At Jacobin: Socializing Finance

(Cross-posted from Jacobin. A shorter version appears in the Fall 2016 print issue.)


At its most basic level, finance is simply bookkeeping — a record of money obligations and commitments. But finance is also a form of planning – a set of institutions for allocating claims on the social product.

The fusion of these two logically distinct functions – bookkeeping and planning – is as old as capitalism, and has troubled the bourgeois conscience for almost as long. The creation of purchasing power through bank loans is hard to square with the central ideological claim about capitalism, that market prices offer a neutral measure of some preexisting material reality. The manifest failure of capitalism to conform to ideas of how this natural system should behave, is blamed on the ability of banks (abetted by the state) to drive market prices away from their true values. Somehow separating these two functions of the banking system –  bookkeeping and planning –  is the central thread running through 250 years of monetary reform proposals by bourgeois economists, populists and cranks. We can trace it from David Hume, who believed a “perfect circulation” was one where gold alone were used for payments, and who doubted whether bank loans should be permitted at all; to the 19th century advocates of a strict gold standard or the real bills doctrine, two competing rules that were supposed to restore automaticity to the creation of bank credit; to Proudhon’s proposals for giving money an objective basis in labor time; to Wicksell’s prescient fears of the instability of an unregulated system of bank money; to the oft-revived proposals for 100%-reserve banking; to Milton Friedman’s proposals for a strict money-supply growth rule; to today’s orthodoxy that dreams of a central bank following an inviolable “policy rule” that reproduces the “natural interest rate.” What these all have in common is that they seek to restore objectivity to the money system, to legislate into existence the real values that are supposed to lie behind money prices. They seek to compel money to actually be what it is imagined to be in ideology: an objective measure of value that reflects the real value of commodities, free of the human judgements of bankers and politicians.


Socialists reject this fantasy. We know that the development of capitalism has from the beginning been a process of “financialization” – of extension of money claims on human activity, and of representation of the social world in terms of money payments and commitments. We know that there was no precapitalist world of production and exchange on which money and then credit were later superimposed: Networks of money claims are the substrate on which commodity production has grown and been organized.  And we know that the social surplus under capitalism is not allocated by “markets,” despite the fairy tales of economists.  It is allocated by banks and other financial institutions, whose activities are not ultimately coordinated by markets either, but by planners of one sort or another.

However decentralized in theory, market production is in fact organized through a highly centralized financial system. And where something like competitive markets do exist, it is usually thanks to extensive state management, from anti-trust laws to all the elaborate machinery set up by the ACA to prop up a rickety market for private health insurance. As both Marx and Keynes recognized, the tendency of capitalism is to develop more social, collective forms of production, enlarging the domain of conscious planning and diminishing the zone of the market. (A point also understood by some smarter, more historically minded liberal economists today.) The preservation of the form of markets becomes an increasingly utopian project, requiring more and more active intervention by government. Think of the enormous public financing, investment, regulation required for our “private” provision of housing, education, transportation, etc.

In  world where production is guided by conscious planning — public or private — it makes no sense to think of  money values as reflecting the objective outcome of markets, or of financial claims as simply a record of “real’’ flows of income and expenditure. But the “illusion of the real,” as Perry Mehrling somewhere calls it, is very hard to resist. We must constantly remind ourselves that market values have never been, and can never be, an objective measure of human needs and possibilities. We must remember that values measured in money – prices and quantities, production and consumption – have no existence independent of the market transactions that give them quantitative form. We must recognize the truth that Keynes – unlike so many bourgeois economists – clearly stated: a quantitative comparison between disparate use-values is possible only when they actually come into market exchange, and only on the terms given by the concrete form of that exchange. It is meaningless to compare  economic quantities over widely separated periods of time, or in countries at very different levels of development. On such questions only qualitative, more or less subjective judgements can be made.

It follows that socialism cannot be described in terms of the quantity of commodities produced, or the distribution of them. Socialism is liberation from the commodity form. It is defined not by the disposition of things but by the condition of human beings. It is the progressive extension of the domain of human freedom, of that part of our lives governed by love and reason.

There are many critics of finance who see it as the enemy of a more humane or authentic capitalism. They may be managerial reformers (Veblen’s “Soviet of engineers”) who oppose finance as a parasite on productive enterprises; populists who hate finance as the destroyer of their own small capitals; or sincere believers in market competition who see finance as a collector of illegitimate rents. On a practical level there is much common ground between these positions and a socialist program. But we can’t accept the idea of finance as a distortion of some true market values that are natural, objective, or fair.

Finance should be seen as a moment in the capitalist process, integral to it but with two contradictory faces. On the one hand, it is finance (as a concrete institution) that generates and enforces the money claims against social persons of all kinds — human beings, firms, nations — that extend and maintain the logic of commodity production. (Student loans reinforce the discipline of wage labor, sovereign debt upholds the international division of labor.)

Yet on the other hand, the financial system is also where conscious planning takes its most fully developed form under capitalism. Banks are, in Schumpeter’s phrase, the private equivalent of Gosplan, the Soviet planning agency. Their lending decisions determine what new projects will get a share of society’s resources, and suspend — or enforce — the “judgement of the market” on money-losing enterprises. A socialist program must respond to both these faces of finance.  We oppose the power of finance if we want to progressively reduce the extent to which human life is organized around the accumulation of money. We embrace the planning already inherent in finance because we want to expand the domain of conscious choice, and reduce the domain of blind necessity. “It is a work of culture — not unlike the draining of the Zuider Zee.”


The development of finance reveals the progressive displacement of market coordination by planning. Capitalism means production for profit; but in concrete reality profit criteria are always subordinate to financial criteria. The judgement of the market has force only insofar as it is executed by finance. The world is full of businesses whose revenues exceed their costs, but are forced to scale back or shut down because of the financial claims against them. The world is full of businesses that operate for years, or indefinitely, with costs in excess of their revenues, thanks to their access to finance. And the institutions that make these financing decisions do so based on their own subjective judgement, constrained ultimately not by some objective criteria of value, but by the terms set by the central bank.

There is a basic contradiction between the principles of competition and finance. Competition is imagined as a form of natural selection: Firms that make profits reinvest them and thus grow, while firms that make losses can’t invest and must shrink and eventually disappear. This is supposed to be a great advantage of markets.

But the whole point of finance is to break this link between profits yesterday and investment today. The surplus paid out as dividends and interest is available for investment anywhere in the economy, not just where it was generated. Conversely, entrepreneurs can undertake new projects that have never been profitable in the past, if they can convince someone to bankroll them. Competition looks backward: The resources you have today depend on how you’ve performed in the past. Finance looks forward: The resources you have today depend on how you’re expect (by someone!) to perform in the future. So, contrary to the idea of firms rising and falling through natural selection, finance’s darlings — from Amazon to Uber and the whole unicorn herd — can invest and grow indefinitely without ever showing a profit. This is also supposed to be a great advantage of markets.

In the frictionless world imagined by economists, the supercession of markets by finance is already carried to its limit. Firms do not control or depend on their own surplus. All surplus is allocated centrally, by financial markets. All funds for investment comes from financial markets and all profits immediately return in money form to these markets. This has two contradictory implications. On the one hand, it eliminates  any awareness of the firm as a social organism, of the activity the firm carries out to reproduce itself, of its pursuit of ends other than maximum profit for its “owners”. The firm, in effect, is born new each day by the grace of those financing it.

But by the same token, the logic of profit maximization loses its objective basis. The quasi-evolutionary process of competition – in which successful firms grow and unsuccessful ones decline and die  – ceases to operate if the firm’s own profits are no longer its source of investment finance, but both instead flow into a common pool. In this world, which firms grow and which shrink depends on the decisions of the financial planners who allocate capital between them. Needless to say it makes no difference if we move competition “one level up” – money managers also borrow and issue shares.

The contradiction between market production and socialized finance becomes more acute as the pools of finance themselves combine or become more homogenous. This was a key point for turn-of-the-last-century Marxists like Hilferding (and Lenin), but it’s also behind the recent fuss in the business press over the rise of index funds. These funds hold all shares of all corporations listed on a given stock index; unlike actively managed funds they make no effort to pick winners, but hold shares in multiple competing firms. Per one recent study, “The probability that two randomly selected firms in the same industry from the S&P 1500 have a common shareholder with at least 5% stakes in both firms increased from less than 20% in 1999 to around 90% in 2014.”

The problem is obvious: If corporations work for their shareholders, then why would they compete against each other if their shares are held by the same funds? Naturally, one proposed solution is more state intervention to preserve the form of markets, by limiting or disfavoring stock ownership via broad funds. Another, and perhaps more logical, response is: If we are already trusting corporate managers to be faithful agents of the rentier class as a whole, why not take the next step and make them agents of society in general?

And in any case the terms on which the financial system directs capital are ultimately set by the central bank. Its decisions — monetary policy in the narrow sense, but also the terms on which financial institutions are regulated, and rescued in crises – determine not only the overall pace of credit expansion but the criteria of profitability itself. This is acutely evident in crises, but it’s implicit in routine monetary policy as well. Unless lower interest rates turn some previously unprofitable projects into profitable ones, how are they supposed to work?

At the same time, the legitimacy of the capitalist system — the ideological justification of its obvious injustice and waste —  comes from the idea that economic outcomes are determined by “the market,” not by anyone’s choice. So the planning has to be kept out of site. Central bankers themselves are quite aware of this aspect of their role. In the early 1980s, when the Fed was changing the main instrument it used for monetary policy, officials there were concerned that their choice preserve the fiction that interest rates were being set by the markets. As Fed Governor Wayne Angell put it, it was essential to choose a technique that would “have the camouflage of market forces at work.”

Mainstream economics textbooks explicitly describe the long-term trajectory of capitalist economies in terms of an ideal planner, who is setting output and prices for all eternity in order to maximize the general wellbeing. The contradiction between this macro vision and the ideology of market competition is papered over by the assumption that over the long run this path is the same as the “natural” one that would obtain in a perfect competitive market system without money or banks. Outside of the academy, it’s harder to sustain faith that the planners at the central bank are infallibly picking the outcomes the market should have arrived at on its own. Central banks’ critics on the right — and many on the left — understand clearly that central banks are engaged in active planning, but see it as inherently illegitimate. Their belief in “natural” market outcomes goes with fantasies of a return to some monetary standard independent of human judgement – gold or bitcoin.

Socialists, who see through central bankers’ facade of neutral expertise and recognize their close association with private finance, may be tempted by similar ideas. But the path toward socialism runs the other way. We don’t seek to organize human life on an objective grid of market values, free of the distorting influence of finance and central banks. We seek rather to bring this already-existing conscious planning into the light, to make it into a terrain of politics, and to direct it toward meeting human needs rather than reinforcing relations of domination. In short: the socialization of finance.


in the U.S. context, this analysis suggests a transitional program perhaps along the following lines.

Decommodify money. While there is no way to separate money and markets from finance, that does not mean that the routine functions of the monetary system must be a source of private profit. Shifting responsibility for the basic monetary plumbing of the system to public or quasi-public bodies is a non-reformist reform – it addresses some of the directly visible abuse and instability of the existing monetary system while pointing the way toward more profound transformations. In particular, this could involve:

 1. A public payments system. In the not too distant past, if I wanted to give you some money and you wanted to give me a good or service, we didn’t have to pay a third party for permission to make the trade. But as electronic payments have replaced cash, routine payments have become a source of profit. Interchanges and the rest of the routine plumbing of the payments system should be a public monopoly, just as currency is.

 2. Postal banking. Banking services should similarly be provided through post offices, as in many other countries. Routine transactions accounts (check and saving) are a service that can be straightforwardly provided by the state.

 3. Public credit ratings, both for bonds and for individuals. As information that, to perform its function, must be widely available, credit ratings are a natural object for public provision even within the overarching logic of capitalism. This is also a challenge to the coercive, disciplinary function increasingly performed by private credit ratings in the US.

 4. Public housing finance. Mortgages for owner-occupied housing are another area where a patina of market transactions is laid over a system that is already substantively public. The 30-year mortgage market is entirely a creation of regulation, it is maintained by public market-makers, and public bodies are largely and increasingly the ultimate lenders. Socialists have no interest in the cultivation of a hothouse petty bourgeoisie through home ownership; but as long as the state does so, we demand that it be openly and directly rather than disguised as private transactions.

 5. Public retirement insurance. Providing for old age is the other area, along with housing, where the state does the most to foster what Gerald Davis calls the “capital fiction” – the conception of one’s relationship to society in terms of asset ownership. But here, unlike home ownership, social provision in the guise of financial claims has failed even on its own narrow terms. Many working-class households in the US and other rich countries do own their own houses, but only a tiny fraction can meet their subsistence needs in old age out of private saving. At the same time, public retirement systems are much more fully developed than public provision of housing. This suggests a program of eliminating existing programs to encourage private retirement saving, and greatly expanding Social Security and similar social insurance systems.

Repress finance. It’s not the job of socialists to keep the big casino running smoothly. But as long as private financial institutions exist, we cannot avoid the question of how to regulate them. Historically financial regulation has sometimes taken the form of “financial repression,” in which the types of assets held by financial institutions are substantially dictated by the state. This allows credit to be directed more effectively to socially useful investment. It also allows policymakers to hold market interest rates down, which — especially in the context of higher inflation — diminishes both the burden of debt and the power of creditors. The exiting deregulated financial system already has very articulate critics; there’s no need to duplicate their work with a detailed reform proposal. But we can lay out some broad principles:

1. If it isn’t permitted, it’s forbidden. Effective regulation has always depended on enumerating specific functions for specific institutions, and prohibiting anything else. Otherwise it’s too easy to bypass with something that is formally different but substantively equivalent. And whether or not central banks are going to continue with their role as the main managers of aggregate demand —  increasingly questioned by those inside the citadel as well as by outsiders — they also need this kind of regulation to effectively control the flow of credit.

2. Protect functions, not institutions. The political power of finance comes from ability to threaten routine social bookkeeping, and the security of small property owners. (“If we don’t bail out the banks, the ATMs will shut down! What about your 401(k)?”) As long as private financial institutions perform socially necessary functions, policy should focus on preserving those functions themselves, and not the institutions that perform them. This means that interventions should be as close as possible to the nonfinancial end-user, and not on the games banks play among themselves. For example: deposit insurance.

3. Require large holdings of public debt. The threat of the “bond vigilantes” against the US federal government has  been wildly exaggerated, as was demonstrated for instance by the debt-ceiling farce and downgrade of 2012. But for smaller governments – including state and local governments in the US – bond markets are not so easily ignored. And large holdings of pubic debt also reduce the frequency and severity of the periodic financial crises which are, perversely, one of the main ways in which finance’s social power is maintained.

4. Control overall debt levels with lower interest rates and higher inflation. Household leverage in the US has risen dramatically over the past 30 years; some believe that this is because debt was needed to raise living standards of living in the face of stagnant or declining real incomes. But this isn’t the case; slower income growth has simply meant slower growth in consumption. Rather, the main cause of rising household debt over the past 30 years has been the combination of low inflation and continuing high interest rates for households. Conversely, the most effective way to reduce the burden of debt – for households, and also for governments – is to hold interest rates down while allowing inflation to rise.

As a corollary to financial repression, we can reject any moral claims on behalf of interest income as such. There is no right to exercise a claim on the labor of others  through ownership of financial assets. To the extent that the private provision of socially necessary services like insurance and pensions is undermined by low interest rates, that is an argument for moving these services to the public sector, not for increasing the claims of rentiers.

Democratize central banks. Central banks have always been central planners. Choices about interest rates, and the terms on which financial institutions will be regulated and rescued, inevitably condition the profitability and the direction as well as level of productive activity. This role has been concealed behind an ideology that imagines the central bank behaving automatically, according to a rule that somehow reproduces the “natural” behavior of markets.

Central banks’ own actions since 2008 have left this ideology in tatters. The immediate response to the crisis have forced central banks to intervene more directly in credit markets, buying a wider range of assets and even replacing private financial institutions to lend directly to nonfinancial businesses. Since then, the failure of conventional monetary policy has forced central banks to inch unwillingly toward a broader range of interventions, directly channeling credit to selected borrowers. This turn to “credit policy” represents an admission – grudging, but forced by events – that the anarchy of competition is unable to coordinate production. Central banks cannot, as the textbooks imagine, stabilize the capitalists system by turning a single knob labeled “money supply” or “interest rate.” They must substitute their own judgement for market outcomes in a broad and growing range of asset and credit markets.

The challenge now is to politicize central banks — to make them the object of public debate and popular pressure.  In Europe, the national central banks – which still perform their old functions, despite the common misperception that the ECB is now the central bank of Europe – will be a central terrain of struggle for the next left government that seeks to break with austerity and liberalism. In the US, we can dispense for good with the idea that monetary policy is a domain of technocratic expertise, and bring into the open its program of keeping unemployment high in order to restrain wage growth and workers’ power. As a positive program, we might demand that the Fed aggressively using its existing legal authority to purchase municipal debt, depriving rentiers of their power over financially constrained local governments as in Detroit and Puerto Rico, and more broadly blunting the power of “the bond markets” as a constraint on popular politics at the state and local level. More broadly, central banks should be held responsible for actively directing credit to socially useful ends.

Disempower shareholders. Really existing capitalism consists of narrow streams of market transactions flowing between vast regions of non-market coordination. A core function of finance is to act as the weapon in the hands of the capitalist class to enforce the logic of value on these non-market structures. The claims of shareholders over nonfinancial businesses, and bondholders over national governments, ensure that all these domains of human activity remain subordinate to the logic of accumulation. We want to see stronger defenses against these claims – not because we have any faith in productive capitalists or national bourgeoisies, but because they occupy the space in which politics is possible.

Specifically we should stand with corporations against shareholders. The corporation, as Marx long ago noted, is “the abolition of the capitalist mode of production within the capitalist mode of production itself.” Within the corporation, activity is coordinated through plans, not markets; and the orientation of this activity is toward the production of a particular use-value rather than money as such. “The tendency of big enterprise,” Keynes wrote, “is to socialize itself.” The fundamental political function of finance is to keep this tendency in check. Without the threat of takeovers and the pressure of shareholder activists, the corporation becomes a space where workers and other stakeholders can contest control over production and the surplus it generates – a possibility that capitalist never lose sight of.

Needless to say, this does not imply any attachment to the particular individuals at the top of the corporate hierarchy, who today are most often actual or aspiring rentiers  without any organic connection to the production process. Rather, it’s a recognition of the value of the corporation as a social organism; as a space structured by relationships of trust and loyalty, and by intrinsic motivation and “professional conscience”; and as the site of consciously planned production of use-values.

The role of finance with respect to the modern corporation is not to provide it with resources for investment, but to ensure that its conditional orientation toward production as an end in itself is ultimately subordinate to the accumulation of money. Resisting this pressure is no substitute for other struggles, over the labor process and the division of resources and authority within the corporation. (History gives many examples of production of use values as an end in itself, which is carried out under conditions as coercive and alienated as under production for profit.) But resisting the pressure of finance creates more space for those struggles, and for the evolution of socialism within the corporate form.

Close borders to money (and open them to people). Just as shareholder power enforces the logic of accumulation on corporations, capital mobility does the same to states. In the universities, we hear about the supposed efficiency  of unrestrained capital flows, but in the political realm we hear more their power to “discipline” national governments. The threat of capital flight and balance of payments crises protects the logic of accumulation against incursions by national governments.

States can be vehicles for conscious control of the economy only insofar as financial claims across borders are limited. In a world where capital flows are large and unrestricted, the concrete activity of production and reproduction must constantly adjust itself to the changing whims of foreign investors. This is incompatible with any strategy for  development of the forces of production at the national level; every successful case of late industrialization has depended on the conscious direction of credit through the national banking system. More than that, the requirement that real activity accommodate cross-border financial flows is  incompatible even with the stable reproduction of capitalism in the periphery. We have learned this lesson many times in Latin America and elsewhere in the South, and are now learning it again in Europe.

So a socialist program on finance should include support for efforts of national governments to delink from the global economy, and to maintain or regain control over their financial systems. Today, such efforts are often connected to a politics of racism, nativism and xenophobia which we must uncompromisingly reject. But it is possible to move toward a world in which national borders pose no barrier to people and ideas, but limit the movement of goods and are impassible barriers to private financial claims.

In the US and other rich countries, it’s also important to oppose any use of the authority – legal or otherwise – of our own states to enforce financial claims against weaker states. Argentina and Greece, to take two recent examples, were not forced to accept the terms of their creditors by the actions of dispersed private individuals through financial markets, but respectively by the actions of Judge Griesa of the US Second Circuit and Trichet and Draghi of the ECB. For peripheral states to foster development and serve as vehicle for popular politics, they must insulate themselves from international financial markets. But the power of those markets comes ultimately from the gunboats — figurative or literal — by which private financial claims are enforced.

With respect to the strong states themselves, the markets have no hold except over the imagination. As we’ve seen repeatedly in recent years — most dramatically in the debt-limit vaudeville of 2011-2013 — there are no “bond vigilantes”; the terms on which governments borrow are fully determined by their own monetary authority. All that’s needed to break the bond market’s power here is to recognize that it’s already powerless.

In short, we should reject the idea of finance as an intrusion on a preexisting market order. We should resist the power of finance as an enforcer of the logic of accumulation. And we should reclaim as a site of democratic politics the social planning already carried out through finance.

The Puzzle of Profits

Part II of Capital begins with a puzzle: In markets, commodities are supposed to trade only for other commodities of equal value, yet somehow capitalists end up with more value than they start with.

In the world of simple exchange, money is just a convenience for enabling the exchange of commodities: C-M-C is easier to arrange than C-C. But profit-making business is different: the sequence there is M-C-M’. The capitalist enters the market and buys some commodities for a certain sum of money. Later, he sells some commodities, and has a larger sum of money. This increase — from M to M’ — is the whole point of being capitalist. But in a world of free market exchange, how can it exist?

Let’s put some obvious misunderstandings out of the way. There’s nothing mysterious about the fact that people can accomplish things with tools and previously acquired materials that they would be unable to with unaided labor. The problem is not that “capital,” in the sense of a stock of tools and materials, is productive in this sense. To the extent that what appears as “profit” in the national accounts is just the cost of replacing worn-out tools and materials, there’s no puzzle. [1]

The mystery is, how can someone enter the market with money and, after some series of exchanges, exit with more money? In the sequence M-C-M’, how can M’ be greater than M? How can the mere possession of money seemingly allow one to acquire more money, seemingly without end?

Before trying to understand Marx’s answer, let’s consider how non-Marxist economists answer this question.

1. Truck and barter. The most popular answer, among both classical and modern economists, is that the M-C-M’ sequence does not exist. All economic activity is aimed at consumption, market exchange is only intended to acquire specific use-values; when you think you see M-C-M you’re really looking at part of some C-M-C sequence(s). The classical economists are full of blunt statements that the only possible end of exchange is consumption. In today’s economics we find this assumption in the form of the “transversality condition” that says that wealth must go to zero as time goes to infinity. That’s right, it is an axiom in modern economics that accumulation cannot be a goal in itself. Or in the words of Simon Wren-Lewis (my new go-to source for the unexamined conventional wisdom of economists): “It would be stupid to accumulate infinite wealth.” Well OK then!

2. You earned it. Another answer is that the capitalist brings some additional unmeasured commodity to the production process. They are providing not just money M but also management ability, risk-bearing capacity, etc. In this view, if we correctly measured inputs, we would find that  M’=M. In its most blatantly apologetic form this is effectively skewered by comrades Ackerman and Beggs in the current Jacobin. For unincorporated businesses, it is true, it is not straightforward to distinguish between profits proper and the wages of managerial labor, but that can’t account for profits in general, or for the skewed distribution of income across households. If anything, much of what is reported as managerial salaries should probably be called profits. This is a point made in different ways by Piketty and Saez  and Dumenil and Levy; you can also find it offered as straightforward business advice.

3. It was the pictures that got small. The other main classical answer is that profit is the reward for “abstinence” (Senior) or “waiting” (Cassel). (I guess this is also the theory of Bohm-Bawerk and the other Austrians, but I admit I don’t know much about that stuff.) It appears today as a discount rate on future consumption. This invites the same question as the first answer: Is capitalist accumulation really motivated by future consumption? It also invites a second question: In what sense is a good tomorrow less valuable than the same good today? Is the utility derived from a glass of wine in 2013 really less than the utility derived from the same glass consumed in 2012,or 2010, or 1995? (So far this has not been my experience.) The logically consistent answer, if you want to defend profit as the return to waiting, is to say Yes. The capital owner’s pure time preference then represents an objective inferiority of output at a later date compared with the same output at an earlier date.

This is a logically consistent answer to the profits puzzle, and it could even be true with the right assumptions about the probability of an extinction-event asteroid impact/Khmer Rouge takeover/zombie apocalypse. With a sufficiently high estimate of the probability of some such contingency, M’ is really equal to M when discounted appropriately; capitalists aren’t really gaining anything when you take into account their odds of being eaten by zombies and/or suffocated by plastic bag, before they get to enjoy their profits. [2]  But I don’t think anyone wants to really own this point of view — to hold it consistently you must believe that economic activity becomes objectively less able to satisfy human needs as time goes by. [3]

4. Oops, underpaid again. We can take the same “profit as reward for waiting” idea, but instead of seeing a pure time preference as consistent with rational behavior, as modern economists (somehow) do, instead interpret it like the classical economists (including Cassel, whose fascinating Nature and Necessity of Interest I just read), as a psychological or sociological phenomenon. Consumption in the future is objectively identical to the same consumption today, but people for some reason fail to assign it the same subjective value it the same. Either they suffer from a lack of “telescopic facility,” or, in Cassel’s (and Leijonhufvud’s) more sophisticated formulation, the discount rate is a reflection of the human life expectancy: People are not motivated to provide for their descendants beyond their children, and future generations are not around to bargain for themselves. Either way, the outcome is that exchange does not happen at value — production is systematically organized around a higher valuation of goods today than goods tomorrow, even though their actual capacity to provide for satisfaction of human needs is the same. Which implies that workers — who provide labor today for a good tomorrow — are systematically underpaid.

5. Property is theft. The last and simplest possibility is that profits are always just rents. Capitalists and workers start out as just “agents” with their respective “endowments.” By whatever accident of circumstances, the former just end up underpaying the latter. Maybe they are better informed.

We could develop all these points further — and will, I hope, in the future. But I want to move on to (my idea of) Marx’s answer to the puzzle.

One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between. What is the relationship between these two forms of income? For someone like Cassel, interest has priority; profit is a derived form combining interest with income from managerial skill and/or a rent. For Marx on the other hand, and also for Smith, Ricardo, etc., profit is the primitive and interest is the derived form; interest is redistribution of profits already earned in production. (Smith: “The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue.”) In other words, are profits an addition to interest, or is interest as a subtraction from profit? For Marx, the latter. The fundamental question is how money profits can arise through exchange of commodities. [4]

Marx gives his answer in chapter four: The capitalist purchases labor-power at its value, but gets the results of the labor expended by that labor-power. The latter exceeds the former. In other words, people are capable of producing more than it takes to reproduce themselves, and that increment is captured by the capitalist. In four hours, you can produce what you need to live on. The next four or six or eight or twelve hours, you are working for The Man.

This is the answer, as Marx gives it. Labor power is paid for at its value. But having purchased labor power, the capitalist now has access to living labor, which can produce more than the the cost of its own reproduction.

I think this is right. But it’s not really a satisfactory answer, is it? It’s formally correct. But what does it mean?

One way of fleshing it out is to ask: Why is it even possible that labor can produce more than the reproduction-costs of labor power? Think of Ricardo’s world. Profits are positive because we have not yet reached the steady state — there are still natural resources available whose more intensive use will yield a surplus beyond the cost of the labor and capital required to use them. The capitalist captures that surplus because capital has the short side of both markets — there is currently excess land going unutilized, and excess labor going unutilized. [5]

Another way: There is something in the production process other than exchange, but which is captured via exchange.

I want to think of it this way: Humanity does have the ability to increase social value of output, or in other words the aggregate capacity to satisfy human needs from nature does in general grow over time. This “growth” happens through our collective creative interchange with nature — it is about pushing into the unknown, a process of discovery — it is not captured beforehand in the market values of commodities.

In a proper market, you cannot exchange a good in your possession for a good with a greater value, that is, with a greater capacity to satisfy human needs in general. (Your own particular needs, yes.) But you can, through creative activity, through a development of your own potential, increase the general level of satisfaction of human needs. The capitalist by buying labor power at its value, is able to capture this creative increment and call it their private property.

Our potential is realized through a creative interchange with nature. It’s not known in advance. What can we do, what can’t we do — we only learn by trying. We push against the world, and discover how the world pushes back, in so doing understand it better and find how it can be reshaped to better suit our needs. Individually or collectively, it’s a process of active discovery.

You as a person can exchange the various things you are in possession of, including your labor power, for other things of equal value. (Though for different use values, which are more desired by you.) But you will also discover, through a process of active learning and struggle, what you are capable of, what are the limits of your powers, what creative work you can do that you cannot fully conceive of now.

Through the process of education, you don’t just acquire something that you understood clearly at the outset. You transform yourself and learn things you didn’t even know you didn’t know. When you do creative work you don’t know what the finished product will be until you’ve finished it. I still — and I hope for the rest of my life — find myself reading economics and having those aha moments where you say, “oh that’s what this debate is all about, I never got it before!” And science and technology above all involve the discovery of new possibilities through a process of active pushing against the limits of our knowledge of the world.

The results of these active process of self-development and exploration form use-values, but they are not commodities. They were not produced for exchange. They were not even known of before they came into being. But while they are not themselves commodities, they are attached to commodities, they cannot be realized except through existing commodities. I may produce in myself, through this process of self-testing, a capacity for musical performance, let’s say. But I cannot realize this capacity without, at least, a sufficient claim on my own time, and probably also concrete use-values in the form of an instrument, an appropriate performance space, etc., and also some claim on the time of others. In this case one can imagine acquiring these things individually, but many — increasingly over time — processes of self-discovery are inherently collective. Science and technology especially. So specifically a discovery that allows cheaper production of an existing commodity, or the creation of a new commodity with new use-values, can only become become concrete in the hands of those who control the process of production of commodities. By purchasing labor power — in the market, at its value — capitalists gain control of the production process. They are thus able to claim the fruits of humanity’s collective self-discovery and interchange with nature as their own private property.

In some cases, this is quite literal. Recall Smith’s argument that one of the great advantages of the division of labor is that it allows specialized workers to discover improved ways of carrying out their tasks. “A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it.” Who do you think gained the surplus from these inventions? This still happens. Read any good account of work under capitalism, like Barbara Garson’s classic books All the Livelong Day and The Electronic Sweatshop. You’ll find people actively struggling to do their jobs better — the customer service representative who wants to get the caller to the person who can actually solve their problem, the bookshelf installer who wants it to fit in the room just right. The results of these struggles are realized as profits for their employers. But these are exceptional. The normal case today is the large-scale collective process of discovery, which is then privately appropriated. Every new technology draws on a vast history of publicly-available scientific work — sometimes we see this directly as with biomedical research, but even when it’s not so obvious it’s still there. Every Hollywood movie draws on a vast collective project of storytelling, a general collective effort to imbue certain symbols with meaning. Again see this most directly in the movies that draw on folktales and other public-domain work, but it’s true generically.

It is this vast collective effort at transformation of nature and ourselves that allows the value of output to be greater than the value of what existed before it. Without it, we would eventually reach the classical steady state where the exercise of labor could produce no more than the value of the labor power that yielded it. So when Marx says the source of profits is the fact that labor can produce more than the value of labor power, lying behind this is the fact that, due to humanity’s collective creative efforts, we are continuing to find new ways to shape the world to our use.

Capital is coordination before it is tangible means of production. Initially (logically and historically) the capitalist simply occupies a strategic point in exchange between independent producers thanks to the possession of liquid wealth; but as the extension of the division of labor requires more detailed coordination between the separate producers, the capitalist takes over a more direct role in managing production itself. “That a capitalist should command on the field of production, is now as indispensable as that a general should command on the field of battle.”

There is another way of looking at this: in terms of the extension of cooperation and the division of labor, which is realized in and through capitalist production, but in principle is independent of it. I’ll take this up in a following post.

[1] Marx makes this point clearly in his critique of the Gotha program.  Elimination of surplus as such cannot be a goal of socialism.

[2] It would seem that we have enough evidence to rule out a sufficiently high probability of world-ending catastrophe to explain observed interest rates, assuming the minimum possible return on accumulated wealth is zero. But of course in some conceivable circumstances it could be negative — that’s why I include the Khmer Rouge takeover, where your chance of summary execution is presumably positively related to your accumulated wealth. Also, maybe we have reason to think that  catastrophe is more likely in the future than we would naively infer from the past. It would be funny if someone tried to explain interest rates in terms of the doomsday argument.

[3] There has been a lot of discussion of appropriate social discount rates in the context of climate change. But nobody in that debate, as far as I can tell, takes the logical next step of arguing that excessively high discount rates imply a comprehensive market failure, not just with respect to climate change. There is not a special social discount rate for climate, there is an appropriate social discount rate for all future costs and benefits. If market interest rates are not the right tool for weighing current costs against future benefits for climate, they are not the right guide for anything, including the market activities where they currently govern.

[4] Yes, interest exists independently of profits from production, and indeed is much older. Marx recognizes this. But capitalism is not generalized usury.
[5]  And substitution between factors is impossible — Marx’s “iron law of proportions” — or at least limited.

Karl Marx, Original Real Business Cycle Theorist

From Theories of Surplus Value:

Let us assume that wages and profit fell simultaneously in total value, from whatever cause (for example, because the nation had grown lazier), and at the same time in use value (because labour had become less productive owing to bad harvests, etc.), in a word, that the part of the product whose value is equal to the revenue declines, because less new labour has been added in the past year and because the labour added has been less productive…

Prescott, Barro, Sargent, Lucas, etc. owe this guy royalties! or at least a footnote.

Dumenil on Marx

[This past Febuary, a few of us were lucky enough to take part in a discussion of the structure of Capital led by Gerard Dumenil. I just unearthed my notes; for the sake of posterity, here they are.] Marx’s method Marx moves from the concrete, to the abstract, and back to concrete. Concrete reality is unitary, but concepts are necessarily partial. So the definitions of particualr concepts don’t matter except insofar as they form part of a particular science. Marx’s work contains several, at least partially independent systems of concepts. So for instance alienation is not part of the system of concepts, or science, constituted by value, capital, profit, etc. Capital begins with the commondity, builds via money to value, and then builds to capital. The error of idealism is to confuse the production of theoory with the exposition of theory; the latter builds up logicallly from the simplest concepts, while the former cannot. Exposition can follow a deductive method, but the original development of theory cannot. The three volumes of Capital Volume I is of course finished, Volume II is also largely finished, but Volume III is not. Capital is value in a movement of self-expansion. It is necessary, but basically indeterminate, to give one of these eleements priority in exposition. The commodity is the unity of use- and exchange-value, or of utility and value. Volume II is accounting. Volume I is explaining the class anture of capital. That’s why Marx begins with the self-expansion of capital, rather than the movement (circuit) of capital, even though either is equally acceptable logically. In a sense Volume I is all about unemployment. But it’s just as much about exploitation, and about technical-organizational change. It ends with primitive accumulation for political rather than scientific reasons – he wants to conclude with a topic that allows for a harsh condemnation of capitalism. Volume II then is the “movement” part of value in movement of self-expansion. Each “atom” of value moves through various forms, from money, to commodity, to the productive process, to different commodities, back to money – the familiar M-C-P-C’-M’. Volume II is really providing a form of accounting: the distribution of value among its various forms is like the asset side of a balance sheet. Together the discussion of circulation and the reproduction schemes articualt both aspects – movement and self-expansion. The reproduction schemes imagine all the circuits taking place together, in sync. The three sectors – I, constant capital; II, wage goods; and III, luxuries – correspond to the three forms of valorization – c, v and s. (Marx recognized the concept of national income before it was widely understood.) In Volume III the different conponents that have been described separately are integrated into a picture of the cpitalist process as a whole. Marx is no longer discussing basic concepts, but mechanisms. In some sense, the section on the Law of Capitalist Accumulation could better have gone here. Now we no longer assume prices are proportional to values, but introduce prices of production. (Probably not the best name to have used.) The mechanism governing prices of production is that excess supply of a good produces lower prices in the short run; lower output (Marx doesn’t emphasize this, but it is key); and less investment in that industry. In the long run, as this process equalizes profit rates across industries, market prices come into line with prices of production. Crises Marx’s theory of crises does not rely on disproportions, in fact he criticizes Ricardo for his focus on them. There really is no theory of short-run crises in Marx. (The Labor Theory of Value: What happens with long-run prices that are not proportionate to values? Marx should not have spoken of the “transformation” of values into prices.) The tendency of the Rate of Profit to Fall is fundamentally about the character of innovations – capital-saving innovations are rare. Increased competition is the result, not the cause, of the falling rate of profit. (Here we are at the limits of Marx’s analysis.) Historically there have been two main periods of declining profits, the late 19th century and the 1970s. The profit squeeze is part of the story of the 1970s fall – maybe one-third. An explanation based on intensified international competition, as in Brenner, is absolute bullshit. [Dumenil’s words.] Finance Only industrial capital makes the full circuit described above. Commercial capital is limited to the “commodity-handling” and “money-handling” parts of the circuit. All labor in these circuits is unproductive labor. Cases like transportation are tricky and can be placed in either circuit. Interest-bearing capital: this embodies the division between active and inactive capitalists. If the analysis in Volume II corresponds to the asset side of a balance sheet, the analysis of interest-bearing capital corresponds to the liability side, that is, how capital comes into the firm, how the firm is financed. (In Marx’s terms interest-bearing capital includes shares as well as debt.) The active capitalist has the chracter of an owner but also of a worker, pays self a wage. Eventually the active capitalist disappears and is replaced by a salaried manager: this was a very prescient observation by Marx. Banking capital: Banks become adminstrators of interest-bearing capital, while remaining one of the main embodiments of commercial capital. So financial institutions have two aspects: on the one hand, they carry out a specific commercial function, but on the other they are the representatives of the capoitalist class in general. Fictitious capital: This is not value in the movement of self-expansion. All interest-bearing capital is fictitious. Securities issued by corporations are “less fictitious” since they finance productive capital, but they are still not capital, because (1) that would be double-counting [with the productive capital they finance], and (2) their value may fluctuate independently. In any case, we should not fetishize the concept of fictitious capital. The question of how much of the income of the financial sector comes through fictious capital is superficial. Remember, banks are partly one industry among others, but partly the carriers of the status and claims of the capitalist class as a whole. (Over time capital ownership is becoming more collective.) Big financial institutions are the police of capitalism, enforcing capitalist logic on the management of firms. If the capitalist class loses control of finance, it loses control of the productive process. Consider the highest-income 0.1% of the population [in the United States], with incomes of at least $2 million per year. Half of their income takes the form of wages. (Not e however that a larger fraction of capital income than wage income is probably hidden, so the real share of wages may be smaller.) It is as if some part of claims on profits are shifting away from traditional forms of interest-bearing capital, and toward positions within financial institutions. But it is not as simple as saying that the highest wages are really profits or rents. The important point isn’t simply that wages are high, but that they come from control over production. Those who get the most “profit-like” wage income as executive salaries, bonuses, etc., are in the same families that own financial assets – the relationship [between the financial and “traditional” parts of the capitalist class] is now a love affair, not a conflict. The 1970s saw a revolt of the money capitalists, with new discipline imposed on managers, using the language of corproate governance, “shareholder value,” etc. This was very successful – of course top managers were happy to go along in the US. Managers in Europe and Japan were more reluctant. So in the US all those ideas of managerialism, “soulful corporation,” and so on, seemed to disappear. But this shift did not really extend to the inner workings of the firm – production is organized more than ever by professional managers. The difference is that managers no longer think of themselves as standing between owners and the popular classes. This earlier conception had been the result of a history of class struggle. The business cycle Marx’s theory of the business cycle is not found in any one section or chapter. It’s not a theory of disproportion, of the misallocation of capital between sectors. In Marx, a recession is a sudden contraction of activity. There are five phases of the cycle; one is overproduction, which requires a definition of “over” – relative to what? In Volume III, overproduction is over with respect to the supply of labor. This is what produces a short-run fall in the profit rate. In general, there are two short-term mechanisms producing recessions: wages and interest rates. One or both rises in expansions and encroaches on profits. This produces contractions, although how is not explicit in Marx. The phrase that the “ultimate ground of crises is the restricted consumption of the masses” sounds like a story of insufficient aggregate demand. But this is not what marx has in mind. As he says in Volume II, wages usually peak just before a crash. Marx supposes the typical cycle to be ten years long, but this is a vague gneeralization without any sophisticated reasoning behind it. This may be connected to technological factors, but the idea that a lack of real investment opportunities leads to excessive financial investment is total bullshit. [Again, GD’s phrase.] Stability and instability Volume III has a clear story about competition: If profits are higher in one sector, there will be investment there; if the output of a sector can’t be sold, prices will be cut. This can be modeled. It is difficult, but not impossible, to produce Marx’s results. Stability requires some reaction to imbalances, but not too much. The second question, is what determines the overall size of the economy? Imbalances between supply and demand in the goods market are dealt with by quantity (as well as price) adjustments. This “direct control of quantities” is present in Ricardo and of course Keynes but not Marx. Control of quantities makes it easier to get convergence in the model. The overall size of the economy is determined by the supply of credit. Credit creation is procyclical but the money supply is counercyclical. (Kalecki’s model needs a credit mechanism to allow investment to vary independently. It doesn’t have it – Kalecki never considered money.) We [D&L, not Marx] speak of proportions and dimensions. Proportion is investment abd relative prices between industries. Dimension is the overall size of the economy, the growth path. To model capitalism, we need to have stability of proportion and instability of dimension. Capitalism remains at the frontier of stability of dimension. (The price mechanism is slower than the quantity mechanism.) Inventories grow – if the quantity adjustment is too large there is an increase in inventories elsewhere that ouweighs the decrease at the first firm. The short-run dynamics are somewhat Keynesian. The development of the credit system creates the possibility of greater instability of dimension. This in turn invites more active control by the authorities. Take a simple two-factor model. Innovation is local – new technologies are similar to old ones. Innovation is random in the neighborhood of existing technologies. If an innovation raises the profit rate, it is adopted. In addition, Marx believes it is easier to innovate by raising the proportion of capital – technological change is biased in a capital-using direction. Hortatory You need to understand mechanisms. You need a global perspective. You need to know history. You need to be an activist. We absolutely need to get rid of the capitalist classes. You need to get some political culture. Don’t become stupid writing a dissertation. Do not attempt to derive concrete developments from abstract laws of value. Do not fall into idealism. If you’ve only read Capital you know nothing about the contemporary crisis. You need to explain what’s going on. This is not the end of history. Your research agenda will be determined by what happens next. Still, there are some principles: We live in a class society, classes are not going to disappear tomorrow. The basic marxist framework is not absolute, it may evolve, but it still applies. When you are told that your dissertation is too broad, listen with only one ear.

Marx and the crisis: missing or just missed?

Over at Crooked Timber, John Quiggin suggests that Marxian analyses of the economic crisis have been MIA. So, for the record:
Chris Rude, The World Economic Crisis and the Federal Reserve’s Response to It: August 2007-December 2008Jim Crotty, Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’David Kotz, The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal CapitalismErdogan Bakir and Al Campbell, The Bush Business Cycle Profit Rate: Support in a Theoretical Debate and Implications for the Future
Engelbert Stockhammer, The finance-dominated accumulation regime, income distribution and the present crisisCostas Lapavitsas, The Roots of the Global Financial Crisis and Financialised Capitalism: Crisis and Financial Expropriation
Gerard Duménil and Dominique Lévy, The Crisis of Neoliberalism and U.S. HegemonyAnwar Shaikh on Marx and the crisis (video)Rick Wolff, Economic Crisis from a Socialist Perspective
Robert Brenner, What Is Good for Goldman Sachs Is Good for America: The Origins of the Current CrisisJohn Bellamy Foster and Harry Magdoff, Financial Implosion and Stagnation: Back To The Real Economy