August 26, 2020


Banks, Bubbles, Profits

Richard Westra is University Professor at the Institute of Political Science, University of Opole, Poland and international Adjunct Professor of the Center for Macau Studies, University of Macau. His research focuses on the philosophical underpinnings of economic phenomena, with an emphasis on financialization, globalization, and neoliberalism. His many writings also consider the politics of states of exception, legalization of politics, and the study of global apartheid.

Alongside Robert Albritton, Makoto Itoh, and Thomas Sekine, Westra traces his intellectual lineage to Japanese political economist Kozo Uno (1887–1977). Arising largely out of debates about the nature of the transition from feudalism to capitalism in Japan, Uno’s thought responds to a need to comprehend social-economic forms displaying “mixed” characteristics—mixed modes of production (i.e. feudal societies with capitalist characteristics or vice versa) and mixed economies (i.e. socialistic economic forms internal to capitalist economies or vice versa), as well as “capitalist” economic activity in pre-capitalist societies. Both Uno and Westra’s work is therefore concerned with reconciling the “law-like” aspects of economic phenomena with the contingency of empirical history. The task of analytically articulating these mixes necessitates a theoretical understanding of capitalism in its most pure and general form.

This standpoint of “pure theory” distinguishes Uno and his followers from theorists, both mainstream and Marxist, who conceptualize capitalist development on a continuum from zero to full development. For the former, economic growth and the process of historical development are determined instead by ongoing encounters between the ideal form of capitalism and the conditions of actually existing human societies. Crucially, this process does not necessarily move towards an endpoint where the ideal form is fulfilled, nor towards full development.

Westra argues that this tension between the tendencies of capitalism as an ideal and the real needs of society begins to implode during the latter half of the twentieth century. What differentiates this period from earlier ones is the dissociation of social development and economic growth. Profit-seeking continues but does so mainly via financialization, understood not as a result of business cycles, but as an ongoing structural crisis demonstrating the unraveling of value creation, production, and non-capitalist institutions that constituted much of what is known as liberal civil society.

Something of a heretic among heretical Marxians, Westra’s writings might inspire a—hopefully productive—disagreement across the ideological spectrum. What he and the tradition he works in offers is twofold: first, an approach to Marx that attempts to isolate methodology; and, second, a way to think seriously about historical regression in the present that relies on neither mystical theories of civilizational decline, nor a truncated framework of secular stagnation.

In the interview that follows, we discuss financial globalization, the changing historical role of the banking sector, the decoupling of growth from development, and the historical specificity of capitalism.

An interview with Richard Westra

Brendan Harvey: How do you define capitalism, and how do you understand the relationship between capital and labor that’s specific to it?

Richard Westra: My view originates in Marx, who gives us quite a clear way to distinguish capitalism from other types of historical modes of production. He does this by demonstrating two things: the first is that the division between propertyless workers and property owners is a class structure specific to capitalism. The second is that within capitalism, the reproduction of material life depends on the market, and is thus a by-product of profit making. The commodification of labor is therefore about the separation of workers from their means of subsistence and the consolidation of ownership over those resources in the hands of capital. Wages enable workers (not as individuals or families, but as a class) to purchase goods required for their own reproduction via the market.

bh: Discussions about the slow recovery after 2008 often make reference to the postwar “golden age of capitalism.” You have a different interpretation of this period—can you describe it for us?

rw: In the nineteenth century, capitalism very closely conformed to Marx’s understanding of it. Wherever it spread, it reproduced similar class relations and expanded market dependence. But by the late-nineteenth and early-twentiethth century, this sort of trend begins to stall. Capitalism begins to generate noncapitalist practices in order to support market operations. The golden age of postwar capitalism reaches the apogee where noneconomic, noncapitalist practices are marshaled to support profit making, but where the goal of profit making is not eliminated. The partial decommodification of labor was, paradoxically, necessary to preserve its continued commodification. It is the matrix of extraeconomic and welfare state support that is really characteristic of the so-called golden age of capitalism. I understand globalization, financialization, and neoliberalism as a breakup of this matrix, and with it the stalling of what capitalism is as a historical society.

bh: In Periodizing Capitalism and Capitalist Extinction, you describe the way that, during the 1970s, economic growth becomes “decoupled from development as development is decoupled from the sequences of industrialization which marked it heretofore.” What is the role of banks in this shift?

rw: In mid-nineteenth-century Britain, the modern banking system emerged as commercial or “relationship banking.” A system of commercial banks backed by a central bank lent the money of depositors, which were essentially businesses holding money as depreciation and contingency funds during the course of business cycles.

Once this money was removed from the circuit of capital and deposited in the banking system, it was no longer capital—it was rendered “idle” or “dormant” as Marx referred to it. The role of commercial banks was to socialize this money. Let’s say I’m a producer of cotton garments, and I hold my depreciation fund or contingency fund in the banking system. Once it is stored there, other firms—say, a furniture business facing growing competition or increased demand—can borrow it. Once the money of one capitalist is put into the banking system, it is made available to all capitalists, thus increasing the magnitude of capital in operation within the broader economy. However, it is not merely a question of increasing the magnitude of value augmentation but also its speed. As capital generates relationship banking to manage its collective savings, so commercial capital is generated to manage the buying and selling of commodities. Commercial capital, which takes over merchant activities, can also avail itself of idle funds to purchase commodities in bulk, returning money to capital for reinvestment before the commodities they produce are sold. This speeds up the turnover time of capital to enhance profit making.

In the early twentieth century relationship banking began to play a more pronounced social role with the presence of so-called “finance capital.” This period saw a transition away from family-run “entrepreneurial” firms towards large monopolies and oligopolies. In order to manage the investment demands of, say, the steel industry—and also the new transportation and shipping industries that accompanied it—capital could no longer rely on socialized savings in banking systems. Finance capital relied on a new cohort of upper middle class savers, landowners, and small business owners to compensate for the missing funds. By agglomerating idle money that is scattered across different layers of society and investing it into the stock market, finance capital places these additional idle monies into the hands of industrial capitalists.

It is important to distinguish between finance capital and financialization. Rudolf Hilferding called the former finance capital precisely because it used the levers of finance to agglomerate and invest funds in real capitalist production. Finance capital not only agglomerates the wealth across society and puts it to work, but it also begins to actually manage it as the profits of big banks become ever more intertwined with the success of these businesses.

The sheer amount of idle funds expands exponentially in the postwar economy. Even the working class managed to accrue significant savings, and large corporations made so much money that they no longer relied on big commercial banks. They generated their own banking operations and used them to fund investment (as, for example, the General Motors Acceptance Corporation did). But for idle money to become capital, it needs to be invested in production-centered activity. Some of this investment came from expenditures associated with the welfare state; governments themselves started to borrow more, particularly to support counter-cyclical fiscal policy during business cycle troughs. This began a sort of cycle of temporary deficits that you can see on all of these graphs of the economic expansions and contractions from, let’s say, 1950 to 1970 among advanced economies. In this period we also see the emergence of socialized savings such as pension funds, insurance funds, and the beginnings of mutual funds. But again, up until around the 1970s, these pooled funds were largely absorbed by industrial production, the welfare state, and, in countries like the United States, by the military.

bh: Does this money stop being absorbed?

rw: In the 1970s, there’s a huge accumulation of idle money that can no longer be profitably invested in domestic production. Some of it goes into overseas industrial expansion, particularly to newly industrialized countries like South Korea, Taiwan, Singapore, and Hong Kong. But once these countries generate their own capital base, they no longer need to tap into this pool of money for production.

This is when this pool of money begins to take on several new forms, and it is these new forms, in domestic and international banking systems, that I and others refer to as financialization. To reiterate, financialization is not a form of capital; once money leaves the production-centered circuit and becomes idle, it is no longer capital. Financialization emerges when the transformation of idle money back into capital comes to a halt.

Once financial and industrial elites recognized this pool of idle funds, they thought of ways to liberate them. Contrary to what others have said, I frame liberalization as a sort of reregulation: there was deregulation around the matrix of institutions that make up the welfare state, but there was also a series of new regulations allowing idle money to operate on its own account to attract an income stream despite weakening real profitability from capitalist investment. Financialization, then, is the point in the disintegration of capitalist economies when pools of idle money accumulate to such an extent that there is virtually no chance they will ever be invested in production.

bh: There is a tendency within to describe deregulation as the cause of this increased speculation. But you argue that it was actually an effect of pressures to speculate arising from the lack of opportunities for profitable investment.

rw: Yes, and globalization is just the corollary to financialization—it is the physical disintegration of production-centered economies. On the one hand there’s an increasing agglomeration of funds, and, on the other, there’s a disintegration of vertical production models dependent on national economies. The latter only lessens the demand for the former to be invested in real production. Eventually, segments of the elite class begin to realize that this money is there, and something needs to be done with it. What needs to be done with it—from their perspective—is speculative modes of arbitrage. For these activities to occur, new regulations had to be put in place. The old regulations which granted industrial capital leverage over finance were dampened, tweaked, and ultimately changed outright, leading to the deregulation, liberalization, and privatization that define this era.

bh: How is this process related to the dollarization that occurred in the early 1970s?

rw: All of this money flooding into the global banking system encouraged excessive borrowing, particularly among countries seeking to build their own industrial system. At this point the structure of the US economy was quite different than it is today. Before the USD became the world’s reserve currency, the United States was largely constrained by its own resources, and this greatly limited the ability of the government to respond to the crisis. This is when we see books like James O’Connor’s Fiscal Crisis of the State, for example, which argued that government borrowing was crowding out private investment. Wealthy countries were borrowing to keep financing the welfare state—particularly with unemployment rising, businesses closing, and the tax base shrinking—while many poorer countries were borrowing to create productive industries.

When Paul Volcker unilaterally raised interest rates on the dollar, it nearly destroyed the US banking system, and destroyed the aspirations of developing countries. Third World countries were placed at the mercy of the IMF and the World Bank, which were repurposed from development operations to extortion operations through structural adjustment programs. But because interest rates reached about twenty-one percent, the dollar became the hottest commodity in the world. Money flowed into the US economy; into US banks, US denominated assets, and treasuries and other US dollar “safe havens,” with very lucrative payouts. The interest rate hike during the decline of production-centered business profit further accelerated the hollowing out and disintegration of advanced economy production systems. It did this by creating a situation where real interest rates were higher than profits, thus de-incentivizing production-centered investment.

Prior to this point, the banking sector had yet to fully embrace securitization and trading in “secondary markets.” Banks lent borrowers money directly, and they expected those countries, states, or municipalities to pay that money back to them with interest. With the near collapse of global banking systems, there was no way to return to the commercial banking model of lending—the sheer extent of national and global debts among all categories of borrowers significantly outstripped the capital holdings of the financial system upon which relationship lending was based. Securitization decreased the amount of money the financial system needed to hold against lending, allowing banks to remove nonperforming loans or otherwise illiquid assets—like Third World debt or home mortgages—off their balance sheets by packaging them into investment vehicles which were sold to investors who then traded them in secondary markets. It is at this point when the alphabet soup of newfangled financial instruments and the new architecture of derivatives hedging and shadow banking took center stage.

bh: You describe a shift from business cycles to alternating asset bubbles and meltdowns. How does this shift change how we understand economic crises?

rw: Initially, capitalism was marked by decadal business cycle oscillations driven by the renewal of fixed capital. The upward part of this cycle consisted of massive reinvestment and increased productivity, as well as a new cluster of innovations which spread throughout the economy and provided a new foundation for profit making. By the 1980s, I argue, economies no longer operate according to these business cycles. Instead, we see swells of financial capital oscillating around financial bubbles and bursts. In 1987, we saw a huge global stock market crash, after which states like Japan were forced to bail out much of the world with their savings. And this process continued through the 1990s and into the 2000s. The shift from business cycles to bubbles also abrogates relationship banking. Banks no longer lend directly to customers. They initiate loans, but once they are originated, they are distributed to different investors and packaged off to different financial entities. In the old commercial banking model, banks had to be very conscious about debt and lending. But in the new financial model, they don’t have to be conscious about that at all.

It’s important also to note that these bubbles have nothing to do with market fundamentalism. It’s all about governments and commanding heights businesses—either erstwhile production-centered transnational corporations, financial corporations and the various categories of funds management in collusion with government and central banks—fostering a peculiar simulacrum around what neoliberals believe their late beloved market should do, and then blaming odious outcomes on the invisible hand.

bh: You articulate the close relationship between particular types of value production and the respective “nexus” of institutional and infrastructural supports that accompany them. Are we on the brink of a new phase in each of these spheres?

rw: Capitalism comes into historical being to satisfy a delimited range of human wants: these are manufactured, standardized material goods. The system of accounting upon which its profit depends is rooted in production-centered activity. As we discussed, the cluster of mass produced consumer durables of the golden age depended on noncapitalist supports. As these supports have largely disintegrated, so has capitalism’s ability to produce and distribute those goods to the people that need them. The decoupling between production and development has left us with something more predatory and less connected to the sorts of social development that has accompanied it in the past.

The new global putting out system dissolves the capital-labor relation as we know it and transitions into an economy in which work is performed around the world by contingent quasi-peasant, quasi-proletarian labor forces. Politically, this may manifest in authoritarian regimes where manufacturing wages do not meet reproduction costs and must be supplemented by family work in agriculture, services, seasonal labor, etc. While the surplus value this system yields is enormous, little of it is invested, as it accrues largely as interest and rents. The consumption wealth effects of this arrangement are enjoyed by those in both advanced and non-developed economies who are plugged into the interest and rent economy. For the rest of us around the world, life chances are diminishing and the specter of destitution is becoming our reality.

There is “another world” staring at us. There are new energy sources, durable public transportation infrastructure, reconfigured living spaces, renewable communication infrastructures and devices, and so on out there. But this requires more long term investment and lower rates of profitability than capital can survive on. As long as capital can produce extremely high rates of surplus value through the current system, and governments and central banks support the bubble economy, there is no economic imperative to invest money otherwise.

There is no excerpt because this is a protected post.

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