The dotcom bubble (2003)

From the July 2003 issue of the Socialist Standard

In the 1990s, with the world’s economy and stock markets driven largely by the dotcom internet telecommunication advances, it was claimed by capitalist spokesmen that this would result in ever-increasing productivity along with rising prosperity. This was the view propagated by Greenspan in the United States and by Gordon Brown in the UK.

House prices soared, along with internet stocks, to record levels. Borrowers already highly in debt borrowed even more against their assets in what has become known as the feel-good factor.

In spite of the optimistic forecasts by Greenspan and Gordon Brown the boom ended, in a slump as socialists had forecast. Capitalist politicians struggled to adopt measures to halt the economic deterioration by juggling with interest rates and money supply, attempting to avoid the inevitable downturn. The fact of the matter is that we are in an environment which is now inevitably accompanied by rising business failures and unemployment. Hardly a week passes without the announcement of some pension scheme being unable to meet its obligations, Marconi and Equitable Life to mention only two.

It is not uncommon for workers to lose not only their jobs but a large part of their pensions as well. Due to the greater life expectancy it is doubtful whether pensions as we know them will survive. How the funding of pensions conflicts with adequate pensions schemes was explained in the August 2002 Socialist Standard (“Pensions, pay and poverty”). Members of Parliament will have no worries, however, as they regularly vote for generous increases in salaries and pensions.

In France recently there have been large demonstrations against the extension of the contribution period to 41 years in order to qualify for a full pension as a government employee. Pension funding problems in Italy and Germany greatly exceed those of the UK. Why has this happened? Why did the dotcom internet “revolution” fail to produce the lasting upsurge in production, profits and prosperity that the official spokesman promised?

To claim, as do present-day economists, that new inventions in production based on faster communications increasing turnover are novel developments of capitalism is fallacious. Marx and Engels were well aware of this but, unlike the present-day politicians, were aware of its consequences.

In chapter 4 of Volume III of Capital, Marx (in fact Engels from Marx’s notes) describes how in his day the introduction of wireless telegraphy, the Suez Canal, and the resultant reduction in shipping time led to a reduction in the time of circulation of capital and refers to “the entire globe being girdled by telegraph wires”. Marx was aware of the effect of improved communications on circulation of capital and its period of turnover and the resultant effect on profits. But in no sense did he see it as producing a permanent social change for the better in the form of steadily rising prosperity. He pointed out that the resultant decrease in the period of turnover leads to a rise in the rate of profit. The dotcom “revolution” had this same effect, which led to capitalists investing in the new technology attracted by the prospect of bigger profits. As usual, there was too much investment leading to what is commonly called a “bubble” which inevitably burst.

The claims of orthodox economics to be a science is dubious. To be so it would have to have measurable units just as chemistry, for instance, has atomic and molecular weights. Having no precise units of measurements, they resort to terms such as “confidence”, “market outlook”, and “aggregate supply and demand factors”. Central to their theories is the belief that the capitalist economy can be managed without periodic economic crises. Clearly, history shows that this does not happen.

We are now in a situation where rival capitalist powers cut their respective interest rates in order to lower currency values against their rivals. One of the main factors in determining a currency value is real interest rates (nominal rate minus the rate of price increases). Nominal rates rise with inflation but this does not mean that real interest rates do. However, if inflation falls and nominal rates remain the same then real interest rates rise. This effect can currently be seen in Germany with a soaring euro reflecting high real interest rates.

Nominal interest rates in the UK today are at their lowest for fifty years. As prices fall consumers do not automatically increase spending if they feel the goods will be cheaper in the near future. If goods are sold more cheaply to clear stock, this will result in a fall in profits. The result of this pushes the economy towards recession, the opposite of the brave new world we were promised as the result of the internet dotcom “revolution”.

At the same time the economy sees the unwinding of debt. As businesses are liquidated so the money goes out of the system. Those economic historians who base their opinions of the view that economic history commenced in 1945 have seen steadily rising prices as a permanent feature of capitalism. Many are now saying it cannot go much lower than it is now.

Because a downward pressure on prices, other things being equal, is an inevitable corollary of depressions, Greenspan has made if clear that he is prepared to buy US government bonds in order to maintain liquidity although interest rates are already 1.25 percent in the United States.

Gordon Brown, the King Canute of Economics, has even stated that, by balancing public expenditure and taxation, the economy could be managed without economic crises. GDP has failed to achieve the levels he forecast. When he and other world leaders congregate at their G7 and G8 meetings, as they did last month in Evian, their ruminations fail to come up with any measures to remedy capitalism’s problems. Its problems are inherent as are its inbuilt contradictions which cannot be managed away.

Terry Lawlor

World View: Japan's Tightrope Act (1995)

From the October 1995 issue of the Socialist Standard

"The Japanese economy is moving into recession following the banking crisis and credit crunch. Property prices are on the slide. Business bankruptcies are increasing” (Socialist Standard, November 1992).

When we warned of worsening prospects for the Japanese economy our view was a minority one. The consensus view expressed in the capitalist media was that by government intervention using tax cuts and increased public spending the economic slowdown could be reversed.

At the beginning of 1993 when signs of a developing trade war appeared, the conventional view was that negotiations among the world’s economic superpowers could settle their differences. We stated however "the present trade war cannot be ended by GATT. NAFTA, or G7 summits. It will, continue in one form or another as long as world production is organised for profit rather than use" (Socialist Standard, April 1993).

At the end of July this year Cosmo, Japan's fifth largest credit union (these are similar to our building societies) collapsed following the withdrawal by depositors of 60 billion Yen (£425 million). Cosmo which has 15.297 members admitted that bad debts were about ¥170 billion in May with interest in arrears on loans of ¥184 billion. The Bank of Japan was forced to lend Cosmo sufficient to cover the withdrawals. The Japanese Finance Ministry quickly produced a rescue plan to weaken the Yen and thereby boost exports and boost the economy. This consisted of intervention along with the US Federal Reserve to bolster the dollar. Japanese insurance companies will now be allowed to lend in foreign currencies. Accounting rules will be changed to "give Japanese insurers more flexible ways to account for foreign bond holdings and will also let them decide whether to report foreign exchange losses in their accounts . . . Such changes may help insurance companies out of their present fix but at the cost of making their accounts less transparent" (Economist, 5 August).

Banking crisis: Excessive lending in the 1980s is estimated to have left the country’s lenders with bad debts of ¥50,000 billion, almost £350 billion (Daily Telegraph, 1 August). Non-performing loans of Japanese banks, trusts and longterm credit banks at put at around ¥12 trillion (The Banker, July 1995). Problem loans, according to the Director of the Finance Banking Bureaux, amounted to about ¥40,000 billion (£290 billion) equal to almost 10 percent of Japan's gross domestic product (Financial Times, 7 July). In a recent speech the governor of the Bank of Japan stated that:

"the late 1920s Showa depression was triggered by the failure of a very small bank. The issue is not the size of the troubled institution but whether any unrest in the financial system could cause a chain reaction of deposit withdrawals throughout the system” (The Banker, July 1995).

Trade wars: These are not over. Following a last-minute compromise agreement over car imports into Japan from the United States, Kodak complained to the American trade authorities that the Japanese Fuji Film Company was obstructing Kodak’s access to the Japanese market. Trade wars ultimately have no victors. They can end in being extended to the battlefields.

The property bubble: Housing in Japan is estimated to be 19 times as expensive as similar properties in the United States and has been estimated at six times Japanese GDP. Cosmo quadrupled its lending in the space of two years by backing property developers. In December 1994, two other credit unions failed after their property-related loans turned sour (Economist, 5 August). Commercial property has fallen by 50 percent of its value since 1991.

Pension funds: Like other developed countries, Japan has an increasing number of aged people but on a scale that is larger than the UK and other European countries with rapidly increasing pension liabilities. The projected pay-outs have been based on assumptions made when the stock-market was far higher than at present and where commercial property values were booming along with their rentals. But in an economic environment where asset values are falling to a level that cannot cover the amounts borrowed against them the projected pension payouts become questionable. In short the welfare system in Japan is undergoing the same demise as it is elsewhere.

Unemployment: This has for the year 1994 increased to 2.94 percent

Interest rates: The recent cut in the Japanese discount rate to a record low of one percent in the hope of stimulating the economy and the stock-market has had no lasting effect. The Nikkei Dow has lost two-thirds of its value in the last five years. Japanese banks enter a large number of their share holdings at their acquisition value which means that with the fall in the Japanese stock-market they are worth less than the balance sheets imply.

Apart from the previous six attempts since 1992 to prop up the Japanese economy with tax cuts, public spending injections even to the extent of getting the postal savings institute to help by investing in the stock-market all have been of no avail. Why should this latest package of measures announced after the Cosmo collapse be anymore effective? Japan’s problems are deep-seated and long-standing. The present scenario is similar to the l929-30s in the United States.

Japan’s problems cannot be viewed in isolation from the rest of the world economy. A full-blown slump in Japan could have knock-on effect by disruption of capital flows if the Japanese overseas investors start withdrawing their assets from overseas. There is also the consequences of lessened demand for imports.

Once again the financial commentators are suggesting that Japan has reached a point where recovery is the only possible outcome of the recent rescue attempts by the Japanese powers-that-be. We have no hesitation in rejecting these arguments. The worsening problems described above are inherent to the capitalist mode of production. Credit crises, trade wars and the problems dealt with above are inevitable in a system where competing capitalist powers struggle for market dominance in their relentless drive for profit.

Terry Lawlor

The rise of fictitious capital (2023)

From the October 2023 issue of the Socialist Standard 

By ‘real capital’ Marx meant money capital invested in physical means of production and the workforce itself with a view to producing commodities to be sold on a market in the expectation of realising a profit – or financial return – from selling them. However, what has become increasingly salient in recent decades is another form of capital that Marx dubbed ‘fictitious capital’.

Fictitious capital does not involve the transformation of money into commodities. It is not about investing in means of production to produce commodities for sale on a market. In this respect it is distinguishable from interest-bearing capital in the form of bank loans to businesses that produce commodities. The latter do not constitute fictitious capital as such.

Bank loans become fictitious capital when they are used for some other purpose than financing the production of commodities. For instance, you might borrow money from a bank to purchase a new car or, indeed, pay off another debt. The bank advances the loan on the understanding that it will be repaid, plus interest, over a certain period; it expects to make a ‘financial return’ no less that a factory producing widgets expects to make a financial return. Marx represented this formulaically as M-M’ where M represents the sum loaned out – the principal – and M’ represents the principal returned to the lender plus interest paid by the borrower out of her wages or savings.

In this scenario no new or additional value has been created – unlike in the case of the M-C-M’ circuit where C is capital invested in physical means of production. There has simply been a net transfer of money from the borrower to the lender. The lender has gained money at the expense of the borrower. While, for Marx, the M-C-M’ circuit quintessentially defines the capitalist mode of production, it is the M-M’ circuit, which starts and finishes with money, that most directly, or overtly, expresses what motivates capitalist production – namely, to make money. In this instance:

‘The production process appears simply as an unavoidable middle term, a necessary evil for the purpose of money-making. This explains why all nations characterised by the capitalist mode of production are periodically seized by fits of giddiness in which they try to accomplish the money making without the mediation of the production process’ (Capital, Vol. 2, Ch.1).

The desire to make money by bypassing the production process, as it were, has become increasing apparent with the growing ‘financialisation’ of the economy. What financialisation does is to drive investors to seek out and promote every conceivable kind of revenue flow – from student debt to mortgage repayments and much more besides – that can be turned into financial assets and bundled up in ways that make then appear more reliable and attractive as a source of future income.

Fictitious capital can be characterised as an outgrowth of the credit system. Traditional bank capital did indeed aid industrial production through the provision of credit to industrial enterprises as Marx noted, even if the banks themselves took a cut from the resulting increase in industrial output. With fictitious capital there is a difference. The tendency is to make money, not out of increased physical output but out of money itself in the form of various revenue streams. The financial instruments available to do this are diverse and evolving and include not just collateralised debt obligations or loans but also bonds, equity stocks and various kinds of derivatives.

If one were to identify a convenient starting point when financialisation began to seriously take off as an economic trend this would probably be the collapse of the Bretton Woods monetary system in the 1970s that had formally linked international currencies to the US dollar (itself convertible into gold up until 1971 when President Nixon abruptly abandoned convertibility). The new system of floating exchange rates paved the way to a sharp rise in currency speculation. In money value terms, the ratio of foreign exchange transactions to the global trade in commodities was 2:1 in 1973. By 2004 it had soared to 90:1 and has since grown even more, making the speculative trading of currencies the world´s biggest market (Firat Demir, ‘The Rise of Rentier Capitalism and the Financialization of Real Sectors in Developing Countries’, Review of Radical Political Economy, September 2007).

Subsequently, financialisation was boosted further by the Big Bang reforms of the late 1980s that deregulated financial markets and made London the leading financial centre in the world. In the wake of these reforms came various technological innovations which have also contributed to the astonishing growth in financial capital. The introduction of computers has given rise to the phenomenon of high frequency trading (HFT) employing digital algorithms to buy and sell financial assets by predicting short-term price movements in shares and identifying potentially lucrative arbitrage opportunities.

Since then, financialisation has, as it were, spilled over and penetrated even what is loosely called the ‘real economy’. Everyone is seemingly getting in on the act — from large retail establishments to manufacturing giants. Financial speculation and the provision of in-house credit are just more arrows to put in their quiver, so to speak — an additional means of making more money in an increasingly competitive world. That has made for a huge expansion in the role that financial intermediaries play within the economy and a notable diversification of the kinds of financial instruments at their disposal. Indeed, this has advanced to such an extent that, according to Ravi Bhandari, there is ‘no longer a purely financial sector (banks, insurance companies, etc.) on the one hand, and a ‘productive’ sector on the other’ (tinyurl.com/3d254kmy).

The stock market has been dubbed a market par excellence for fictitious capital, representing the capitalisation of property rights (as opposed to the capitalisation of production itself in the case of real capital) and, as such, constitutes a market for the circulation of these property rights. These rights, suggested Marx, represent ‘accumulated claims, legal titles, to future production’ and any income resulting from that production:

‘Gains and loss through fluctuations in the price of these titles of ownership… become, by their very nature, more and more a matter of gamble, which appears to take the place of labour as the original method of acquiring capital wealth’ (Capital, Vol.3, Ch.30).

A corporation might well raise funds for investment (real capital) by issuing shares on the stock exchange. By purchasing a share, one then has a claim on the future earnings of this corporation. However, this share does not function as real capital. As Marx explained, the money advanced by investors for the purpose of being used as real capital does not exist twice, ‘once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises’. Real capital ‘exists only in the latter form’ and a share represents merely a ‘title of ownership to a corresponding portion of the surplus-value to be realised by it’ (Capital, Vol 3, Ch 29).

The shareholders will hope that, in addition to receiving dividends, the value of their shares will appreciate over time, enabling them to realise a capital gain if and when the shares are sold on the stock market (in the case of a ‘public’ company). The rise or fall in the value of this fictitious asset — the shareholder certificate — representing the capitalisation of anticipated income streams can sometimes bear little apparent relation to current movements in the real economy. The secondary market in the buying and selling of these financial assets is essentially driven by market expectations of future profitability, and this can have a speculative element.

That helps to explain the rather puzzling coincidence of a buoyant stock market with share prices sometimes reaching record highs alongside a real economy that shows every sign of being in the doldrums. A different kind of logic applies in each case. ‘Autonomisation’ is the buzzword to describe the tendency for fictitious capital to strive to transcend or unshackle itself from real capital in the business of money making.

Though ultimately fictitious capital cannot sever itself from developments impacting on real capital, there does, at times, appear to be a certain disconnection between them. Speculative activity that grew out of the very system of credit that financed industrial development can, at times, become frenzied and take the form of speculative bubbles – from the Dutch tulipmania bubble (1634-38) through to the internet-based Dot-Com bubble of the late 1990s, and many more besides. Inevitably these burst at some point when, as Marx noted, the magic of compound interest breaks down as, indeed, it eventually must.

In the meanwhile, as far as these paper claims to future income that constitute fictitious capital are concerned:

‘To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value’ (Capital, Vol. 3, Ch. 29).

The belief that wealth can be created merely by making money from money is akin to the medieval belief in alchemy – that you can transform base metals into gold.

It is the investment of this ‘real capital’ that generates the surplus value the system fundamentally depends on. This presupposes the employment of wage labour to create the surplus value out of which such capital originates in the first place.

Fictitious capital, on the other hand, does not and cannot create surplus value at all but at best merely redistributes it amongst fractions of the capitalist class.

Robin Cox

Cooking the Books: Turmoil at the Stock Exchange (2007)

The Cooking the Books column from the September 2007 issue of the Socialist Standard

“FRESH TURMOIL IN EQUITY MARKETS” read the headline of the weekend Financial Times (11/12 August) after a week of dramatic falls in share prices on the world’s stock exchanges. “GROWTH THREATENED BY MARKET TURBULENCE, SAY ECONOMISTS” read the one in the Times the next day, which reported the principal of one hedge fund are saying “Nobody has yet mentioned to me the possibility of a stock market crash and I find that surprising”.

So, what was it all about? Could it really have been a prelude to another 1929 and 1930s slump? Or was it another purely financial crisis hardly affecting the real economy?

Although the turmoil was centred on financial markets, especially stock markets, in most respects its origins lay in the housing sector in the US where financial institutions have been selling “sub-prime” mortgages, i. e. to those with poor credit records and who are therefore more likely to default – and have been. The US housing market bubble – now being paralleled in the UK and elsewhere – has come to an end and mortgage defaults have escalated.

Financial institutions in the US and elsewhere are now coming under pressure because of their exposure in this market but the main issue at present is that no-one knows the extent of the problem, mainly because much of this debt has been packaged together and sold on to financial institutions other than those originally lending the money.

Some hedge funds and other financial instruments that have invested in this debt in the hope of higher than average returns for their investors have got into trouble. In the case of some funds run by BNP Paribas, they have simply been unable to calculate their value because of the current volatility of this sector of the financial markets, leading to even further fear and uncertainty.

The most serious knock-on effect has been a tightening of credit – banks are reluctant to lend money, even to one another. It is this that has been affecting stock markets in particular.

The easy credit that has helped financial merger and acquisition activity the last two or three years (especially by private equity firms) propelled the stock markets of the world upwards. This is because private equity groups, by changing the legal status of the firms they take over from public to private companies, have been taking firms off the stock market and so reducing the supply of shares available as a whole; also, easy credit has helped companies buy back their own shares, to the same effect – reducing the supply of shares and so, in accordance with the law of supply and demand, pushing up share prices.

It is the end of this easy credit and the positive stock market conditions it has promoted that is bothering the financial markets more widely. In truth, after the massive stock market falls of 2000-2003, most stock markets are not over-valued but are being affected by a contagious fear that has spread from the housing sector via the credit markets.

But this is one of the problems with the capitalist market economy – the lack of planning and the instability inherent in the system can have far-reaching and unpredictable consequences. Just how far-reaching only time will tell, but given the underlying problems into the UK housing market alone, this period of market fear may have some way to run yet.

Finance and Industry: American Democrats & British Labour (1960)

The Finance and Industry Column from the September 1960 issue of the Socialist Standard

American Democrats & British Labour

In their economic policy and ideas on the way to deal with threats of unemployment there are many resemblances between the American Democrats and the Labour Party, and both have been much influenced by Keynesian theories. The following summary of the Democrats’ policy in the Presidential election, written by a correspondent of the Economist (6/8/60) could almost all of it have been written about the Labour Party and their slight differences from the Conservatives:

The Democrats assert that the past eight years have consisted of “ two recessions . . . .  separated by the most severe peace-time inflation in history,” and they blame the Administration's tight money policy for the present slackness in business. They blame credit restraint also for adding to the cost of servicing the growing public debt. The Democrats offer to end the tight money-policy and to set the economy moving forward at the brisk rate of 5 per cent, each year “without inflation.” How inflation can be avoided is not revealed in detail, although "a variety of remedies” is said to be at hand; since "monetary and credit policies properly applied" are among these, it is not clear how the Democratic policy would differ from the Republican in practice. The Democrats are, however, more willing than are the Republicans to counteract recessionary trends by prompt spending on public works and by temporary tax cuts.

It will be seen thal the Democrats and the Labour Party both favour low interest rates and a policy of cncouraging a greater expansion of production; and both accuse their opponents of having been responsible for inflation and high prices—forgetting how inflation went on when they were in power, up to 1951 in Britain and 1953 in U.S.A. Both parties believe that it is now within the power of a government to rule out for all time the possibility of a severe depression, and if anything approaching a severe depression does occur under Republican or Tory government it will be blamed on their perversity or ineptness.

Of course, experience of Labour and Democrats in office before the last war did not support their confidence about their powers. The British Labour Party came in with a promise to reduce unemployment (then at about 1,100,000) and saw it leap to 2½ million. In U.S.A. Roosevelt was elected in 1933 and seven years later unemployment in U.S.A. was still 14.3 per cent. (16.9 per cent., according to the American trade unions).

Exports

Mr. Macmillan has been exhorting business men to increase their exports and to cultivate what he called “export joy,” but he made it clear that what is wanted is an aggressive selling policy in overseas markets. As all the newspapers backed him up, as also did some trade union spokesmen, we may assume that selling more goods in foreign countries is generally considered "a good thing.”

But, elementary as it may appear to be, there are numberless people who write about trade who have never yet grasped that one country's exports are another's imports. So we read in the Sunday Dispatch (17/7/60) that many of the 400 of Britain's trade chiefs who are being urged by Macmillan to join in the fun of selling more abroad, could see nothing at all funny in the Japs "selling more abroad" in Britain. On the contrary, they ‘‘were seething yesterday as they digested the Jap pact," which "will flood Britain with an extra £3.000,000 worth of cheap Japanese goods." The ground for their anger was said to be the cheapness of the Japanese goods, against which British manufacturers could not compete—but it is certain that every additional ton of British goods sold in a foreign market through the export drive will work up some local manufacturer into seething indignation, too.

One commentator on Macmillan's speech (Daily Herald, 18/7/60) recalled that “this is the biggest ‘export crisis' session since the days when Sir Stafford Cripps went round the country exhorting British industry to make its post-war export drive." He might equally and more usefully have recalled an earlier speech of Sir Stafford Cripps, made during the war, when he said that “If . . . . we were to start once again the vicious circle of international trade competition we should be lost, and in a few years would be confronting another war."

World Food

Early in August a Freedom From Hunger Conference was held at Oxford under the auspices of the Oxford Committee for Famine Relief. Lord Boyd Orr, former Director-General of the U.N. Food and Agriculture Organization spoke, as he often has before, about the almost boundless possibility of increasing world food production:

If the nations of the world will cooperate, we can wash out the hunger of the world in ten years, and provide enough food for the increasing world population for the next 100 years." (Daily Telegraph, 2/8/60.)

He attacked the profit motive and complained that only in war-time will governments set out to provide food according to human need—at which lime, though he did not say this, they will also organize for destruction of life and property utterly without regard to cost.

The Assistant Director-General of U.N. Food and Agriculture Organization, Mr. Veillet-Lavallee, said that “there is now less to eat in the Far East than there was before the war,” and “in some parts of Africa 80 per cent. of the children are underfed or badly fed." (News Chronicle, 1/8/60.) He also stated that North America’s surplus wheat now amounts to 1,382,000 bushels a year and that it costs £350,000 a day to preserve the surplus which they hold because they cannot sell it.

Boom in land

For weeks the newspapers and politicians have been discussing the rocketing prices of land as more and more keen buyers chase after the shrinking acres available for use as building sites. Nearly ninety years ago Frederick Engels wrote a series of articles on the Housing Question for the Leipzig Social-Democratic paper Volkstaat. In them he had this to say about the situation then:

The growth of the big modern cities gives the land in certain areas, particularly in those which are centrally situated, an artificial and often colossally increasing value; the buildings erected in these areas depress this value, instead of increasing it, because they no longer correspond to the changed circumstances. They are pulled down and replaced by others. This takes place above all with workers’ houses which are situated centrally and where rents, even with the greatest overcrowding, can never, or only very slowly, increase above a certain maximum. They are pulled down and in their stead, shops, warehouses and public buildings are erected. Through its Haussmann in Paris, Bonapartism exploited this tendency tremendously for swindling and private enrichment. But the spirit of Haussmann has also been abroad in London. Manchester and Liverpool, and seems to feel itself just as much at home in Berlin and Vienna. The result is that the workers are forced out of the centre of the towns towards the outskirts: that workers' dwellings, and small dwellings in general, become rare and expensive and often altogether unobtainable, for under those circumstances the building industry, which is offered a much better field for speculation by more expensive houses, builds workers’ dwellings only by way of exception.

But what goes up sometimes comes down equally fast and some land booms end in a crash. There are reports already that much of the recently built office accommodation is not meeting additional demand but squeezing out existing older buildings. The Star (19/7/60) had the following about a land crash in Venezuela:

Just when there is a great to-do about soaring land values in Britain here is some news about a land boom that has gone bust.

Out in Venezuela they have had one of the biggest slumps in land values since the famous Florida crash in the 20’s.

Office blocks, houses and property in Caracas have come tumbling down in price with the growing inability of Venezuela to sell her glut of oil in world markets.

In Caracas landlords, who three or four years ago could demand almost any price for accommodation, are now virtually bankrupt. For most of them have raised huge loans on inflated values, which have disappeared over night.

According to the Star some of the depressed property in Venezuela was backed by British and American insurance companies.

Edgar Hardcastle

Pathfinders: More Tales from the Crypto (2023)

The Pathfinders Column from the January 2023 issue of the Socialist Standard

In autumn last year youthful fintech whizzkid Sam Bankman-Fried, proprietor of FTX, one the hottest crypto-exchange companies in the world, was boasting about pouring billions of dollars, yes billions, into the Democrat war chest to fight the 2024 US presidential election. Then his chips got fried in ‘one of the largest corporate collapses in history, including the implosion of Enron in 2001’ (nyti.ms/3FhREgH). FTX stock value went from billions to nothing in the blink of an eye. Hundreds of thousands of customers lost their money. The aftershock hit other crypto exchanges like Swyftx and Bybit who immediately laid off nearly half their staff (bit.ly/3haWNiR). And all this followed a gigantic crypto market crash in May after South Korean firm Terra-Luna went down, resulting in two thirds of global crypto value – about $2 trillion – being wiped out including for market ‘bluechips’ like Bitcoin and Ethereum. Though the currencies were virtual, the disaster was real enough. 20 people reportedly committed suicide and South Korean police were ordered to patrol known suicide bridges in Seoul to stop more people jumping.

To borrow a crypto phrase, the worldwide trade in crypto ‘went to the moon’ in 2021-2, with $275bn traded daily in over 16,000 currencies on more than 400 exchanges and platforms (tmsnrt.rs/3Br1oEi). Non-fungible tokens (NFTs), crypto art tradables considered a nerdy joke a year before, ballooned into a $40bn global market, not far off the $50bn value of the total fine-art market (Bloomberg, 6 January, 2022). How did all this happen? Essentially it’s Tulipmania or the South Sea Bubble, based on ‘next sucker’ logic, where people invest in ‘assets’ on the assumption that they will be able to sell on to the next sucker at a higher price. Forget the original rationale of crypto as digital money alternative, that was never very practical anyway and is now irrelevant. Forget the silly notion that speculator commodities ought to have some intrinsic value. That matters not one jot. One of them, Dogecoin, was created by software engineers as a joke solely to poke fun at Elon Musk, but was subsequently endorsed by Musk and wound up becoming the world’s fourth-largest crypto, valued at $80bn. The runaway momentum behind this global Ponzi scheme is not real wealth, but that it can make some people fortunes. Until, one day, it doesn’t.

The May 2022 crash should have been to crypto what the R101 was to hydrogen airships, but market disasters never dent the faith of the capitalist faithful. And crypto traders have a vested interest in not letting crypto die. Instead they’re desperate to keep promoting it in order to draw in the next consignment of gullible buyers, so they’re not left holding the bag in their own multi-level marketing trap. Meanwhile governments have been slow to regulate this crazy casino despite it being a gift to money laundering, smash-and-grab hackers, ransomware and organised crime. Indeed even the politicians have got pound signs in their eyeballs. In December the UK government introduced a set of gloves-off banking deregulation measures including a ‘nod to developing the UK as a centre for crypto assets’ (bbc.in/3FEJfph ).

But crypto advocates aren’t just about the money, they are ideologically motivated, hailing crypto as the future of money and even the future of the internet. While real revolutionaries ask the big question, what if we abolished capitalist trading and money entirely, crypto fans obsess over the pseudo-radical question, what if we have a money system that’s not mediated through any centralised state agency, and what if we roll that peer-to-peer architecture out to other centrally controlled systems like the web. They are essentially techno-libertarians, in love with the screw-you-Jack premise and get-rich-quick promise of capitalism, but with a deep-seated animus against the state regulatory apparatus that normally goes with it. They want football without the referee, the Wild West without the sheriff, trusting in invisible Adam Smith woo-woo to make it all work. Now they also want Web3, a decentralised blockchain version of the web which supposedly frees it from the power of the Big 4, Facebook, Apple, Google and Amazon, who reap the benefits from user-generated content while cutting the artists and creators out of the revenue stream. The fact that the Silicon Valley venture capitalists behind the Big 4 are the same ones now backing Web3 should be a big clue that the technology might be decentralised but the power certainly won’t be. If anything it will be the opposite, as Web3, just like the crypto casino, is based on using blockchain tokens. As web blogger Molly White points out, in a podcast series by Financial Times journalist Jemima Kelly, ‘When there’s a token involved, there is a speculative financial component’, to which Kelly adds ‘Web3 isn’t really about making the internet any fairer, or less easy to exploit by fatcat Silicon Valley investors, it’s… about introducing yet another layer of financialisation to the web’ (apple.co/3HyRhB8). None of this apparently matters to crypto ideologues with their warped notion of freedom. To them, the blockchain has become a fetishistic emancipatory totem.

To recap, the blockchain is simply a ledger system distributed across multiple computers that records digital transactions. All participants have a copy of this ledger, making it theoretically (though not actually) impossible to alter afterwards. The point of this is to prevent double accounting without relying on some central checking mechanism. What use is this in capitalism, a system entirely built around centralised hierarchical control? Many would say none at all, given that the technology is currently grotesquely inefficient in terms of energy use, requiring at least eight orders of magnitude more energy than a standard centralised alternative (bit.ly/2Kew9QE). Might it be useful in socialism, perhaps as a way to reduce the load on central administrative hubs involved in production and distribution? It’s possible, because the heavy power consumption involved is mainly caused by the current need for crushing layers of encryption, hash functions, public-private keys and all the rest of the paraphernalia of capitalist secrecy. Socialism, being a trust-based sharing cooperative, wouldn’t need any of that. Even then, blockchains might still be seen as overpowered, over-engineered and overcomplicated in a society that may set more store by keeping it simple, stupid.

Paddy Shannon

Pathfinders: The next bubble (2011)

The Pathfinders Column from the June 2011 issue of the Socialist Standard

The next bubble

Investors are bulging at the wallets with hype over the recent stock market flotation of LinkedIn.com, the business executive’s Facebook, although the initial price offer (IPO) of $45 per share was widely considered too high, given that it was a valuation around 17 times the company’s estimated 2010 income and given LinkedIn’s own prediction that it won’t make any profit this year. The IPO peaked on the first trading day at $122, but this was no great surprise since so far this is the only social media business you can buy shares in. LinkedIn is at the time of writing trading at 25 times earnings compared to Google’s modest six, and what goes up can come down. After the recent flotation of China’s version of Facebook, Renren, the share price initially rocketed but soon dropped to below the IPO. And all of this is nothing compared to the hysteria likely when the expected flotation of Facebook takes place, and analysts are already worrying that this could be the start of the next big bubble http://www.bbc.co.uk/news/technology-13436866

Eyebrows might descend to new heights at the idea of a huge internet bubble so soon after the devastation of the housing bubble. But in fact conditions are right for it. The banks are not taking any chances after their recent drubbing, but investors are sitting on huge piles of cash while rising inflation nibbles away like mice at their wads. Now is not the time to be holding paper money, and with the housing market still in free-fall and consumer spending screwed down there’s not a lot apart from the odd stray Rembrandt for the money rich to sink their loot into. So what to spend money on when there’s nothing to spend money on? Well, those social media johnnies are showing pretty strong market growth, so worth a punt surely? Doubly so if everyone else is at it too.

Well, that’s what they thought about web growth back in 2000, when dollar signs rolled down the punters’ eyeballs faster than the hit-counters on the hot websites. But the dollars turned to tears then as panicky shouts set off a share price avalanche. And they probably will this time too. The trouble is that it’s hard to put a real value on new and unproven social and commercial structures, but investors by nature are addicted to optimism. With the cool objectivity of those with no real money to throw at such ventures we might ask what do these social media really amount to? Whereas Ebay has been a success because people can actually make real savings on purchases, social media exist simply because they can, not necessarily because we need them. A combination of inane (and sometimes damaging) gossip and online narcissism can be amusing for a time, sure enough, but isn’t it just a phase most people will tire of eventually? In a Me-world where everyone is a celebrity, the problem is that nobody listens to anyone but themselves, and how boring does that become? What do people really get out of it, in concrete terms? A bunch of ‘friends’ they’ve mostly never heard of or haven’t got anything to say to, and business contacts they’ve no real use for. More is not better. We may not even be evolved for this sort of connectivity. ‘Dunbar’s Number’ is the theoretical limit  – roughly 150 – of social relationships the human brain can feasibly cope with, a number derived from anthropological research. Still, who’s to say what limit there is on ‘virtual’ relationships?  You don’t even know your neighbour’s name but so long as you’ve got a who’s who in your smart phone then you’re a functioning member of society, Jack. Just keep up the subscription payments and don’t worry about it.

But surely all this sub-light-speed handshaking has facilitated social protest and anti-establishment thought? Well, that’s what one would hope, but as fast as radical ideas sweep into the cyber-synaptic networks they seem to sweep out again, creating a series of political Mexican waves that leave the mass unmoved and the air only slightly disturbed above their heads. Should we be glad of the new mass attention, or bewail its lack of attention span? Maybe both. At any rate, socialists unlike capitalist investors have seen enough novelty not to expect too much from novelty.

Of course the owners of LinkedIn, Facebook and Twitter have made millions, but then so do crooks who start pyramid schemes. It doesn’t mean there’s anything of value there. There’s no real labour, for one thing, or any real product, just a frenzy of connections, sound and fury, signifying nothing. Can someone reinvent Friends Unplugged please?

________________________________

Better luck next time…

If you’re reading this, then the globally promoted May 21st doomsday predictions of one Harold Camping have not come to pass, earthquakes and cataclysms have not riven and rent the firmament, and 200 million people have not been ‘raptured’ to heaven by the merciful beardie in the sky. But 250 of them will have got a double disappointment, as one (atheist) entrepreneur has succeeded in charging them up to $135 each for looking after their ‘Eternal Earthbound’ pets, and he gleefully adds that he doesn’t do refunds (‘‘Rapture’ apocalypse prediction sparks atheist reaction’, BBC Online, 20 May). Meanwhile atheists in North Carolina have been organising parties, presumably to fiddle while Earth burns, and another group in Washington have called their celebration ‘Countdown to back-pedalling’. Whether Camping renounces all his beliefs in the sober light of May 22nd remains to be seen, however he did make a similar prediction in 1994. But that one, say his followers (he has followers!) didn’t count for some reason.

________________________________

Throwing away the keys

Technology news has lately been dominated by news of security leaks. Google’s Android operating system for smart phones has been haemorrhaging personal data that unscrupulous data-miners can collect and use. Sony’s Playstation network had a security breach through which a cyber attack stole account details of 100 million people. Meanwhile the smug smiles were wiped off the faces of Mac users convinced they lived a charmed life as hundreds have been hit by a ‘scareware’ attack, and an anti-piracy firm has itself been hacked and now made to walk the plank by the French government that employed it. It may be a trivial observation, but in a common-ownership society that is not fundamentally at war with itself like capitalism, there would be no more incentive to hack or create viruses than there would be to vandalise buildings or burgle houses. And then we could dispense with all these firewalls, speed-dragging virus-guards, and those endless, endless, endless bloody passwords.

Paddy Shannon

Bubble troubles (2008)

From the May 2008 issue of the Socialist Standard

The intoxicating US housing boom has come to an end. Now the economic hangover has arrived.

With the collapse of the housing boom in the US what is likely, at the very least, is a prolonged crisis of the credit system. And as credit greases the wheels of capitalism this is no laughing matter for the capitalist class.

The Federal Reserve has been doing its best to ease the pain—the pain for the investment banks, that is. Barkeeper Ben Bernanke announced on March 11 that the Fed intends to generously fund the banks “rehab,” loaning them the incredible sum of $200 billion in return for the tainted “mortgage-backed securities” as collateral. This is very much like a doctor who prescribes a little hair of the dog to an alcoholic as a “cure” for a hangover. At best, such bailouts will probably only buy a bit of time.

And not very much time at that—judging from the recent string of collapses in recent weeks. On March 7, the investment fund Carlyle Group Corp. announced that it was unable to meet $37 million in margin calls from its lenders and a few days later it was reported that the 85-year-old investment bank Bear Stearns, which suffered huge hedge fund and mortgage-related losses, is being bought out by JPMorgan Chase in a fire sale, with money loaned by the Fed.

Far from calming the financial waters, the actions of the Fed have drawn attention to the severity of the crisis and also accelerated the decline of the dollar. Somehow, the system as a whole—the once inebriated economic body and its battered financial organs—will have to expel the vast quantities of toxic loans that are clogging it up. When other countries face this dilemma, the US has always the first to prescribe a bit of shock therapy, making use of capitalism’s natural function of regurgitation. For some reason or another, though, the US policy makers are sentimental when it comes to their own venerable financial institutions.

The US government that hasn’t lifted a finger to assist the massive number of workers who face foreclosure, but has acted quickly to pump money into the accounts of those who have made a good living picking the pockets of those workers. The direct impact of the crisis involving “subprime loans” (once more accurately referred to as “predatory loans”) has already led to hundreds of thousands of foreclosures, with the overall number of foreclosures up 79 percent in 2007 alone. Clearly, the US policy makers have every intention of shifting as much of the pain from the crisis onto the working class as is economically and politically possible.

Empty wealth

Some cold comfort to workers from the crisis, however, is that it rips great holes in some of the smug arguments that economists and politicians have tried to pass off as “common sense” (and which seemed plausible enough during the long speculative boom in the US that basically stretches all the way from the mid-1990s until recent months). For instance, it is becoming increasingly self-evident that the prices of many “commodities” lack any real basis and are thus “fictitious” prices to a large extent.

There is an important distinction, in other words, between the products of labour, which are the basis of any society and happen to take the form of commodities in a capitalist society, and the wide variety of things that have a price and thus take the commodity-form but are not the product of labour and thus lack intrinsic value. When capitalism is humming along, no one is very concerned with whether what is being bought and sold has intrinsic value or not, so long as it can be sold on the market. Thus, “mortgage-backed securities”—to take one example—were as good as gold for many years.

Now that the housing bubble has collapsed, however, such securities are being shunned, as it is clear that a great number of borrowers will be unable to meet their mortgage payments. The “value” (=price) of this commodity has plummeted, wiping out a vast amount of wealth that existed on paper, while leaving a hard lump of debt behind.

It is hardly surprising that people flock to gold during a crisis. That behaviour is not motivated by a human love of shiny metal objects. Rather, gold has served as the “general equivalent” or money historically precisely because gold has intrinsic value as a product of labour and that that value exists in a form that is inherently more durable and divisible than most other products of labour. 

In short, a crisis reveals the crucial distinction between commodities in the fundamental sense (as the capitalistic form of products of labour) and commodities in the purely formal sense (as anything with a price). Call it the revenge of the labour theory of value.

There is some irony in the collapse of the housing bubble revealing the distinction between intrinsic value and mere price. Because one of the initial attractions of the housing market to investors, after their dizzying experience with stock-market gambling, was that it appeared to be terra firma. After a vast amount of paper wealth was wiped out of 401k (retirement) plans and mutual funds circa 2000, it seemed that real-estate was a secure investment in a tangible asset.

But to describe a house as having intrinsic value turns out to only be a half-truth. Sure, the house itself has intrinsic value, like any other commodity in the fundamental sense just described, according to the socially necessary labour expended to produce it. In other words, the house’s value (as a structure) stems from the value of the building materials used and the amount of labour expended to assemble them.

However, in addition to the house itself, the price of the land upon which it is built represents a large part of the overall price—and the bulk of the price in the case of large urban areas. And that land has no intrinsic economic value (apart from whatever labour was necessary to clear trees or previous buildings out of the way so that construction could commence), only a price determined, since its supply is fixed, by the paying demand for it. In this sense, real-estate prices are a reflection—more than anything else—of the purchasing ability of the prospective buyers. So it is no surprise that those prices rose rapidly along with the increasing abundance of cheap credit.

Buyers in each particular housing market tried to convince themselves why the price of their own house would never fall (whether because of the desirability of their neighbourhood, the solid construction of the house itself, the strong local economy, or some other reason), but in fact there is no intrinsic value around which the price must gravitate, meaning that there is much room for the price to rise, or indeed, fall.

Profit-creation

Another central (but often ignored) fact which a crisis helps shed some light on is the origin of profit. During a speculative bubble, when mutual funds or housing prices are steadily rising, profit seems to arise magically from the very act of investment. No one is too bothered to ponder how this feat of alchemy is achieved. When the bubble eventually bursts, it may dawn on some that the actual creation of profit—rather than the mere transfer of money from one wallet to another—involves more than simply letting go of funds and then waiting for an even bigger sum to return in boomerang-like fashion.

And if the person bothers to investigate the matter further, it would become clear that profit is generated in the production process. It is there that surplus-value is generated as the difference between the value of the labour-power the workers sell to capitalists in return for their wages and the value those workers add to the commodities produced through their actual labour. In contrast, much of the profit that appeared to be created during the boom was in fact an expression of the expansion of debt.

The housing boom, like the stock market boom that preceded it, was praised as a way for workers to move up the social ladder, and it seemed that there was enough profit to go around to swell the ranks of the capitalist class. From today’s perspective, however, we see that workers are left in a worse situation than ever following the speculative boom, facing foreclosures and wiped out retirement funds. The only upward mobility in the end was for the money itself, which was coaxed out of the pockets of workers to pad the salaries of the much heralded “financial wizards.”

Granted, in any speculative bubble the expansion of consumption goes hand-in-hand with an increase in productive activity, but it is certainly not the case that the enormous gains made through speculation in certain activities reflect or correspond to an expansion in surplus-value created via production. Rather, the increase in the “value” (=price) of real-estate, stocks, or whatever the mania is centred on is fed by the speculation itself. Prices go up as more money is thrown at the object of speculation, and with those rising prices even more money is invested. But there is nothing to sustain the high prices once the speculative demand dries up. This is quite different from an increase of investment in productive activity that results in products containing surplus-value that are sold to realize a profit.

A comparison to eating, rather than the earlier hangover analogy, may highlight the distinction between mere speculation and investment in production. Simply put, speculation is not all that different from a person who consumes a large amount of food without performing any physical activity whatsoever. The result, unless the person enjoys a remarkable metabolism, is weight gain.

During the housing boom, the economy swallowed a tremendous amount of credit that for the most part was not directed towards productive activity, and this inevitably led to a flabby result. The speculative feast was good fun for those who partook of it, but now the heavy debt burden is making it hard for the capitalist economy to function, with the credit crisis also hindering investment in productive activities.

But it is not as if a “muscle-bound” capitalism is a lovely state of affairs either. As mentioned earlier, the surplus-value that arises from productive activity is nothing more than unpaid labour extracted from the working class. So there is no profit without exploitation.

A “fundamentally strong” capitalism (as it is called by those critical of finance capital but enamoured by capitalism itself) may conjure up an image of a healthy organism, but really it is more appropriate to picture a young Arnold Schwarzenegger prancing around the stage of a Mr. Universe contest clad only in his over-inflated muscles and surreal suntan. It is not true health or strength, but just the appearance of it. And just as Arnie worked out incessantly in the pursuit of muscles for their own sake, without any concern for their actual use, the productive activity under capitalism is only a means of building bigger and bigger profits, rather than being primarily a way to produce material wealth to meet the needs of society’s members in accordance with their collective and democratic will. There are all sorts of side-effects from the mad pursuit of profit, both in the short- and long-term, similar to how Mr. Schwarzenegger’s steroid-fuelled body-building in his younger years resulted in open-heart surgery by the time his muscles had sagged with age. 

Workers cannot be indifferent to a crisis, no matter how much we are disgusted by the predictable pendulum swing between “boom” and “bust” (and the sudden mood swings it causes among our capitalist rulers), because our lives can be directly influenced by today’s financial turbulence. But at the same time, we have no interest whatsoever in thinking up ways to put capitalism “back on track” or make it “healthy” again. Even when the system is in tip-top shape it works directly counter to the interests of workers.

The crisis will not miraculously or mechanically turn every worker into a socialist, as some pseudo-Marxists fervently hope, but it does at least create a situation where socialists may find workers more willing to consider an alternative to capitalism. It is up to us, as socialists, to present that alternative in a convincing way based on our understanding of the essential nature and limitations of the capitalist system.

Michael Schauerte

Cooking the Books: Living in an asset (2006)

The Cooking the Books column from the April 2006 issue of the Socialist Standard

At the beginning of March the Nationwide Building Society reported a fall in its house price index of 0.2 percent. They attribute this to a mere blip in the market. Other commentators are not so sure; they see it as a sign that the predicted end of the present house price boom is nigh.

Actually, it is not really a boom in the price of houses. Houses are a product of labour and so have a value of their own but, once built, they are subject, through use, to depreciation and will only maintain their value if money is spent on their maintenance. With inflation, the price of a properly maintained house will tend to rise anyway, though, with gains in productivity in the building industry, the cost of building a house will fall.

What is booming is not the price of the house as a building but the price of the land on which it stands. As land is not the product of labour it has no value, just a price which Marx (in Capital, Volume I, chapter 3, section 1) called an “imaginary price-form” as it wasn’t an expression of value. The price of land, however, is not entirely irrational but is calculated by “capitalising” the income it can be expected to bring. So, if a plot of land brings in an annual income (normally as rent) of £5000, it can be regarded as a capital-value bringing in an income of this amount and, if the rate of interest is 5 percent, as worth £100,000.

This in fact is how surveyors and property speculators calculate the monetary value of a property, though over a longer period than a year. Because of the permanent, if at the moment fairly slow, inflation, “income” can include the expected rise in price by the end of the chosen period. Also, if the chosen rate of interest is different, then so will the monetary value. For instance, if, in the example above, the rate had been 4 percent the monetary value would be £125,000. If the rate had been 6 percent it would be £83,333.

Low interest rates will tend to encourage a rise in the actual selling price of land anyway because they will tend to increase the demand for it. This is especially the case with the land on which houses stand, in that the house with its land is generally bought by taking out a loan (a mortgage) and the lower the rate of interest charged on it the more people that can afford to enter the market.

Most people buy a house to be their home for the foreseeable future, but a significant number now buy a house as a financial asset which they hope will increase in price, so enabling them to realise a capital gain. This has introduced the same sort of speculative element into the housing market as exists on the stock exchange, with people gambling on an increase in what their asset is worth.

It is this that has led one school of capitalism-watchers to argue that not only does this make a housing bubble possible, but that a bubble actually exists at present and which will sooner or later burst, leading house-and-land prices to fall.

If this happens, then, in a period of relatively low inflation as at present, this price fall wouldn’t be absorbed by house-and-land prices not rising as fast as inflation but by them actually falling. There would be widespread negative equity and repossessions. And it wouldn’t be just those who bought a house as a speculative investment who would get their fingers burnt. Those who bought a house merely as a place to live in would suffer too.

Capitalism is exposed as an irrational and anti-human system when a basic human need such as shelter can become the subject of stock-exchange-like speculation with all the consequences that can result when a speculative bubble bursts.

Cooking the Books: The Price of Everything (2018)

The Cooking the Books column from the October 2018 issue of the Socialist Standard

At the end of August the Office for National Statistics published its annual ‘UK national balance sheet’ which it says is a measure of ‘the nation’s wealth’. More accurately it later explains that it’s an ‘estimate of the total value of land, housing, machinery and financial assets held in the UK by individuals and companies.’ What is being measured is the price that the assets held would fetch if notionally sold. The tables can be found here: [Link.]

The figure the ONS arrives at for the end of the year 2017 is £10.2 trillion (a million million, what used to be called a billion), adding that this is ‘an average of £155,000 per person.’ Relevant for comparison with other countries, this latter is completely misleading if taken to mean that every individual in Britain has net assets of that amount, if only because it doesn’t take into account how the £10.2 trillion is divided. As we know from other ONS statistics, it is very unevenly divided.

Wealth is something, either provided free by nature or fashioned from it by human work, that is useful to human life in a particular society. By this standard, financial assets are not wealth; they are merely claims on wealth. Counting them as wealth as well as the wealth they have claims on – for instance, the mortgage as well as the house – is double-counting.

Ignoring, then, financial assets, what’s left are two forms of real wealth, which the ONS calls ‘produced non-financial assets’ (buildings, structures, machinery, equipment, inventories) and ‘non-produced non-financial assets’ (land). The ONS emphasises just how much of their total figure for 2017 is represented by land:

‘UK net worth more than trebled between 1995 and 2017, but much of this was from growth in the value of land. Land accounts for 51% of the UK’s net worth, higher than in any other measured G7 country.’

In Germany in 2017 it was 26 percent. In the UK in 1995 it was 33.7 percent.

The Times (30 August) commented that this showed ‘that the economy is floating on a house price bubble.’ Actually, it’s a land price bubble as it is not the price of houses that has gone up (if anything this tends to go down) but that of the land on which they stand. The ONS statistics illustrate this very well. The total notional price of ‘dwellings’ owned by ‘households’ amounted at the end of 2017 to £1.57 trillion while the total notional price of the land on which they stood amounted to £4.1 trillion, over two-and-a half times as much.

The price of land, however, is as irrational as financial assets in that an increase in its total amount never represents an increase in total wealth. In both Marxian and pre-Marxian economics, land, being what the ONS itself describes as ‘non-produced’, i.e., not the product of human work, has no ‘value’ separate from its price. This is the capitalisation of the income the land is expected to bring as rent over a period of years. This is speculative in both senses of the term; that the rent will be the same for the period is a speculation and that it won’t be can be a subject for financial speculation.

It is not land price bubbles that drive the capitalist economy; that’s the pursuit of profits by ‘non-financial corporations’. Land price bubbles only make the system more unstable, more unequal – and more irrational.

Bitcoin-mania (2018)

From the February 2018 issue of the Socialist Standard

Bitcoin was set up in 2009 in accordance with a design drawn up by a person, or more probably a group of persons, calling themselves ‘Satoshi Nakamoto’. In a paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (bitcoin.org/en/bitcoin-paper), he/they stated that:

‘A purely peer-to-peer version of electronic cash would allow payments to be sent directly from one party to another without going through a financial institution.’

Libertarian money

What, you might wonder, is the advantage of such a system over the electronic payments systems such as Paypal and Visa that already exist? None as far as most people are concerned. However, those who set it up had been influenced by ‘libertarianism’ in its American sense,  such as anarcho-capitalists, ‘minarchists’ and other advocates of an unregulated market economy. They wanted a ‘cash system’ that was independent of the state and, also, didn’t want to involve a ‘financial institution’, in particular not banks, which, like the state, were accused of issuing unsound money by creating too much.

The basis of the system is a network of computers without a central server, all the computers being in direct contact with all the others. Hence peer-to-peer. The problem with such a decentralised, or, rather, non-centralised, system is how to verify that the person making the payment has not already spent the ‘electronic cash’ attributed to them. The innovation here was to apply ‘blockchain’ technology, as explained in the Pathfinders column of the December Socialist Standard:

‘When you make a Bitcoin transaction, the details are distributed across the entire network. To be sure the transaction is unique (i.e. not a 'double spend') it must be validated. To do this, the system triggers a competition in which freelance 'miners', acting somewhat like accountants, race to validate the transaction in return for a diminishing new-issue Bitcoin payment, which also helps to grow the currency at a controlled rate. Once validated, the transaction is then written into an encrypted public ledger as a permanent record or 'block'. This block is linked to previous blocks and in turn becomes the anchor or link to the next created block, forming an unbroken chain.’

The decision to call the validators ‘miners’ was another reflection of the ‘libertarian’ ideology behind the project. It was explicitly chosen to be like gold mining. As Nakamoto wrote:

‘The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case it is CPU [computer] time and electricity that is expended.’

In this respect Bitcoin’s aim was to create the digital equivalent of a gold currency, to realise on the internet Ron Paul’s dream of a return to the gold standard.

It is not clear whether Bitcoin’s originators really intended their electronic cash to replace state fiat money or even just to compete with it. They seemed more concerned just to show that their ‘electronic cash’ could be created and that their system could work. If so, they proved their point; they did manage to transfer Bitcoins from one member of the network to another. A few cafés and other establishments agreed to accept payment in Bitcoins but more to appear trendy than for business reasons. At first Bitcoin was little more than a toy for computer whizz-kids.

Bitcoins didn’t have a price until 2010 when it was made convertible into fiat money at the rate of 1 Bitcoin = 0.003 US cents. The first recorded purchase using Bitcoins is said to have taken place in May that year when a computer whizz-kid paid 100,000 of them for two pizzas. By the following year, however, it had achieved parity with the US dollar.

The money changers come back

Bitcoins have never been independent of state fiat money or prices expressed in it. The businesses that accept payments in Bitcoins price their goods or services by converting their fiat money prices into Bitcoin ones; when someone pays for an item in Bitcoins the business doesn’t keep them. In fact, normally they don’t even receive them (what use would they be to them?) as the Bitcoins go to a Bitcoin dealer who converts them into fiat money and pays that to the business. Not that, with the price of Bitcoins as it is, many will be using it to buy anything.

From 2010 people who were not part of the peer-to-peer network began to buy Bitcoins. But why? There was a feature of the system – disguising payers and payees – that was attractive to those who prefer to be paid in cash rather than by cheques. Not plumbers and other handymen but bigger fry such as drugs barons, arms dealers, money launderers and others wanting to avoid financial regulations. This is why Blackrock CEO Larry Fink recently described the Bitcoin price as ‘an index of money laundering’. At the moment North Korea is being accused of hoarding Bitcoins to use them to get round the latest sanctions. Secrecy didn’t have to be part of the system but was incorporated into it by the designers, either because they were ideologically opposed to the authorities knowing or because they wanted to replicate on the internet the equivalent of payments in cash.

Despite the original intention of Bitcoin being a system of payment ‘without going through a financial system’, that is precisely what you have to do to buy or sell Bitcoins. Bitcoin exchanges have grown up where you can buy Bitcoins with state fiat money and where you can convert Bitcoins that someone has paid you into fiat money. For a fee of course.

And the speculators too

Technically a Bitcoin is a token enabling you to access Bitcoin’s money transfer service. Bitcoins only exist as strings of computer code, and are intrinsically worthless. But so are fiat money’s notes and coins, only behind them is the state guaranteeing their face-value. There is nothing behind Bitcoins. Yet last year the price of a single Bitcoin overtook the price of an ounce of gold and reached $19,000 in December from less than $1,000 at the beginning of the year. No wonder people are comparing the current Bitcoin bubble to the Tulip-mania that swept through Holland in 1636-7. At the moment Bitcoins are being bought purely for speculative purposes to make a gain out of their rising price. Sooner or later the bubble is going to burst and some suckers are going to lose their money and could end up holding something worth less than a tulip bulb.

It is this aspect – as an object of speculation – that has led some commentators to describe Bitcoins as a ‘crypto-asset’ rather than a ‘crypto-currency’, something people can invest in that will hold or increase its monetary value over time. In any event a fluctuating price conflicts with Bitcoin’s original aim of being a payments system. There is an irony in this. Its creators wanted to create an electronic version of gold. They seem to have succeeded in that gold, having been demonetised, is now an asset subject to price fluctuation due to speculation. Real gold would of course be a safer investment as it will always be worth more than a tulip bulb because of the considerable labour time spent finding and fashioning it.

Ironically too, governments and banks have become interested in the blockchain technology behind Bitcoins as it offers a cheaper way of registering transactions (and not just financial ones) and transferring money. To get in on the act could be a more rational capitalist reason for buying and holding Bitcoins as, at some point, the system or a part of it might be sold as has happened to other inventions by computer whizz-kids.

Bitcoins are not the only tokens to access electronic services provided by a network of computers using blockchain technology. There are over a thousand other so-called ‘crypto-currencies’. Many are offshoots of Bitcoin and the exchanges that deal in Bitcoins deal in other such tokens as Litecoin, Dash, Ripple and the appropriately named Ether.

What a waste

From the point of view of satisfying human needs, all the human ingenuity that went into developing the Bitcoin system and all the computer time and resources involved in operating it have been so much waste. In a socialist society, based on the common ownership of the means of production and access to the products according to need, there would be no need for an electronic payments system, in fact no need for any sort of payments system since buying and selling will have been replaced by giving and taking, and so need for money at all. There would, however, still be a need for computing skills and computer technology. In socialism the skills and enthusiasm of the type of people who first developed Bitcoin could be put to much better – and more satisfying – use.

Adam Buick

Pathfinders: Capitalism's model behaviour (2008)

The Pathfinders column from the August 2008 issue of the Socialist Standard

The business of science, it might be said, is to distinguish what is knowable from what is not knowable. The first great flowering of modern scientific thinking, in the days of Newton, Leibniz and Descartes, established a revolutionary perspective of certainty and predictability on a world previously dominated by a largely religious or superstitious belief in nature’s untameable randomness. Instead of being at the mercy of fate, humanity through science could be its master. Everything, in theory, was knowable. If the position, mass, velocity and direction of every particle could be known, so it was thought, then in principle the entire future of the cosmos could be extrapolated from this knowledge.

This faith in the power of science to unlock any secret seems touchingly naïve today, after the cold showers of quantum physics and chaos theory. But the war continues, between the certainty and uncertainty principles, between what science can do and what it can’t. And inevitably, with possibly the biggest financial crash since the 1930’s on the world’s doorstep, some scientists are looking at the economy and asking the same big questions.

Do financial booms and busts have causes, and are those causes identifiable, and more crucially, predictable? Or is the economy essentially a chaos system, whose workings a computer the size of Jupiter could still not reliably forecast?

Sumit Paul-Choudhury argues (New Scientist, 21 June) that financial bubbles are not only unpredictable and unstoppable, but even useful and desirable. According to this theory, bubbles generate an enormous incentive to take reckless risks in developing new technologies or systems with important social benefits but low financial returns. When the bust comes, the reckless lose their shirts, but the social benefits remain for the rest of us. Thus, for example, the dot-com bubble and bust ruined investors but laid the foundations of the modern internet. The recent housing bubble stimulated the building of lots of houses, which will still be there when prices have crashed, and much more affordable in the future.

There is a lot one could say to this. Firstly, a financial bubble is by definition an inflation in credit out of all proportion to any parallel increase in production, and is in consequence the most inefficient and wasteful method of stimulating development. To say that some good comes out of such catastrophic events is not to say anything at all. Development would have happened anyway, and regularly does, without any inflationary cycle to push it along. Secondly, it is an ivory-tower argument which takes no account of the terrible toll such busts have, not on fatcat investors who can afford it, but on millions of workers who already live on the breadline and have no resources with which to withstand the depredations of global recession. Third, it is an example of ‘spin’, where an admission of lack of control is packaged with a sales-pitch, to make a virtue out of a necessity. It is like arguing that bubonic plague serves a useful purpose, because it stimulates change in society.

When divorced from this preposterous spin, the admission that humans cannot control the economy walks a very dangerous edge. It is only a short step to the Marxian conclusion that the economy – capitalism – is an irrational system and should be abolished in favour of a more rational one. Aware of this, some scientists pursue the neo-Newtonian ideal of being able to predict the market. To this end, they offer us computer models.

What one has to say about computer models from the outset is that they can be a very powerful tool for understanding complex systems, provided that the parameters fed into the models are correct in the first place. The more complex the system, the more complex the parameters, and the less certainty over the initial algorithms. Climate modelling is a case in point. The best computers in the world can only predict the weather with any confidence up to three days in advance, after which the variables spiral exponentially out of control. Thus, attempts to predict the consequences of global warming vary widely.

The established way to test a model is to see how well its predictions accord with past documented events, in this case economic crises. Older models, which presupposed standard economic theories of rational trading and the law of value, that is, prices tending to gravitate towards their proper values, have had no success in predicting inflationary bubbles. Some success is now being claimed for models which recognise irrational elements such as trader fear and the herd instinct, and which are designed around artificially intelligent buyers and sellers who interact among themselves, just like real traders (New Scientist, 19 July). But these new models only deal in probabilities. They estimate that the probability of a bubble and bust event is a good deal more likely than older ‘equilibrium economics’ models suggested. But of course they can’t say when. Worse, while the weakness of fixed parameter models is that the parameters may be wrong, the weakness of artificially intelligent models, computer models which can ‘learn’ and modify their own parameters, is that they may rapidly become as complex and opaque as the system they are trying to emulate. One may end up with a computer model which becomes as incomprehensible as its real life counterpart.

The observation has been made in this column before that a computer model of socialist production and distribution, while complex, could be a useful contribution to socialist thinking and would not have to factor in such unquantifiable elements as trader fear or speculator frenzy. Indeed the strength of the socialist model would be in its relative simplicity. Once total demand and total supply are known, a small standard deviation would suffice because in the real world, based not on floating prices but on fixed use-values and known energy costs, production would proceed in a steady state. Only large scale catastrophic natural events, such as droughts, earthquakes, tsunamis or severe storms would cause any blip in the production process, but unless an event was so catastrophic that it affected global production, such as an unstoppable plague or an asteroid impact, the essentially steady and predictable production of socialist society would be able to absorb it. There’s a Nobel prize waiting for the computer scientist who comes up with the first working model of socialist non-market economics. But of course, they’d only get their prize in socialism. And, one need hardly add, there wouldn’t be any money attached.

Paddy Shannon