Download an indication of a `credit-fuelled` burst that was `fictitious`.

Finance, the Rate of Profit and Imperialism
Paper for MPE2 session, WAPE/AHE/IIPPE conference, Paris, 5-7 July 2012
By Tony Norfield
Abstract
This paper examines how Marx’s theory of value can be developed to understand the role of
finance for imperialism today. The basic outlines of Marx’s theory of credit and finance are
given in Capital, but this is an incomplete work. Hilferding’s classic book, Finance Capital,
was an important advance, with its analysis of the connections between monopoly and
finance. However, there has been little progress in the Marxist analysis of finance since its
publication. Recent work has tended to focus on financial crises, or on the role of the financial
sector in the national economy and the growth of financial trading. There has been little or no
attention to the question of finance and imperialism. This paper will offer a framework for
understanding the imperialist financial system using value theory. It will examine the
relationship between the Marxist concepts of the rate of profit, accumulation and fictitious
capital and the ‘modern’ concepts of return on equity and leverage. This forms the basis for
understanding how the financial system is a key part of the mechanism by which the major
imperialist powers maintain their economic privileges in the global economy.
Keywords: Finance, credit, fictitious capital, accumulation, rate of profit, return on equity,
leverage, value theory, imperialism, parasitism, productive and unproductive labour.
1. Introduction
Financial markets and companies have been the focus of attention in recent years, especially
following the crash of 2008. Yet while there has been plenty of coverage of the crisis in both
the popular media and in academic journals, there have been few analyses that have gone
beyond documenting in a descriptive fashion the expansion of financial trading and the
various forms this has taken. Marxist scholars generally base their critique of finance on the
theory of value and accumulation, noting that finance is unproductive, parasitic and prone to
speculative excess. However, while these views may follow the analysis in the classical
literature, from Marx to Hilferding and Lenin, they do little to go further in understanding
how the financial system works in the context of Marx’s value theory. Neither do they do
much to examine the role the financial system plays for imperialism today.
This paper aims to ‘go back to basics’ and to build up a framework using value theory
to explain the role of finance for the imperialist world economy. First I will summarise the
core concepts of value theory as set out in Marx’s Capital, then I will discuss how these are
used to conceptualise the rate of profit for the capitalist system as a whole. One important
issue is to distinguish productive capital from other forms of capital, but the trickiest question
is how to incorporate the financial system into the analysis. Volume 3 of Capital has
incomplete and fragmentary remarks on banking and credit, which enabled Hilferding’s
Finance Capital, published in 1910, to stand out as the ‘fourth volume’ of Capital in
contemporary eyes, given that it offered a comprehensive analysis of the relationship between
banks and industry.1 I discuss not only how the financial system has an important impact on
the rate of profit calculations for the system as a whole, but also how its special position in the
1
We shall see below that while Hilferding introduced some important concepts he also made some
questionable calculations on profitability. This is quite apart from his distortions of Marx’s crisis
theory, where he focuses on disproportionality and argues for more regulation, on which see
Grossmann (1992, Chapter 1).
1
sphere of circulation leads to a different profit dynamic from those for industrial and
commercial companies. Finally, I discuss the principal ways in which the financial system
acts as part of the mechanism by which the major imperialist powers – particularly the US
and the UK – maintain their economic privileges in the global economy. It is shown that this
mechanism does not depend upon financial crises and predatory relations between creditor
and debtor, although these certainly exist; it operates on a day-to-day basis as part of the
fundamental structure of the imperial system.
2. Value theory and calculations of the rate of profit
The sole aim of capitalist production is to make a profit. Marx’s theory of value explains the
origin of this profit and how the dynamic of capitalist accumulation takes particular forms,
resulting in a tendency of the rate of profit to fall. This tendency is what Marx termed ‘just an
expression peculiar to the capitalist mode of production of the progressive development of
the social productivity of labour’.2 Here I will focus not on this law, although I would endorse
Marx’s observation that it is ‘in every respect the most important law of modern political
economy, and the most essential for understanding the most difficult relations’.3 Instead of
analysing trends in the rate of profit over time, I will show how to conceptualise the rate of
profit, explaining the different factors that determine its magnitude.
First, it is necessary to outline some elements of Marx’s theory of value. This theory
applies solely to capitalism, that historically specific form of social organisation in which the
products of human labour are commodities and in which labourers work for the profit of the
capitalists, the owners of the means of production. The value of commodities is a function of
the socially necessary labour-time that went into their production, both directly in terms of the
new expenditure of ‘living’ labour by the workers and indirectly as a result of the value
transferred to the product by the means of production. The profit of the capitalist employers
depends on the amount of surplus value produced by the workers, which in turn results from
the time that they work after producing a value equal to the wage they are paid.
This leads to the definition of productive labour in Marxist theory. The definition has
nothing to do with a moral judgement about whether the work done is socially useful, useless
or otherwise. It rests on what directly produces value and surplus value for capitalism. Marx’s
analysis in Capital is focused on the dynamic of this process, and Volumes 1 and 2 deal
almost exclusively with industrial capital because this ‘is the only mode of existence of
capital in which not only the appropriation of surplus value, or surplus product, but
simultaneously its creation is a function of capital’. Industrial capital is, then, the most general
and most important form of capital, and the one that is considered to employ productive
workers.4
However, this is too narrow a definition of productive labour, and both the logic and
text of Marx’s analysis also point to other groups of workers who are productive of value and
surplus value for capital. One group is involved in the transport and packaging of
commodities, since this function also adds to their use-value.5 Another group includes
producers of use-values that are not material commodities who nevertheless work for a
capitalist company, for example in private hospitals and education.6 In the following sections,
however, I will use the shorthand of ‘industrial’ capital to refer to employment in and the
operations of productive capitalists.
Marx (1974c, Chapter 13, p213). Marx outlined a number of ‘counteracting influences’ that make the
fall only a tendency.
3
Marx (1973, p748).
4
Marx (1974b, Chapter 1, Section 4, p57).
5
This is also true for those storage costs that do not arise out of the difficulty of realisation. See Marx
(1974b, Chapter 6, Sections 2.2 and 2.3, pp151-153).
6
See Marx (1969, Addenda 12, Section H, pp410-411).
2
2
Many workers employed by capitalist companies do not produce value and surplus
value. These are the ones operating in what Marx calls the ‘sphere of circulation’. One area of
this is the capitalist market activity of transforming use-values into values or the reverse
operation, ie the selling or buying of commodities, including the accounting processes, as in
the case of those working for merchant or money dealing capital (which we shall call
commercial capital below). Another important area covers the workers in the more
specifically financial sphere, providing services in the exchange between different agents of
titles to the ownership (and use) of money and capital. This includes banks and other financial
companies, real estate agents, and so forth. Whatever profits the labourers in these
occupations bring to their particular employer, via mark ups, fees or interest payments,
workers in the sphere of circulation do not produce new value (nor any surplus value) for the
system as a whole.
Another group of workers is not employed by private capital but is important to
consider briefly: public sector workers in local and central government, and others providing
state-funded services. They have become increasingly important in the post-1945 period,
along with the expansion of state expenditures and taxation. The growing gap between
spending and taxation, and the related growth of government debt, are clear signs of problems
in capital accumulation.7 Private capital depends ever more upon state-driven demand and
financial support, as well as on the police and the armed forces. This is a big topic to analyse
in its own right and it mostly falls outside of the focus of our inquiry into the role of finance
for imperialism. However, it is worth making some brief points on this topic.
Public expenditure is largely financed through taxation, so it is a drain on the private
capitalist sector and on the total surplus value produced, even though some of the
expenditures may also benefit sections of private capital. Some expenditures are transfer
payments of various kinds – giving to one section of the population what is taken away in
taxation from others. These may be seen as redistributions of value and, while they may
influence the pace of accumulation, they are not necessarily a drain on total surplus value in
private capitalist hands. Nevertheless, much of public expenditure will be a consumption of
resources – even in the administration of transfer payments - that is such a drain. Indirectly,
there may be some savings for private capital, for example in the provision of health and
education services for workers compared to the costs of what private capital would otherwise
provide. But it is no surprise that state spending is normally seen as unproductive for private
capital, and there is a real basis in the logic of capital accumulation for the attacks on
‘bureaucracy’ and public services. Hence, another qualifying factor in considering the
profitability of the capitalist system as a whole is to allow for unproductive state spending that
is a drain on the total surplus value produced. However, this factor is not included in the
analysis that follows.
2.1 How to approach the rate of profit on capital investment
In Marx’s analysis, the rate of profit, r, is expressed as the total surplus value produced,
divided by the advance of both constant and variable capital, or:
(i)
r
S
C V
This simple formula is the one commonly used to represent the rate of profit on total social
capital. However, this formula leaves out of account two important sets of qualifying factors,
aside from the issue of state expenditure and taxation noted above. These need to be
considered before a correct concept of the rate of profit in the capitalist system can be
derived.
7
See Haldane (2011, Chart 16) for the trend increase in public debt ratios for G7 countries from the
1970s.
3
The first set of qualifying factors concerns the period of turnover:
-
r should be considered as the annual rate of profit, the total surplus value produced in
a year, S, divided by the capital advanced in that year;
-
C is the total advance of constant capital, ie the advance of the fixed capital
(machinery, buildings, etc) plus the advance of constant circulating capital (raw
materials, energy used, etc). Fixed capital transfers its value to the product over
several labour processes, meanwhile retaining its ‘definite use-form’,8 and we can
assume that it is advanced for a year or longer. Circulating capital, on the other hand,
is entirely consumed in the labour process and it may be may be turned over several
times per year. In the latter case, while a total of, say $10m of raw materials may be
used up in a year, only $2m may need to be advanced at any one time for the
purchase of raw materials for the next period of circulation;
-
V is the total advance of variable capital (wages), and it will also be less than the total
annual wage bill if the period of circulation for variable capital is less than one year.9
These turnover elements of the formula are important, though they are usually set aside
because of the difficulty of getting comprehensive information on turnover time. A shorter
turnover time will mean that there is more surplus value produced compared to the advance of
capital in a year, so that the rate of surplus value and the rate of profit per annum will also
rise.10 In practice, most Marxist analyses of the rate of profit using national government
statistics consider some proxy for the total surplus value in a particular year divided only by
the stock of fixed assets that capitalists advance. This is a reasonable simplification to deal
with the problem of turnover times. However, it will overstate the rate of profit because it
excludes circulating capital altogether, rather than dividing the annual amount of circulating
capital by its average turnover time as an additional element to add to the fixed capital.11 In
what follows, the formulae I develop are for an annual rate of profit. Turnover time is not
explicitly considered, but it should be noted that the rate of profit would increase if turnover
time were reduced.
The second set of qualifications is more critical, in my view, when conceptualising
the rate of profit: these relating to the advance by capitalists of funds that do not produce
value and surplus value. This is unproductive employment of economic resources within the
private capitalist sector. As will be shown, such funds need to be allowed for not only in the
denominator of the rate profit formula. They will also deduct from the numerator.
Capitalist expenditures that do not produce value and surplus value fall into two
categories: commercial (or merchant) capital and financial capital, as noted above. The
standard rate of profit formula noted above can be amended to allow for these. Yet this is
rarely done in the literature, even though the majority of Marxist commentators would agree
that commercial and financial activities, being in the ‘sphere of circulation’, are unproductive
of value and a drain on the productive sector of the capitalist economy. Below I explore this
question.
2.2 Productive and commercial capital and the rate of profit
Marx (1974b, Chapter 8, ‘Fixed capital and circulating capital’, p160).
In Capital, Volume 3, Chapter 4 ‘The effect of turnover on the rate of profit’, Marx assumes that
circulating constant capital is turned over in the same time as the variable capital (Marx 1974c, p72).
Variable capital is also circulating capital in Marx’s definition.
10
See Marx (1974b, Chapter 16) for examples of the higher annual rate of surplus value compared to
the rate of surplus value for one labour process period.
11
For a discussion of this point, see Kliman (2012, pp80-82).
8
9
4
To the best of my knowledge, the first scholar to produce an amendment to the rate of profit
formula to include commercial capital was Ben Fine.12 His derivation uses Marx’s analysis
that the commercial capitalists can be considered as buying commodities from the productive
capitalists below value and selling them at value, while achieving the same average rate of
profit as the productive capitalists. In this activity, the commercial capitalists have to advance
cash or other means of payment, and they also need to advance capital to pay for buildings,
equipment, commercial workers, etc. Marx assumes an equal rate of profit between the two
types of capital because, in practice, they overlap. It is considered relatively easy for a
producer to move (at least partially) into commerce, or vice versa, if the rates of profit are
significantly different and attractive enough to induce such a change.13
The productive capitalist sells his commodities at the following price:
(ii)
(C + V)(1 + r)
The commercial capitalist buys from the productive capitalist at this (lower than value) price
and sells his commodities at value, equalling the total value produced. If B is the sum of
commercial money capital advanced to buy the commodities and K is the advance of
commercial capital for expenditures on buildings, commercial workers, and so on, then:
(iii)
(C +V)(1 + r) + Br +K(1 + r) = C + V + S
Note here that the commercial money capital advanced, B, is used in exchange but returned
on the sale of commodities, so there is no ‘loss’ of this sum of value. It does not have to be
added to the selling price of the commodities. The only concern of the commercial capitalist
is that he earns a return, r, on the money advanced, hence the term Br. His advanced capital
K, by contrast, is money actually expended and does not come back to him except by being
added to the price at which he bought the commodities, along with a profit, r, on that advance
of K. Hence the term K(1 + r).
Rearranging equation (iii) and solving for r gives the following, amended formula, for
the rate of profit on the total social capital:
(iv)
r  C VS KB K
This should be considered as the rate of profit on the sum of productive and commercial
capital advanced. As is clear from this formulation, the new rate of profit allowing for the
separate existence of commercial capital appears to be lower than in formula (i), which only
considers productive capital. This is both due to a reduction of the total surplus value by the
costs of circulation K, and because of the larger denominator that reflects the higher value of
advanced capital, including commercial capital (the B and the K). However, Marx’s simple
formula for industrial (or productive) capital was still valid, and would have given the same
result, as it implicitly included the operations of commerce within its terms. Marx evidently
considered all the phases of circulation and production of commodity values, but in the simple
Fine (1985-86). Fine’s article corrects an interesting (Sraffian) analysis of commercial and financial
capital produced by Panico (1980). Although Fine’s article covers the theory of interest, his formulae
do not cover financial or banking capital, nor the rate of profit including these elements. Fine also
suggests that banking capital will not achieve the same rate of profit as other forms of capital
investment, but a higher one due to barriers to entry in banking based on a denial of loans by existing
banks. The same commercial capital formula and similar comments on banking profitability appear in
Fine & Saad-Filho (2004, p138). Section 2.5 below reaches different conclusions on bank profitability.
13
Vertical integration of industry helps companies manage commercial costs internally. Retailers, by
contrast, do not often get involved directly in production. In recent decades the hold of large,
imperialist retailers over producers (eg Wal-Mart and China) has increased with ‘globalisation’. But
this is a feature of the imperialist world economy rather than one that indicates an equalisation of profit
between retailers and producers.
12
5
rate of profit formula the costs of circulation were being borne directly by the industrial
capitalists.
The previous analysis of how to account for commerce in the formula for the rate of
profit is taken from Fine’s article, already cited. It is worth noting that if commercial capital
has a faster turnaround of buying/selling that shortens the M – C or the C’– M’ phases in the
standard Marxist notation of M – C … P … C’– M’, then there is a reduction of the
advanced B or K compared to the total surplus value produced. In this way, commercial
capital is less of a drain on the surplus value produced by productive capital and the system
rate of profit (per annum) will rise. A smaller negative thus appears as a productive increase
of value.
2.3 Banks, financial capital and the rate of profit
The previous formula for both productive and commercial capital was not quite as direct in its
implications as the simple rate of profit formula, but it was nevertheless clear. Fine’s
methodology can also be extended to incorporate banking or financial capital into the
averaging process, although this was not done in his article. Such a calculation depends on
two assumptions: firstly, that banking or financial capital, operating in the sphere of
circulation is unproductive of value; secondly, that this part of capital earns the same rate of
profit as the other capitalist functional forms. There are likely to be fewer disagreements with
the first assumption, which is the same as for commercial capital, and indeed none can be
conceded if one holds to a Marxist theory of value. However, for the second assumption, the
fact that banks have appeared to earn a dramatically higher rate of profit than industrial or
commercial companies in recent decades might lead to more questioning of its validity. Here I
will show how banking profitability can be understood in an ‘equal rate of profit’ framework.
Later, I explain how the calculation of profitability can be developed to explain the source of
the higher banking sector profit rate.
Firstly, it is necessary to discuss what is meant here by the banking and financial
sector. In recent decades, the financial system has expanded dramatically, taking on many
forms beyond the concept of banking covered in Marx’s analysis in Volume 3 of Capital.
Marx’s analysis is built around the notion of banks as intermediaries, drawing on the pools of
spare liquidity in the economy, whether household or corporate funds, and being able to use
these for loans to industrial and commercial capital. This is the key to Marx’s explanation of
the modern credit system as a spur to capital accumulation, but it also underpins his
comments on how the credit system develops into a ‘colossal form of gambling and
swindling’, as the gap between ownership and control of capital grows.14 The credit system is
also a mechanism for the centralisation of capital, whereby companies merge, or are taken
over, via the transactions of shares on the stock exchange.
Marx (1974c, Chapter 27, ‘The role of credit in capitalist production’, p441): “The credit system
appears as the main lever of over-production and over-speculation in commerce solely because the
reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced
because a large part of the social capital is employed by people who do not own it and who
consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his
private capital in so far as he handles it himself. This simply demonstrates the fact that the selfexpansion of capital based on the contradictory nature of capitalist production permits an actual free
development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to
production, which are continually broken through by the credit system. Hence, the credit system
accelerates the material development of the productive forces and the establishment of the worldmarket. It is the historical mission of the capitalist system of production to raise these material
foundations of the new mode of production to a certain degree of perfection. At the same time credit
accelerates the violent eruptions of this contradiction - crises - and thereby the elements of
disintegration of the old mode of production.’
14
6
By the banking and financial sector I mean those companies whose activities are
largely confined to borrowing (or taking in deposits) and lending (or investing in financial
assets, including corporate bonds or equities). These are companies that can utilise social
money resources to lend to industrial and commercial capitalists, whether directly through
loans or through subscribing to company bond or equity issues. I do not separately consider
their financial dealings with households, though household deposits will form part of the total
funds they can lend to companies. Neither do I specifically consider insurance companies,
pension funds and other financial asset managers. However, these latter are included to the
extent that they also draw upon social money resources to lend to companies by purchasing
their bond and equity issues.15 Furthermore, I do not consider relationships between the
companies in the banking and financial sector, but treat them as one unit having a relationship
with industrial and commercial companies. While this will omit a number of dimensions of
financial activity today, it will include those financial dealings that have the most direct
bearing on the process of capital accumulation.16
In order to show how banking and financial capital can be included in our
calculations of system profitability, it is necessary to define additional variables for this
sector. Let E be the value of bank equity capital, or ‘shareholders’ equity’. This is equal to the
original subscription of equity when the bank started operations, plus any further share issues,
plus retained earnings, minus Treasury shares.17 This equity capital value does not vary with
the bank’s share price in the market.
Let D be the value of deposits and other net borrowings from the non-bank sector
(hence excluding interbank loans). It is worth noting that these deposits include not only the
surplus cash resources of the non-bank sector, but they will also be boosted by the banking
sector’s own creation of money through its recycling of deposits.18 These can nevertheless
still be counted as included in D, since they are deposits in the banking system, deposits that
are the banks’ liabilities.
The value of D plus E amounts to the bank’s total liabilities and these are used to
fund its total assets, which we will define as A. For simplicity, we will assume that total
assets equal total liabilities. So the next formula is:
(v)
A=D+E
Assume for simplicity in what follows that, of the bank’s total assets, a value equivalent to E
covers the bank’s fixed and circulating capital costs (buildings, technology, managerial and
labour costs) and its core reserve capital. This leaves a value equivalent to D to be lent out to
industrial and commercial companies (we exclude lending to households from the analysis).
In practice, a portion of E may also act as loanable funds, but it is unlikely that any of D
would cover the bank’s costs, except in the case of fraud! In this analysis, the use of any part
of D for financial or other investments aside from lending to industrial and commercial
companies is also excluded.
Then, if the average interest rate paid on deposits is id, and the average return on bank
investment assets is ia, the bank’s net interest income (before deducting other, non-interest
costs) can be written as:
15
Asset managers will only be investing new funds in companies when they purchase equity and bond
issues, not when they purchase previously issued securities from other holders in the market.
16
UK data show that at the end of 2010, UK individuals held only 11.5% of UK shareholdings, down
from 47.4% in 1963, with the rest being held by foreign investors and institutions of various kinds. See
ONS (2012).
17
Treasury shares are shares held by the company that issued them. A company acquires treasury
shares by buying them in the market. In the UK, Treasury shares can be cancelled, sold, or used in
employee share (or share option) schemes.
18
See Hall (1992) for an interesting analysis of this deposit creating process, and a critique of the
Marxist literature at the time for ignoring it! Dos Santos (2011a) does include this element in his useful
discussion of the credit system and accumulation.
7
(vi)
Aia – Did , or, alternatively, D(ia – id) if ia is considered as the return on assets lent.19
Referring back to equation (iii), we can consider the invested deposit sum D as representing
the borrowed funds of industrial and commercial companies. These latter funds are for their
investments in constant capital, variable capital, a proportion of commercial money capital
advanced and for the fixed and circulating costs of commercial capital. For the total constant
capital, C, this can be broken down into C1, advanced by the industrial capitalist directly, and
C2, that portion borrowed from the bank. Hence
(vii)
C = C1 + C2
similarly,
V = V1 + V2
B = B1 + B2
K = K1 + K2
Since, by assumption, all the borrowed funds equal the total deposits of banks, then:
(viii)
D = C2 + V2 + B2 + K2
These formulations may be rather fiddly, however the logic is simple enough and it can be
developed to derive some interesting and intuitively reasonable results.
Firstly, total surplus value remains S, but the surplus value is not only shared between
industrial and commercial capitalists and the financial sector in proportion to their advance of
capital. For the latter two sectors, their costs of capital outlay for buildings, technology,
personnel, etc, are not transferred to the values of commodities, so these costs must be
recovered from the total surplus value produced in society. Hence, the total profit
appropriated by the three sectors is lower. It can be represented as:
(ix)
S–K–E
The total capital advanced by all three sectors can be given as the sum of that belonging to the
industrial and commercial capitalists, the funds they have borrowed from the financial sector
plus the financial sector’s own equity. Hence we can now write the rate of profit on total
social capital as:
(x)
r  C1 V1 SB1KKE1  D E
While based on simplifying assumptions, this overall result, highlights the impact of the
commercial and financial sectors on the total rate of profit. I believe this to be an original
formulation, though elements of it have been discussed in the literature.20 I will discuss the
implications after first noting how Marx tackled the issue of finance and the rate of profit in
Capital and how this was developed in Hilferding’s Finance Capital.
19
This assumes that banks only make a return on lending, and excludes the fees and charges they
impose on their customers, and any net earnings they derive from financial trading. The latter items
could be included, but would unnecessarily complicate the argument here.
20
See Lapavitsas & Itoh (1998, p95). They note that bank capital covers the costs of office buildings,
equipment, personnel, etc, and that these costs are ‘pure costs of circulation … As such, these costs are
replenished out of the total surplus value produced in a given period’. However, they give no formula
that expresses the broader relationship to the rate of profit on total social capital. Panico (1980) makes
an interesting attempt to derive a system of equations to represent the relationships between the
industrial and financial sectors. However his analysis and system assumptions are closer to Sraffa than
to Marx, being driven by physical inputs and technical coefficients, and he combines the industrial and
the commercial sectors as one unit in his general equation system.
8
2.4 Bank capital, the rate of profit, Marx’s Capital and Hilferding’s Finance Capital
There is little direct guidance from Marx on how to conceptualise the impact of financial
capital on the rate of profit.21 In Volume 3 of Capital, Marx conducts an ample discussion of
how the rate of interest is determined; that interest is a deduction from surplus value, and that
gross profit is split into interest and profit of enterprise.22 However, this only relates to the
distribution of a given total of surplus value. There is no discussion of how the total surplus
value is reduced in order to meet the unproductive costs of finance. Neither is it clear what
kind of deduction should be made. These omissions no doubt arise from the fact that only
Volume 1 of Capital was fully completed by Marx. For both Volumes 2 and 3, Engels had a
long struggle trying to piece together the notes that Marx had left into a coherent presentation!
Marx’s comments on bank capital are contained in Chapters 29 to 32 of Volume 3.
He says that bank capital consists of a bank’s cash plus its holdings of securities of various
kinds. This sum of capital can also be divided in a different way, between the banker’s
invested capital and his deposits.23 This latter division corresponds to the variables introduced
in the previous section: E, equity capital, and D, deposits. However, Marx does not analyse
these again, except in the context of his discussion of ‘fictitious capital’, that we examine in
the next section.
In Capital, Marx does not consider how, or whether, these sums of capital enter into
the formation of the average rate of profit for the whole system. His analysis also sets aside
the fact that banks have physical assets, buildings, equipment, etc, which need to be funded.
The sum of a bank’s capital cannot be made up solely of cash and securities. For Marx in
Volume 3, banks are essentially considered only as bearers of cash to lend (or to invest in
securities) and to get interest from this. The issue of the average rate of profit including banks
is not dealt with in the analysis.
Hilferding develops Marx’s analysis more explicitly to take account of the operations
of the banking system. He notes that for capital ‘banking is a sphere of investment like any
other, and it will only flow into this sphere if it can find the same opportunities for realising
profit as in industry or commerce; otherwise it will be withdrawn’.24 This is part of
Hilferding’s discussion of how the rate of profit for banks tends to be the same as the rate of
profit elsewhere. However, his argument on how the average is derived is flawed, partly
because Hilferding confuses the operation of the rate of profit and the rate of interest in this
process and partly because he reverses the logical sequence.
He notes, correctly, that ‘the rate of interest is governed in the first place by supply
and demand of loan capital as a whole, and this determines the gross profit of the banks,
which they make by lending the money’. But then he says that the ‘basic datum is the level of
profit, and the amount of their own capital must be adjusted in accordance with it’. The
meaning of this latter statement is not clear until later in the same paragraph when he says that
the ‘bank's own capital must be reckoned in such a way that the profit on it is equal to the
average profit’. In an example, he argues that, if the average profit rate is 20%, then for a
given net profit of 2 million marks, the bank’s capital can be reckoned as 10 million marks.
Furthermore, if the bank has at its disposal a loan capital of 100 million marks, the remaining
90 million marks ‘are available as deposits of its customers’.
This argument ignores the fact that the deposits of the bank’s customers are a given,
whatever may be the level of profit. It also confuses what, in modern terminology, is the
bank’s equity capital plus deposits with the bank’s equity market capitalisation. The ‘E + D’
21
However, the logic of value theory suggests what should be done, and the analysis of the previous
section gives my approach to this question.
22
Marx (1974c, Chapter 23, especially pp372-374).
23
Marx (1974c, Chapter 24, p463).
24
Hilferding (1981, p172).
9
terms are givens, and not dependent on the bank’s market capitalisation which will vary with
changes in its share price.
Hilferding makes a clear distinction between the rate of interest and the (average) rate
of profit, using this in his analysis of ‘promoter’s profit’.25 However, even here he does not
make a clear distinction between the value of a bank’s share capital when issued and the
market price of such shares at a later point. While a bank’s market capitalisation will
influence its financial power in the market, and it can also act as a ‘means of payment’ in
share swaps to purchase other companies, market capitalisation does not have a direct
relationship to the size of a bank’s share capital nor to its ability to make loans.
Alongside these issues, Hilferding takes the average rate of profit as a given, one that
the banks also earn on advanced capital. However, as the previous section has shown, banking
capital has to be allowed for as a factor that reduces the average rate of profit. Hilferding’s
presentation does not show how this can be calculated, although he agrees that there should
be a reduction, since it is a clear consequence of Marx’s theory of value.26
2.5 Fictitious capital, finance and the nature of modern capitalism
One of the ironies in Volume 3 of Marx’s Capital is that the first discussion of ‘fictitious
capital’ does not occur in Chapter 25 entitled ‘Credit and fictitious capital’ – the chapter does
not even mention the term! Instead, it is covered in later chapters, and especially Chapter 29,
entitled ‘Component parts of bank capital’. Essentially, fictitious capital is a sum of value
represented by a financial security whose value is determined by the capitalisation of future
(expected) income.27 As such, even though the security may also represent a claim to
ownership of the assets of a company, as with an equity, its value does not represent real
capital. In the case of government securities, there is no representation of capital at all. The
value of a government bond only represents the net present value of future coupon payments,
plus a principal repayment, based on the financing of these payments from future tax receipts.
In general, the value of such securities goes up as the interest rate (the discounting
rate) goes down, and vice versa. This makes the value of securities appear quite divorced
from the rate of profit in the capitalist system, and from any relationship to the production of
value, a feature that is underlined by the far less visible nature of the average rate of profit
compared to the market rate of interest.
Furthermore, as the form of fictitious capital developed in the 19th century, with the
growth of joint-stock companies, so did a trading market in the assets of companies. Capitalist
investors view company assets as financial assets with prospective nominal returns – an
expansion of value – rather than as real assets of companies that are producing use-values of
particular kinds. This accentuates the inherent tendency of capitalist production to have value
25
Hilferding (1981, pp107-116).
He notes that since “circulation does not produce a profit, and simply represents costs, there is a
tendency to reduce the capital applied in this sphere to a minimum. Bank capital … including both the
bank's own capital and deposited capital, is nothing but loan capital and as such it is, in reality, only the
money form of productive capital” (Hilferding 1981, p173). This latter point is incorrect. What is
deposited in banks is not necessarily the money form of productive capital, and it may not become
productive capital when lent out. Neither can the bank’s own (equity) capital be considered as
productive capital, since it will largely be used to fund the bank’s operations. In this analysis, however,
I assume that deposits at banks are lent out to industrial and commercial capitalists for their operations.
27
This definition is the same as Marx’s (1974c, p467), but differs from Harvey’s, who confuses
‘fictitious value’ – his term for credit money backed by an unsold commodity as collateral - and
‘fictitious capital’: ‘If this credit money is loaned out as capital, then it becomes fictitious capital’
(2006, p267). A bank loan to a company only becomes fictitious capital if that loan is securitised.
26
10
expansion as its sole aim.28 The phenomenon of ‘financialisation’ thus has a far longer history
than the contemporary users of this term tend to appreciate.
One important feature that follows from this is the lack of distinction between
different forms of capitalist enterprise when viewed from the standpoint of value expansion.
The companies may do different things – from high-tech or dirty industrial, to smart or dumb
commercial, to complex or high street financial – but they are all measured according to how
much profit they make. This is not to deny that the source of the capitalist system’s profit lies
in exploiting labour that is productive of value, just to note that they do not need to care about
such details. The details that are at the centre of attention are those that will accrue the highest
profits, whether these result from influencing commercial legislation, from imposing
monopoly barriers in their buying and selling, or from driving down their costs.
The concept of fictitious capital and Marx’s related analysis of the credit system point
to a broader view than is usually taken of the role of finance in capitalism, one that is not
focused solely on the banking sector, nor one that poses a schism between ‘finance’ and
‘industry’. In this context, I would agree with Hoca on how to define ‘finance capital’ today,
when he argues against confusing – and counter-posing – functional divisions between
different areas of capitalist activity with the essence of modern capitalism that combines
monopoly and finance.29
2.6 Implications of the general formula: borrowing, equity and leverage
Section 2.3 introduced a set of formulae to represent how banks and financial companies lend
to industrial and commercial companies, who then use these funds to finance their
expenditures on constant and variable capital, and on the costs of circulation. Here I will
examine some important relationships using these formulae.
2.6.1 ‘Profit of enterprise’, interest and surplus value
Marx divided the total surplus value into ‘profit of enterprise’ and interest. This division
occurs before he has introduced landed property and rent into the analysis, and likewise I will
exclude landed property and rent. However, in Marx’s analysis of profit of enterprise, while
he considers both industrial and commercial capitalists, he gives the impression that the only
deduction to be made from the total surplus value accruing to these capitalists is the interest
paid to ‘the owner and lender of money capital’.30 As already shown, however, the total
surplus value available for distribution is much lower than this, since it must cover the costs
of both commercial capital (K) and banking capital (E). Total surplus value available for
distribution among all capitalists is equal to S – K – E, as noted in (ix) above.
This implies that the correct formula for the profit of enterprise is:
(xi)
S – K – E – Dia
where the final term is the interest paid on the funds that industrial and commercial
companies borrow from the banks.31 If the former also lent funds to the banks, then they
would also receive a portion of Did in interest, but that would not be profit of enterprise,
28
One incident from my professional career highlights this. A company finance director I was
interviewing took me around his copper semi-manufacturing plant to see the striking, shimmering,
golden metal, fresh from the extrusion process. He held back his sense of awe and said: ‘It’s beautiful,
but we have to make money on it’.
29
Hoca (2012).
30
Marx (1974c, Chapter 23, p371).
31
Dos Santos (2011b, p26) ignores the deductions from total surplus value due to commercial and
financial capital when giving his formula for the profit of enterprise.
11
strictly speaking. If that portion were represented by α, then the total returns of industrial and
commercial companies would be:
(xii)
S – K – E – Dia + αDid
If it were assumed that the source of all the deposits lent by banks came from industrial and
commercial companies, then α then would be equal to 1. In this case, the net deduction of
interest would have the same magnitude as (though the opposite sign to) the net interest
income of banks shown in equation (vi).
12
2.6.2 Return on equity: industrial, commercial and financial capitalists
The owners of capitalist companies, whether industrial, commercial, financial or otherwise,
must usually advance some of their own capital to begin operations, or to continue to operate.
However, they will normally also borrow investment funds from the financial system. When
this occurs, while they are concerned about the returns they get on the total advance of
capital, they are more particularly focused on the return on their ownership stake, or the
‘return on equity’. The return on equity - or another form of it, earnings per share – is a
common metric reported for companies quoted on the stock exchange. This is different from
the simple measure of the rate of profit S/(C + V) cited in Marxist literature, and also from the
more complex derivation in equation (x). Equation (x) gives the calculation of the system rate
of profit including borrowed capital, but it does not show the return on equity that different
groups of capitalists may earn.
Capitalist corporations do not pay any attention to the Marxist calculation of the rate
of profit and have no interest in reporting such a thing as it applies to them, even if they could
calculate it.32 However, as will be shown below, that the return on equity is still determined,
or at least constrained, by the rate of profit on the capitalist system as a whole.
The return on equity for the industrial and commercial capitalists is their profit of
enterprise, plus any deposit interest received from banks, divided by their own advance of
capital, or:
(xiii)
RoE ICC 
S  K  E  Di a  Did
C1  V1  B1  K1
This return on equity measure also makes clear how profitability can be boosted from the
point of view of equity investors, without them necessarily providing any more funds for
investment, but instead relying on borrowed funds. Within limits, this can mean that it is
possible for the RoE to rise even if the rate of profit on total investment falls. It is
nevertheless the rate of profit that determines the volume of profit that the total investment
will bring, to be divided up between shareholders and bondholders. Whatever may be the
borrowing ratios of a company, the underlying rate of profit on the total investment of funds,
both those advanced by the owners and those borrowed from the financial market, will
determine the final verdict. This can be seen by examining the relationship between the
system rate of profit, equation (x), and the previous formula for the return on equity for
industrial and commercial companies.
Rearranging equation (x) to make the total capital advanced the subject, the result is:
C1  V1  B1  K1  D  E 
S K E
r
Hence,
C1  V1  B1  K1 
S K E
r
DE
Now, substituting the right hand side of the previous equation for the denominator in (xiii)
and multiplying the right hand side fraction (top and bottom) by r, the result is:
RoE ICC 
r ( S  K  E  Dia  Did )
S  K  E  r(D  E)
This shows that the return on equity for industrial and commercial companies will decline as r
falls, since both the numerator falls and the denominator rises.
32
The Marxist concept of the rate of profit is one that applies to the whole system. Individual capitals
are considered as portions of the total social capital advanced and will tend to get a share of the total
surplus value in proportion to their capital as the rate of profit is equalised between different sectors.
13
However, the return on equity for the banks has a less clear relationship to the system
rate of profit. This RoE is the net interest income, after deducting other costs (assumed here to
be equal to E), divided by the advance of their own capital, E, or:
(xiv)
RoE Banks 
D(ia  id )  E
E
In this case, the trend in the system rate of profit, r, has a less direct impact on the RoE. If
there is a trend of falling profitability, then the RoEICC will fall, as previously indicated. This
will reduce these companies’ ability to meet interest payments on borrowed funds, so there is
likely to be downward pressure on ia (considered as a percentage return on assets, not simply
as an interest rate) through a lower demand for funds and also due to potential loan losses.
That will probably feed into a lower figure for ROEBanks eventually. Nevertheless, there are
some degrees of freedom on this measure that could make the banks still look profitable,
despite lower returns elsewhere. In particular, it is the gap between borrowing and investing
(lending) rates that is critical for the banks.
Two other important points can be made about the RoE equations (xiii) and (xiv).
Firstly, being composed of very different elements, there is clearly no direct relationship
between the two equations and the respective rates of return on equity are liable to be
different at any moment. However, a reasonable assumption is that capitalist competition will
tend to equalise these RoE measures over time.
Take the example where the RoE for industrial and commercial companies is
systematically higher than that for banks. In this case, the banks might be able to charge more
for loans because the other companies may be more willing to pay the higher interest charges
to borrow funds. This would help equalise RoE figures. In addition, there could be an
allocation of extra capital into the industrial and commercial sector. This could come from the
investment of new capital, or a switch of funds out of the banking sector and into the other
sectors. In the opposite case, when the RoE for banking capital is systematically higher, then
there could also be a shift of new or existing capital into banking/finance, or the banks may
compete with one another to reduce interest rates to industrial and commercial companies, or
to raise interest rates in order to attract more deposits. In practice, there are only few
examples of non-financial capitalists moving into finance, or of financial companies moving
into industrial and commercial operations.33 Hence, it is more likely that an equalisation of
RoE measures would come about through changes in the structure of market interest rates
rather than through a significant shift of capital between sectors.34
Secondly, it is interesting to note the impact of a rise in the volume of borrowed funds
on the different RoE measures. In the case of industrial and commercial companies, more
borrowed funds will tend to reduce the RoE in a particular year, unless the sum of surplus
value rises sufficiently. The extra profits they gain from their extended operations must be
greater than the extra interest costs they pay for the funds in order to boost their RoE. Even
then, any borrowings that increase C2 and V2 will increase the denominator of the system rate
of profit measure, r, and might reduce the rate of profit. If so, this will have an impact on the
RoEICC as already shown. Any borrowings that increase K will tend to have an even more
detrimental effect on the RoE. Commercial capital produces no extra surplus value, and a
higher value of K will be a bigger deduction from surplus value, even if there is no rise in the
The ‘private equity’ phenomenon of recent years might be seen as an example of financial capitalists
moving into other spheres. However, it is based on leveraged buy-outs, financed with relatively cheap
bank funds and dependent on advantageous tax laws. It represents an example of predatory and
parasitic capitalism rather than financial capitalists wishing to become ‘productive’.
34
Using a different measure of profitability, Duménil and Lévy (2004, p98) show there were flows of
capital between the non-financial and financial sectors of the US economy, attracted by the profitability
gap, although these did not close the gap.
33
14
denominator term K1.35 Hence there are evident constraints on the volume of funds that it
makes sense for these companies to borrow, as suggested by formula (xiii).
This constraint is very different for the banks. By virtue of their position in the
capitalist economy, they have relatively easy access to deposits and, as their RoE formula
(xiv) indicates, every reason to expand deposit taking (through their ability to create credit) as
long as the return on lending/investing is higher than the interest rate they pay for those
deposits. While getting extra deposits – and making extra loans and investments - may imply
some extra costs for their operations and their advances of capital (eg through opening more
branches), on the whole one would expect these to be less than proportionate to the extra
deposits taken in. This leads on to a discussion of leverage.
2.6.3 Rates of return and leverage
Industrial and commercial companies borrow far less as a proportion of the equity held by the
company’s owners than do banks and other financial companies. The ratio of borrowing to
shareholders’ equity, a common definition of leverage, is much higher for banks. This is a
function of the role of banks, drawing in funds from society and to lending these to those who
want or need them. If the deposit or money creating ability of banks is included, then this
operation can expand dramatically. The ratio of borrowed funds to equity will change
according to economic conditions, with borrowing growing rapidly when times look good and
growing less, or even falling, when times are bad. Nevertheless, at all times banks borrow far
more than do other capitalist companies when compared to the size of their capital or equity
base.
As an indication of the divergence, it is considered normal for banks to have a
leverage ratio of around 20 – in other words, when borrowing is 20 times the size of equity.36
Industrial and commercial companies, by contrast, are looked upon questioningly by the stock
market if their ratios are more than 1.37 One other divergence with the banks is that even if the
companies borrowed funds they would be very likely to use the funds for investment in their
own productive and commercial operations. The banks borrow funds to lend to others, or to
invest elsewhere, since that is the economic function they perform.
Higher leverage means higher risk, since the interest on the borrowing must still be
paid even if the investment turns out badly. But if investment returns are good, a low cost of
borrowed funds relative to the investment returns will magnify the return on equity. This
increases the volatility of returns, and standard portfolio investment theory makes an
adjustment for this, deflating the higher returns by the higher volatility, when calculating an
‘information ratio’ on investment performance.38 This approach corresponds to a common
sense view that high risks are only worth taking if the potential rewards are commensurately
higher.
Data on the leverage of banks versus industrial and commercial companies, and on
the relationship of leverage to reported profitability, is very patchy. However, my assessment
of the information available for the UK and the US reaches the following conclusions.
In the period prior to the 1980s, the higher, but relatively stable, level of leverage for
banks was ‘normal’. Bank profitability was on a par with industrial and commercial
35
It is possible, however, that investments in the sphere of circulation by commercial capital will help
reduce capital’s overall turnover time, thus increasing the annual production of surplus value for a
given amount of productive capital. This issue is dealt with in Volume 2 of Capital. See Marx (1974b,
especially Chapter 16).
36
See Haldane (2011).
37
For the aggregate of US manufacturing companies, debt holdings were less than the value of equity
in each year from 2001 to 2010. Hence leverage was less than 1. This was also true for the aggregate
measures of mining and wholesale trading companies. See US Census Bureau (2012, Table 794).
38
See the following for details of the information ratio: http://en.wikipedia.org/wiki/Information_ratio
15
companies, and the banks’ higher leverage ratio was part of the process by which they
compensated for a lower rate of return. In other words, they would have made lower than
average profits if they did not borrow (relatively cheap) funds via deposits to re-lend to other
companies. After the early 1980s, however, the banking sector began to expand dramatically
and so did their leverage ratios as market interest rates fell, and general returns fell, following
a slowdown in economic growth. Because the financial sector is most able to access high
volumes of (cheap) funds, banks were at the forefront of increasing leverage. While there
were many market upsets from the mid-1980s, these lower interest rates and, from the early
2000s, a more benign, stable rate of economic growth in major countries, gave the basis on
which higher leverage did not seem so risky.39 Higher leverage was a means by which
banking capital could counteract a fall in profitability, and, for a while, even boost it.
Leverage ratios for some institutions hit levels in excess of 100 in the US, and as high as 60
or 80 in Europe. Once the credit-fuelled bubble burst, however, this gave a particular
‘financial’ form to the crisis that broke in 2007-2008.
3 Finance and imperialism
The previous calculations were for the capitalist system as a whole, using the abstraction of
one set of industrialists, one of commercial capitalists and one of banks. The commercial
capitalists and banks share in the profits produced by the industrial capitalists, and the capital
they advance for their operations also weighs on the profit rate. However, this abstraction sets
aside the facts of international trade, investment and financial relationships, and does not take
account of the unequal status of different countries in the world capitalist system. Including
these points, in other words, accounting for the fact of imperialism, brings two further
developments of the general system relationships discussed above.
Firstly, industry, commerce and finance in a particular country can grow beyond what
might be expected to put a limit on this growth when their field of operations is expanded
beyond the limits of one country. This is a standard conclusion from international trade
theory, based on specialisation and the international division of labour. However, as critics of
the standard theory point out, this division of labour is not simply based on which country has
the best products or the most efficient business operations. It is also determined by state,
industrial, commercial and financial power.40
Secondly, the previous analysis was based on Marx’s theory of value for the capitalist
system as a whole. This analysis needs to be modified in order to understand more clearly the
position of individual countries within the system, in particular the privileged position of the
imperialist countries when the operation of the law of value is examined on an international
scale. My focus is on the financial aspects of imperialism - how financial power boosts the
economic gains that imperialist powers enjoy - rather than on all international economic
relationships under imperialism. Not only do ‘the banks’ of a particular country benefit; the
banks also form part of the overall mechanism that supports an imperialist country’s gains
from the world economy.
One result easily follows from extending value analysis for the whole system to a
closer examination of relationships between different countries. The limits to the growth of
commerce and finance in one country given by the costs these sectors impose on the valueproductive sector of that country are lifted when revenues from other countries can meet the
39
This was true for banks in most capitalist countries, but especially in the US, UK and the main
imperialist powers. See Norfield (2011c) for further details.
40
See, for example, the interesting analysis of European economic integration in Carchedi (2001). He
gives a careful and detailed analysis of value theory in the context of European integration, but he only
discusses foreign exchange markets, monetary crises and ‘seigniorage’ as mechanisms of financial
value extraction, in addition to the core notion in his analysis that competitive advantage lies with the
more productive (higher organic composition) capitalist producers
16
higher costs of commerce and finance! In particular, a country’s financial sector may expand
dramatically if that system can appropriate surplus value produced elsewhere in the global
capitalist system.41 Surprisingly, this simple point receives no coverage in the Marxist
literature. But this omission is consistent with that literature analysing neither why the
financial sector in the UK, for example, is so big, nor how the financial sector operates as a
functional part of imperialist economic power.42
Before addressing these questions in more detail it is worth making some further
preliminary remarks. Each of the world’s major economic powers has sizeable financial
sectors compared to the rest of the national economy, but the UK stands out. One measure of
size is the ratio of bank liabilities to national GDP. In 2008, the UK’s ratio was 5.5, the
second highest in the world. While Switzerland’s ratio was higher at 6.3, the Swiss economy
is less than a quarter of the size of the UK economy, showing how much bigger is the UK
banking system in absolute terms. The ratio for the US was relatively low at 0.9 times GDP,
but given that the US has a higher GDP (6.5 times that of the UK), the scale of the US
banking system on this measure was just above that for the UK, making it the biggest in the
world.43 Any single measure of the size of the financial sector will have drawbacks, but these
figures are consistent with other information on the scale of the financial markets (equities,
bonds, foreign exchange, commodities, derivatives, etc) based in each country. The evidence
clearly points to the UK and the US as being the pre-eminent financial imperialist powers, but
the UK has boosted its financial sector by much more than the US compared to the size of the
domestic economy.
It is not open to every country to establish a major international banking and financial
network: the growth of the UK financial sector is based on its status and privileges in the
world economy. In the remainder of this section, I highlight the features that allow the
financial system to act as a prop for an imperialist power’s wealth and income.
3.1
Finance and value extraction under imperialism
There are three important ways in which the financial sector can play a key role for the
economic livelihood of an imperialist power: (a) by drawing on (relatively low cost) funds
from abroad to lend to domestically based capital and to the state; (b) by financing the foreign
operations of domestic corporations, whether from domestic or from foreign funds, so that
they can exploit foreign labour, and (c) by taking a share of globally produced surplus value
through providing loans and other ‘financial services’ to foreign businesses and governments.
Each of these financially derived benefits for the imperialist power concerned depends on a
privileged relationship with other countries. I exclude from consideration the wholly domestic
operations of banks and other financial companies. However, I do include access to foreign
funds that is open to governments directly, for example through their auctions of public sector
debt, since this auction process is usually managed by the private financial sector alongside
the government.
41
Smith (2010) analyses the process of value appropriation by imperialist powers in the context of
globalised production, and details the mechanism for what we have termed here ‘industrial and
commercial companies’. This thesis focuses on the financial dimension of the process that he does not
cover.
42
For example, Callinicos (2009, p193) merely notes the City’s growth as a UK ‘response to relative
economic decline’, and that is all in a 300-page work on ‘global political economy’. He pays no
attention to the role of finance for British imperialism today.
43
For the ratios to GDP, see Demirgüç-Kunt and Huizinga (2010, Table 2, p29). Relative GDP sizes
are taken from IMF data for 2010. Switzerland’s banking system has expanded largely on the basis of
banking secrecy laws, low tax rates and tax evasion by plutocrats and criminals from a wide range of
countries. The UK has also adopted these methods to some degree, but the ratio of bank liabilities to
GDP per extra billion dollars of funds grows faster for a smaller economy. See Shaxson (2011) for a
discussion of tax havens.
17
Note also that while much of the discussion has been of ‘banks’, this term should be
considered shorthand for the operations of the private capitalist financial system in toto. This
comprises the bond, equity, money (including foreign exchange), commodity and derivatives
markets. Of course, the ‘banks’ concerned need not be of the same nationality as the country
in which they operate, and almost all will have ownership that is geographically diverse.
However, the focus here is on how the financial system based in an imperialist country is part
of that country’s economic power structure.
3.1.1
Imperial privilege and access to foreign funds
Governments, households, companies and banks borrow from the financial system for a
variety of reasons, and easy access to (relatively low cost funds) is an important economic
advantage to have. Access to funds will be a function of how developed the financial system
is, and potential access to funds by governments and companies will be increased if the
financial system in a country is integrated with the rest of the world economy. Of course, this
can also prove to be a serious disadvantage if foreign funding suddenly dries up, or if the
credit system, locally or globally, fuels a speculative bubble that bursts and damages the
economy. There are many such examples! However, the financial system provides support
both for investment and consumption spending, whether through direct funding or via
financing government expenditures and welfare payments in all capitalist countries. For
imperialist countries, particularly those that have specialised in finance, their economic
privileges put them in a stronger position than others, even when there is a crisis that engulfs
them too – something that the US and the UK are benefiting from in the present turmoil.
One important way in which these advantages accrue is from the high credit ratings
that the major ratings agencies grant to the strongest powers. Many government credit ratings
have been downgraded since the onset of the crisis in 2008, and some countries remain at risk
of new or further downgrades, but most of the so-called G10 countries, the most wealthy and
influential of the established capitalist powers, still have a triple-A (or close to it) credit
rating.44 This means that they can get credit from international lenders and investors on the
most favourable terms.45 The nationally owned private sector companies of these countries
can potentially enjoy these benefits too, not simply the government, since the sovereign credit
rating normally sets the upper limit on the rating of companies. By comparison, the weaker
and non-imperialist powers usually pay more to borrow from international markets.
One study notes that ‘developing countries have low credit ratings and high risk
premia while exhibiting credit ratios that are often much stronger than highly rated developed
countries’. 46 This is because they are unable ‘to borrow at long maturities and fixed rates in
domestic currency’. Instead they must either borrow major foreign currencies (usually US
dollars) or only borrow short-term domestic currency. This makes their ‘debt service
vulnerable to shocks to the short-term real interest rate and the real exchange rate’, a risk that
the imperialist powers generally manage to avoid. An interesting question is how far the US,
with its burgeoning private and public sector debt levels, has been favoured by the agencies
The ‘G10’ actually comprises 11 countries: US, Japan, UK, Germany, France, Switzerland, Italy,
Canada, Belgium, Netherlands and Sweden. The US had its rating reduced from triple-A in August
2011 by one of the three main agencies, S&P, while Japan, Italy and Belgium have lower ratings given
their very high (government) debt levels. However, the remaining G10 countries (and some others)
have triple-A ratings from all three major agencies. This information is correct as of end-March 2012.
45
The lowest credit risk does not necessarily mean the lowest interest rate on borrowing, since many
other factors will affect interest rate levels, not least expectations of inflation and central bank policy.
For example, Japan has had the lowest government borrowing rates for many years, given its chronic
deflation, despite having had its rating downgraded to AA by the agencies.
46
See Hausmann (2002).
44
18
more because of its economic and political might rather than because it meets a set of strict
criteria that indicate it is able and willing to meet its obligations. 47
The second dimension of advantage for the major financial powers, the US and the
UK, comes from them having fashioned an international financial system that works in their
interests. Despite these powers being persistent borrowers in global financial markets through
their chronic current account deficits, and despite them being large net debtors in terms of
their national balance sheets, they are unique in managing to earn a net positive return on
their negative overseas investment positions! In the US case, the mechanism works mainly
through the international role of the US dollar, the main vehicle currency for trade and
investment. In addition to seigniorage benefits, the most important result for the US has been
low cost funding for its chronic external deficit through massive foreign purchases of US
government securities.48 For the UK, the most significant source of cheap funding has been
international bank borrowings, generated via the City of London, the world’s biggest
international money market.49
If finance is a relation of power between creditor/lender and debtor/borrower, the
facts of an imperialist world economy show that is not a simple case of the creditor being in
charge! The structure of the imperial financial system means that the debtor imperialist power
can be in a surprisingly strong position. This is not directly dependent on military force. It is a
market ‘fact’, something that other countries have to put up with. This is the ‘normal’
situation of the imperialist world economy, a normality that each power will fight to defend.
3.1.2
Financing foreign operations of domestic capital
The imperialist powers can use the international financial system as a source of funds for
domestic corporate, household and government needs, but the system can also be used to
promote the foreign operations of domestic capital. The focus in this section is on how the
financial system enables them to expand their sources of surplus value from across the globe.
Marx noted how the credit system could accelerate the growth of capital. In his
terminology, a ‘concentration’ of capital occurs when an individual company expands, and a
‘centralisation’ of capital when existing companies are combined. The credit system draws
into the hands of capitalists ‘the money resources which lie scattered, over the surface of
society, in larger or smaller amounts’ and ‘it soon becomes a new and terrible weapon in the
battle of competition and is finally transformed into an enormous social mechanism for the
centralisation of capitals’.50 This weapon is used aggressively by the stronger imperialist
powers to take over rivals, to expand their operations and to restrict competition.
A good example is UK company Vodafone’s takeover of German mobile company
Mannesmann in February 2000. The deal worth £112bn was then the world’s biggest ‘hostile’
(not mutually agreed) takeover. Mannesmann had been an ‘alliance partner’ of Vodafone, and
Vodafone owned 35% of its shares via an earlier acquisition. But when Mannesmann bought
another UK company, Orange, in October 1999 this ‘contravened a gentleman's agreement
not to compete on each other's territory’. Enraged that its own monopolistic plans were under
threat as the industry was in a merger boom, Vodafone launched its hostile bid for
It has been notable that a series of US government shutdowns – five since 1981 - and debates on
whether to raise the debt ceiling (and thus obtain the funds to pay creditors) did not lead the agencies to
downgrade the US until 2011. The same concessions would not have been allowed for other countries.
48
See Norfield (2011a) for a discussion of ‘dollar imperialism’. Asian central banks were the main
purchasers in the 2000s, as they attempted to insulate themselves from further financial turmoil after
the financial crisis of 1997-98 by building up foreign exchange reserves. One study suggested that
foreign buying of US Treasuries had reduced yields by as much as 150 basis points. See Warnock and
Warnock (2005).
49
See Norfield (2011b) for details.
50
Marx (1974a, Chapter 25, Section 2, p587).
47
19
Mannesmann in November 1999.51 The deal was concluded via a ‘share swap’, in which a
certain number of Vodafone shares were exchanged for Mannesmann shares; Vodafone paid
no cash for the takeover. Mannesmann ended up owning 49% of the combined group - less
than a controlling interest - and its stock was delisted on the Frankfurt exchange.
On the takeover, the new company became by far the largest company on the London
stock market and the fourth largest in the world, consolidating its lead position in the global
telecom market. Vodafone now owns networks in over 30 countries and has partner networks
in over 40 additional countries.52 The ability to conclude the deal – and many before it – was
not simply a question of price. It depended on Vodafone being listed on a major stock
exchange. Without this, it would not have been able to grow by attracting vast resources from
global investors, and neither would its shares have been an acceptable means of payment for
Mannesmann’s shareholders.
In this way, the ‘financial’ power of an imperialist country can be translated into a
more broadly defined economic power and influence. Companies based in imperialist powers
have more scope to scour the world for sources of surplus value. They can finance their
expansion by drawing on the capital resources of the world from their home financial
markets. They can also use the capitalised market value of their corporate assets (via share
swaps), rather than cash, as a means to pay for their takeover targets, although they can also
get easy access to cash from major banks if necessary. With these resources, they can act as
predator rather than prey, with a wide range of financial weapons. The range of such weapons
was steadily extended across the globe, especially from the 1980s, as US and UK imperialism
pressured all countries to relax controls on financial transactions and capital flows.53
Financing and facilitating takeover activity is a key function of major financial markets. It is a
driver of what Marx called the ‘centralisation’ of capital and helps create the conglomerates
and monopolies that dominate the world’s industries and economies today. This is a mode of
the accumulation of capital that has less to do with developing the productive forces and
raising productivity than in Marx’s day. Instead, it is a feature of parasitic imperialism, one
that seeks control of markets and appropriation of value, rather than its creation.
3.1.3
Appropriating global surplus value
Major capitalist powers that are the base location for global financial markets benefit not just
from easier, and cheaper, access to international funds, nor just from the financial power that
these markets can give to their corporations. They can also make money from the operations
of the financial markets themselves. At the beginning of this section, I noted that the limits
one might expect on the growth of the unproductive financial sector in a country are lifted
when it can gain revenues from abroad. The rapid expansion of international financial dealing
since the 1980s has been a potential source of profit for, and an incentive behind the growth
of, the financial sector of the economy in many countries. However, at the forefront of this
trend has been the boom in the activities of the City of London, the centre of dealing for the
imperialist power most closely associated with finance.54
Profits from financial dealing may come from differences in interest rates on
borrowing and lending and other bid-offer spreads in transactions, from fees for financial
services (advice on mergers, organising the issue of equity or bond securities, etc), or from
speculative bets on market prices. However, all these profits arising in the sphere of
circulation are a deduction from the surplus value produced elsewhere. More than this, the
51
See BBC News (2000).
Vodafone (2012).
53
See Helleiner (1996) for a review of this process up the mid-1990s.
54
Since 2007, the City of London has produced a regular report on major global financial centres, The
Global Financial Centres Index. London has remained in top position up to March 2012, and usually
ranks close to New York as a favoured centre for financial business. See City (2012).
52
20
whole costs of the financial sector are also a deduction from surplus value, as shown in
Section 2. A financial company may specialise in international dealings, but will not care
about the source of the profits, which could also come from domestic capital. However, a
financial company operating in a major international financial centre can draw upon the
surplus value produced anywhere in the world, for the ultimate benefit of the imperialist
power in which it is based.
Striking examples of this can be seen in the case of the UK financial sector. The
following table gives a snapshot of the figures showing the gross and net revenues ‘earned’
from international financial services dealings.
Table 1: UK international financial services revenues and payments
(£ billion)
2010
2011
Financial services revenues
42.3
47.7
Financial services payments
10.7
12.8
Total net financial services revenues
31.7
34.9
Source: UK Office for National Statistics, 28 March 2012
For the UK, the net financial services balance is the biggest positive item in its balance of
payments on goods and services. At close to £35bn in 2011, it amounted to a little over 2% of
UK GDP and covered a third of the UK’s big deficit in visible goods trade. The £35bn figure
is not a measure of the net profits of financial services from international dealing, being only
the net revenue accrued before allowing for costs. However, it is a guide to the extent to
which the UK financial services sector draws in surplus value produced abroad. The source of
the surplus value is hidden by a multitude of transactions between financial, commercial and
industrial companies and governments, and part of it may even come from the exploitation of
workers in Britain.55 The UK data breakdown indicates that around three-quarters of the net
surplus comes from ‘monetary financial institutions’, ie banks, while a fifth comes from
securities dealers and a small share is from the activities of fund managers.56
In practice, while the financial companies do not need to care about the source of
their profits, the UK financial sector has grown so large because of its ability to draw in big
revenues from its international operations. Critics of the banks, especially in the UK, will
often attack them for not giving enough support, or loans, to domestic businesses.57 But this
call for banks to play a more useful role in economic activity typically ignores the parasitic
role of the financial sector, and, in particular, the role that the financial system plays in the
world economy for the imperialist powers.
In addition to their ability to gain financial dealing, or broking, revenues from abroad
when based in the Britain, UK banks, like their peers, will also derive revenues from their
own foreign-based operations. Data for such revenues do not exist, but my observation from
nearly two decades working in different international banks is that they are high. Banks based
in the major capitalist countries make high returns from their branches in poor countries,
55
One interpretation of how the law of value operates in the global economy is that there is a world
average rate of profit towards which the rates of profit registered in different part of the world economy
will gravitate. As a result, surplus value produced anywhere will form part of this averaging process, so
that it is not correct to say that the profits reported come from a particular place. Instead, the total
system profits are distributed according to the share of the total capital advanced by different capitals.
In our view, it is questionable how far this averaging process works out in reality, given monopoly
barriers to competition and a stratified world economy.
56
UK Pink Book (2010, Table 3.6, p53).
57
See, for example, NEF (2011).
21
where labour and other costs are lower, and where transaction margins are usually also much
higher. Their foreign branches in all countries pay a contribution back to the headquarters, as
a licensing fee, for the use of technology and for the use of the home bank’s credit, etc. This
is quite apart from the information that the foreign branches can pass back to the main
dealmakers in the bank’s home base,58 and the ability that local bank branches may have to
help the home bank circumvent a country’s controls on capital flows.
4 Conclusion
This paper has set out a framework for analysing the role of finance using Marx’s theory of
value and argued how this can contribute to a fuller understanding of imperialism today. After
summarising the main elements of Marx’s theory of productive and unproductive labour, the
paper showed how to account for ‘commercial’ and ‘financial’ capital, important forms of
capital that are often ignored in expositions of Marx’s conception of the rate of profit. This
paper also showed how that key target of capitalist corporations - the ‘return on equity’ - is
governed by the rate of profit of the system as a whole. By highlighting this relationship, the
paper illustrated how such phenomenal forms as return on equity and leverage are related to
the fundamentals of value and surplus value production.
Other scholars have assessed the imperialist world economy, examining ‘unequal
exchange’ in trade, manipulation of markets by powerful countries and predatory finance in
creditor-debtor relationships. This paper focused instead on how the ‘normal’ operation of
finance is an important part of the mechanism by which major imperialist powers – especially
the US and the UK - sustain their privileges in and appropriate value from the global
economy. This mechanism does not necessarily depend on debt crises, notwithstanding how
frequent and destructive these are. Nor does it depend directly upon military force, though
this is an important part of an imperialist power’s overall position in the global hierarchy.59
The global financial system is a critical dimension of imperialist power today, and it should
be no surprise that the latest crisis has taken a peculiarly financial form.
Tony Norfield, 5 May 2012
PhD Student, Economics Department, School of Oriental and African Studies, London
Email: [email protected]
58
This can lead to a major bank taking a significant position in the financial market of a small country,
backed by its superior resources, enabling it to manipulate prices to profit from dealing.
59
See Norfield (2012) for a discussion of an ‘index of imperialism’, including GDP, military spending,
banking status and the role of a currency in central bank FX reserves.
22
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