CAPITAL AND CRISIS (part 2)

Part 2 of the article ‘capital and crisis’ in the series THE RETURN OF MARX,) is below and now online at where the full article is available.


d) Financial Speculation. (The crisis augmented.)

The huge amounts of money swirling around within the financial sector of capitalism arise from two sources. The first is the source noted above - the production and sale of commodities and services. It is an accumulation and surplus created by the combined efforts of those productive citizens, who work for a salary or wage. This surplus finance - ‘money-capital’ - exists as currency residing in various forms of deposits and accounts. The second source is created in the form of the trade in ’paper’, also mentioned above (section c). This money market ‘paper’ comprises of a mixture of certificates, bonds, issues, futures, derivatives and numerous other financial ’instruments’, which in their essence are nothing more than future ’promises to pay’. Despite the quality of the paper upon which they are printed, they remain nothing more than sophisticated and often complex I.O.U.’s. An obvious problem occurs when these ‘promises-to-pay’ are traded as if they had an intrinsic value of their own, and are counted as good as money. The problem is that in actual fact they are only as good, as the promises to pay are realistic and not just wishful thinking. As this multitude of (often bundled together) certificates etc., are passed on (bought and sold) for cash or other pieces of paper, they appear - when credit is good - to be valuable in themselves. For this reason they soon proliferate. As an example of such proliferation, it is estimated that in 2011, a sum of $600,000 billion represents the amount of hopeful claims resting on OTC’s (Over-The-Counter Derivatives) alone. Yet, the bulk of this ‘paper’ as with many other financial ’instruments’ will actually be, and in crisis will be shown to be, a fictitious form of money. Marx again, this time on such fictitious forms of capital.

“The reserve funds of the banks, in countries with developed capitalist production, always express on the average the quantity of money existing in the form of a hoard, and a portion of this hoard in turn consists of paper, mere drafts upon gold, which have no value in themselves. The greater portion of banker’s capital is, therefore, purely fictitious and consists of claims (bills of exchange), government securities (which represent spent capital), and stocks (drafts on future revenue)….. In addition to this, it must be noted that this fictitious banker’s capital represents largely, not his own capital, but that of the public, which makes deposits with him, either interest-bearing or not.” (Marx. Capital. Volume 3. page 629/630. Emphasis added. RR.)

Since the above type of trading is largely made up of fabricated representatives of money, (ie paper promises to pay) such trading is viewed as risky and so the risk is insured or ‘hedged’ as it is often termed. However, if one or more of these claims or I.O.U.’s fails to be honoured, then a whole chain of ‘promises-to-pay’ defaults can and often does occur. In terms of such collapses and default losses due to speculative trading in such paper, one only need recall the Barings Bank and Sumitomo cases of the late 20th century. Such collapses did not end with these two particular events as the later examples at Allied Irish Banks, Societe Generale and more recently of the Swiss UBS bank trader, Kweku Adoboli, testify. All these publicly acknowledged incidents have shone a light on the ice-burg tip of derivatives dealings, which at least one Financial Times correspondent considered, “dangerously opaque and illiquid” (FT August 1 2011). Indeed, this observation is not surprising, ‘derivatives‘, were designed precisely to be opaque and therefore mask or hide much of the ‘toxic-debt‘ they contain. This toxic aspect of the present crisis is systemic, (an inherent part of the system) as is well known to those in the finance sector of capitalism, even if they have failed to understand the whole process. For example;

“In the wake of the collapse of Lehman Brothers, the need for a mechanism by which to move derivatives trades out of a collapsing institution and onto the books of others has come into sharp focus….Limiting systemic risk has become one of the overarching themes of global market reform in the wake of the financial crisis..” (Financial Times. OTC section. August 1. 2011. Emphasis added. RR.)

Note that the ‘risk’ in this financial market is admittedly ‘systemic’! Note also, that although it is not mentioned in this quote, those in charge of your pension fund and other such structured savings schemes, are up to their necks ‘playing’ the market in such lottery-type ‘spread-betting’ gambling with your savings and your future pension. Financial instruments such as ‘derivatives’, ‘mortgage guarantees’ and ‘credit default swaps’ and ‘spread-betting’ or ‘short-selling’ on share prices, are just the most recent means by which the financial sector of society has sought to speculate and to ‘insure’ their speculation against possible loss. There are at least two-score acronyms, such as OTC’s in financial sector language, all based around the production of multiple ‘certificates’ which promise to pay - at a future date - the principle borrowed together with interest - if they are not already ‘discounted’. They are the modern terms for that earlier capitalist development of ‘bills of exchange’ and ‘drafts’ which were described by Marx.

Since these ‘investors’ are just passing around large amounts of fictitious money in the form of elegant looking pieces of paper, in the expectation of increasing their wealth, it would seem to be no problem for ordinary people if they eventually lost the lot. However, it is a great problem, as we can understand, when we realise that some of the money is real and some of this real money is ours. Plus this group are tied into the same banking system as the rest of us and are parasitic on the production and circulation of commodities and services. For this reason - their crisis - suddenly becomes ours! Further collapses in the finance sector will cause further dislocations and interruptions to the basic circuit of production and exchange. [See the article - ‘No Plan B. at www.critical-mass.net] We already know this is so from the fact that the general tax-payer was forced by the government to pay to support the speculative banking losses (risky trading swindles - dodgy derivative mortgages) in 2008, so that we would have a banking system to continue using. This was a situation which caused debate and controversy and it is one which is still actively debated. Not surprisingly, Marx anticipated this argument also;

“This is the point where both sides of the controversy on the prevalent theory of crises are at the same time right and wrong. Those who say that there is merely a lack of means of payment, either have only the owners of bona fide securities in mind, or they are fools who believe that it is the duty and power of banks to transform all bankrupt swindlers into solvent and respectable capitalists by means of pieces of paper. Those who say that there is merely a lack of capital, are either just quibbling about words,…. or they are referring only to such cavaliers of credit who are now, indeed, placed in the position where they can no longer obtain other people’s capital for their operations and now demand that the bank should not only help them to pay for the lost capital, but also enable them to continue with their swindles.” (Capital Volume 3 p 693. Emphasis added. RR.)

Swindles such as that perpetrated by Bernie Madoff’s Investment Securities, discovered in 2008 indicate that little has changed over the 120 or so years since Marx penned the above words. And of course, swindles are still being carried out daily. Such actual and potential financial tremors and debt-bomb explosions in the financial superstructure, ahead of a further devastating general collapse, have already had massive effects upon the foundations upon which it is built - the foundations of everyday employment in production and circulation - a foundation upon which we all currently rely. Marx’s observation above, that speculators demand the bank should help them out is now being taken even further. The banks, following this example, now also demand to be ‘bailed-out’ of the situation they have helped create, by gifts of tax-payer money and by the removal of welfare benefits to ordinary people. Which brings us to the much vexed question of sovereign debt.


e) State debt. (The crisis politicised.)

The question of massive state debts, which swamped the media attention during the summer of 2011, is an interesting and revealing one. These modern state debts range from trillions of dollars and euros to billions of pounds and other currencies. However, it is the extent of the debt which is new, not its actual existence. The logic of how it arises is simple. Governments of capitalist countries acquire their revenue from two main sources of realised surplus value. The first source is tax deductions directly from income, profits, purchases (VAT) and property. The second source of government revenue has been from loans. So in sum, government revenue comes from taxes upon individuals, industry, commerce, finance and loans. Of course, all these sources of income are derived ultimately from the surplus value created during the process of production. It is of course, the loans and expenditure of governments, not the taxes paid by citizens, which have create the present monstrous levels of state debt. However, these revenue sources are not static, but variable and have varied progressively downward for the following reasons.

Since the mid 20th century, production for profit began to exit the advanced countries of Europe and North America in particular, with an accompanying rise in unemployment. Jobless workers no longer pay tax and the support they need from the state increases. In addition the absent companies no longer pay the home government the taxes they formerly did, so that source of state income is also reduced. Nevertheless, the ambitions of governments often continue to outstrip the tax revenues accruing to them. Armed forces, for the purposes of forcibly securing sources of raw materials, loan guarantees and markets for capital, are expensive to maintain. When they are deployed in wars for the same or other purposes, the expense shoots up as the equipment increases in sophistication and needs replacing as it is worn out or destroyed. In short, state expenditure everywhere has been going up, whilst income has been going down. In such circumstances the pro-capitalist governments of Europe and North America (the modern cavaliers of credit) have availed themselves of loans from those in the financial sectors of the economy, who as we noted above, have individually or collectively managed to accumulate vast wealth in the monetary form. But within this lending process lies another fundamental problem. Marx, explained the potential outcome of this in the following manner.

“The state has to annually pay its creditors a certain amount of interest for the capital borrowed from them. In this case, the creditor cannot recall his investment from his debtor, but can only sell his claim, or his title of ownership. The capital itself has been consumed, i.e., expended by the state. It no longer exists. What the creditor of the state possesses is 1) the state’s promissory note,…..this promissory note gives the creditor a claim upon the annual revenue of the state, that is, the annual tax proceeds, for a certain amount... But in all these cases, the capital, as whose offshoot (interest) state payments are considered, is illusory, fictitious capital. Not only that, the amount loaned to the state no longer exists…No matter how often this transaction is repeated, the capital of the state debt remains purely fictitious, and, as soon as the promissory notes become unsaleable, the illusion of this capital disappears.” (Marx. ibid page 623. Emphasis added. RR. )

In other words, the modern capitalist state in Europe and North America, has been increasingly drawn, by its pro-capitalist politicians, left, right and centre, into the speculative financial circuit of creating ‘paper’ fictitious capital. The agents of the state, have issued ’bonds’ for increasingly vast amounts, during the post-war period, which they knew could never be paid from the states existing tax-revenue base. The bonds have no intrinsic value, they are only ‘promises to pay’ issued by governments, it must be said, without the consent of their respective citizens. These state officials now continue to sell ‘government ‘bonds’ just to pay the interest on the previous bonds they issued. The increase of the state debt limit in the USA during August 2011, as with previous increases, is a recognition of the fact that income - under the richest form of capitalism - is never going to match expenditure. Not without, that is, cut-backs in state and other employment of such magnitude and diversity that it will engender huge uprisings and potentially revolutionary consequences. And such increases in debt ceilings, and reductions in employment welfare do not even solve the problem, they merely push the problem further into the future - or in the current US political terminology they just ‘kick the ‘can’ up the road’.

Those finance capitalists, the modern equivalent of Marx’s ‘money capitalists‘, who have accumulated huge wealth and provided the loans are demanding increasing interest for some governments on future loans, in one case over six percent during August 2011. These bond holders are also presently ‘passing-the-parcel’ round - so to speak - and trying to off-load their existing bonds and other such promissory notes, before any country defaults and cancels these politically promoted obligations. In the same way as the private sector finance capital made bad loans (mortgages etc) and then on governmental initiative were bailed out by the tax payer, the owners of government bonds wish to offload the government’s bad debts onto the citizens of the respective countries. The additional pound of flesh, they are factoring into their calculations is the demand to be guaranteed state assets in case of the inevitable default. Thus, if this transpires, an individual or conglomerate of individual finance capitalists will own national resources and land that was formally in the collective ownership of the people via the state. These financial ‘vampires’, via their representatives in central banks and the IMF (International Monetary Fund), are also insisting that the politicians decrease all state jobs (initially 30,000, in Greece - more to follow), welfare (including pensions), along with increasing taxes and prices. It is this IMF and ECB (European Central Bank) led project which is now politicising the economic crisis as the occupiers of Wall Street, the rioters in Greece and the demonstrators in Spain are now demonstrating.


f) Going beyond Capital. (The crises transcended.)

So there we have it. Let us summarise this system of capitalism. Commodity production under the control of, and driven by capital, over-produces endless varieties and surplus numbers of commodities, while creating unemployment, on the one hand, and on the other, creates huge quantities of profits for the rich. In this process it; a) exhausts the raw material resources of the planet, pollutes the air, the sea, the land; b) gluts the markets with short-life commodities creating obsolete commodities that need to be dumped and engendering a fetishist, insatiable desire for possession of commodities among people; c) creates structured unemployment and relative poverty; d) produces a mass of profits so immense that those in control of it search for any and every possible means of increasing wealth. This frantic search leads to speculation and eventual collapses in production and thus further unemployment, collapses in the value of money, collapses of fictitious capital and debt crises - all of which lead to further dislocations in the much needed circuit of production and exchange. The present crisis - which has not yet hit its lowest point - demonstrates that the capitalist mode of production and exchange has again reached its practical, social and now ecological limits. This tendency to ignore boundaries of either, moral, ethical, fiscal or ecological is inherent within the capitalist mode of production and was also identified by Marx.

“The limits within which the preservation and self expansion of the value of capital resting on the expropriation and pauperisation of the great mass of producers can alone move—these limits come continually into conflict with the methods of production employed by, capital for its purposes, which drive towards unlimited extension of production, towards production as an end in itself, towards unconditional development of the social productivity of labour.” (Marx. Capital Volume 3 p 331. Emphasis added. RR.)

This unquestioned drive toward, unlimited extension of production, is reflected in the repeated mantra proposed by politicians - of all shades of opinion - who imagine that the solution to the this crisis created by the past and present overproduction is further capitalist production - on and on, into the future. This same perspective is repeated by the ‘officials’ of various trade union movements throughout Europe and North America, who seem content to regurgitate variations on the dominant liberal-economic theme. They all, in one nuanced form or another, repeatedly intone, ‘the solution lies in ‘economic growth‘, as if it were some magic incantation which will miraculously make the current problems vanish. In this way, they all ignore, not only the causes of the present catastrophic symptoms, but also the growing awareness, that the ecology of the planet could not possibly sustain the unlimited extension of production which is both implicit and explicit under the domination of capital. And this eventuality in one sense is nothing new. For this additional consequence, was a probability of which Marx was well aware. In his personal notes (Grundrisse) prior to the writing of ’Capital’ he wrote that under capitalism science and technology was primarily directed toward production for profit. He further commented;

“For the first time, nature becomes purely an object for humankind, purely a matter of utility…the theoretical discovery of its autonomous laws appears as a ruse so as to subjugate it…whether as an object of consumption or as a means of production.” (Marx. Grundrisse. Page 410. Penguin 1973. Emphasis added. RR.)

There are many challenges facing individuals, communities, nations, and of course where these overlap, humanity in general. However, the greatest challenge is not the conquest of space as many seem to imagine. Nor is it the ability to explore the deep ocean trenches or to overcome or eliminate the many diseases still blighting the human species. Great as these challenges are, they are not the most difficult, for they do not require the collective and concerted efforts of millions, but merely the concerted efforts of a relative few knowledgeable, well funded and committed people. The greatest challenge is the overcoming and ending the rule of capital with its symptoms of militarism, colonialism and imperialism and the reorganisation of social production on a new and completely different basis. For that challenge, millions of committed and organised citizens are required to press for change. The kind of numbers that courageously and tirelessly filled Tahrir Square and other Arab streets, but this time assembling and organising knowing they have to not just change the political regime, but alter the entire socio-economic system. And this time seeking an alteration that does not try to replicate either the authoritarian system of Fascism, or that of Leninist style state-capitalism. What Marx has to say on the latter question of a post-capitalist, future will be the focus of the next article in this series -

‘THE RETURN OF MARX - 2‘.

R. Ratcliffe (October 2011.)