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A Re-Visit to Finance Capital in Marxian Perspective Byasdeb Dasgupta
The very idea of capital in the form of finance capital, as it prevails today, is not treated as an analytical category in Marx’s Capital. One comes across terms like money capital, merchant capital and fictitious capital in the three volumes of Capital. Hilferding was one of the few Marxian scholars who introduced the idea of finance capital as an analytical category in the early twentieth century. Whether Marx used the term “finance capital” or not is not important; but what is more important is the fact whether one gets any clue of finance capital from Marxian take on capital as such in his magnum opus. To our understanding what today is dubbed as finance capital can be explained by Marxian analytical categories pertaining to capitalism in Capital. In this short note on finance capital we will make an attempt to relate finance capital with the Marxian understanding of modern day capitalism as is laid down in Capital. But we need to keep in our mind that capitalism as Marx envisaged during his time while writing Capital has progressed much further. Today any understanding of capitalism from an economic perspective would perhaps remain incomplete if one does not take into care the functioning of stock markets all over the world as various monetary and similar circulations of physical and financial assets take shape through these markets. It is not to say that the stock markets remain today at the core of the capitalist circulation process. But it is one of the very important social institutions through which various circuits of capital function today, accumulation of capital takes place and dictates the terms and conditions for money capital as distinct from say merchant capital or even industrial capital.
There is another aspect which also must be taken into perusal in defining finance capital – that is modern corporate forms of business organizations. A corporation
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or a corporate organization is actually owned by innumerable shareholders who are not directly connected or related with each other but run by managers with a Board of Directors selected by the owner shareholders at the top of the hierarchy. Marx and Engels talked about Joint Stock Companies. However, today’s corporate business houses are much bigger and complex than the joint stock companies indicated by Marx in Capital. The corporate firms – financial or non-financial – do play today significant role in the circulation and accumulation of what may be called finance capital as distinct from the industrial capital.
In today’s global capitalism the interest of finance is of paramount significance without the understanding of which it is not possible perhaps to understand the causes of the global economic crisis hitting the world economy since 2008 (which is described as something similar in its magnitude like the Great Depression of the 1930s). The classical role of what is known as finance is to intermediate between the surplus and deficit units in the economy where the deficit units are supposed to undertake productive investment (net addition to the physical capital stock in the economy) in the economy which would increase the share of physical and productive assets in the economy. To use the Marxian parlance the deficit units are presumed to use more money capital to generate more surplus value in the system and hence, more capital accumulation. Today finance is not performing this task.
Rather, it has a circuit of its own in which finance capital multiplies itself through numerous circulations and ever-increasing number of different financial instruments of which various kinds of derivatives products are of crucial significance.
In today’s context, to understand finance capital as distinct from industrial capital one needs to refer to what is referred to as the process of financialization, which implies enormous rise in the interest of finance in every sphere of economy. This is
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manifested in terms of ever-rising shares of financial assets in the total assets of the economy and also ever-increasing shares of financial assets vis-à-vis physical assets (Sen and Dasgupta, 2018, Epstein, 2005). The process of financialization is also associated with rising existence of rentier class or rentier interest – an interest which is not linked with the real economy in terms of physical investment as such.
As said at the onset, the rise of finance capital is correlated with certain activities of the corporate firms all over the world with India being no exception. We can differentiate between two types of corporate firms – financial and non-financial. In fact, there are ample empirical evidences that non-financial corporates too like financial corporates do play significant role in generation and accumulation of finance capital and thereby, lend enormously to the process of financialization. As noted by Crotty (2003) which is also cited in Dasgupta (2013),
“The first is a shift in the beliefs of financial agents, from an implicit acceptance of the Chandlerian view of the large NFC as an integrated combination of illiquid rreal assets – that is, physical and organizational assets that cannot be sold for cash quickly and without a major loss in value – assembled to pursue long-term growth and innovation, to a ‘financial’ conception in which the NFC is seen as a
‘portfolio’ of liquid subunits that home office management must continually restructure to maximize the stock price at every point in time. The second is a fundamental change in management’s reward structure, from one that links pay to the long-term success of the firm, to one that links it to short-term stock price movements.”
Hence, finance capital and the process of financialization renders everything through the lens of finance per se, which hardly any responsibility for the real economy and furthermore, it is something to do with short-termism. The latter implies the zeal for making high monetary return from (financial) investment very
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quickly which is not possible through investment in physical assets. This short- termism may be ascribed to the future uncertainty or fundamental uncertainty a la Keynes, which is an inherent characteristic of a money-using capitalist economy where with every technological innovation real production of commodities have become specialized more and more while future demand (particularly effective demand as conceived by Keynes) has become generalized which in a way is indicative of fundamental uncertainty in the system. Marx was not oblivious to this uncertainty, In fact, in his understanding of capitalist economy as can be found in the three volumes of his magnum opus Capital there are hints about crises in the capitalist system through the prevalence of uncertainty. The modern-day manifestation of this uncertainty can be found in reality in terms of short-termism or short-term quick monetary return including the prevalence of rentier interest.
There are ample empirical evidences of rise of finance capital, rentier interest and financialization as a process vis-à-vis the real economy. Following Dasgupta (2013) they are the following as reported in Palley (2007) in the context of US economy:
(1) Huge increase in financial sector debt vis-à-vis non-financial sector debt from 9.7% in 1973 to 31.5% in 2005.
(2)An increase in debt-x-revolving credit vis-à-vis GDP during 1973-2005 from 136.3% in 1973 to 207.3% in 2005
(3)Rise in mortgage debt in GDP from 45.2% in 1973 to 97.5% in 2005
(4)An increase in household debt as share of GDP from 45.2% in 1973 to 94%
in 2005
(5)A fall in NFC debt in total non-financial sector debt from 26.2% in 1973 to 19.8% in 2005
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(6)An increase in household debt in total domestic non-financial debt from 33%
in 1973 to 43.9% in 2005
(7)Increase in share of finance, insurance and real estate (FIRE) sector in GDP from 15.1% in 1973 to 20.4% in 2005. Note that in the Indian context, the share of FIRE in GDP rose from 11.73% in 1973-74 to 16.86% in 2011-12 as can be found from the Economic Survey published by the Government of India.
(8)A decline in real gross investment as percent of GDP in the real economy from 17.7% in 1973 to 16.5% in 2005
(9)An increasing wage-productivity gap
(10) An increase in financial innovations with new forms of derivatives being introduced regularly on a continuous basis
(11) An increase in debt creation, through the financial sector, in terms of different vehicles of debt.
Another important measure or dimension through which the process of financialization across the globe occurs and finance capital gets accumulated is manifested in terms of huge surge in foreign exchange transactions all over the globe from US $ 570 billion in 1989 to US $ 1.9 trillion in 2004 (Epstein 2005).
A very insignificant portion of these foreign exchange trade is on account of international trade of merchandise goods; rather, these transactions are on account of different financial capital flows mostly.
If we consider functional distribution of national income in a money-using capitalist economy we can assert the following facts given the empirical evidences in the existing literature (Dasgupta, 2013):
(a)A rise in managers’ share vis-à-vis wage share and also, rise in managers’
share in national income
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(b)A rise in capital’s share vis-à-vis labour’s share
(c)A rise in share of interest income in national income as well as that of profit (d)As far as rise in profit is concerned there is rise in financial sector’s profit in
total profit income in the economy and a fall in the non-financial sector’s profit hence.
Financialization as an economic process, as we have mentioned above, signifies the continuous increase in the share of all kinds of financial assets in total asset holdings in the economy – most of which are not meant for intermediation between the surplus units and deficit units in the economy. Rather, finance has its own circuits today in which initial money capital (M) magnifies to higher money value (M’). This is the circuit which Marx in Capital refers as M-M’ circuit. Note that in this circuit no labour process is involved for conversion M into M’ where M’ is greater than M. The surplus generated is the difference between M’ and M. This is the typical circuit which is operational in the context of financial sectors and firms including the non-financial corporate firms (NFCs). Now the pertinent question is whether the generation and accumulation of finance capital is totally delinked from the labour – to be precise from the Marxian concept of surplus labour which under capitalist production process takes the money value form as surplus value? The answer is a definite no. The question of finance capital or finance is not delinked from the question of labour viz. Marxian surplus labour. The answer to this question may be traced to the understanding how the initial money capital (M) in the financial circuit is generated? Analytically, there are three distinct possibilities:
1. Initial investment in financial assets or financial sectors may be generated from national savings. Thus, financialization requires the generation of high savings rates (household and corporates taken together), which is possible when income distribution is skewed in favour of the rich and wealthy who
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have high propensity to save – particularly in financial assets. In the context of India, we can observe a phenomenal rise in the household savings rate since 1991 and this happened at a time when income inequality widened. So, growing income inequality is a necessary condition for fueling savings rates which is growth deterring. In economies where domestic savings rates remain low or stagnant, national savings are fueled by foreign savings as national savings is equal to domestic savings plus foreign savings. The major share of these savings is in financial assets which are circulated continually within the financial circuits mentioned above and hardly related to the circuits of capital in the real economy.
2. The second possibility is the investment of corporate surplus and loans in financial instruments as indicated by Sen and Dasgupta (2018) in the Indian context. The financial assets include stocks, debentures, bonds and various derivative products. This has a crucial link to the surplus generation process in the real economy viz. the typical capitalist production processes as envisaged in Capital by Marx in the form of M-C-M’ circuit. More investment in financial assets by the NFCs warrants (a) continually more and more generation of surplus (the lion’s share of this surplus is not accumulated as capital in the real sector) and (b) ever increasing continuous siphoning off this surplus in financial circuit thus jeopardizing the real growth. Therefore, the pressure is on labour in particular as only increasing labour exploitation by increasing labour productivity and stagnating real wage growth can only ensure continuous surplus generation at ever increasing scale for the distribution of this surplus in the financial circuit to take the form of finance capital. In Indian context Sen and Dasgupta (2018) provided empirical evidence at the firm level of the ever-increasing tendency of the NFCs to siphon lion’s share of their surplus to financial circuits. NFCs
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in India are investing in financial assets more and more at a time when real investment i.e. investment in physical assets are dwindling. NFCs are even borrowing to invest in short-term financial assets for quick monetary return and further accumulation of financial assets. Net fixed assets of the Indian NFCs declined from 43.5% of total assets in 1992-93 to 33.1% in 2011-12.
Total physical assets as percent of total assets of NFCs fell from 66% in 1992-93 to 48% in 2011-12. On the other hand, total financial assets rose from 34% in 1992-93 to 52% in 2011-12. The financial assets of the NFCs include in the Indian context, as reported by Sen and Dasgupta (2018) (i) sundry debtors, (ii) loans and advances, (iii) investments in financial assets like stocks, debentures, mutual funds, derivatives products and like, (iv) cash and bank balances, (v) interest accrued on loans and advances, (vi) deposits/balances with government/others, and (vii) other loans and advances.
3. The third possibility is the reinvestment of most of the surplus generated in the M-M’ circuits in the financial circuits themselves which imply finance does not perform here its classical role of intermediation between surplus and deficit units. This is also related with the rentier interest in the financial circuits. There are ample empirical evidences of rise in such rentier interests in the economy through the process of financialization and the hegemonic role played by the finance capital vis-à-vis the real economy. This is cited in Sen (2004) as rentier income including capital gains on financial assets in some OECD countries. For example, for the US economy during 1981-99 the share of rentier income including capital gains for the decade of 1980s was 58.94% and for the decade of 1990s was 59.19%. It is further noted in Sen (2004) that the rentier income share in GDP of US rose from 14.81%
during 1960s to 33.49% during 1990s. The surplus generated in the financial
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circuits is distributed as compensation for managers and rewards for other agents including the bank capitalists and like who extend credit to the financial sector and thus provide necessary conditions for the reproduction of finance capital on ever increasing scale. Whatever remains after all these distributions are accumulated further as finance capital in the same or other financial circuits.
Hence, the initial money capital (M) of the financial circuit is sourced from national savings, the surplus generated in the real circuit and the surplus of the financial circuits reinvested. And the current nature of global capitalism facilitates the channeling of surpluses, thus appropriated, to the financial sector and in financial assets. Through different financial innovations in the form of derivative products, these surpluses further swell to higher money value (M’) and creates Ponzi schemes like of financial circulations in the economy which always has adverse implications for labour in general. The latter signifies more and more stress on flexible labour regimes in every real circuits in the form of numerical flexibility, wage flexibility, functional flexibility and temporal flexibility (Sen and Dasgupta, 2009). This is vindicated in the Indian context by the ever-widening wage-productivity gap in the Indian formal manufacturing segment as shown by the figure below.
Figure 1
Real Wage, Labour Productivity and Labour Share in Indian Manufacturing (1985-86 to 2010-11)
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Source: Annual Survey of Industries (various years), Government of India and author’s own calculation.
So, the hegemony of finance capital in today’s global capitalism has a significant bearing on surplus labour (value) performers in the real segment of the economy. This is evident in terms of flexible labour regime with labour losing its voice representation and thereby, its bargaining power and resulting in increasingly higher labour productivity and stagnating real wage and hence, increasing surplus generation and thus increasing labour exploitation in Marxian sense of the term.
Sweezy (1997) argued that the period of 1974-75, after the collapse of the Bretton Woods era, earmarked three intricately interrelated trends in global capitalism. They include (a) the slowing down of the overall real economic expansion, (b) the worldwide proliferation of monopolistic or oligopolistic multinational corporations which are siphoning more and more surplus generated in the real circuits (viz. M-C-M’ circuit) to the financial circuits (viz.
M-M’ circuits), and (c) financialization of the capital accumulation process i.e.
surplus generated in real and financial circuits gets more and more accumulated
0.000 1000.000 2000.000 3000.000 4000.000 5000.000 6000.000
1985-… 1987-… 1989-… 1991-… 1993-… 1995-… 1997-… 1999-… 2001-… 2003-… 2005-… 2007-… 2009-…
Real Wage
Labour Productivity Labour Share
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as money capital in the financial circuits mostly. Levitt (2008) argued this as a shift of the centre of gravity of the capitalist system from the M-C-M’ circuits to the financial circuits i.e. M-M’ circuits. And ultimately, it is the labour, as Marx would have envisaged, that bears the endemic risk of the entire process of financialization and finance capital which is bereft of its classical intermediating role in the real economy.
References:
Crotty, James (2003), “The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era”, Research Brief 2003-2005, Political Economy Research Institute (PERI), University of Massachusetts: Amherst.
Dasgupta, Byasdeb (2013), “Financialization, labour market flexibility and global crisis: A Marxist Perspective” in Byasdeb Dasgupta (ed) Non- Mainstream Dimensions of Global Political Economy, Routledge: London; pp.
76-100.
Epstein, Gerald A. (2005), Financialization and the World Economy, Northampton, MA: Edward Elgar.
Levitt, Karl Polanyi (2008), “The Great Financialization”, John Kenneth Galbraith Prize Lecture, June 8, 2008, available online at www.karipolanyilevitt.co,/wp-content/uploads/2011/01/The-Great-
Financialization.pdf.
Palley, Thomas (2007), “Financialization: What It Is and Why It Matters”, Working Paper No. 525, The Levy Economic Institute of Bard College, New York, December 2007.
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Sen, Sunanda (2004), Global Finance At Risk – On Real Stagnation and Instability, Oxford India Paperbacks, OUP: New Delhi.
Sen, Sunanda and Byasdeb Dasgupta (2009), Unfreedom and Waged Work – Labour in Indian’s Manufacturing Industry, Sage: New Delhi.
Sen, Sunanda and Zico Dasgupta (2018), “Financialisation and corporate investments: the Indian case”, Review of Keynesian Economics, Vol. 6 No. 1, Spring 2018; pp. 96-118.
Sweezy, Paul (1997), “More (or Less) on Globalization”, Monthly Review, 9(4).
Available online at www.monthlyreview.org/1997/09/01/more-or-less-on- globalization
