Reviewed by Hans G Despain
There has been a resurgence of Marxist analysis of money and finance.
Costas Lapavitsas’s recent work is exceptional.
His most recent book, Profiting without Producing, will be a reference point for Marxian political economy for decades to come. The book is in some sense four books (divided into three sections). In part one Lapavitsas offers a luminous history of Marxian monetary/finance theory. Part two penetratingly develops a Marxian concept of money, for an explanation of contemporary finance. The intention in part two is to interpret Marx’s theory of money for understanding contemporary contradictions and crises. Part three analyzes two phenomena. First the rise of financialization – Lapavitsas provides impressive empirical and historical analysis to demonstrate financialization (specifically for the U.S., U.K., Japan, and Germany). Second Lapavitsas describes, and (based on parts two and one of the book) explains, the financial collapse in the U.S. 2007-8, and the Eurozone finance/fiscal crises 2009-10.
There will surely emerge criticism of this book for its mode of presentation. However, Lapavitsas is attempting to interpret (international) political economy as it is happening. Thus, many presentational difficulties cannot be avoided.
Costas Lapavitsas has emerged as a premier monetary theorist. Lapavitsas is deeply rooted in Marxian political economy, especially of the Kozo Uno tradition of Japan (11, 121). In previous work Lapavitsas (with Makoto Itoh, 1998) interprets and develops Marx’s theory of money and credit into a contemporary monetary theory and a precursor of (with potential to surpass) Post-Keynesian monetary theories. This earlier book has become a theoretical cornerstone for understanding Marx’s monetary theory and successfully demonstrates the urgent relevance of Marxian political economy for understanding contemporary financial crises.
In 2003 Lapavitsas extends these ideas to underscore the non-economic foundations of Marxian monetary theory. Lapavitsas (2003) draws from anthropological and institutional political economy to help explain Marx’s philosophical orientation and value theory for understanding money. He demonstrates convincingly that Marx’s theory of money is rooted in social relations of trust, reciprocity and other non-economic foundational aspects of money and credit relations.
The theoretical implications of Lapavitsas’s position are massive. Alex Cistelecan (2014) has demonstrated in his review of Lapavitsas et al. (2012) the advantages over Habermas. Lapavitsas et al. (2012) establish, based on a Marxian monetary perspective, that the crisis in Europe is not merely the failure of the Eurozone, but the structural contradictions of capitalism.
In Profiting without Producing, Lapavitsas ‘ultimately’ aims to explain three historical phenomena: 1) the historical process of financialization, 2) the financial crisis of 2007-8, 3) the instability of monopoly-finance capital. He brilliantly succeeds in all three tasks. There is also the omnipresence of a fourth theme, history of economic thought. This is political economy at its finest.
Lapavitsas’s book is divided into three parts and ten chapters. Chapter one begins with the contemporary phenomenon of financialization and the ubiquitous presence of financial derivative activity. Chapter two rehearses financialization in heterodox political economy and Marxian political economy in particular. Marxian economists were the first to fully understand the structural shifts that had taken place, and theorize the destabilizing tendencies.
Chapter three generously presents Hilferding’s Finance Capital as capturing the “first ascendency of finance” (post-1970 being the second). The first ascendency of finance culminates in imperialism. The importance here is crucial. Imperialism is not merely a form of political power and military dominance, but finance and political economy. The implication here is not simply historical, but theoretical. Finance generates (both economic and political) power, master-slave-like power-relations, and super-exploitation (see below).
Part two, consisting of three chapters, constitutes Lapavitsas’s political economy of financialization. These very ambitious chapters are both historical and theoretical; respectively this section is intentionally descriptive and explanatory. Lapavitsas roots his own political economy of financialization in Marx’s theory of money. It is argued that Marx’s theory of value has tremendous capacity to cast light “on the salient monetary aspects of financialization” (82). Here Lapavitsas draws heavily from his previous work (Lapavitsas, 2003; Itoh and Lapavitsas 1998).
Crucial here is that the financial system of financialization is not merely a parasitical excrescence of capitalism (122), “but an integral part of it sustaining accumulation” (106). The “financial system emerges endogenously from real accumulation” (123). The mainstream contends the financial system emerges out of market failure to bring together those with loanable funds (savers) and those who have investment/productive projects (borrowers), whereby banks and the financial system emerge to “intermediate” and facilitate the reduction of risk. Lapavitsas, following Kozo Uno, argues the mainstream position is radically incomplete.
Lapavitsas distinguishes between the banking system and the financial system. The banking system emerges as a rentier endeavor to usurp surplus value through loaning idle funds. The banking system takes in short-term deposits (paying small amounts of interest) to loan long-term (at higher rates of interest).
There are serious contradictions in a banking system that has short-term deposits, but long-term loans. Thus, a financial system develops to provide “liquidity” and limit the potential for banking crises due to ‘runs-on-banks’. Thus, the reason for the emergence of a full-fledged financial system, in distinction to a banking system more narrowly conceived, is to provide “liquidity” for banks. “From this [Unoian] perspective the money market is, at its core, an interbank market for reserves of liquidity” (131). In other words, for banks to avoid bank runs, money/capital markets emerged between banks (129).
Here is my cartoon version. The conventional account told is that money or stock markets emerge because some entrepreneurial projects fail to get loanable funds. Thus, entrepreneurs stand out on “Wall Street” and sell shares to accumulate start-up capital. The Unoian perspective claims this is unrealistic and unhistorical. Instead, banks get anxious for liquidity; hence banks do not want to tie up all their deposits in long-term loans. Thus, banks want to be able to get part of the surplus-value/exploitation action without making the full loan. Thus, it is banks that begin to buy/sell shares of stock, diversifying loaning-activity with activity in highly liquid capital (money or “stock”) markets.
Now these transactions (i.e. trading stock) have a cost. Thus, a firm unable to get a traditional loan will give up more of its future profits in the form of finance. For this reason, Lapavitsas argues that the “rate of dividend” or “rate of discounting” will be greater than the rate of interest (the price of a more traditional loan) but must be strictly less than the rate of profit. Such that:
i ≤ d ≤ r
Where i is the rate of interest, d the rate of discounting, r the rate of profit (162). Note the rate of discounting is the rate of dividend, but when a dividend is not paid, it is also the amount expected to be made on ‘capital gains’ – as a rate between the price paid and price sold.
Of course there is a rather important historical problem here. The discounting rate seems to have very little to do with either the rate of interest or rate of profit. Indeed, this is the point, and the reason it is usually not understood. These upper and lower limits are simply the conditions necessary for successful “simple reproduction” at the macroeconomic level. In a regime of simple reproduction these boundaries must hold true. However, at a more sectorial and market level these rarely (if ever) hold. There is no sectorial mechanism at work; there is no “natural rate of interest”. Crucially, the rate of interest is independent of the labor theory of value (116). With no sectorial mechanisms for equilibrium, the equilibrium mechanism is financial crisis. “It is characteristic of capitalist crises to emerge first in the money market, subsequently becoming broader credit crises and perhaps developing into general economic crises” (132).
This also means that the rate of discounting can vary greatly from the rate of interest and the rate of profit. Thus, capital markets exist as a source of liquidity for banks (128), and act as a “lever for the formation of loanable capital but in a highly mediated and precarious way” (119). In other words, this liquidity comes at a risk, and generates macroeconomic or systemic instability.
Banks engage in financial activities for liquidity. But in addition, by “engaging in these practices banks help to stretch accumulation, and thus to generate the flows of loanable capital” (126). “Money market credit is vital to capitalist accumulation because it increases the fungibility of loanable capital” (132). Importantly, “a system of finance could emerge only if capitalist relations already permeated economic life” (108). Thus, “the key economic relations that provide systemic content to finance do not lie within the realm of finance, but within the rest of the economy” (107). In short, the existence of a highly consistent reproduction of class relations and expected profitability (i.e. relations of exploitation) are necessary conditions for a modern system of finance. Interest-bearing capital relations must be extensive (112-18) and financial markets will then emerge as a source of liquidity for banks (131). Indeed, “a deep and wide money market is an integral requirement of an advanced credit system since it allows banks to deliver their own functions more effectively” (132).
Part one of this book is an impressive rehearsal of heterodox monetary theory. Lapavitsas underscores the importance of Marxian political economy for understanding the transformational shift of capitalism towards a more financially organized capitalism. Marxian political economists have been at the forefront of these developments (13-67). Rudolf Hilferding’s outstanding contribution Finance Capital continues to be a seminal point of departure (45ff). Hilferding establishes three key points useful for understanding the contemporary historical process of financialization. Hilferding insisted Marx’s theory of money is the cornerstone of the structure of finance. He differentiates between commodity (e.g. gold), fiat (e.g. paper) and credit (e.g. loans) forms of money. Finally, the accumulation of surplus value in the form of “hoards” is the key to understanding modern finance (53).
Hilferding’s argues that as capitalism develops, the scale of production expands, fixed capital requirements increase, and profit rate equalization becomes impaired due to the centralization of capital and market power concentration “that consciously restricts competition to protect profitability” (59). Finance capital, or stock markets, are created to provide liquidity to banks, and to finance massive enterprises.
Capitalistic development increases the scales of production and concentration of market power. These insights become the basis of the “monopoly capital” theory of Paul Baran and Paul Sweezy (15-22). The monopoly capital theorists came to underscore the importance of finance and capital markets for understanding the reproduction dynamics of contemporary finance. Monthly Review theorists continued to emphasize the stagnation tendencies of monopoly capitalism, and the tendencies toward crises generated by monopoly-finance capitalism. Lapavitsas argues Giovanni Arrighi, French Regulation Theorists, Robert Brenner, and Prabbat Patnaik (among others) have made significant contributions to understanding the historical processes of financialization, especially concerning money, international political economy, exploitation, and crisis.
Lapavitsas’s aim is to demonstrate Marxian monetary theory is highly capable of explaining contemporary monopoly-finance capitalism. Part three of the book is an empirical and historical analysis of transformation within and between productive enterprises, banks, and households. In desperate brevity, monopoly capital enterprises have diminished their reliance on banks, while increasing their dependence on financial markets. Banks too rely less on loans to enterprises and more on activities within financial capital markets. The so-called rentier class has been effectively euthanized. Rather than relying on income streams from interest, banks make their profits from capital gains in financial markets, as well as loaning to, and handling the financial conduct of individuals. Most striking however, is how individuals “have been drawn into the realm of formal finance” (170) for borrowing and lending (e.g. mortgages, savings), purchasing (credit cards), and financial services (e.g. pension funds, 401k management).
Chapters 7, 8 and 9 sketch the essential historical paths of accumulation in the US, Japan, Germany, and the UK, based on new empirical regularities of productive enterprises, banks, and households. Productivity and technological increases have shifted the balance between wages and profits in favor of profits. For productive enterprises, financial markets have been an important source of income streams (201). This has given priority to allocation of surplus value to inner-enterprise financial activity, and away from increases in wages, salaries and benefits. Exploitation has been significantly intensified. Workers and households have increasingly turned to financial enterprises and markets to compensate. The distributional result of monopoly-finance capital is that “capital has managed to appropriate the bulk of output increases from rising productivity, even if the latter has not grown with much dynamism” (190).
The results of the empirical and historical trends are remarkable. With the rise of monopoly capital, disproportionality between (Marxian) departments 1 (means of production and investment capital) and 2 (Articles of consumption, or commodities, see Marx, Capital Vol. 2 Chapter 20 ) is no longer the reason for crises (263). There is no evidence of overaccumulation (275). Firms have not been taking on an over-expansion of debt. Neither is there any evidence of “over-consumption” (274) or under-consumption of households (263). Instead (US and Japanese) households and non-profit institutions increased debt-ratios significantly to maintain consumption patterns (276), and financial capital market activities of non-financial and financial enterprises have exploded (222-46).
However, household debt and default is only the trigger of crisis (278). The real culprit is twofold: (1) the explosion in “shadow banking” activity (279ff) and (2) “financial expropriation” (146-7, the basis of super-exploitation). Recall from part two of the book that shadow banking arises necessarily to provide liquidity to banks. In other words, rather than loan long-term on deposits that are short-term, derivative capital markets allow banks essentially to make short-term loans. With the increase in defaults, banks turned to capital markets for liquidity. An increase in demand for liquidity decreased asset prices. In effect this is exactly analogous to a traditional bank run, but all carried out in the shadow banking sector. Banks demand liquidity (selling assets for money), which depresses asset prices (deflation), which in turn increases selling, and greater asset deflation. There is a capital market freeze, whereby banks are forced to curtail traditional lending activity to households. Households in turn can no longer meet their liabilities and spending patterns. Firms experience a decrease in household spending as lost sales, leading to lay-offs and an increase in unemployment.
In a sense, we could argue this is a return to a disproportionality crisis, not between departments 1 and 2, but between financial activity and traditional production activity; all of which is built upon an institutional arrangement of super-exploitation (i.e. traditional exploitation of firms squeezing workers, plus banks taking a portion of future income in the form of interest and/or fees).
Lapavitsas convincingly argues that the historical process of financialization represents a transformation of mature or monopoly capitalism, whereby altered conduct of non-financial enterprises, banks and households increases the importance of the financial sector, which can be dubbed, following the Monthly Review theorists, monopoly-finance capital. Interest-bearing capital diminishes in importance for non-financial enterprises, but increases for households. Most importantly, the short-term financial activity of financial institutions increases the incentives for productive firms toward intensive attempts to increase relative surplus value. The increase in relative surplus within the workplace, in conjunction with increased household indebtedness, means that monopoly-finance capitalism is a system of super-exploitation. The growth and increased importance of the financial sector, built on a system of super-exploitation, generates macroeconomic instability and vast potential for financial catastrophe.
13 February 2014
- 2014 Review of Crisis in the Eurozone, by Costas Lapavitsas, et al. and The Crisis of the European Union: A Response, by Jurgen Habermas Marx and Philosophy Review of Books 21 January https://marxandphilosophy.org.uk/reviewofbooks/reviews/2014/938
- 1998 Political Economy of Money and Finance London: Macmillan.
- 2012 Crisis in the Eurozone London: Verso.
- 2012 Financialization in Crisis Leiden: Brill.
- 2003 Social Foundations of Markets, Money and Credit London: Routledge.