Speculative Capital Unit Two: Yesterday and Today Study overview and general reading list Concepts Discussion questions Reading excerpts Online study group on speculation Concepts We've hopefully shored up our foundation in political economy, so can now look at the matter at hand. So much of political experience has been governed by concept of imperialism "anti-imperialist" struggle, national liberation struggles etc. A lot of the theoretical work for this was done by Lenin. Imperialism: Highest Stage of Capitalism. (1916) Implicit in Lenin's view was (1) capitalism develops in stages. (2) The era of industrial/competitive capital had given way to finance capital. (merger of industrial capital and bank capital under control of financiers. (3) the concept of a dominant section of a class (financiers) [A form of capital, that, through its agents, assumes a controlling role in the economy -- to set the political agenda, organizes society around its needs.] But let's compare the time Lenin was writing w/ today [get report from Marx collective]. Key points: THEN: 1. Finance capital: Export of capital for production, infrastructure esp railways. 2. Bank centric. 3. Industrial. 4. Colonial system 5. Bribery of working class 6. Imperialism NOW: 1. Transfer of capital, not for production/ 2. Stock market/money-market centric 3. Electronic 4. "Open markets" 5. Retraction of bribe 6. Globalization [Also similarities: financial oligarchy, rentiers, monopoly in many senses] Not saying Lenin was wrong? Could only see up to what was developed then. What happened? Early 1970s -- period of upheaval. Europe & Japan economies rebuilt. Vietnam War. Forced end of Bretton Woods. Increased competition. Microchip. Stock crash. Volatility in financial, commodity markets. Oil shocks. Key points: 1. Emergence in force of financial strategies for hedging, managing risk. (Currency markets, money market funds, futures, portfolio insurance, options, derivatives.) Breakup of Bretton Woods system, floating exchange rates; as corporations did business in more countries, with fluctuating exchange rates, had to find ways to minimize effect of fluctuations. "Corporate risk management" Sophisticated ways of dealing with money to hedge, or insure, or stabilize. "financial risk management" "blurred the lines that separate hedgers from speculators" 2. Important and necessary part of any "responsible" corporate financial strategy. Treasury departments of corporations who are compelled in various ways to _manage_ money. A 1993 study: 85.2 % of Fortune 500 companies use derivative securities, 87.7% speculate at least some of the time. Goal -- "to control their finanical environment". Intel: 15% of bottom line from spec in interest rate and currency inst. [Barnet, _Global Dreams_ estimates that currency trading makes up up to 40% of Citibank's profits?] 3. These new strategies are only technically possible by the advances in the means of circulation, means of finace (credit, etc.) ie. computers, Internet, etc. The introduction of computers allowed for new ways of doing this. 4. The objectivity of it. 5. Pooling of risk to make it more manageable. Globalization creates a bigger pool. So that significance of individual incidents are minimized. This layer of financial activity is insulated, as it were from the productino process, or at least regional or local production issues. Top of page Discussion questions Compare the period that Lenin wrote in (and about) in Imperialism with today (in terms of technical environment, development of capitalism, world politics, etc.) What similarities are there? What differences? [Report on Henwood reading, and Lenin excerpts in reading] Top of page Yesterday and Today: Reading excerpts Finance capital [All Lenin quotes are from Imperialism, The Highest Stage of Capitalism (1916), page numbers refer to the Selected Works One Volume Edition, International Publishers, 1971.] The transformation of numerous modest middlemen into a handful of monopolists is one of the fundamental processes in the growth of capitalism into capitalist imperialism. (Lenin, p. 188) We see the rapid expansion of a close network of channels which cover the whole country, centralising all capital and all revenues., transforming thousands and thousands of scattered economic enterprises into a single national capitalist, and then into a world capitalist economy. (Lenin, p. 190) Scattered capitalists are transformed into a single collective capitalist. When carrying the current accounts of a few capitalists, a bank, as it were, transacts a purely technical and exclusively auxiliary operation. When, however, this operation grows to enormous dimensions, we find that a handful of monopolists subordinate to their will all the operations, both commercial and industrial, of the whole of capitalist society; for they are enabled -- by means of their banking connections, their current accounts and other financial operations ... to control them, to influence them by restricting or enlarging, facilitating or hindering credits, and finally to entirely determine their fate... [Lenin, pp 191-192 emphasis in original] ...banks greatly intensify and accelerate the process of concentration of capital and the formation of monopolies in all capitalist countries. [Lenin, p. 193] The banking system 'possesses, indeed, the form of universal bookkeeping and distribution of the means of production on a social scale, but solely the form,' Marx wrote in Capital half a century ago (Russian trans, Vol III, part II, p. 144 [pp 606-07, Moscow 1967] ... In substance, however, the distribution of means of production in not at all 'universal', but private, i.e. it conforms to the interests of big capital [Lenin, p. 193] "This bank capital, i.e., capital in money form, which is thus actually transformed into industrial capital, I call 'finance capital'." "Finance capital is capital controlled by banks and employed by industrialists." [Lenin is quoting R. Hilferding, Finance Capital, Moscow 1912.] <Lenin continues, in a new paragraph> This definition is incomplete insofar as it is silent on one extremely important fact -- on the increase of concentration of production and of capital to such an extent that concentration is leading, and has led, to monopoly... The concentration of production; the monopolies arising therefrom; the merging or coalescence of the banks with industry -- such is the history of the rise of finance capital and such is the content of that concept." [Lenin, p. 201] ... the result is that the industrial capitalist becomes more completely dependent on the bank. [Lenin, p. 196] Thus, the twentieth century marks the turning-point from the old capitalism to the new, from the domination of capital in general to the domination of finance capital. [Lenin, p. 200] The change from the old type of capitalism, in which free competition predominated, to the new capitalism, in which monopoly reigns, is expressed, among other things, by a decline in the importance of the Stock Exchange. [Lenin, p. 194] Finance capital is the merger of industrial capital and bank capital, under the control of the financiers. It represented the domination of the financiers over the industrial capitalists. Nevertheless, this capital was destined to go back into production. The financiers invest it in order to produce more profit from the exploitation of human labor. ["Economic globalization: Capitalism in the age of electronics", Rally, Comrades!, June, 1997, http://www.lrna.org/league/Rally/15.02/rc.15.02.global.html] "It is characteristic of capitalism in general that the ownership of capital is separated from the application of capital to production, that money capital is separate from industrial or productive capital, and that the rentier who lives entirely on income obtained from money capital, is separated from the entrepreneur and from all who are directly concerned in the management of capital. Imperialism, or the domination of finance capital, is the highest stage of capitalism in which this separation reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially "powerful' states stand out among all the rest. The extent to which this process is going on may be judged from the statistics on emissions, i.e.., the issue of all kinds of securities." (Lenin, p. 210) The Changing Financial System "The early 1970s were watershed years in the shaping of the current period. To pick two events: Within months of each other, the Bretton Woods agreement was dissolved, and the first commercial microprocessor was introduced by a young start-up company, Intel. "The economic pressures brought about by, among other things, the rebuilt economies of Japan and Europe coming online forced the dissolution of the Bretton Woods agreement, which freed exchange rates from their moorings -- a policy necessity on the part of the United States. On a separate track, the microprocessor was developed and deployed as part of the search for new tools to cheapen production and coordination costs to compete and profit in this environment. That is, these two disparate elements of the "globalized" economy -- market-driven exchange rates and the heart-brain of automated systems -- were both products of the same process of post-World War II capitalism coping with changing conditions." ("Rethinking Globalisation", Race and Class, 1998-9) "Until the early 1970s, exchange rates were legally fixed, the price of oil varied over a narrow range, and the overall price level rose by no more that 3% or 4% a year The abrupt appearance of new risks in areas so long considered stable had triggered a search for novel and more effective tools in risk management. Derivatives are symptomatic of the state of the economy and of the financial markets, not the cause of the volatility that is the focus of so much concern." [Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk, John Wiley and Sons, 1996. p. 305] "During the 1970s and 1980s, volatility seemed to be breaking out all over, even in places where it had been either absent or muted. Volatility erupted in the foreign exchange markets after the dollar was cut free from gold in [1971] and allowed to fluctuate freely; volatility overwhelmed the normally serene bond market during the wild swings in interest rates from 1979 to the mid-1980s; and volatility shot up in commodity markets during the huge jump in oil prices in 1973 and again in 1978. "These unexpected outbreaks of volatility soon littered the corporate landscape with a growing number of carcasses, providing grim warnings to executives that a fundamental change in the economic environment was taking place.... As a consequence, a new kind of customer appeared in the financial markets: the corporation seeking to transfer the risks in exchange rates, interest rates and commodity prices to someone better equipped to carry them... But when volatility exploded in areas where it had never been much of a concern, corporate managers, like the farmers of yesteryear, began to worry about the very survival of their companies... [Bernstein, Against the Gods pp. 320-321] Financial assets (billions) Type 1980 1994 Change Commercial banks $1,482 $ 4,162 2.8x Nonbank finance 2,881 12,393 4.3x Savings institutions 792 1,013 1.3x* Mutual funds 6 1,463 23.6x Money market funds 76 605 7.9x Asset-backed securities 0 528 -- *savings institutions have been declining since 1988. [Source: Statistical Abstract of the United States, Table 768 (Fed Reserve System?)] "Over the last two decades, the US system has been reshaped by the spread of multifunctional financial conglomerates and the emergence of an unregulated parallel banking system. This parallel system emerge during the 1970s with the introduction of money market mutual funds. Along with other powerful trends like securitization, these events have broken down the carefully compartmentalized credit and capital marketplace established in New Deal legislation 60 years ago." [Jane W. D'Arista and Tom Schlesinger, "The Parallel Banking System", International Economic Insights.] Top of page