Economics As If People Really Mattered

Week Five – Credit and Capitalism

Mary Mellor, The Nature of Money

Chapt.4 – Credit and Capitalism

Credit is essential for contemporary capitalism because:

1.Money is needed to enable the productive or trading process to start

2.Customers also need credit to be able to purchase goods

3.If capital is to accumulate there must always be new money coming into the system

“Marx, for example, emphasizes that all of these forms of capital – merchants’ capital, money capital and rent on land – had an historical existence which stretches back well before the advent of industrial capital in the modern sense.

“Marx, for example, emphasizes that all of these forms of capital – merchants’ capital, money capital and rent on land – had an historical existence which stretches back well before the advent of industrial capital in the modern sense.

We therefore have to consider an historical process of transformation in which these separate and independently powerful forms of capital became integrated into a purely capitalist mode of production.

“Marx, for example, emphasizes that all of these forms of capital – merchants’ capital, money capital and rent on land – had an historical existence which stretches back well before the advent of industrial capital in the modern sense.

We therefore have to consider an historical process of transformation in which these separate and independently powerful forms of capital became integrated into a purely capitalist mode of production.

These different forms of capital had to be rendered subservient to a circulation process dominated by the production of surplus value by wage labour.

“Marx, for example, emphasizes that all of these forms of capital – merchants’ capital, money capital and rent on land – had an historical existence which stretches back well before the advent of industrial capital in the modern sense.

We therefore have to consider an historical process of transformation in which these separate and independently powerful forms of capital became integrated into a purely capitalist mode of production.

These different forms of capital had to be rendered subservient to a circulation process dominated by the production of surplus value by wage labour.

The form and manner of this historical process must therefore be a focus of attention.”

David Harvey, Limits to Capital (London: Verso, 2006), 73.

The purpose of capitalism is self-expansion – capital begets capital – and it does so by monetizing social value and human labour. This is a circuit of transformation.

The purpose of capitalism is self-expansion – capital begets capital – and it does so by monetizing social value and human labour. This is a circuit of transformation.

“Historical capitalism involved therefore the widespread commodification of processes – not merely exchange processes, but production processes, distribution processes, and investment processes – that had previously been conducted other than via a ‘market’. And, in the course of seeking to accumulate more and more capital, capitalists have sought to commodify more and more of these social processes in all spheres of economic life.”

Immanuel Wallerstein, Historical Capitalism (London: Verso, 2011), 15.

1. From finance capital to financialisation

Financialisation sees financial assets not as representing wealth in the ‘real’ economy, but as wealth creating investment in their own right. (p.85)

Leverage became the most important tool of financial accumulation… debt [or leverage] piled on a small amount of initial investment can vastly increase the profit made.

The secret is access and banks were lending incredibly cheaper to speculative finance companies. (p.89)

2. Credit and speculation: hedge funds and derivatives

Hedge funds – ‘betting syndicates for the very rich’ (p.89)

A major activity of hedge funds is derivative trading…Most hedge fund derivative activities are purely speculative, that is, there is no underlying exchange of goods or services. They gamble on anything, shares, securities, futures, currencies. (p.90)

On the margin – leveraging without borrowing money. (p.91)

2. Credit and speculation: hedge funds and derivatives

Hedge funds are an emblem of the globalised casino economy, with most of their funds held offshore to avoid tax. (p.93)

3. Credit-driven take-overs

Private equity firms trade in companies, not financial assets and derivatives (p.94)

Private equity frms borrow extensively to buy companies, with a high ratio of borrowing to money directly invested. The borrowed money is usually placed on the balance sheet of the company purchased, rather than on the balance sheet of the private equity company. (p.94)

4. Credit and privatisation

Having lost the ability to create its own money, the state has to get the private sector to create it for them by buying and trading in government bonds. (p.97)

Private finance initiatives (PFIs) were first introduced under John Major in 1992 and were greatly expanded when Labour cme to power in 1997. By 2008 total investments had reached over £60 billion. (p.98)

5. From speculation to fraud

Rather than directly funnelling money to social needs, charities have to run the roller-coaster of bull and bear markets in order to create financial ‘wealth’. (p.100)

Pensions, social security, health insurance

6. The limits of financialisation

The two main aspects of capitalism, productive and financial, are inherently in conflict. Capitalism is divided against itself. Finance seeks short term gain while productive capital needs long term investment.

The financial sector is not just about the activities of a financial market (intermediation between those with capital and those who need capital), it is about the process of financial accumulation. (p.102)

… the difference between capital in money or productive form ultimately leads to the separation between interest on money capital and profit of enterprise.

The distinction amounts to a division of the surplus in two different forms, which may ultimately crystalize into a division between money capitalists and producer entrepreneurs.

Harvey, Limits to Capital, 72.

7. Speculating with the People’s money

The argument put forward in this book is that although the money system is controlled by capitalist finance, it is still publically underpinned by social trust and political authority. The money system is backed by the capacity of the state to borrow money on the basis of future taxation, or issue money that will be accepted as viable through the trust of the people.

The money system therefore is only as strong as the solidarity of the society itself, and the capacity of the political authority to ensure payment of taxes or access other forms of national income. (p,104)

The modern banking system evolved through a close link between the needs of capitalism and the needs of the state.

Financialised capitalism no longer wishes to keep its side of the bargain.

While it will still supply the state with loans through the money market, it is not willing to support the other important aspect of the money system, taxation.

Since it is taxation that is the ultimate source of high-powered money which underpins all other aspects of the money system, globalised money must be fragile. (106-7)