasing income inequalities lead to the increasing indebtedness of private households (which is a form of covert underconsumption) and (b) that increased financial leverage and speculation is part of the neoliberal era of deregulation. It identifies the latter as a new stage of capitalism, branded as Neoliberalism, or Globalisation or later as Financial Globalisation. However, neither the MR argues that financial profit has become independent from surplus-value. The Social Structures of Accumulation (SSA) approach follows a similar to the MR path identifying financialisation with the Neoliberal SSA (Tabb (2010)) and adding their own emphasis on institutions.

Bryan et.al (2009) argue since the early 1980s finance has become commodified through several financial innovations (securitization, derivatives etc.). Although Bryan (2010) avoids to characterise this as a new capitalist stage, he essentially implies so. He claims that (a) increased leverage and derivatives and (b) workers’ financial exploitation through usurious loans change radically capitalism’s functions and class structure. They argue that the wage relationship (i.e. labour-time) and its relationship to money have ceased to be related but separate and that the latter has subsumed the former. Concomitantly, labour became a form of capital as the reproduction of labour is now a source of surplus-value transfer in the form of interest-payments and the ‘financialisation of daily life’. In their very peculiar formulation, behind the Marxist terminology (surplus-value etc.) exploitation is not confined to unpaid labour-time but extends to usury. Moreover, the argument that labour is now a form of capital implies directly a new class structure different from typical capitalism.

Lapavitsas (2008), adopted finacialisation directly from post-Keynesianism. He argues, in the spirit of ‘shadow banking’, that typical banking is almost redundant and that the financial system is becoming totally stock-exchange based. Fictitious capital is a redundant concept and new financial developments do not relate, even distantly, to the sphere of production and have to be analysed independently. Thus, the LTV and its money theory are essentially discarded. He introduces the vague concept of ‘finance’ as the new master of the system. To avoid criticisms of proposing two separate capitalist classes he argues that ‘finance’ subsumes and reshapes productive-capital according to its prerogatives. Consequently, there is no meaningful distinction between them. Additionally, ‘finance’ acquires a channel of direct exploitation of workers through the provision of usurious loans: ‘These practices are reminiscent of the age-old tradition of usury, but they are now performed by the formal financial system’ (Lapavitsas (2009)). He initially branded this new source of financial profit as ‘financial exploitation’. After criticism (e.g. Fine (2009)) for confusing capitalist exploitation with the pre-capitalist exploitation of usury, he made an inconsequential facelift and changed the term to ‘financial expropriation’. He argues that this enables financial institutions to boost their profits independently of surplus-value and possibly to exploit ‘us all’ (Lapavitsas (2014), alluding to other social strata apart from labour. For him this new structure constitutes a new stage of capitalism (or a new ‘social order’ as he brands in more graphical but less theoretically coherent terms). Furthermore, he argues that there is no general theory of crisis (as Marxism argues) but each crisis is historically specific. He maintains that the 2008 crisis was a financialisation crisis with no relations whatsoever to profitability (as the latter remained constant (Lapavitsas & Kouvelakis (2012)).

The Marxisant and Marxo-Keynesian FH, essentially adopt the post-Keynesian endogenous money theory which is highly problematic as its cannot define coherently what is ‘capital’ and, consequently, misconceive the relation between interest and profit. Essentially, their approach is akin to that of the old Banking School and faces similar problems. Thus, the Marxisant and Marxo-Keynesian FH sacrifice – or deform beyond recognition – the crucial Marxian concept of fictitious capital and end up with the same with the Mainstreamers and the post-Keynesian argument: the monetary sector dominates the real sector and has independent from the latter sources of profit. But what strikes exceptionally is the Marxisant FH’s essential confluence with the Post-Keynesian theory of classes. As already analysed, Keynesian and Post-Keynesian thought inherits the notion of the rentier from Classical Political Economy but it actually deforms it. For the former rentiers (in the version of landowners, that is a transformed remnant of feudalism) were a separate class, not doing business but appropriating rent that was subtracted from entrepreneurial profits and, thus, diminished investment. This conflict that characterised capitalism during A.Smith’s and D.Ricardo’s years has long ceased to exist. Landowning has been assimilated into the capitalist class and lost its independent existence and function. Keynesianism redefined this distinction between industrialists and financiers, essentially seen as separate classes. Keynesianism does not have analytical problems with this as it argues that other factors affect savings and other investment. However, Marxism conceives money and productive capital as forms of total capital that both take part in the formation of the general rate of profit (which among others is a process unifying the bourgeoisie against the proletariat). Because interest is part of surplus-value and financial profits depend upon the general rate of profit, Marxism does not elevate the distinctiveness of money and productive-capital to the point of being separate classes.

Last but not the least, the Marxisant FH currents have a weak theory of crisis. They do not offer a general theory of capitalist crisis but instead opt for a conjunctural one. Each historical epoch and each particular crisis has its own specificities. But essentially, as Tome (2011) clearly shows, FH ultimately ascribes to a Keynesian possibility theory of crisis. This a very insubstantial theory of crisis especially from those FH currents that refer even in passim to Marxism. Lapavitsas (2014: 37) is again a typical example. He states that the development of financialisation has nothing to do with Marx’s tendency of the profit rate to fall. Moreover, he asserts that falling profitability in capitalist production was never a key factor behind the rise of finance.

 

 

III. Classical Marxism versus the FH

The FH purports that it offers a superior analytical framework in order to comprehend the economic transformations of the recent decades. The empirical side of the FH is beyond the scope of this paper; although there is compelling evidence that real accumulation continues to be the centre of the capitalist system and that falling profitability a-la-Marx is at the core of the 2008 crisis (e.g. Shaikh (2010), Mavroudeas & Paitaridis (2015)). There are also forceful rejections of FH’s empirical applicability for specific economies (e.g. Mavroudeas (2015)). This section offers an alternative to FH analysis of the recent developments in capitalism that is based on the Classical Marxist perspective.

Classical Marxism analyses the relationship between monetary and real accumulation through the lenses of the total capital circuit which reveals the modus operandi of the various forms of capital, in unity in the context of real accumulation. This unified exposition is absent both from the Mainstream and post-Keynesian perspectives and gives Marxism a superior understanding of the relationship between finance and production, where the sphere of production has a structural (and historically permanent) primacy over finance. This viewpoint enables Marxism not to fall prey to questionable stylized facts that create false impressions about new stages and, at the same time, to be able to analyze new phenomena within the contours of the fundamental mechanisms of operation of the capitalist system.

The Marxian total capital circuit presents how capital operates and assumes different forms in order to extract surplus-value:

     C …. P ……C’    M’

↓                   ↓

c+v             c+v+s

 

where  M: money

C: commodities (means of production (c) and labour-power (v))

P: production process

C’: commodities of greater value produced (via the inclusion of surplus-value (s))

M’: increased money return (in the form of profit) for the C’

 

The circuit begins with circulation (the advancement of M for buying C) and ends with circulation (the payment of M’ for C’). Between C and C’ takes place the production process where circulation is interrupted and surplus-value is extracted. The three fundamental forms of capital (money-capital, productive-capital and commercial-capital) function differently but are also entwined in this circuit. Money and commercial-capital, that operate in the sphere of circulation, operate in the beginning and the end. Productive-capital operates at the centre. The sphere of production (and thus productive-capital) has primacy over the others as surplus-value (the aim of the capitalist system) is extracted under its auspices (Fine & Harris (1979)). This surplus-value is subsequently redistributed between productive, money and commercial capital because the former needs the support of the two others.

Money plays a crucial role in this circuit. It is the most mobile element of the circuit. When it represents value (it has not become capital), it has its most fluidity. However, when it enters the production process and becomes capital (which is necessary for claiming surplus-value) becomes less fluid. Capital regains its fluidity when the commodities produced are sold in exchange for M’. Part of that money is reinvested in the production process, becoming less fluid capital whilst another part is consumed or hoarded by the money owner.

There is tension between money’s inherent mobility and its necessary bound in the production process. The money owner views it as a process that takes time and is risky. This makes it undesirable and would only be undertaken if the expected returns are likely to be significantly greater than those of other capitalists involved in the process who retained flexibility, such as money-capital who operates at the M stage or commercial-capital who functions at the C stage. As each capitalist sees himself as a free-rider of the system (that is he tries to leave to its peers the costs for the functional operation of the capitalist system), he seldom tries to disentangle himself from the bounds of production. There are phases of the economic cycles that this tendency becomes stronger and phases that it becomes weaker. For example, greater returns to productive-capital were evident throughout much of the 19th century. But, particularly after the 1873 crisis, this changed and the tendency to fluidity returned. Transferable shares and their commodification became the dominant means through which capitalists tried to reduce the risk of their involvement in the production process.

Marxism grasps the unity and the internal strife of capital and the complex functions of money-capital through the distinction between the use of money as credit and the use of money as capital. Borrowing and use of money as capital is different because money is then used not just to buy a good or to meet a payment but in order to make more money. From the perspective of capitalist production, this occurs when money is borrowed in order to expand accumulation with the expectation of a future profit. Marx distinguishes carefully between money-capital’s functions. Money involved in the lending and borrowing activities of the capitalist financial system, is defined as loanable money capital (LMC). LMC is sub-divided in two generic forms: money-dealing capital (MDC) and interest-bearing capital (IBC). MDC advances credit in general for buying and selling in the sphere of circulation. IBC uses credit relations to advance money capital in order to appropriate surplus-value.

Traditionally the capitalist financial system collects idle funds and channels them to investment through the credit and the capital markets (which operate differently). Credit markets involves both MDC and IBC. Capital markets involve solely IBC. The novelty of recent hybrid forms (such as ‘shadow banking’) is that they combine in complex ways the operation of both banking and capital markets. Hence, they combine MDC and IBC.

The credit system begins with trade credit, which arises through trade relations mostly tied to similar and/or related sectors and geographical proximity. Next comes Banking credit (collection and advance of LMC by banks), which arises in the discounting of trade bills and is based on the collection of idle money from several sources and thus overcomes some of the particularities of trade credit. By collecting idle money from several sources in the economy, banks partly homogenize credit and begin to give it a less individual character. The next instance is the money market (where LMC is traded among banks). The top of the credit system is the central bank (the leading bank of the money market).

The capital market accompaniments the credit system. Contrary to the latter, it mobilises idle money on the basis of property (equity) rather than credit (debt). Nevertheless, the credit market is connected with the stock market, as both draw funds from the same pool of LMC and as lending by the former sustains the operations in the latter.

Because IBC is money-capital traded as a commodity commanding interest, it has a dual character in the context of the total circuit. On the one hand it is immediately related to the sphere of real accumulation for interest payment and on the other hand it is immediately related to the form of credit-money. Hence, it has certain degrees of freedom towards the sphere of real accumulation, as the interest rate which determines IBC is formed outside the total circuit by the supply and demand for LMC. This gives to IBC a second duality. First, because it is a relationship between a capitalist possessing money (‘monied’ capitalist) and a capitalist possessing an investment project (‘functioning’ capitalist) it can give rise to speculation (i.e. rent-seeking). Secondly, IBC comes out from the generation of sums of money in the turnover of total social capital, which are transformed subsequently into LMC by the credit system.

IBC differs from productive-capital because its owner through lending claims part of the surplus-value (in the form of interest) without any direct involvement in production. In cases of unwelcomed developments (conflicts between labour and capital in production and distribution, falling profitability etc.) IBC’s lender withdraws it and invests in other sectors instead of having to intervene directly in the industry. This characteristic of IBC is crucial for money-capital (banks) because it enhances the liquidity of their liabilities. Their deposits, which (for commercial banks at least) form the basis of their money-dealing operations are highly liquid since depositors are not tied to any particular bank. In well-developed banking systems personal knowledge and trust do not enter the relation so that deposits and other monetary instruments are non-specific and anonymous forms in which capital can be held. The money-dealing that banks carry out, and competition within banking facilitates this distancing of money and deposits from specific ties. However, IBC’s freedom has limits because by lending directly to industry it cannot be totally indifferent to the latter’s outcomes.

Fictitious capital is a form of IBC. IBC is already defined as money-capital which is loaned in order to be used in the sphere of production for extracting surplus-value, in contrast to the simple loan of money (money as such) which simply facilitates transactions in general. However, since there is an obligation to repay a loan (which takes the form of debt), it is possible for this debt to acquire a life of its own. Consequently, the obligation (which takes the form of securities, e.g. shares, bonds), can autonomously be bought and sold at some money value, which might or might not correspond to the ability of its sum of money (if used as capital in the production sphere) to realize enough surplus-value. This autonomous circulation of IBC in the form of securities is called by Marx fictitious capital. ‘Fictitious’ does not imply that it does not exist or it is artificially created. It denotes that its circulation is distinct from the circulation or the yield of capital which it represents (Fine (2013-2014), pp.49-50). Therefore, fictitious capital is related to the financial activities of capital in general and becomes more crucial when the financial system becomes more complex.

Practically, fictitious capital represents an uncertain bet on surplus-value that might be extracted in the future but which it is being discounted in the present. Its operation is closely related to the expansion of joint-stock companies, the negotiation of their assets in the stock exchange and the expansion of credit-money (that facilitates to a great extent their transactions and their valuations). Periods of economic euphoria usually foment high expectations about the future and, thus, can engineer waves of robust economic growth (as they influence positively investment). These expectations-led booms have usually the tendency to overshoot; that is to create increasingly over-optimistic future expectations. But as soon as the ‘real economy’ cannot keep pace with those expectations (i.e. investment does not lead to the expected profits) then its growth starts faltering. In other words, the so-called ‘fundamentals’ recall to reality the unsustainable growth engineered by fictitious capital. The busts that follow have also the tendency to overshoot; but this time to the downside. These usually lead to the eruption of an economic crisis because of the burst of the so-called ‘bubble’.

This role has been recognized long ago by Marxist economists. H.Grossmann (1929, p.158) showed that “among the factors that counteract the breakdown Marx includes the fact the progressively larger part of social capital takes the form of share capital:

‘…these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, once costs have been deducted … These do not therefore go into levelling the rate of profit, because they yield a lower than average rate of profit. If they did not enter into it, the general rate of profit would fall much lower. (1959, p.240)’

 

This pinpoints the credit system’s ability to continue making profits when real accumulation starts facing difficulties in a way which delays the fall of the general profit rate. However, despite the relative autonomy of the credit system, ultimately, its operations broadly comply with the essential motion of capitalist accumulation. Thus, the crisis phase of capitalist business cycle typically begins with the collapse of speculation in stockpiled commodities by wholesale merchants, and the rise of the interest rate which affects the debt structure at some point causing its collapse, bringing the crisis phase to be followed by depression.

Itoh (1988, pp.303-342), following the Uno school of Japanese Marxism, embedded this function within the phases of economic cycles. He argued that towards the upswing’s end and in the beginning of over-accumulation the profit rate declines and commodity prices tend to rise. Then, speculative trading and stockpiling of commodities take place in expectation of further price rises. Speculative trading also appears in the stock exchange as the share prices of some industries begin to rise in response to the increase in their commodity prices.

Summarising, Classical Marxism has a coherent and sophisticated framework to grasp the phenomenon of prolonged financial euphoria without separating it from real accumulation. This framework can also explain satisfactorily the recent financial innovations.

The most dramatic cotemporary change is that the bill of exchange (with its direct links to the financing of production and trade) is substituted as the dominant financial asset by the ‘repo’ (‘sale and repurchase agreement’). In a repo, a borrower of cash sells a bundle of securities for an amount of money to a lender with the agreement that the former will repurchase the securities for another amount of money after a fixed period. The securities thereby act as collateral for the cash loan. In the event that the cash borrower defaults on repayment, the cash lender owns the securities to keep, sell or use again as collateral. In this context institutional developments led to the notion of ‘bank’ to become elastic and the phenomenon of ‘shadow banking’ emerged.

This trend tends to merge the two pillars of the financial system (credit and capital markets) mainly through securitization. However, securitization transforms property into tradable financial assets against a promise for repayment; that is into fictitious capital. In this way the contemporary financial system became more unstable as traditional institutional mechanisms and trust were disturbed.

All this contemporary financial house of cards depends upon the extraction of surplus-value in the sphere of production. In the aftermath of the 1973 profitability crisis, the subsequent waves of capitalist restructuring failed to resolve the overaccumulation crisis. Despite the dramatic increase of labour exploitation (that is the increase of the rate of surplus-value), they shied away from a decisive destruction of unviable capitals. Thus, profitability never recovered sufficiently. The last trick, together with the ‘globalisation’ (that never extinguished the national economy but increased pressure on both labour and unviable capitals), was the expansion of fictitious capital operations. Nevertheless, as argued above, this stratagem has definite limits. Expansion through financial doping soon met its limits set by the real accumulation. Thus, the 2008 crisis erupted. The financial collapse was strictly geared to the problems of the real accumulation.

With regards to the other pillar of the Marxisant FH currents, namely that finance acquires an independent from surplus-value mechanism of ‘direct exploitation’ through usury, there is a robust rejection. Fine (2009) argued accurately that it misinterprets the Marxist analytical framework. The financial revenues from loans given to workers can be (a) an additional appropriation of a part of the value of their labour-power or (b) a part of the value of their labour-power that is being expended for the acquisition of socially necessary commodities. In the first case, if this appropriation becomes permanent, then it will lead to a new lower value of labour-power. In the second case, the current value of labour-power is actually lower than what it appears. In both cases there are no extra – and moreover independent from surplus-value – financial profits. To argue otherwise means that these Marxisant FH currents propose a different theory of the determination of the labour-power and of the operation of the labour market than that of Marxism. In such a theory, direct power relations instead of indirect economic mechanisms are the only mechanism that can enable the financial system to garner extra profits. Again, this view misinterprets capitalism as a pre-capitalist system.

 

Conclusions

 

The Marxist and Marxisant FH currents, with the notable exception of B.Fine’s rather peculiar interpretation, err on five counts.

First, they interpret short-run and conjunctural phenomena as long-run structural changes. In methodological terms, the FH is a middle-range theory (for a critique of this methodology see Mavroudeas (2012), Ch.3).

Second, they promote the false perception that the post-1990s financial expansion was a totally new phenomenon without any previous historical precedent.

Third, their argument about the financial system’s novel ‘direct exploitation’ mechanism equates unwarrantedly capitalism with the pre-capitalist era of transition from feudalism to capitalism.

Fourth, they propose an unrealistic class analysis.

Fifth, they lead to unjustified analytical fuzziness as they obscure the understanding of capitalism’s fundamental economic and social processes.

In a nutshell, FH’s grandiose proposition about a new stage of capitalism or even a new brand of capitalism fails to account both analytically and empirically for the evolution of contemporary capitalism. On the contrary, Classical Marxism offers a superior analytical and empirical perspective.

 

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