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. Marx and many of his less radical contemporary reformers saw the
historical role of industrial capitalism as being to clear away the legacy of
feudalism – the landlords, bankers and monopolists extracting economic
rent without producing real value. But that reform movement failed. Today, the
Finance, Insurance and Real Estate (FIRE) sector has regained control of
government, creating neo-rentier economies.
The aim of this post-industrial finance capitalism is the opposite of that of
industrial capitalism as known to 19th-century economists: It seeks wealth
primarily through the extraction of economic rent, not industrial capital
formation. Tax favoritism for real estate, privatization of oil and mineral
extraction, banking and infrastructure monopolies add to the cost of living and
doing business. Labor is being exploited increasingly by bank debt, student
debt, credit-card debt, while housing and other prices are inflated on credit,
leaving less income to spend on goods and services as economies suffer debt
deflation.
Today’s New Cold War is a fight to internationalize this rentier
capitalism by globally privatizing and financializing transportation,
education, health care, prisons and policing, the post office and
communications, and other sectors that formerly were kept in the public domain
of European and American economies so as to keep their costs low and minimize
their cost structure. In the Western economies such privatizations have
reversed the drive of industrial capitalism to minimize socially unnecessary
costs of production and distribution. In addition to monopoly prices for
privatized services, financial managers are cannibalizing industry by debt
leveraging and high dividend payouts to increase stock prices. * * *
Today’s neo-rentier economies obtain wealth mainly by rent seeking, while
financialization capitalizes real estate and monopoly rent into bank loans,
stocks and bonds. Debt leveraging to bid up prices and create capital gains on
credit for this “virtual wealth” has been fueled by central bank
Quantitative Easing since 2009. Financial engineering is replacing industrial
engineering. Over 90 percent of recent U.S. corporate income has been earmarked
to raise the companies’ stock prices by being paid out as dividends to
stockholders or spent on stock buyback programs. Many companies even borrow to
buy up their own shares, raising their debt/equity ratios. Households and
industry are becoming debt-strapped, owing rent and debt service to the
Finance, Insurance and Real Estate (FIRE) sector. This rentier overhead leaves
less wage and profit income available to spend on goods and services, bringing
to a close the 75-year U.S. and European expansion since World War II ended in
1945. These rentier dynamics are the opposite of what Marx described as
industrial capitalism’s laws of motion. German banking was indeed
financing heavy industry under Bismarck, in association with the Reichsbank and
military. But elsewhere, bank lending rarely has financed new tangible means of
production. What promised to be a democratic and ultimately socialist dynamic
has relapsed back toward feudalism and debt peonage, with the financial class
today playing the role that the landlord class did in post-medieval times.
Marx’s View of the Historical Destiny of Capitalism: to Free Economies
from Feudalism
The industrial capitalism that Marx described in Volume I of Capital is being
dismantled. He saw the historical destiny of capitalism to be to free economies
from the legacy of feudalism: a hereditary warlord class imposing tributary
land rent, and usurious banking. He thought that as industrial capitalism
evolved toward more enlightened management, and indeed toward socialism, it
would replace predatory “usurious” finance, cutting away the
economically and socially unnecessary rentier income, land rent and financial
interest and related fees for unproductive credit. Adam Smith, David Ricardo,
John Stuart Mill, Joseph Proudhon and their fellow classical economists had
analyzed these phenomena, and Marx summarized their discussion in Volumes II
and III of Capitaland his parallel Theories of Surplus Valuedealing with
economic rent and the mathematics of compound interest, which causes debt to
grow exponentially at a higher rate than the rest of the economy. However, Marx
devoted Volume I of Capital to industrial capitalism’s most obvious
characteristic: the drive to make profits by investing in means of production
to employ wage labor to produce goods and services to sell at a markup over
what labor was paid. Analyzing surplus value by adjusting profit rates to take
account of outlays for plant, equipment and materials (the “organic
composition of capital”), Marx described a circular flow in which
capitalist employers pay wages to their workers and invest their profits in
plant and equipment with the surplus not paid to employees. Finance capitalism
has eroded this core circulation between labor and industrial capital. Much of
the midwestern United States has been turning into a rust belt. Instead of the
financial sector evolving to fund capital investment in manufacturing, industry
is being financialized. Making economic gains financially, primarily by debt
leverage, far outstrips making profits by hiring employees to produce goods and
services.
Capitalism’s Alliance of Banks with Industry to Promote Democratic
Political Reform
The capitalism of Marx’s day still contained many survivals from
feudalism, most notably a hereditary landlord class living off the land rents,
most of which were spent unproductively on servants and luxuries, not to make a
profit. These rents had originated in a tax. Twenty years after the Norman
Conquest, William the Conquer had ordered compilation of the Domesday Book in
1086 to calculate the yield that could be extracted as taxes from the English
land that he and his companions had seized. As a result of King John’s
overbearing fiscal demands, the Revolt of the Barons (1215-17) and their Magna
Carta enabled the leading warlords to obtain much of this rent for themselves.
Marx explained that industrial capitalism was politically radical in seeking to
free itself from the burden of having to support this privileged landlord
class, receiving income with no basis in cost value or enterprise of its own.
Industrialists sought to win markets by cutting costs below those of their
competitors. That aim required freeing the entire economy from the “faux
frais” of production, socially unnecessary charges built into the cost of
living and doing business. Classical economic rent was defined as the excess of
price above intrinsic cost-value, the latter being ultimately reducible to
labor costs. Productive labor was defined as that employed to create a profit,
in contrast to the servants and retainers (coachmen, butlers, cooks, et al.) on
whom landlords spent much of their rent. The paradigmatic form of economic rent
was the ground rent paid to Europe’s hereditary aristocracy. As John
Stuart Mill explained, landlords reaped rents (and rising land prices) “in
their sleep.” Ricardo had pointed out (in Chapter 2 of his 1817 Principles
of Political Economy and Taxation) a kindred form of differential rent in
natural-resource rent stemming from the ability of mines with high-quality
orebodies to sell their lower-cost mineral output at prices set by high-cost
mines. Finally, there was monopoly rent paid to owners at choke points in the
economy where they could extract rents without a basis in any cost outlay. Such
rents logically included financial interest, fees and penalties. Marx saw the
capitalist ideal as freeing economies from the landlord class that controlled
the House of Lords in Britain, and similar upper houses of government in other
countries. That aim required political reform of Parliament in Britain,
ultimately to replace the House of Lords with the Commons, so as to prevent the
landlords from protecting their special interests at the expense of
Britain’s industrial economy. The first great battle in this fight against
the landed interest was won in 1846 with repeal of the Corn Laws. The fight to
limit landlord power over government culminated in the constitutional crisis of
1909-10, when the Lords rejected the land tax imposed by the Commons. The
crisis was resolved by a ruling that the Lords never again could reject a
revenue bill passed by the House of Commons.
The Banking Sector Lobbies Against the Real Estate Sector, 1815-1846
It may seem ironic today that Britain’s banking sector was whole-heartedly
behind the first great fight to minimize land-rent. That alliance occurred
after the Napoleonic Wars ended in 1815, which ended the French blockage
against British seaborne trade and re-opened the British market to lower-priced
grain imports. British landlords demanded tariff protection under the Corn Laws
– to raise the price of food, so as to increase the revenue and hence the
capitalized rental value of their landholdings – but that has rendered the
economy high-cost. A successful capitalist economy would have to minimize these
costs in order to win foreign markets and indeed, to defend its own home
market. The classical idea of a free market was one free from economic rent
– from rentier income in the form of land rent. This rent – a
quasi-tax paid to the heirs of the warlord bands that had conquered Britain in
1066, and the similar Viking bands that had conquered other European realms
– threatened to minimize foreign trade. That was a threat to Europe’s
banking classes, whose major market was the funding of commerce by bills of
exchange. The banking class arose as Europe’s economy was revived by the
vast looting of monetary bullion from Constantinople by the Crusaders. Bankers
were permitted a loophole to avoid Christianity’s banning of the charging
of interest, by taking their return in the form of agio, a fee for transferring
money from one currency to another, including from one country to another. Even
domestic credit could use the loophole of “dry exchange,” charging
agio on domestic transactions cloaked as a foreign-currency transfer, much as
modern corporations use “offshore banking centers” today to pretend
that they earn their income in tax-avoidance countries that do not charge an
income tax. If Britain was to become the industrial workshop of the world, it
would prove highly beneficial to Ricardo’s banking class. (He was its
Parliamentary spokesman; today we would say lobbyist.) Britain would enjoy an
international division of labor in which it exported manufactures and imported
food and raw materials from other countries specializing in primary commodities
and depending on Britain for their industrial products. But for this to happen,
Britain needed a low price of labor. That meant low food costs, which at that
time were the largest items in the family budgets of wage labor. And that in
turn required ending the power of the landlord class to protect its “free
lunch” of land rent, and all recipients of such “unearned
income.” It is hard today to imagine industrialists and bankers hand in
hand promoting democratic reform against the aristocracy. But that alliance was
needed in the early 19th century. Of course, democratic reform at that time
extended only to the extent of unseating the landlord class, not protecting the
interest of labor. The hollowness of the industrial and banking class’s
democratic rhetoric became apparent in Europe’s 1848 revolutions, where
the vested interests ganged up against extending democracy to the population at
large, once the latter had helped end landlord protection of its rents. Of
course, it was socialists who picked up the political fight after 1848. Marx
later reminded a correspondent that the first plank of the Communist Manifesto
was to socialize land rent, but poked fun at the “free market” rent
critics who refused to recognize that rentier-like exploitation existed in the
industrial employment of wage labor. Just as landlords obtained land rent in
excess of the cost of producing their crops (or renting out housing), so
employers obtained profits by selling the products of wage-labor at a markup.
To Marx, that made industrialists part of the rentier class in principle,
although the overall economic system of industrial capitalism was much
different from that of post-feudal rentiers, landlords and bankers.
The Alliance of Banking with Real Estate and Other Rent-Seeking Sectors:
With this background of how industrial capitalism was evolving in Marx’s
day, we can see how overly optimistic he was regarding the drive by
industrialists to strip away all unnecessary costs of production – all
charges that added to price without adding to value. In that sense he was fully
in tune with the classical concept of free markets, as markets free from land
rent and other forms of rentier income. Today’s mainstream economics has
reversed this concept. In an Orwellian doublethink twist, the vested interests
today define a free market as one “free” for the proliferation of
various forms of land rent, even to the point of giving special tax advantages
to absentee real estate investment, the oil and mining industries
(natural-resource rent), and most of all to high finance (the accounting
fiction of “carried interest,” an obscure term for short-term
arbitrage speculation). Today’s world has indeed freed economies from the
burden of hereditary ground rent. Almost two-thirds of American families own
their own homes (although the rate of homeownership has been falling steadily
since the Great Obama Evictions that were a byproduct of the junk-mortgage
crisis and Obama Bank Bailouts of 2009-16, which lowered homeowner rates from
over 68% to 62%). In Europe, home ownership rates have reached 80% in
Scandinavia, and high rates characterize the entire continent. Home ownership
– and also the opportunity to purchase commercial real estate – has
indeed become democratized. But it has been democratized on credit. That is the
only way for wage-earners to obtain housing, because otherwise they would have
to spend their entire working life saving enough to buy a home. After World War
II ended in 1945, banks provided the credit to purchase homes (and for
speculators to buy commercial properties), by providing mortgage credit to be
paid off over the course of 30 years, the likely working life of the young home
buyer. Real estate is by far the banking sector’s largest market. Mortgage
lending accounts for about 80 percent of U.S. and British bank credit. It
played only a minor role back in 1815, when banks focused on financing commerce
and international trade. Today we can speak of the Finance, Insurance and Real
Estate (FIRE) sector as the economy’s dominant rentier sector. This
alliance of banking with real estate has led banks to become the major
lobbyists protecting real estate owners by opposing the land tax that seemed to
be the wave of the future in 1848 in the face of rising advocacy to tax away
the land’s entire price gains and rent, to make land the tax base as Adam
Smith had urged, instead of taxing labor and consumers or profits. Indeed, when
the U.S. income tax began to be levied in 1914, it fell only on the wealthiest
One Percent of Americans, whose taxable income consisted almost entirely of
property and financial claims. The past century has reversed that tax
philosophy. On a national level, real estate has paid almost zero income tax
since World War II, thanks to two giveaways. The first is “fictitious
depreciation,” sometimes called over-depreciation. Landlords can pretend
that their buildings are losing value by claiming that they are wearing out at
fictitiously high rates. (That is why Donald Trump has said that he loves
depreciation.) But by far the largest giveaway is that interest payments are
tax deductible. Real estate is taxed locally, to be sure, but typically at only
1% of assessed valuation, which is less than 7 to 10 percent of the actual land
rent.[1] The basic reason why banks support tax favoritism for landlords is
that whatever the tax collector relinquishes is available to be paid as
interest. Mortgage bankers end up with the vast majority of land rent in the
United States. When a property is put up for sale and homeowners bid against
each other to buy it, the equilibrium point is where the winner is willing to
pay the full rental value to the banker to obtain a mortgage. Commercial
investors also are willing to pay the entire rental income to obtain a
mortgage, because they are after the “capital” gain – that is,
the rise in the land’s price. The policy position of the so-called
Ricardian socialists in Britain and their counterparts in France (Proudhon, et
al.) was for the state to collect the land’s economic rent as its major
source of revenue. But today’s “capital” gains occur primarily
in real estate and finance, and are virtually tax-free for landlords. Owners
pay no capital-gains tax as real estate prices rise, or even upon sale if they
use their gains to buy another property. And when landlords die, all tax
liability is wiped out. The oil and mining industries likewise are notoriously
exempt from income taxation on their natural-resource rents. For a long time
the depletion allowance allowed them tax credit for the oil that was sold off,
enabling them to buy new oil-producing properties (or whatever they wanted)
with their supposed asset loss, defined as the value to recover whatever they
had emptied out. There was no real loss, of course. Oil and minerals are
provided by nature. These sectors also make themselves tax exempt on their
foreign profits and rents by using “flags of convenience” registered
in offshore banking centers. This ploy enables them to claim to make all their
profits in Panama, Liberia or other countries that do not charge an income tax
or even have a currency of their own, but use the U.S. dollar so as to save
American companies from any foreign-exchange risk. In oil and mining, as with
real estate, the banking system has become symbiotic with rent recipients,
including companies extracting monopoly rent. Already in the late 19thcentury
the banking and insurance sector was recognized as “the mother of
trusts,” financing their creation to extract monopoly rents over and above
normal profit rates. These changes have made rent extraction much more
remunerative than industrial profit-seeking – just the opposite of what
classical economists urged and expected to be the most likely trajectory of
capitalism. Marx expected the logic of industrial capitalism to free society
from its rentier legacy and to create public infrastructure investment to lower
the economy-wide cost of production. By minimizing labor’s expenses that
employers had to cover, this public investment would put in place the
organizational network that in due course (sometimes needing a revolution, to
be sure) would become a socialist economy. Although banking developed
ostensibly to serve foreign trade by the industrial nations, it became a
force-in-itself undermining industrial capitalism. In Marxist terms, instead of
financing the M-C-M’ circulation (money invested in capital to produce a
profit and hence yet more money), high finance has abbreviated the process to
M-M’, making money purely from money and credit, without tangible capital
investment.
The Rentier Squeeze on Budgets: Debt Deflation as a Byproduct of Asset-Price
Inflation:
Democratization of home ownership meant that housing no longer was owned
primarily by absentee owners extracting rent, but by owner-occupants. As home
ownership spread, new buyers came to support the rentier drives to block land
taxation – not realizing that rent that was not taxed would be paid to the
banks as interest to absorb the rent-of-location hitherto paid to absentee
landlords. Real estate has risen in price as a result of debt leveraging. The
process makes investors, speculators and their bankers wealthy, but raises the
cost of housing (and commercial property) for new buyers, who are obliged to
take on more debt in order to obtain secure housing. That cost is also passed
on to renters. And employers ultimately are obliged to pay their labor force
enough to pay these financialized housing costs. Debt deflation has become the
distinguishing feature of today’s economies from North America to Europe,
imposing austerity as debt service absorbs a rising share of personal and
corporate income, leaving less to spend on goods and services. The
economy’s indebted 90 percent find themselves obliged to pay more and more
interest and financial fees. The corporate sector, and now also the state and
local government sector, likewise are obliged to pay a rising share of their
revenue to creditors. Investors are willing to pay most of their rental income
as interest to the banking sector because they hope to sell their property at
some point for a “capital” gain. Modern finance capitalism focuses on
“total returns,” defined as current income plus asset-price gains,
above all for land and real estate. Inasmuch as a home or other property is
worth however much banks will lend against it, wealth is created primarily by
financial means, by banks lending a rising proportion of the value of assets
pledged as collateral. Chart 10.4: annual changes in GDP and the major
components of asset price gains (nominal, $bn) The fact that asset-price gains
are largely debt-financed explains why economic growth is slowing in the United
States and Europe, even as stock market and real estate prices are inflated on
credit. The result is a debt-leveraged economy. Changes in the value of the
economy’s land from year to year far exceeds the change in GDP. Wealth is
obtained primarily by asset-price (“capital”) gains in the valuation
of land and real estate, stocks, bonds and creditor loans (“virtual
wealth”), not so much by saving income (wages, profits and rents). The
magnitude of these asset-price gains tends to dwarf profits, rental income and
wages. The tendency has been to imagine that rising prices for real estate,
stocks and bonds has been making homeowners richer. But this price rise is
fueled by bank credit. A home or other property is worth however much a bank
will lend against it – and banks have lent a larger and larger proportion
of the home’s value since 1945. For U.S. real estate as a whole, debt has
come to exceed equity for more than a decade now. Rising real estate prices
have made banks and speculators rich, but have left homeowners and commercial
real estate debt strapped. The economy as a whole has suffered. Debt-fueled
housing costs in the United States are so high that if all Americans were given
their physical consumer goods for free – their food, clothing and so forth
– they still could not compete with workers in China or most other
countries. That is a major reason why the U.S. economy is de-industrializing.
So this policy of “creating wealth” by financialization undercuts the
logic of industrial capitalism.
Finance Capital’s Fight to Privatize and Monopolize Public Infrastructure:
Another reason for deindustrialization is the rising cost of living stemming
from conversion of public infrastructure into privatized monopolies. As the
United States and Germany overtook British industrial capitalism, a major key
to industrial advantage was recognized to be public investment in roads,
railroads and other transportation, education, public health, communications
and other basic infrastructure. Simon Patten, the first professor of economics
at America’s first business school, the Wharton School at the University
of Pennsylvania, defined public infrastructure as a “fourth factor of
production,” in addition to labor, capital and land. But unlike capital,
Patten explained, its aim was not to make a profit. It was to minimize the cost
of living and doing business by providing low-price basic services to make the
private sector more competitive. Unlike the military levies that burdened
taxpayers in pre-modern economies, “in an industrial society the object of
taxation is to increase industrial prosperity”by creating infrastructure
in the form of canals and railroads, a postal service and public education.
This infrastructure was a “fourth” factor of production.Taxes would
be “burdenless,” Patten explained, to the extent that they were
invested in public internal improvements, headed by transportation such as the
Erie Canal.[2] The advantage of this public investment is to lower costs
instead of letting privatizers impose monopoly rents in the form of access
charges to basic infrastructure. Governments can price the services of these
natural monopolies (including credit creation, as we are seeing today) at cost
or offer them freely, helping labor and its employers undersell industrialists
in countries lacking such public enterprise. In the cities, Patten explained,
public transport raises property prices (and hence economic rent) in the
outlying periphery, as the Erie Canal had benefited western farms competing
with upstate New York farmers.That principle is evident in today’s
suburban neighborhoods relative to city centers. London’s Tube extension
along the Jubilee Line, and New York City’s Second Avenue Subway, showed
that underground and bus transport can be financed publicly by taxing the
higher rental value created for sites along such routes. Paying for capital
investment out of such tax levies can provide transportation at subsidized
prices, minimizing the economy’s cost structure accordingly. What Joseph
Stiglitz popularized as the “Henry George Law” thus more correctly
should be known as “Patten’s Law” of burdenless taxation.[3]
Under a regime of “burdenless taxation” the return on public
investment does not take the form of profit but aims at lowering the
economy’s overall price structure to “promote general
prosperity.” This means that governments should operate natural monopolies
directly, or at least regulate them. “Parks, sewers and schools improve
the health and intelligence of all classes of producers, and thus enable them
to produce more cheaply, and to compete more successfully in other
markets.” Patten concluded: “If the courts, post office, parks, gas
and water works, street, river and harbor improvements, and other public works
do not increase the prosperity of society they should not be conducted by the
State.” But this prosperity for the overall economy was not obtained by
treating public enterprises as what today is called a profit center.[4] In one
sense, this can be called “privatizing the profits and socializing the
losses.” Advocating a mixed economy along these lines is part of the logic
of industrial capitalism seeking to minimize private-sector production and
employment costs in order to maximize profits. Basic social infrastructure is a
subsidy to be supplied by the state. Britain’s Conservative Prime Minister
Benjamin Disraeli (1874-80) reflected this principle: “The health of the
people is really the foundation upon which all their happiness and all their
powers as a state depend.”[5] He sponsored the Public Health Act of 1875,
followed by the Sale of Food and Drugs Act and, the next year, the Education
Act. The government would provide these services, not private employers or
private monopoly-seekers. For a century, public investment helped the United
States pursue an Economy of High Wages policy, providing education, food and
health standards to make its labor more productive and thus able to undersell
low-wage “pauper” labor. The aim was to create a positive feedback
between rising wages and increasing labor productivity. That is in sharp
contrast to today’s business plan of finance capitalism – to cut
wages, and also cut back long-term capital investment, research and development
while privatizing public infrastructure. The neoliberal onslaught by Ronald
Reagan in the United States and Margaret Thatcher in Britain in the 1980s was
backed by IMF demands that debtor economies balance their budgets by selling
off such public enterprises and cutting back social spending. Infrastructure
services were privatized as natural monopolies, sharply raising the cost
structure of such economies, but creating enormous financial underwriting
commissions and stock-market gains for Wall Street and London. Privatizing
hitherto public monopolies has become one of the most lucrative ways to gain
wealth financially. But privatized health care and medical insurance is paid
for by labor and its employers, not by the government as in industrial
capitalism. And in the face of the privatized educational system’s rising
cost, access to middle-class employment has been financed by student debt.
These privatizations have not helped economies become more affluent or
competitive. On an economy-wide level this business plan is a race to the
bottom, but one that benefits financial wealth at the top.
Finance Capitalism Impoverishes Economies While Increasing Their Cost
Structure:
Classical economic rent is defined as the excess of price over intrinsic
cost-value. Capitalizing this rent – whether land rent or monopoly rent
from the privatization described above – into bonds, stocks and bank loans
creates “virtual wealth.” Finance capitalism’s exponential
credit creation increases “virtual” wealth – financial
securities and property claims – by managing these securities and claims
in a way that has made them worth more than tangible real wealth. The major way
to gain fortunes is to get asset-price gains (“capital gains”) on
stocks, bonds and real estate. However, this exponentially growing
debt-leveraged financial overhead polarizes the economy in ways that
concentrates ownership of wealth in the hands of creditors, and owners of
rental real estate, stocks and bonds – draining the “real”
economy to pay the FIRE sector. Post-classical economics depicts privatized
infrastructure, natural resource development and banking as being part of the
industrial economy, not superimposed on it by a rent-seeking class. But the
dynamic of finance-capitalist economies is not for wealth to be gained mainly
by investing in industrial means of production and saving up profits or wages,
but by capital gains made primarily from rent-seeking. These gains are not
“capital” as classically understood. They are “finance-capital
gains,” because they result from asset-price inflation fueled by debt
leveraging. By inflating its housing prices and a stock market bubble on
credit, America’s debt leveraging, along with its financializing and
privatizing of basic infrastructure, has priced it out of world markets. China
and other non-financialized countries have avoided high health insurance costs,
education costs and other services freely or at a low cost by viewing them as a
public utility. Public health and medical care costs much less abroad, but is
attacked in the United States by neoliberals as “socialized
medicine,” as if financialized health care would make the U.S. economy
more efficient and competitive. Transportation likewise has been financialized
and run for profit, not to lower the cost of living and doing business. One
must conclude that America has chosen to no longer industrialize, but to
finance its economy by economic rent – monopoly rent, from information
technology, banking and speculation, whilst leaving industry, research and
development to other countries. Even if China and other Asian countries
didn’t exist, there is no way that America can regain its export markets
or even its internal market with its current debt overhead and its privatized
and financialized education, health care, transportation and other basic
infrastructure sectors. The underlying problem is not competition from China,
but neoliberal financialization. Finance-capitalism is not industrial
capitalism. It is a lapse back into debt peonage and a rentier neo-feudalism.
Bankers play the role today that landlords played up through the 19th century,
making fortunes without corresponding value, by capital gains for real estate,
stocks and bonds on credit, by debt leveraging whose carrying charges increase
the economy’s cost of living and doing business.
Today’s New Cold War is a Fight by Finance Capitalism Against Industrial
Capitalism:
Today’s world is being fractured by an economic warfare over what kind of
economic system it will have. Industrial capitalism is losing the fight to
finance capitalism, which is turning out to be its antithesis – just as
industrial capitalism was the antithesis to post-feudal landlordship and
predatory banking houses. In this respect, today’s New Cold War is a
conflict of economic systems. As such, it is being fought against the dynamic
of U.S. industrial capitalism as well as that of China and other economies.
Hence, the struggle also is domestic within the United States and Europe, as
well as confrontational against China and Russia, Iran, Cuba, Venezuela and
their moves to de-dollarize their economies and reject the Washington Consensus
and its Dollar Diplomacy. It is a fight by U.S.-centered finance capital to
promote the neoliberal doctrine giving special tax privileges to rentier
income, untaxing land rent, natural resource rent, monopoly rent and the
financial sector. This aim includes privatizing and financializing basic
infrastructure, maximizing its extraction of economic rent instead of
minimizing the cost of living and doing business. The result is a war to change
the character of capitalism as well as that of social democracy. The British
Labour Party, European Social Democrats and the U.S. Democratic Party all have
jumped on the neoliberal bandwagon. They are all complicit in the austerity
that has spread from the Mediterranean to America’s Midwestern rust belt.
Finance capitalism exploits labor, but via a rentier sector, which also ends up
cannibalizing industrial capital. This drive has become internationalized into
a fight against nations that restrict the predatory dynamics of finance capital
seeking to privatize and dismantle government regulatory power. The New Cold
War is not merely a war being waged by finance capitalism against socialism and
public ownership of the means of production. In view of the inherent dynamics
of industrial capitalism requiring strong state regulatory and taxing power to
check the intrusiveness of finance capital, this post-industrial global
conflict is between socialism evolving out of industrial capitalism, and
fascism, defined as a rentier reaction to mobilize government to roll back
social democracy and restore control to the rentier financial and monopoly
classes. The old Cold War was a fight against “Communism.” In
addition to freeing itself from land rent, interest charges and privately
appropriated industrial profits, socialism favors labor’s fight for better
wages and working conditions, better public investment in schools, health care
and other social welfare support, better job security, and unemployment
insurance. All these reforms would cut into the profits of employers. Lower
profits mean lower stock-market prices, and hence fewer finance-capital gains.
The aim of finance capitalism is not to become a more productive economy by
producing goods and selling them at a lower cost than competitors. What might
appear at first sight to be international economic rivalry and jealousy between
the United States and China is thus best seen as a fight between economic
systems: that of finance capitalism and that of civilization trying to free
itself from rentier privileges and submission to creditors, with a more social
philosophy of government empowered to check private interests when they act
selfishly and injure society at large. The enemy in this New Cold War is not
merely socialist government but government itself, except to the extent that it
can be brought under the control of high finance to promote the neoliberal
rentier agenda. This reverses the democratic political revolution of the 19th
century that replaced the House of Lords and other upper houses controlled by
the hereditary aristocracy with more representative legislators. The aim is to
create a corporate state, replacing elected houses of government by central
banks – the U.S. Federal Reserve and the European Central Bank, along with
external pressure from the International Monetary Fund and World Bank. The
result is a “deep state” supporting a cosmopolitan financial
oligarchy. That is the definition of fascism, reversing democratic government
to restore control to the rentier financial and monopoly classes. The
beneficiary is the corporate sector, not labor, whose resentment is turned
against foreigners and against designated enemies within. Lacking foreign
affluence, the U.S. corporate state promotes employment by a military buildup
and public infrastructure spending, most of which is turned over to insiders to
privatize into rent-seeking monopolies and sinecures. In the United States, the
military is being privatized for fighting abroad (e.g., Blackwater
USA/Academi), and jails are being turned into profit centers using inexpensive
convict labor. What is ironic is that although China is seeking to decouple
from Western finance capitalism, it actually has been doing what the United
States did in its industrial takeoff in the late 19th and early 20th century.
As a socialist economy, China has aimed at what industrial capitalism was
expected to achieve: freeing its economy from rentier income (landlordship and
usurious banking), largely by a progressive income tax policy falling mainly on
rentier income. Above all, China has kept banking in the public domain. Keeping
money and credit creation public instead of privatizing it is the most
important step to keep down the cost of living and business. China has been
able to avoid a debt crisis by forgiving debts instead of closing down indebted
enterprises deemed to be in the public interest. In these respects it is
socialist China that is achieving the fate that industrial capitalism initially
was expected to achieve in the West.
Summary: Finance Capital as Rent-Seeking:
The transformation of academic economic theory under today’s finance
capitalism has reversed the progressive and indeed radical thrust of the
classical political economy that evolved into Marxism. Post-classical theory
depicts the financial and other rentier sectors as an intrinsic part of the
industrial economy. Today’s national income and GDP accounting formats are
compiled in keeping with this anti-classical reaction depicting the FIRE sector
and its allied rent-seeking sectors as an addition to national income, not a
subtrahend. Interest, rents and monopoly prices all are counted as
“earnings” – as if all income is earned as intrinsic parts of
industrial capitalism, not predatory extraction as overhead property and
financial claims. This is the opposite of classical economics. Finance
capitalism is a drive to avoid what Marx and indeed the majority of his
contemporaries expected: that industrial capitalism would evolve toward
socialism, peacefully or otherwise.
Some Final Observations: Financial Takeover of Industry, Government and
Ideology:
Almost every economy is a mixed economy – public and private, financial,
industrial and rent-seeking. Within these mixed economies the financial
dynamics – debt growing by compound interest, attaching itself primarily
to rent-extracting privileges, and therefore protecting them ideologically,
politically and academically. These dynamics are different from those of
industrial capitalism, and indeed undercut the industrial economy by diverting
income from it to pay the financial sector and its rentier clients. One
expression of this inherent antagonism is the time frame. Industrial capitalism
requires long-term planning to develop a product, make a marketing plan, and
undertake research and development to keep undercutting competitors. The basic
dynamic is M-C-M’: capital (money, M) is invested in building factories
and other means of production, and employing labor to sell its products
(commodities, C) at a profit (M’). Finance capitalism abbreviates this to
a M-M’, making money purely financially, by charging interest and making
capital gains. The financial mode of “wealth creation” is measured by
the valuations of real estate, stocks and bonds. This valuation was long based
on capitalizing their flow of revenue (rents or profits) at the going rate of
interest, but is now based almost entirely on capital gains as the major source
of “total returns.” In taking over industrial companies, financial
managers focus on the short run, because their salary and bonuses are based on
the current year’s performance. The “performance” in question is
stock market performance. Stock prices have largely become independent from
sales volume and profits, now that they are enhanced by corporations typically
paying out some 92 percent of their revenue in dividends and stock buybacks.[6]
Even more destructively, private capital has created a new process:
M-debt-M’. One recent paper calculates that: “Over 40% of firms that
make payouts also raise capital during the same year, resulting in 31% of
aggregate share repurchases and dividends being externally financed, primarily
with debt.”[7] This has made the corporate sector financially fragile,
particularly the airline industry in the wake of the COVID-19 crises. The
essence of private equity, Matt Stoller explains, is for “financial
engineers [to] raise large amounts of money and borrow even more to buy firms
and loot them. These kinds of private equity barons aren’t specialists who
help finance useful products and services, they do cookie cutter deals
targeting firms they believe have market power to raise prices, who can lay off
workers or sell assets, and/or have some sort of legal loophole advantage.
Often they will destroy the underlying business. The giants of the industry,
from Blackstone to Apollo, are the children of 1980s junk bond king and
fraudster Michael Milken. They are essentially are super-sized
mobsters.”[8] Private equity has played a big role in increasing corporate
leverage, both through their own actions and by disinhibiting large public
companies in the use of debt. As Eileen Appelbaum and Rosemary Batt explained,
the large buyout firms, following the playbook developed in the 1980s, produce
their returns from financial engineering and cost cutting (smaller size deals
target “growthier” companies, but while those private equity firms
assert that they add value, it may just be that they are skilled at identifying
promising companies and riding a performance wave). Contrary to their
marketing, private equity fee structures mean they make money even when they
bankrupt firms. And they have become so powerful that it’s hard to get
political support to stop them when they hurt large numbers of citizens though
exploitative practices like balance (“surprise”) billing.[9] The
classic description of this looting-for-profit practice process is the 1993
paper by George Akerloff and Paul Romer describing how “firms have an
incentive to go broke for profit at society’s expense (to loot) instead of
to go for broke (to gamble on success). Bankruptcy for profit will occur if
poor accounting, lax regulation, or low penalties for abuse give owners an
incentive to pay themselves more than their firms are worth and then default on
their debt obligations.” [10] The fact that “paper gains” from
stock prices can be wiped out when financial storms occur, makes financial
capitalism less resilient than the industrial base of tangible capital
investment that remains in place. The United States has painted its economy
into a corner by de-industrializing, replacing tangible capital formation with
“virtual wealth,” that is, financial claims on income and tangible
assets. Since 2009, and especially since the Covid crisis of 2020, its economy
has been suffering through what is called a K-shaped “recovery.” The
stock and bond markets have reached all-time highs to benefit the wealthiest
families, but the “real” economy of production and consumption, GDP
and employment, has declined for the non-rentier sector, that is, the economy
at large. How do we explain this disparity, if not by recognizing that
different dynamics and laws of motion are at work? Gains in wealth increasingly
take the form of a rising valuation of rentier financial and property claims on
the real economy’s assets and income, headed by rent-extraction rights,
not means of production. Finance capitalism of this sort can survive only by
drawing in exponentially increasing gains from outside the system, either by
central bank money creation (Quantitative Easing) or by financializing foreign
economies, privatizing them to replace low-priced public infrastructure
services with rent-seeking monopolies issuing bonds and stocks, largely
financed by dollar-based credit seeking capital gains. The problem with this
financial imperialism is that it makes client host economies as high-cost as
their U.S. and other sponsors in the world’s financial centers. All
economic systems seek to internationalize themselves and extend their rule
throughout the world. Today’s revived Cold War should be understood as a
fight between what kind of economic system the world will have. Finance
capitalism is fighting against nations that restrict its intrusive dynamics and
sponsorship of privatization and dismantling of public regulatory power. Unlike
industrial capitalism, the rentier aim is not to become a more productive
economy by producing goods and selling them at a lower cost than competitors.
Finance capitalism’s dynamics are globalist, seeking to use international
organizations (the IMF, NATO, the World Bank and U.S.-designed trade and
investment sanctions) to overrule national governments that are not controlled
by the rentier classes. The aim is to make all economies into
finance-capitalist layers of hereditary privilege, imposing anti-labor
austerity policies to squeeze a dollarized surplus. Industrial
capitalism’s resistance to this international pressure is necessarily
nationalist, because it needs state subsidy and laws to tax and regulate the
FIRE sector. But it is losing the fight to finance capitalism, which is turning
to be its nemesis just as industrial capitalism was the nemesis of post-feudal
landlordship and predatory banking. Industrial capitalism requires state
subsidy and infrastructure investment, along with regulatory and taxing power
to check the incursion of finance capital. The resulting global conflict is
between socialism (the natural evolution of industrial capitalism) and a
pro-rentier fascism, a state-finance-capitalist reaction against
socialism’s mobilization of state power to roll back the post-feudal
rentier interests. Underlying today’s rivalry felt by the United States
against China is thus a clash of economic systems. The real conflict is not so
much “America vs. China,” but finance capitalism vs. industrial
“state” capitalism/socialism. At stake is whether “the
state” will support financialization benefiting the rentier class or build
up the industrial economy and overall prosperity. Apart from their time frame,
the other major contrast between finance capitalism and industrial capitalism
is the role of government. Industrial capitalism wants government to help
“socialize the costs” by subsidizing infrastructure services. By
lowering the cost of living (and hence the minimum wage), this leaves more
profits to be privatized. Finance capitalism wants to pry these public
utilities away from the public domain and make them privatized rent-yielding
assets. That raises the economy’s cost structure – and thus is
self-defeating from the vantage point of international competition among
industrialists. That is why the lowest-cost and least financialized economies
have overtaken the United States, headed by China. The way that Asia, Europe
and the United States have reacted to the covid-19 crisis highlights the
contrast. The pandemic has forced an estimated 70 percent of local neighborhood
restaurants to close in the face of major rent and debt arrears. Renters,
unemployed homeowners and commercial real estate investors, as well as numerous
consumer sectors are also facing evictions and homelessness, insolvency and
foreclosure or distress sales as economic activity plunges. Less widely noted
is how the pandemic has led the Federal Reserve to subsidize the polarization
and monopolization of the U.S. economy by making credit available at only a
fraction of 1 percent to banks, private equity funds and the nation’s
largest corporations, helping them gobble up small and medium-sized businesses
in distress. For a decade after the Obama bank-fraud bailout in 2009, the Fed
described its purpose as being to keep the banking system liquid and avoid
damage to its bondholders, stockholders and large depositors. The Fed infused
the commercial banking system with enough lending power to support stock and
bond prices. Liquidity was injected into the banking system by buying
government securities, as was normal. But after the covid virus hit in March
2020, the Fed began to buy corporate debt for the first time, including junk
bonds. Former FDIC head Sheila Bair and Treasury economist Lawrence Goodman
note, the Federal Reserve bought the bonds “of ‘fallen angels’
who sank to junk status during the pandemic” as a result of having
indulged in over-leveraged borrowing to pay out dividends and buy their own
shares.[11] Congress considered limiting companies from using the proceeds of
the bonds being bought “for outsize executive compensation or shareholder
distributions” at the time it approved the facilities, but it made no
attempt to deter companies from doing this. Noting that “Sysco used the
money to pay dividends to its shareholders while laying off a third of its
workforce … a House committee report found that companies benefiting from
the facilities laid off more than one million workers from March to
September.” Bair and Goodman conclude that “there’s little
evidence that the Fed’s corporate debt buy-up benefited society.”
Just the opposite: The Fed’s actions “created a further unfair
opportunity for large corporations to get even bigger by purchasing competitors
with government-subsidized credit.” The result, they accuse, is
transforming the economy’s political shape. “The serial market
bailouts by monetary authorities – first the banking system in 2008, and
now the entire business world amid the pandemic” has been “a greater
threat [to destroy capitalism] than Bernie Sanders.” The Fed’s
“super-low interest rates have favored the equity of large companies over
their smaller counterparts,” concentrating control of the economy in the
hands of firms with the largest access to such credit. Smaller companies are
“the primary source of job creation and innovation,” but do not have
access to the almost free credit enjoyed by banks and their largest customers.
As a result, the financial sector remains the mother of trusts, concentrating
financial and corporate wealth by financing a gobbling-up of smaller companies
as giant companies to monopolize the debt and bailout market. The result of
this financialized “big fish eat little fish” concentration is a
modern-day version of fascism’s Corporate State. Radhika Desai calls it
“creditocracy,” rule by the institutions in control of credit.[12] It
is an economic system in which central banks take over economic policy from
elected political bodies and the Treasury, thereby completing the process of
privatizing economy-wide control.
Footnotes:
[1] I provide the charts in The Bubble and Beyond (Dresden: 2012), Chapters 7
and 8, and Killing the Host (Dresden: 2015). [2] “The Theory of Dynamic
Economics,” Essays in Economic Theory ed. Rexford Guy Tugwell (New York:
1924), pp. 96 and 98, originally in The Publications of the University of
Pennsylvania, Political Economy and Public Law Series 3:2 (whole No. 11), 1892,
p. 96. Europe’s aristocratic governments developed their tax policy
“at a time when the state was a mere military organization for the defense
of society from foreign foes, or to gratify national feelings by aggressive
wars.” Such states had a “passive” economic development policy,
and their tax philosophy was not based on economic efficiency. I provide the
details in “Simon Patten on Public Infrastructure and Economic Rent
Capture,” American Journal of Economics and Sociology 70 (October 2011),
pp. 873-903. [3] George advocated a land tax, but his opposition to socialism
led him to reject the value and price concepts necessary to define economic
rent quantitatively. His defense of bankers and interest rendered his policy
recommendations ineffective as he moved to the libertarian right wing of the
political spectrum, opposing government investment but merely taxing the rent
taken by privatizers – the reverse of what Patten and his pro-industrial
school of economists were advocating, based on classical value and price
theory. [4] “The Theory of Dynamic Economics,” p. 98. [5] Speech of
June 24, 1877. He used Latin and said “Sanitas, Sanitatum” and
translated it as “Sanitation, all is sanitation.” It was a pun on a
more famous aphorism, “Vanitas, vanitatum,” “Vanity, all is
vanity.” [6] William Lazonick, “Profits Without Prosperity: Stock
Buybacks Manipulate the Market and Leave Most Americans Worse Off,”
Harvard Business Review, September 2014. And more recently, Lazonick and
Jang-Sup Shin, Predatory Value Extraction: How the Looting of the Business
Corporation Became the U.S. Norm and How Sustainable Prosperity Can Be Restored
(Oxford: 2020). [7] Joan Farre-Mensa, Roni Michaely, Martin Schmalz,
“Financing Payouts,” Ross School of Business Paper No. 1263 (December
1, 2020), quoted by Matt Stoller,” How to Get Rich Sabotaging Nuclear
Weapons Facilities,” BIG, January 3, 2021. [8] Matt Stoller, ibid. See
also his article “Crime Shouldn’t Pay: Why Big Tech Executives Should
Face Jail,” BIG, December 20, 2020. [9] George Akerloff and Paul Romer,
“Looting: The Economic Underworld of Bankruptcy for Profit,” [10]
Sheila Bair and Lawrence Goodman, “Corporate Debt ‘Relief’ Is an
Economic Dud,” Wall Street Journal, January 7, 2021. [11] Desai, Radhika.
2020.‘The Fate of Capitalism Hangs in the Balance of International
Power’. Canadian Dimension, 12 October. See also Geoffrey Gardiner,
Towards True Monetarism (Dulwich: 1993) and The Evolution of Creditary
Structure and Controls (London: Palgrave, 2006) and the post-Keynesian group
Gang of 8 popularized the term “creditary economics” in the 1990s.
Photo by Mike Kienle on Unsplash
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