Material World: Has capitalism become financialised? (2025)

The Material World column from the May 2025 issue of the Socialist Standard

The financial crisis of 2007-2008 triggered by the large-scale collapse of mortgage-backed securities in the United States was an important catalyst in promoting the view that capitalism has become ‘financialised’. Financial speculation has come to be seen not only as something increasingly autonomous with respect to the real economy (based on the production of commodities), but also as increasingly dominant in determining what happens in the latter.

The crisis was looked upon as being essentially a product of the short-sighted and irresponsible shenanigans of the financial community, aided by the New Financial Architecture (NFA) instituted in previous years and the radical financial deregulation this all entailed. In short, it was said to be the outcome of a steadily intensifying process of ‘financialisation’.

Fictitious capital

Financial speculation grew out of the traditional credit system centred on banking and became more prominent with the rise of the joint stock company. Financial securities initially took the form of stocks and bonds but in the last few decades have proliferated into a bewildering array of financial products. They are all examples of what Marx called ‘fictitious capital’, a future income stream converted into a notional lump sum. A share certificate, for instance, exists largely as a paper claim on future profits to be paid out in the form of dividends.

There is a difference between fictitious capital and an interest-bearing loan provided by a bank to an industrial capitalist to purchase means of production. In the latter case this money capital is incorporated or utilised within the process of the expanded reproduction of capital. The bank takes a cut in the form of interest payments from the increased value – or surplus value – generated at the point of production.

This is not the case with fictitious capital for the simple reason that this does not actually function as capital. That indeed is the reason why it is called fictitious capital. It is not implicated in the expanded reproduction of capital.

Because the stock market comprises a separate market for the circulation of fictitious capital this encourages the illusion that such capital is somehow independent of the real economy – or even that it constitutes ‘real capital besides the capital or claim to which they may give title’ (Marx, Capital, Vol. 3, ch.29. Penguin translation). Obviously, if fictitious capital was qualitatively identical to real capital and able to interact with the latter on equal terms, so to speak, it would then be able to generate real wealth – real profits – all by itself and would cease to be dependent on the real economy for any income it lays claim to.

But, of course, this cannot be the case for the reason so succinctly spelt out by Marx, namely that a capital cannot exist twice ‘once as the capital value of titles of ownership, the shares, and then again as the capital actually invested or to be invested in the enterprises in question’. The problem is that this is precisely what much recent commentary on the subject of crises would seem to imply.

If these ‘financialisation theorists’ are correct in what they say then this would suggest, as Stavros Mavroudeas has pointed out, that ‘financial profits are not a subdivision of surplus-value’ (and) ‘the theory of surplus-value is, at least, marginalised’ (and that) ‘consequently, profitability (…) loses its centrality and interest is autonomised from it’ (quoted in tinyurl.com/2rafv87w ).

Needless to say, if true this would have certain practical implications.

Are we debt peons?

It would seem to suggest, for instance, that more importance ought to be attached to the problem of so-called ‘secondary exploitation’ rather than the primary exploitation that occurs in the workplace (and manifests itself in the production of surplus value). In other words, according to this way of thinking, workers are to be looked upon more as debt peons than wage slaves and, consequently, more attention should be paid to measures such as keeping interest rates down, rent controls, improved trading standards and so on as a way of alleviating their situation.

It is quite true that many workers do indeed qualify as ‘debt peons’, burdened with a variety of debts such as student loans, personal loans, and mortgages. However, their status as debt peons is essentially a derivative one stemming from the economic precariousness they experience as wage workers. It is because of this that they fall into debt. They don’t become wage slaves in order to pay off their debts as debt peons. If anything, it is often the other way round.

In any event, the basic premise of the financialisation theorists is questionable. The illusion that financial gains can somehow become autonomous with respect to the real economy can only be sustained if you focus on the micro-level – the individual investor of fictitious capital.

If an investor sold their shares on the stock market then, of course, they might very well realise a capital gain and be able to purchase tangible goods – real wealth – with the money they received. Their fictitious capital would not have been implicated in the production of real wealth and yet would have resulted in an augmentation of the investor’s own real wealth.

However, if every other shareholder followed suit and simultaneously sought to dispose of their shares as well then the price of these shares would plummet to zero thereby demonstrating their essentially fictitious character. Of course, this hypothetical scenario is inherently absurd – after all, to sell your shares you need someone to buy them – but it does bring out the point that fictitious capital is not about value creation at all. It’s at least partly about speculation and this was spectacularly demonstrated in the case of the 2007-8 financial crisis when the fictitious value of certain financial securities simply evaporated.

Robin Cox

Material World: Will capitalism implode? (2025)

The Material World column from the January 2025 issue of the Socialist Standard

Nothing quite so vividly demonstrated the absurdity of existing society and that it had run well past its sell-by date than the phenomenon we call a depression. By what insane topsy turvy logic could it be that the very abundance of goods that industry churned out should become the source of intense misery to those who had produced this abundance? How absurd that with technology having been developed to the point where human want could be eliminated, this very want should become magnified.

Glutted markets meant mass layoffs, the indignity of the dole queue and the desperation of trying make ends meet. Even in a boom time, needs go unmet; now in a depression the perceptible gap between what people have to put up with and what is materially possible, widened as never before.

It is facts like these that should prompt us to reconsider whether, in the kind of society we live in today, technology or technological innovation can actually deliver ‘abundance’. But delivering abundance doesn’t seem to be the real purpose behind such innovation — making our lives more secure, happy, and content. Behind the smoothly executed fakery of the advertisers, the dissimulation of the pasted-on smiles of the actors who perform in these adverts, another ulterior motive is at work —making a profit by meeting paying demand which, for most people, is limited.

Some argued that crises and depressions were becoming, if not permanent then, at least, progressively worse. Even the Communist Manifesto (1848) had contended that whatever existing measures might be undertaken to overcome such crises this simply meant, ‘paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented’.

However, a quick comparison of the Great Depression of the 1930s and the 2008 global crisis should dispel any such notion. The former event was, by most standards, far more destructive and socially disruptive than the latter, thus refuting the claim that there is some built-in tendency for crises to get progressively worse. As an article in the Economist (10 December 2011) pointed out:

‘The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s. American and European unemployment rates rose to barely more than 10% in the recent crisis; they are estimated to have topped 25% in the 1930s.’

Even when the idea was mooted that the working class would act consciously, and in a united fashion, to deliver the coup de grâce to a demonstrably dying system it was assumed that the desire to do so could only have arisen out of the intense hardship workers experienced within a capitalist society in its apparent death throes. That in itself is a highly questionable thesis. The ‘absolute immiseration’ of workers is, if anything, more likely to impede, than promote, the kind of mindset it will take to get rid of capitalism.

In any event, the very fact that capitalism is still very much alive (if not exactly well) should make us think twice about all such prognoses concerning the ‘impending collapse of capitalism’ — irrespective of the particular route by which it is supposed to reach this point. What needs to be questioned is the very notion of ‘collapse’ itself with all its unfortunate mechanistic and millenarian overtones.

In the Great Depression of the 1930s when many on the Left believed fervently in the imminent collapse of capitalism, we in the Socialist Party brought out a landmark pamphlet called Why Capitalism will not Collapse (audio version here). The pamphlet pointed out that previous crises, going back to the early 19th century, had all likewise prompted predictions of apocalyptic collapse on much the same grounds yet these had all proved unfounded. There was no compelling reason for thinking that things would be any different in the future. Capitalism would only disappear if and when workers clearly wanted that to happen and that was something that could not be imposed on them from above – or, indeed, behind their backs.

Apart from anything else there is no ‘internal’ mechanism one could identify that would mechanically cause the system to collapse. Of course, it is conceivable that capitalism could be brought to a shuddering halt as a result of some ‘external’ factor intervening — such as a global ecological catastrophe or a nuclear war — but that is a different argument and, in any case, it is not quite consistent with what the term ‘collapse’ conveys, which would suggest some kind of systemic or internal implosion.

Robin Cox

Voice From The Back: Californian Nightmare (2007)

The Voice From The Back Column from the December 2007 issue of the Socialist Standard

Californian Nightmare

The dreadful fires in California that led to death and destruction were well reported in the British press, but what was hardly covered was the plight of the immigrant workers. “Out of the burning brush, from behind canyon rocks, several immigrants bolted toward a group of firefighters, chased not by the border police but by the onrush of flames from one of the biggest wildfires this week. … Immigrants from south of the border, many illegal, provide the backbone of menial labor in San Diego, picking fruit, cleaning hotel rooms, sweeping walks and mowing lawns. The wildfires, one of the biggest disasters to strike the county, exposed their often-invisible existence in ways that were sometimes deadly. The four bodies were found in a burned area in southeastern San Diego County, a region known for intense illegal immigration. …Terri Trujillo, who helps the immigrants, checked on those in the canyons, urging them to leave, too, when she left her house in Rancho Peñasquitos ahead of the fires. Ms. Trujillo and others who help the immigrants said they saw several out in the fields as the fires approached and ash fell on them. She said many were afraid to lose their jobs. ‘There were Mercedeses and Jaguars pulling out, people evacuating, and the migrants were still working,’ said Enrique Morones, who takes food and blankets to the immigrants’ camps. ‘It’s outrageous.’ Some of the illegal workers who sought help from the authorities were arrested and deported.” (New York Times, 27 October) What a comment on capitalism, some workers live in such poverty and insecurity they give up their lives in an attempt to keep a menial weekly wage.

Wall Street Shuffle

We are always being told that capitalism is a competitive system that rewards success and punishes failure, but what are we to make of the following? “Merrill Lynch’s directors may be weighing E. Stanley O’Neal’s future, but one thing is already guaranteed: a payday of at least $159 million if he steps down. Mr. O’Neal, the company’s chairman and chief executive, is entitled to $30 million in retirement benefits as well as $129 million in stock and option holdings, according to an analysis by James F. Reda & Associates using yesterday’s share price of $66.09. That would be on top of the roughly $160 million he took home in his nearly five years on the job. Under Mr. O’Neal, Merrill moved aggressively into lucrative businesses like the packaging of subprime mortgages and other complex debt securities. …But those big bets appeared to go bust this week. Merrill announced an $8.4 billion write-down, raising questions about whether Mr. O’Neal will keep his job. One thing that he surely will hold onto, though, are the giant paychecks he has collected. ‘I lay the blame at the foot of the board,” Frederick E. Rowe Jr., a money manager and president of Investors for Director Accountability. “He was paid a tremendous amount of money to create a loss that is mind-boggling, and he obviously took risks that should never have been taken.’” (New York Times, 27 October) He managed to lose $8.4 billion for the company and can claim $159 million for his efforts. Who says capitalism isn’t crazy?

This Is Communism?

“The United States has more billionaires than any other country: 415 by the last count of Forbes magazine. No. 2, and closing fast? China. A year ago, there were 15 billionaires in China. Now, there are more than 100, according to the widely watched Hurun Report. Forbes has documented 66. ..As much as the bounty of billionaires is a source of pride, it is also a potential cause for concern in a nominally Communist country. Per capita income in China is less than $1,000 a year.” (New York Times, 7 November) China is a fast developing capitalist country and just like any other capitalist economy the gap between the rich and the poor is immense.

Chinese Statistics

One of the effects of the rapid expansion of Chinese capitalism is the pollution of the atmosphere and drinking water. This has led to these horrendous statistics. “40% – Percentage by which birth defects among Chinese infants have risen since 2001, according to a government report, which linked the rise to environmental pollution. 460,000 – Number of Chinese who die prematurely every year from exposure to pollution and dirty water.” (Time, 12 November) This expansion may be leading to the creation of more billionaires, but it is also producing more corpses.

Greasy Pole: Lucky Gordon? (2008)

The Greasy Pole column from the December 2008 issue of the Socialist Standard

Gordon Brown’s new Golden Age

Some things are helpful, if not actually essential, to top politicians or to those who are high enough up the greasy pole to feel threatened by a fall. There is, for example, what might loosely be termed luck – an unpredicted change of circumstances which so affects a situation that it puts the politician in an unexpectedly favourable light. But as a son of the manse Gordon Brown has to believe in something rather more ritualistic than luck. He would not dream of gambling, especially where his political fortunes are at stake. All through the nail-biting perils of the past year he has carried stolidly on, diverting criticism and the prospects of a catastrophic electoral defeat with ponderous recitations of what he insists are the historic, enduring achievements of New Labour, particularly of himself at the Treasury. While he did this his poll rating sank lower and lower, he was humiliated at one by-election after another and terrified, sullen rebellion simmered along the benches behind him.

Credit Crunch

And then came the credit crunch and Northern Rock and Lehman and, across the Atlantic, in the financial fortress of 21st century capitalism, the fall of Fannie Mae and Freddie Mac. Suddenly all those precariously mortgaged homes and image-boosting loans ceased to be symbols of comfort; they disintegrated into menace.

There was talk of 21st Century South Seas Bubble. Gordon Brown would not, in public at any rate, have called it luck, and neither would anyone with so much as a glimmering about the chaotic workings of the property based system, but the timing of it for him was – well, lucky. Apparently transformed in personality, he coined the phrase, as the climax of his conference speech, which summed up his hope for survival: “Take it from me, this is no time for a novice”.

This was said in the knowledge that Brown would have no problem, in finding and naming the villains who have fed off the groundless dreams of unsuspecting wage earners until the whole diseased edifice of lies and fraud came crashing down. There were enough of them – the bankers, the financiers, the traders in the City whose ideas of a hard, constructive day’s work has been pushing other people’s money around on paper and betting on the movement, up or down, of share prices. Brown rubbed salt into their wounds when, as part of the package of state investment in the ailing banks, he ensured that certain City favourites were removed from the boardrooms. This was accompanied by Brown calling for “responsible” behaviour by the banks and then Chancellor of the Exchequer Alistair Darling calling in their top people to lean on them to pass on the 1.5 percent reduction in the Bank of England lending rate. More recently Brown has used that word again, demanding “a new, responsible approach”: by the credit card companies. “I think”, he said “we have got to bring the credit card industry (yes, they call it an ‘industry’) in to talk (yes, the call it ‘talk’) to them to join with us in establishing clear principles to apply to the costs people face on their existing debts”. And in case any bank should still not have understood Peter (sorry, Lord) Mandelson will be meeting them to draw up a “guide on behaviour” (yes, they call it ‘behaviour’).

There may be some questions about Mandelson’s suitability to instruct others in such a matter. He is, after all, the man who made himself famous by informing the City that New Labour are “intensely relaxed about people getting filthy rich”. Then there was his cosying up to top Tory George Osborne on the yacht of the Russian billionaire Oleg Deripaska, who did not amass his fortune through considerate reticence towards his rivals. Lord Mayor’s Banquet Mandelson’s boss in Number Ten has a consistent record of sucking up to the overfed parasites of the City, when mellowed by a slap-up

Lord Mayor’s banquet.

There was a time when Brown would make some kind of obscure, ineffective point by refusing to wear the traditional evening suit at this event, turning up in a work-a-day lounge suit. Now that he is Prime Minister he does sartorially as he is told – although he looks far from comfortable in black tie and tails and in any case says roughly the same as before. Here he is in 1998: “London is a city that is creative and responds to change. It has excelled because of the hard work and skills of the workforce and these are the essential British qualities – creativity, adaptability, a belief in hard work, fair play and openness”. In recent times his sycophancy has been more open: in 2005 he blathered “For three centuries … your enterprise as businesses, your unique innovative skills, your courage and steadfastness and your outward looking internationalism have …helped Britain lead the rest of the world”. And last June, as the recession was stirring, quite obviously, into life: “Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate. Thanks to your remarkable achievements we have the huge privilege to live in an era that history will record as the beginning of a new Golden Age”. In fact Brown’s Golden Age was ushering in what is expected to be the widest deepest, most destructive slump since the 1930s. While Brown was bowing and scraping to the City it was at the centre of a veritable culture of mis-selling, over-mortgaging workers’ homes and tempting workers to take on loans which they simply could not afford to repay.

 When the South Sea Bubble burst in 1720 a number of the people who were considered responsible, including Chancellor of the Exchequer John Aisable, were sent to the Tower and part of their estate was taken to help the company back into business. There is no need to go quite so far; there would be no point in punishing Mandelson and Brown and the rest for capitalism’s brutal chaos.

Ivan

In place of capitalism (2009)

From the January 2009 issue of the Socialist Standard

Recently the word ‘capitalism’ seems to be on everyone’s lips. The main reason for this is probably that capitalism – also known as ‘the economy’ or ‘the market system’ is going through a bad patch. The Labour government’s claim to have ended the cycle of boom and bust has been proved disastrously wrong. The last boom, during which food, energy, house and stock market prices rose at unsustainably high rates, has given way to bust.

As usual, workers are the main victims. Many of us have lost our jobs, can’t get new ones or can’t enter the labour force for the first time. We have seen our outgoings soar, our incomes squeezed, even our homes repossessed. Even if we have so far personally avoided the worst of these fates, the worry that we may not continue to do so can be very stressful.

Who or what is to blame for this sorry state of affairs? More constructively, how can it be put right? Only the pitifully small socialist media insist that we need to replace capitalism with socialism. All the other media, which shout so much louder than we can, say things like “We’ve got the wrong kind of capitalism” or “Some people (bankers) have been too greedy.”

There is a widespread and heavily promoted belief that ‘capitalism is the only game in town.’ Anyone who disputes this, for example by advocating that all goods and services should be available on the basis of need, not ability to pay, is dismissed as idealistic or utopian. It is a classic case of self-fulfilling prophecy: support (or at least acquiesce in) the way things are organised today and tomorrow will be more or less the same. But it doesn’t have to be.

Socialists urge that it is futile to try to reform capitalism – the whole system needs to be scraped and replaced by something better. As we explain in our pamphlet Socialism as a Practical Alternative, this means being as constructive as possible, not destructive. For example, such bodies as the World Health Organisation and the Universal Postal Union can be adapted for socialist purposes.

We have as our object the establishment of socialism. In a sense this is true, but we also talk about a socialist movement in the here and now. Every month we say in this journal ‘we are solely concerned with building a movement of socialists for socialism.’  We distribute paper and electronic publications, give talks, take part in debates, run educational events, make films, and much more.

With more members – and particularly active members – we could do things and on a scale we are prevented from doing for lack of human and other resources. For example, we could set up socialist publishing houses producing, promoting and distributing paper and electronic literature. We could organise socialist educational networks at different levels: schools, colleges, universities, distance learning – for potential socialist citizenship, not capitalist employment. Other activities will no doubt be suggested, tried out and perhaps become widespread – who knows?

The point is that more of us will come to realise that we all live in the real world, not with submission to endure it but with imagination to revolutionise it.

Stan Parker

Pieces Together: Another “Expert” Speaks (2009)

The Pieces Together column from the January 2009 issue of the Socialist Standard

Another “Expert” Speaks

“This week Citigroup’s already depressed shares have lost half their value, and shares of Bank of America and JPMorgan Chase are down 30 percent. Those declines have come despite reassuring comments from Treasury Secretary Henry M. Paulson Jr., who told National Public Radio a week ago that people were no longer worried about the possibility of a major bank failure. ‘I’ve got to tell you,’  he said. “I think our major institutions have been stabilized. I believe that very strongly.” The Standard & Poor’s index of 500 stocks fell by more than 6 percent on two consecutive days, Wednesday and Thursday, something that had not happened since July 20 and 21, 1933, in the midst of the Great Depression, when panic was brought on by collapsing commodity prices. Such prices have fallen rapidly this week as well, as evidence mounted of a world recession.” (New York Times, 20 November)

Another “Expert” Recants

“Alistair Darling will be forced to admit tomorrow that the credit crunch has plunged Britain into a deep recession, and the economy will contract for a full year in 2009, for the first time since the early Nineties. As the credit crisis ravaged the world’s financial markets earlier this year, the Chancellor insisted repeatedly that Britain’s `economic fundamentals` were sound. In the budget six months ago, he pencilled in a strong recovery for 2009.” (Observer, 23 November)

Good Business Practice

“The European Union accused drug companies on Friday of adding billions of dollars to health care costs by delaying or blocking the sale of less expensive generic medicines. One common tactic, said Neelie Kroes, the European competition commissioner, was for drug companies to amass patents to protect active ingredients in the medicines — in one case, 1,300 patents for a single drug. Another tactic, she said, was for pharmaceutical companies to sue the makers of generic drugs for ostensible patent violations, which tended to delay the availability of the lower-cost products for years. Ms. Kroes made her comments Friday while presenting the preliminary findings of a broad investigation into accusations of anticompetitive practices in the drug sector. She also turned her sights on the generics companies, which she said had received $200 million from pharmaceutical companies over seven years in exchange for holding their products off the market.” (New York Times, 28 November)

World Hunger Grows

“It is the new face of hunger. A perfect storm of food scarcity, global warming, rocketing oil prices and the world population explosion is plunging humanity into the biggest crisis of the 21st century by pushing up food prices and spreading hunger and poverty from rural areas into cities. Millions more of the world’s most vulnerable people are facing starvation as food shortages loom and crop prices spiral ever upwards. And for the first time in history, say experts, the impact is spreading from the developing to the developed world. More than 73 million people in 78 countries that depend on food handouts from the United Nations World Food Programme (WFP) are facing reduced rations this year. The increasing scarcity of food is the biggest crisis looming for the world”, according to WFP officials.” (Sunday Herald, 30 November)

Cooking the Books: Fictitious capital (2009)

The Cooking the Books column from the January 2009 issue of the Socialist Standard

The present crisis has led journalists to look for quotes from Marx. Here’s another example, this time from John Plender of the Financial Times (18 October):

“Karl Marx was wrong about many things, but in 1893 he provided as good an account of today’s financial implosion as any living commentator. “To the possessor of money capital, the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” (Link.)

Plender was wrong about many things. First, Marx died in 1883 so he could not have written anything in 1893. This was the date that Engels published the second German edition of  Volume II of Capital. Second, it is not even an accurate quote. The first six words are not part of the quote, but something the person Plender was quoting from added in square brackets to introduce the context. Third, the last sentence about “all nations” was added by Engels, as he explained in a footnote (in section 4 of chapter 1).

This said, the passage brings out well that the aim of production under capitalism is not really to make things – that is only incidental – but to make money, more money than those with or controlling money-capital set out with. The source of the added money is the unpaid labour of those who actually produce wealth, the class of wage and salary workers, but this is obscured in financial dealings.

Marx dealt with the illusion that money can give rise to more money without production in Volume III of Capital. Here (chapter 29) he introduced the concept of “fictitious capital”. There is nothing dodgy about such capital. It’s something insurance companies have been doing for years. As Marx explained:

“The formation of a fictitious capital is called capitalization. Every periodic income is capitalized by calculating it on the basis of the average rate of interest, as an income which would be realized by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%. All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.”.

Examples of this are government bonds, the price of land, and stocks and shares. Marx called these “fictitious” capital because the capital sum did not really exist, only the estimated future income stream did and that depended in the end on future production. In the case of shares, the real capital is in the fixed assets (factories, equipment, machines) and working capital (to buy materials, pay for energy, the wages fund) of the capitalist firm; this capital does not exist a second time in the prices of the shares.

One thing that banks had been doing in recent years was to increase the amount of such fictitious capital by turning mortgage repayments into bonds, “securitising” them in the jargon. If, however, the future income stream is threatened or fails to materialise – as has happened – the fictitious capital so created is depreciated or ceases to exist. But this does not mean that the real capital to which it corresponds has ceased to exist, only that its paper duplicate has gone to money heaven. A reminder that “the conception of capital as something with automatic self-expansion properties” is an illusion.

Tiny (URL) Tips (2009)

The Tiny Tips column from the December 2009 issue of the Socialist Standard 

In the wake of the horrific events of the day, his captain is cool. He walks up to Massey and asks; “Are you doing all right, Staff Sergeant?” Massey responds: “No, sir. I am not doing O.K. Today was a bad day. We killed a lot of innocent civilians.”

Fully aware of the civilian carnage, his captain asserts: “No, today was a good day.” Relatives wailing, cars destroyed, blood all over the ground, Marines celebrating, civilians dead, and “it was good day”!:

[Link.]

Even as the financial system collapsed last year, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York. His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods combined:

[Link.]

Sixteen workers are killed a day in the United States because of reckless negligence on the part of their employers. Under existing laws, these employers get a slap on the wrist, or walk away scot-free. Meanwhile, workers who blow the whistle face threats and retaliation at the workplace:

[Dead Link.]

Its ruler re-named the days of the week after himself and his mother. Opera, ballet and the circus are banned. To get a driving licence, citizens must sit an exam on the dead leader’s autobiography. Welcome to Turkmenistan:

[Link.]

When veterans die — from lack of health insurance More than 1.5 million vets don’t have it, and 2,200 vets die every year because of it :

[Link.]

“. . . We suggest that it will be pretty much like this in socialist society. Although it will be global as opposed to tribal, people will still live in small localised communities..” But some people I imagine will choose a clean, green high-rise city lifestyle instead:

[Link.]

Why are so many Americans now toying with socialism, in a country that created the most successful free market economic system in history and spent half of the last century fighting the heresy of Marx’s socialism?

[Dead Link.]

“Americans are saying that with their planes they can see an egg 18 kilometers away, so why can’t they see the Taliban?” ABDULLAH WASAY, an Afghan pharmacist:

[Link.]

Voice From The Back: Kids and Capitalism (2008)

The Voice From The Back Column from the November 2008 issue of the Socialist Standard

Kids and Capitalism

The author of the Harry Potter books JK Rowling recently donated £1 million to the Labour Party because she thought they were doing more to solve the problem of child poverty than the Tories would. She obviously could have not seen the following news item. “Millions of children in the UK are living in, or on the brink of, poverty, a report claims. The Campaign to End Child Poverty says 5.5 million children are in families that are classed as ‘struggling’ – 98% of children in some areas. The campaign classes households as being in poverty if they are living on under £10 per person per day. … The Campaign to End Child Poverty is a coalition of more than 130 organisations including Barnardo’s, Unicef and the NSPCC. According to its research, there are 4,634,000 children in England living in low income families, 297,000 in Wales, 428,000 in Scotland and 198,000 in Northern Ireland. It says 174 of the 646 parliamentary constituencies in Britain have 50% or more of their child population in, or close to, the poverty line.” (BBC News, 30 September) JK Rowling may be a very good writer, but obviously she is not a great thinker.

Capitalist priorities

We live in a society where millions try to survive on a $1.25 a day, where children die for the lack of clean water and yet this society spends billions of dollars trying to find more efficient ways to kill people. The priorities of socialism would be to feed, clothe and shelter its citizens but capitalism has other priorities. “Top U.S. Army officials on Monday said a $160 billion Future Combat Systems modernization program managed by Boeing Co and SAIC Inc was ‘on budget, on track,’ but could see changes over time. Army Chief of Staff Gen. George Casey said the Army was going through a detailed review of 14 separate weapon systems included in the program to ensure that the technologies involved were on schedule. ‘We’re committed to Future Combat Systems. It’s just a question of adjusting as the world changes, and as the need changes,’ Army Secretary Pete Geren told reporters at the annual Association of the U.S. Army meeting. …The Army’s FCS program is a family of 14 manned and unmanned aerial and ground systems, tied together by communications and information links.” (Yahoo News, 6 October) Lots and lots of money to kill, bugger all for starving kids. That is how capitalism operates.

A Much Better Idea

Robert Reich, former US secretary of labour, commenting on the recent economic crisis showed that he understood that China was a capitalist country when he said “There are still only two kinds of capitalism. There’s authoritarian capitalism as in China and Singapore, and there’s democratic capitalism as in US and Europe. If there’s anyone out there who has a better idea, I’m sure the world would love to hear it.” (Newsweek, 13 October) If someone can get us Mr Reich’s address we will send him a subscription to the Socialist Standard so he can learn about the socialist alternative. Although we don’t think he would be too impressed, because we want to get rid of the exploitative system that gives him a privileged existence.

Putting his foot in it

Last year when he was Chancellor of the Exchequer Gordon Brown outlined his annual budget speech with these words – “Britain’s growth will continue into its 60th and 61st quarter and beyond . . . Inflation has fallen from 3% to 2.8%, and will fall further this year to 2% . . . Looking ahead to 2008 and 2009 inflation will also be on target. And we will never return to the old boom and burst.” (quoted in Time, 13 October) He was warmly applauded by the Labour benches and praised by the press for his sagacity and prudence. What a difference a year makes. Inflation stands at about 4.7 percent, banks mortgage lenders have been taken over on the verge of bankruptcy and a deep economic recession looks likely. Capitalism is an anarchic, uncontrollable system. Boom and burst are the very foundation of capitalism. No doubt a future Conservative Chancellor of the Exchequer will in turn pretend that he can control this mad profit system. Capitalism makes fools of the politicians who claim to be able to control it.

Another Reform of Capitalism?

When socialists see workers cram into buses and underground trains on their way to work, we often remark that if cattle were crammed into transport like that on their way to the slaughterhouse there would be a public outcry by Animal Rights groups. Workers are often treated worse than animals but this latest outburst against the working class takes a bit of beating. “An Australian politician has used his first speech to parliament to call for unemployed idlers to be stung with a cattle prod to get them to work. John Williams, a former truck driver, shearer, farmer and small business owner who only took his place in the Senate on July 1, said he had seen many people living on employment benefits who were ‘determined not to work’. ‘They are simply getting a free ride on behalf of tax payers of Australia and it is about time they received a touch on the backside with a cattle prodder to get them off their butts and actually do some work,’ he said.” (Yahoo News, 16 September) To use his fellow Australians use of the language – what a bahstard!

Voice From The Back: This is Democracy? (2009)

The Voice From The Back Column from the September 2009 issue of the Socialist Standard

This is Democracy?

The US government are very fond of lecturing other governments about democracy and extolling the virtues of democracy as opposed to one party regimes. Where it suits their economic interests, such as in oil-rich Middle East states they are less adamant about democracy though. Nevertheless, compared to dictatorship like Saudi Arabia and North Korea, the USA would seem to be a model for the superiority of democracy. However on closer examination the US model is far from perfect. “In 2000, Jon Corzine spent tens of millions of his personal fortune to vault himself from political obscurity to the United States Senate. In 2005, he spent millions more to jump from Washington to Trenton and become New Jersey’s governor. This year he’s opening his wallet again as he looks to overcome a steep deficit in the polls to win re-election, in what could be the ultimate test of whether money trumps all in politics today. Throughout American history, personal wealth has often played a significant role in winning political office. But as campaigns are increasingly decided by 30-second TV ads and sophisticated get-out-the-vote efforts, the two major parties are increasingly looking to recruit individuals with personal fortunes that can help bankroll campaign costs that now more often than not run into the tens of millions of dollars.” (Yahoo News, 9 July) In US-style democracy anyone can become politically powerful but it does help if you happen to be a multi-millionaire.

The Power of Money

It is axiomatic in capitalist society that if you have more money you eat better than those with less of the stuff. Likewise when it comes to accommodation the rich live in palaces while the poor live in inadequate housing. In education, recreation and every other human pursuit money allows for the best of everything and consequently lack of the stuff leads to the cheap and the shoddy. A recent example of this was provided by a review of the treatment of mental health patients in the NHS. “A bleak picture of a mental health service that tolerates bullying and houses children alongside adults in breach of guidelines is revealed in a damning report from a government monitoring body. The Mental Health Act Commission claims many more patient deaths will occur through inadequate staffing and lack of training. The 248-page study, the last by the commission before it is replaced by the new Care Quality Commission, highlights how patients put on suicide watch are often poorly observed, leading to tragedies half-concealed by ‘falsification’ of nursing records.” (Observer, 19 July) Needless to say this sort of treatment is reserved for those who cannot afford the luxurious treatment provided for the very rich. As the Bob Dylan song has it – “Money doesn’t talk, it swears!”

Prophets and Profits

The financial journalist Richard Wachman recently wrote an article in the Observer entitled “We’re two years older and sadder, but perhaps not a great deal wiser”. He reviewed the financial collapse that had occurred from August 2007 to August 2009. “What happened two years ago was to lead to a chain of event that involved the nationalisation of about half the major banks in Britain and the United States. It was also to lead to the collapse of emerging markets from Latvia to Pakistan and the biggest ever globally co-ordinated government rescue package, involving trillions of pounds. The world is now an uglier place with mass unemployment, widespread business failure and dramatic falls in world trade.” (Observer, 2 August) Wachman’s analysis of the problem is not particularly revealing but what is of interest in his article is how the crisis has left so-called experts with egg on their faces. Mervyn King (August, 2007) “I don’t think there’s any real evidence here of a fundamental challenge to the macroeconomic outlook.” and then (February, 2009) “The UK is in deep recession … Restoring both lending and confidence will not be easy and will take time.” George W Bush (August, 2007) “The fundamentals of our economy are strong … and we are headed for a soft landing.” and then “If money isn’t loosened up, this sucker could go down.” (September, 2008) Alistair Darling (August 2007) “People should have confidence that many of the investment they make will be good investments.” and then “Times are arguably the worst they’ve been in 60 years… it’s going to be more long-lasting than people thought.” (September 2008) Capitalism is a social system based on economic slumps and booms and it makes fools of all the “experts”.

Las Vegas, Another View

We are all aware of the Hollywood depiction of Las Vegas as a fun-loving city, full of casinos, nightclubs and good times, but the reality for its growing homeless numbers is far from idyllic. As jobs and homes disappear many of the dispossessed street dwellers are subject to attacks of violence. Now even the streets are being abandoned by the homeless. “Some of the Las Vegas homeless resort to living in a maze of underground flood channels beneath the Strip. There they face flash floods, disease, black widows and dank, pitch-dark conditions, but some tunnel dwellers say life there is better than being harassed and threatened by assailants and the police. ‘Out there, anything goes,’ said Manny Lang, who has lived in the tunnels for months, recalling the stones and profanities with which a group of teenagers pelted him last winter when he slept above ground. ‘But in here, nothing’s going to happen to us.’” (New York Times, 7 August) In one of the most sophisticated urban areas in the world some members of the working class are living like sewer rats. What a hellish system capitalism is.

The crisis: an open letter to trade unionists (2009)

From the September 2009 issue of the Socialist Standard

Fellow Workers,

 Capitalism is once again in the middle of one of its periodic economic crises, this time a bigger one than in the recent past. And, as usual, we are the victims. This crisis has been caused, as all capitalist crises are, by the uncontrollable pursuit of profits that drives the capitalist economy.

 With all capitalist businesses chasing profits, one sector of the economy inevitably overexpands in relation to what it can sell. This time it was the US house-building sector. Its overexpansion had an immediate effect on the banking sector which, in its chase after profits, had been engaging in dubious practices. This in turn had a knock-on effect on other sectors and is still working its way through the economy. Which is where we are today, with closed factories and rising unemployment alongside unmet needs.

 Unemployment in Britain is expected to reach 3 million, maybe even before the end of the year. Faced with this economic tsunami, the government has been helpless. They have bailed-out the banks but, apart from that, all they have done is to print more money, but this won’t get production going again. It will just stoke up inflation for later. It looks as if this Labour government will end like all previous Labour governments – leaving office with more unemployed than when they took over. So showing once again that governments can’t control the way capitalism works.

 The capitalist economy will eventually recover but of its own accord, not because of anything the government might do. And not without first putting the working class through many more months of additional misery.

 Recovery will only come when the rate of profit is restored. Which employers are actively seeking to bring about by imposing wage freezes, even wage cuts, watering down pension schemes, and anything else they can think of to reduce their labour costs. Some have even had the cheek to ask their employees to work for nothing. Meanwhile both the Labour government and the Tory opposition are insisting that public sector workers will have to suffer too.

 Workers should fight back. But the crisis has shifted the balance of forces even more in favour of employers. In the best of circumstances, when production is expanding and there is a labour shortage, unions have to work hard to get wages to go up a bit more than inflation. Now, with falling production and rising unemployment, unions can only try to put a brake on the downward slide, only try to stop things getting worse, .

 Ask yourself this: Why should we have to fight the same battles over and over again? Is this the only future? Yes, within the context of the capitalist system of production for profit, it is. But capitalism is not the only possible way of organising the production and distribution of the things we need. There is an alternative.

 Workers can and should organise to end capitalism which forces them to work for wages to live. We should organise to replace it with a system based on producing the things we need simply because we need them and not to make a profit. Production for use, not production for profit. But we can’t control what is produced unless we also own and control the means of production. In short, we need socialism, the common ownership and democratic control of the means of production.

 To achieve this, workers need to take political action. We need to organise not just in trade unions but also as a political party with socialism as its aim and policy. This the Labour Party never was, even though it was originally set up and financed by the trade unions. Its policy was to work for reforms within capitalism. Labour governments did bring in some reforms, but they were never able to make capitalism work in the interests of workers. That’s just not possible. All of them ended up merely managing capitalism and in the only way it can ever be – as a profit-making system in the interests of those who live off profits extracted from the unpaid labour of wage and salary workers. Instead of Labour changing capitalism, capitalism has changed Labour into the miserable band of self-seeking apologists for capitalism that everybody today can see they are. It’s high time the unions stop financing this capitalist party, as some have already done.

 Some are suggesting that, now that existing Labour Party has failed, the unions should set up a new Labour party. That would be a mistake. Labour reformism has failed once and it would fail again. So, let’s not go down that road a second time. Let’s learn the lesson of history that no government can manipulate capitalism to ensure permanent full employment and steadily rising wages, the TUC’s illusion (and not only theirs) of a radiant future. Which, even if possible, would still leave the exploitation of wage-labour for profit on which capitalism is based.

 No, what is needed is, as we said, a party with socialism as its aim and policy, an instrument workers can use to win control of political power with a view to ending capitalist ownership and the wages system and to bring in the common ownership of the means of production so that these can be used to meet people’s needs in accordance with the principle “from each according to their abilities, to each according to their needs”.

Socialism is still the hope of humanity. Let’s work for it.

The Executive Committee,

The Socialist Party of Great Britain.

August 2009

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.

Cooking the Books: The coming purge (2008)

The Cooking the Books column from the September 2008 issue of the Socialist Standard

Is it a depression or just a recession? According to the Penguin Dictionary of Economics, a recession is “an imprecise term given to a sharp slow-down in the rate of economic growth or a modest decline in economic activity”. This as distinct “from a slump or depression which is a more severe and prolonged downturn”. Government statisticians register a recession when GDP falls for two successive quarters.

On this definition Britain is not in a recession – not yet. But most economy-watchers expect that this stage will soon be reached. Gary Duncan, economics editor of the Times, even writes that this would not be such a bad thing:

“If Britain is to succumb to recession we need to remember that such periods are a virtually inescapable feature of even the most successful capitalist economies, even a necessary one to purge the system of past excesses, inefficient practices and the weakest links among businesses” (21 July).

That’s what Marx said, but it’s not what the economics textbooks teach (they still cultivate the illusion, relayed by politicians, that governments can engineer a steady growth of GDP, i.e. can avoid such periodic “purges”).

For Marx the accumulation of capital, which is the engine of economic growth, proceeded in fits and starts, a series of cycles of moderate activity, boom, crisis, slump, recovery, moderate activity, boom, crisis, etc. Booms eventually created the conditions for the next following slump while slumps created those for recovery.

One thing that happens during a slump that helps recovery is that capital is destroyed. Not just in the physical sense as when machinery is scrapped or factories pulled down but also in terms of the depreciation of capital with the physical elements in which it is embodied not being affected. This is the purge Duncan talks about. Marx explained:

“Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt. If the value of the commodities from whose sale a capitalist reproduces his capital was equal to £12,000, of which say £2,000 were profit, and their price falls to £6,000, then the capitalist can neither meet his contracted obligations nor, even if he had none, could he, with the £6,000 restart his business on the former scale, for the commodity prices have risen once more to the level of their cost-prices. In this way, £6,000 has been destroyed, although the buyer of these commodities, because he has acquired them at half their cost-price, can go ahead very well once business livens up again, and may even have made a profit. A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction” (Theories of Surplus Value, Part Two, p. 496).

“This fall in the purely nominal capital,” Marx went on “State bonds, shares etc. . . amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

As Britain heads for a recession (in whatever sense) the parvenus are already gathering to buy up failed and failing business at bargain prices. As well as laughing all the way to the bank they can justify their unpopular activity as performing a necessary function in capitalism’s business cycle. As indeed they are.

Boom and bust (2009)

Book Review from the November 2009 issue of the Socialist Standard

The Trouble with Capitalism.  By Harry Shutt, Zed books.

  It is easy to see why the publishers have re-issued this book that first came out in 1998 – in it Shutt argued that a devaluation of capital assets could not be avoided for ever and that when it eventually did happen it would take the form of a big crash.

  Mat Little, who interviewed Shutt for Red Pepper this January, summarised what Shutt sees as the contradiction of capitalism that leads to recurring business cycles of boom and bust:

“According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent-up demand for the whole process to begin again in time. That, in brief, is the business cycle.” (www.redpepper.org.uk/Prophet-of-doom)

Although Shutt does not write as a Marxist, this is one of the explanations of the capitalist business cycle put forward by some in the Marxist tradition. It implies that all capitalist crises are caused by the overexpansion (in relation to paying demand) of the sector producing consumer goods. But while the crash of 1929 can be explained in this way, the history of capitalism shows that the overexpansion of any key sector or industry can provoke a contraction of production through a knock-on effect on the rest of the economy.

  Shutt explains the 25-year period of expansion after the end of WW2 in terms of the satisfaction of the market for affordable consumer durables and the end of this post-war boom as a result of the slowing down of this market. Capitalist enterprises were thus, he says, left with a ‘mountain of cash’, profits which could not be re-invested in expanding production, which he also describes as a ‘capital glut’ in the sense of an oversupply of  investible funds.

  What would normally happen in  such a situation is that, in accordance with the law of supply and demand, capital would be devalued; which a crisis would bring about, so restoring the rate of profit (because this is calculated as profit divided by the value of capital). Only, according to Shutt, this did not happen on any large scale in 1974 because the authorities (governments and central banks) took steps to try to stop this, by facilitating the channelling of the surplus of investible funds into non-productive activities such as lending to consumers or speculation on the stock exchange or in property:

“This massive flow of funds – which is not being allowed, as would be dictated by traditional capitalist rationale, to self-destruct through the natural operation of the business cycle – has to find an outlet in more or less speculative forms of investment.” (p. 179)

Writing in 1998 Shutt saw the various financial crises till then – the stock market crash of 1987, the Mexican debt crisis of 1994-95, the financial problems of the Asian ‘tiger economies’ in 1997 – as signs that this was not sustainable and as harbingers of  the Big Crash to come. Now, with the bursting of the dotcom bubble in between, he sees the Crash of 2008 as the expected big one:

“What the prolonged amassing of this huge surplus of capital cum fraud-driven credit bubble, means, according to Shutt, is the inevitable crash – the inexorable end of the business cycle – is going to be far more severe that it would otherwise have been. ‘I think we are looking at negative growth, for an absolute minimum of two or three years and I wouldn’t be surprised if it’s five or ten. That would be a depression,’ he says.” (Red Pepper interview).

Since our failure to foresee the post-war boom with our prediction that WW2 would most likely be followed by a slump, just as after WW1, we have tended to be wary of making such predictions ourselves. So, we will just record this as the opinion of one person who has studied the matter.

Adam Buick

Northern Clay (2007)

From the October 2007 issue of the Socialist Standard

Currency cranks claim – echoed in some badly edited economics textbooks – that banks have the power to “create credit” by a mere “stroke of a pen”: that if someone deposits, say, £100 in a bank, then the bank can lend out many times this amount, effectively creating new purchasing power at will. But this is not the case – banks are essentially financial intermediaries making a profit from borrowing money (typically from depositors) and then lending it out at a higher rate of interest to others; they do not create something effectively out of thin air.

This is obvious in the case of other financial institutions such as a building society or a credit union. A building society accepts deposits from savers, which is lends out to others to buy a house (originally it was only to its members, the savers, a principle still maintained in credit unions). Without these deposits they cannot function – building societies generally make a surplus (which in theory belongs to their members) by charging house-buyers a higher rate of interest than they pay their depositors. Which is why when interest rates go up and they have to pay more to depositors, they also have to charge house-buyers more and mortgage rates go up too.

Northern Rock, currently the focus of one of the most serious financial debacles in modern British history, used to be a building society, but in 1997 they “demutualised” and became a bank that is listed on the London Stock Exchange. From then on the surplus it made from charging borrowers more than it paid depositors became “profit” which belonged to its shareholders and the explicit aim became to maximise this. This essentially legal change did not change its economic function as a financial intermediary nor free it from the financial limitations common to other banks – and it certainly didn’t acquire any right to create credit by the stroke of a pen. But it did allow it access to a wider range of sources from which to obtain money to lend. Instead of being restricted to savers it could now borrow money on the “money market” where short term debts that can easily be converted into cash are traded. It was still a financial intermediary borrowing at one rate and lending at a higher one, only it now had a wider range of sources to borrow from.

Northern Rock seems to have based its entire banking strategy on taking advantage of the relatively low rates of interest available on the money market in recent years. The papers are reporting that while its loans and assets are worth £113 billion, only £24 billion of this has been covered by depositors. The rest – over three-quarters – has come from money borrowed on the money market.

This use of the money markets to underpin long-term lending such as for mortgage loans is what is sometimes known as ‘borrowing short and lending long’, and is traditionally considered bad banking practice. Although all banks have done it at the margins of their operations to smooth-over short-term fluctuations in deposits and loans, it is only in comparatively recent times that some banks have developed entire strategies based around it and Northern Rock appears to be one of the more extreme examples of it.

The main problem that has now developed is that since the beginning of August the money market, like other financial markets, has been in turmoil. Banks and other financial institutions have been reluctant to lend money on it because of the US sub-prime mortgage crisis, so institutions such as Northern Rock who have been relying on it to borrow cheaply have been in trouble. So much trouble in the case of Northern Rock, that it has had to go cap in hand to the Bank of England, which, as the “lender of last resort” to banks has loaned them the money – or rather opened a credit line for them – so that the bank can survive its current problems. The Bank of England is reportedly charging them an interest rate at around one percentage point above the London Inter-Bank Offered Rate (‘Libor’, the rate at which the banks lend to one another). This amounts to what has been described as a ‘penal’ rate of around 8 per cent in total.

Indeed, Northern Rock is probably not just worried about its depositors withdrawing their money (and at the time of writing the government has taken the unusual step of guaranteeing all deposits to stop the ‘bank run’ that had been developing across the country). The underlying issue is more about its inability to continue borrowing money from the money market at a lowish rate of interest – since in many respects it is from the difference between this rate and the rate it charges house-buyers that it makes its profit. Already it is forecasting lower profits for the current year and because its share price has fallen – due to some of its shareholders bailing out too – it is liable to be taken over by some rival. In fact, this is what the papers are predicting and it is probably the only way to save it now that its credibility has been shattered.

One thing that won’t happen – because it can’t – is that Northern Rock’s beleaguered chief executive, Adam Applegarth, will take out his pen and simply create the missing credit. Indeed, what has happened to Northern Rock is further proof that banks cannot create multiples of credit from a given deposit base. If they could do this, Northern Rock would never have had to go cap in hand to the money markets to finance its lending operations in the first place.

Cooking the Books: QE didn’t work (2021)

The Cooking the Books column from the September 2021 issue of the Socialist Standard

Quantitative Easing (QE) was originally introduced by the Bank of England in 2009 with the aim of stimulating a revival of the economy after the Crash of 2008. The Bank bought government bonds, so increasing cash in the hands of the sellers. Depending on who they were, the idea was that they would either invest the money in their business or deposit it in their bank which would then have more money to lend.

It hasn’t worked like that, as a recent House of Lords report confirmed:

‘We conclude, on balance, that the evidence shows quantitative easing has had limited impact on growth and aggregate demand over the last decade. To stimulate economic growth and aggregate demand, quantitative easing is reliant on a series of transmission mechanisms that operate primarily in and through financial markets. There is limited evidence to suggest that these increase bank lending or investment, or boost consumer spending by wealthy asset holders’ (parliament.uk, paragraph 50 – bit.ly/3lOqDcG).

The Report did make the lesser claim that if QE didn’t make things better at least it stopped them getting worse, by helping to prevent ‘a reoccurrence of the Great Depression’ of the 1930s. This is pure speculation as there is no way of proving it since that might not have happened anyway, whereas that QE didn’t stimulate the economy is self-evident.

However, QE benefited some people:

‘the mechanisms through which quantitative easing effectively stabilised the financial system following the global financial crisis have benefited wealthy asset holders disproportionately by artificially inflating asset prices. On balance, we conclude that the evidence shows that quantitative easing has exacerbated wealth inequalities’ (paragraph 68).

By ‘asset prices’ their lordships did not mean the prices of the physical assets used in production such as plant and machinery but the prices of bonds and shares.

This is also the opinion of Catherine Mann, who has just been appointed to the committee that fixes the Bank Rate. She told the Houses of Commons Treasury Select Committee that financial markets:

‘have pocketed much of the recent stimulus (taking QE to £895 billion and rates to a record low of 0.1 percent) and left the real economy a few coins in loose change. Financial markets have absorbed monetary stimulus in “higher asset prices and greater financial stability risks … rather than transmitting [it] to the real economy” since QE became the Bank’s active policy, she said’ (Times, 27 July).

If she is suggesting that ‘wealthy asset holders’ deliberately refused to invest in producing more real wealth then she has got the wrong end of the stick. The reason the extra, cheap money made available by the Bank of England hasn’t found its way into productive investment is because it couldn’t all be invested at a sufficient profit. That is why it has been used instead on stock market gambling and speculation. As long as it is not profitable to invest the extra money, this situation won’t change. The capitalist economy is driven by business investment with a view to profit, not by abundant money or low interest rates.

Even if the government had spent the money directly into the real economy that would not have stimulated a revival but would have caused stagflation as in the 1970s. QE must have seemed a good idea as it avoided that, but it hasn’t worked as intended and has had the effect of enriching ‘wealthy asset holders’. That’s how it is. Governments can’t make capitalism work the way they want. They propose, but capitalism disposes.

Bourgeois Political Economy in Shambles (2010)

Pamphlet Review from the April 2010 issue of the Socialist Standard

Bourgeois Political Economy in Shambles. By Stefan Engel. Verlag Neuer Weg, 2009

This is an English translation of a pamphlet originally published in Germany, with the subtitle “Some additions to the Marxist-Leninist crisis theory.” ‘Marxism-Leninism’ was the official political theory of the former Soviet Union and was enforced throughout most of the former Eastern European satellite governments of the twentieth century. ‘Marxism-Leninism’ is often synonymous with Stalinism.

Engel gives a reasonable account of the current global crisis of capitalism, which began in September 2008.  Crises are inevitable under capitalism because, as Karl Marx pointed out, “a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier” (Capital, Vol. III). German chancellor Merkel, like politicians everywhere, blamed the “financial excesses with no sense of social responsibility, the abandonment of moderation and the middle course by a number of bankers and executives” which “steered the world into this crisis”. As Engel rightly says, this way of arguing “turns attention to the – undeniable – subjective failings of bankers and executives, and distracts attention from the essentials, from the laws of the capitalist mode of production. These laws compel every capitalist, whether factory owner or manager of a stock corporation, whether privately owned or state-owned company, to act, under penalty of ruin”.

But it is the ‘Marxism-Leninist’ understanding of the state, among other things, where it falls down. Engel quotes Engels on the state:

“The modern state, no matter what its form, is essentially a capitalist machine, the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers – proletarians. The capitalist relation is not done away with. It is rather brought to a head” (http://www.marxists.org/archive/marx/works/1880/soc-utop/ch03.htm).

This should have made Engels (and Marx’s) position abundantly clear, but Lenin stood this argument on its head and claimed that capitalism and the state could be made democratic and that this is what socialism means. Engel cites a passage from a pamphlet written by Lenin in 1917:

“… socialism is merely the next step forward from state-capitalist monopoly. Or, in other words, socialism is merely state-capitalist monopoly which is made to serve the interests of the whole people and has to that extent ceased be capitalist monopoly” (original emphasis, www.marxists.org/archive/lenin/works/1917/ichtci/11.htm).

However, the whole thrust of Marx and Engels’s critique is that capitalism and the state, whatever form they take, can never be made to serve the interests of the whole people. For the same reason, the idea of a “socialist state” is a nonsensical contradiction in terms. Lenin was never clear about the need for a “socialist state” as he knew it flouted the basics of Marxism, though it is implicit in some of his writings. Leninists have no such qualms and here we read of the need for a “socialist state of genuine democracy”. But  Leninist states have an abysmal record on democracy, preferring instead a dictatorship over the proletariat as they grapple with the contradictions of managing capitalism. In theory and in practice, ‘Marxism-Leninism’ is a shambles.

Lew Higgins