Saturday, 25 July 2015

The Attack On Fictitious Capital Begins

Last night, on Newsnight, Bank of England economist, Andy Haldane, told Duncan Weldon that the current model of shareholder capitalism had led to a situation in which companies were “nearly eating themselves”. Three thousand miles away, in the US, exactly the same message was being given about US capitalism, by Hillary Clinton. She talked about this phenomenon in terms of “Quarterly Capitalism". What both were referring to is the phenomenon I have discussed many times, over the last few years of the fact that large amounts of realised profits from corporations are being used not for productive investment, but rather to be fed to shareholders either in the form of dividends, or the buy back of shares, which acts to boost share prices, whilst doing nothing to either create wealth, or the profits upon which the payment of future dividends depends.

Haldane pointed out that, in 1970, out of every £100 of company profits, only about £10 would have gone back to shareholders as dividends and other such payments. Today, the figure was more like £60-£70. Clinton in her speech referred to an even higher proportion, around 90%, of profits being returned to shareholders. In her opinion, the reason for this was the fact that over recent years, the concentration has been on companies providing “shareholder value”, and this is reflected in the fact that large companies now provide not annual statements of their performance, but are expected to provide details of their profits, revenues, and forecasts on a quarterly basis. 

This results in a typical fantasy world, whereby companies provide unrealistic forecasts of their performance for future quarters, thereby boosting their share price, on the basis of these promised future profits, only for those forecasts to be progressively reduced, in the weeks before they are due to be announced, down to a level whereby the expectations have been sufficiently lowered that, when the company announces the actual results, they are always able to beat the estimates, by a penny or two, so that, once again, it can be announced that the company performed better than expected, and once again its share price rises.

The other consequence of this is that, all decisions become increasingly short-term. Instead of focussing on the interests of the business, and the need for long-term productive investment, the focus becomes merely on being able to manipulate the accounts so as to beat these estimates, and boost share prices. But, neither Haldane nor Clinton have accepted that part of the reason for the development of this culture is the policies that they have been part of pursuing for the last thirty years. In fact, Haldane, repeated a call for a continuation of that policy in his discussion with Duncan Weldon. Where Mark Carney is warning clearly that interest rates must rise, in the next few weeks, Haldane is continuing to say that interest rates should stay low, because of the weakness of the economy. He doesn't seem to realise that the reason the economy is weak, is because of this process whereby capital is eating itself, and the reason it is doing so, is because money printing, and the actions of central banks to inflate financial and property bubbles, creates a rigged market, whereby speculating in those things becomes a one way bet.

Clinton has referred to the need to change the basis of tax allowances for investment in the US, so as to foster a more long-term approach. Its also why I have suggested we should scrap Corporation Tax, and instead introduce heavier taxes on dividends and other unearned income.  She also referred to the fact that wages have not risen much in the US, and this acts as a disincentive for firms to invest in additional machines and so on to raise productivity. Haldane on the other hand although he pointed to the problem of the control of company boards by these shareholders who look to their own short term interests rather than the interests of business, had no concrete proposals to make to deal with it, and indeed such changes are outside the purview of the Bank of England.

In reality, what these statements represent is the opening salvos, particularly from Clinton, as a senior representative of social democracy, which represents the interests of big industrial capital, of an attack on fictitious capital, and the conservative political forces based on it. That Haldane has intervened in this debate, should be seen in similar terms to Nixon's trip to China, or the way, state officials in the 19th century, had to intervene, to promote Factory Laws, and restrictions on working hours, in the longer term interests of capital itself, which was in danger of destroying the working-class, and consequently its own source of profits. Haldane is simply reflecting the point made above, and indeed the point that a number of financial analysts, and speculators themselves seem to have realised, which is that without real investment, there is no profits growth, and without real profits growth, there can ultimately be no growth in dividends. The financial engineering will reach a limit, and the current bubbles will burst catastrophically.

In fact, there is an obvious vicious circle behind the phenomenon that Haldane and Clinton have described. The reason the proportion of realised profits accounted for by dividends and other such payments has risen, is precisely because real profits growth has been constrained, whilst share prices have been sent to the stars and beyond. From the mid 1990's, when financial markets crashed at the first whiff of an interest rate rise, the Federal Reserve, in particular, has acted to back stop them. Even if those markets slightly corrected, the central banks intervened to lower official interest rates, ease policy and send liquidity rushing into those markets to inflate prices once more. Its no wonder that share holders believed that there was free money to be had, simply by speculating in those shares, bonds and property, without the risk of actually investing capital in things like machines, factories and producing stuff!

The consequence was that share prices, bond prices and property prices kept inflating into one bigger bubble after another. Although, profits continued to rise significantly on the back of the global long wave boom, that increase was nothing like the rise in asset prices. In fact, the more profits were realised, the more money was released for yet further speculation. The consequence was necessarily that the yield, the relation between the amount of dividend, and the price of the share or bond, continued to fall. And, as those yields fell, so, to slow the pace of the fall, it was necessary to pay out a larger and larger proportion of the profit as dividends, which thereby reduces the amount available for productive investment by the company, creating the situation described by Clinton and Haldane.

It is this very situation, which simultaneously leads to a build up of debt, both government debt, and private debt, which is the other side of this fictitious capital. Not only have people gone into huge amounts of debt to buy massively overpriced property, but as latest figures show, there is a continual churn of people who have already bought their homes, or built up equity within them, who go further into debt, by remortgaging every few years. As I wrote recently, this is one reason that large numbers of such debtors will be expropriated as interest rates begin to rise. That process has already begun. Globally interest rates are already rising, and market rates of interest for mortgages in the UK and US, are already rising too

This is what is behind these latest pronouncements too. As John Maynard Keynes, put it, financial and property markets can remain irrational for much longer than anyone can remain solvent. However, in the end, that elastic can only stretch so far, and those markets cannot defy the objective laws of economics forever. That limit has been reached. As a result of the process described above, we already have had bond prices rising so high that yields have become negative in some places. Robert Schiller has calculated that on the basis of his Cyclically Adjusted Price Earnings ratio, many stock markets are at levels over 27, which they have only ever reached in the past just ahead of large crashes such as 1929, 1987, 2000 and 2008. On other valuation methods, such as Tobin's Q, they are also in bubble territory. But, if the effect of share buybacks is taken into consideration, these valuations soar to more than twice these levels. This is clearly unsustainable.

Its worth putting all this into its longer term context. In Capital, Marx essentially analyses capitalism in its early form. His studies were basically conducted up to around 1865, when the first volume was published. Obviously, Marx was aware of the further developments taking place within Capitalism, and this is reflected in his writings, and in Volume III of Capital, where he discusses the way these trends develop naturally out of the laws of motion of capital. But, as Engels describes, in his later Prefaces and in his Supplement to Volume III, huge changes in the nature and structure of capitalism occurred after 1865. The tendencies that Marx had noted, about the expropriation of the monopoly of private capital, by socialised capital, was more or less complete by the latter part of the 19th century. Its manifestation was the growth of the Stock Exchange, which mushroomed on the back of the spread of limited liability companies, after the introduction of The Limited Liability Act in 1855. That same process separated the capitalists from the former role as owners of productive wealth, and turned them solely into the owners of loanable money-capital, fictitious capital.

At the start of the 19th century, when industrial capitalism proper commences with the introduction of machine industry powered by steam, rather than human, animal or water power, productive-capital is in the hands of a relatively small group of capitalists and their families. This becomes possible because the former small producers are themselves expropriated. First they are brought into the manufactories to work, as wage workers, though still using the old handicraft methods. They lose many of these skills as a result of the increasing division of labour, but when machines are introduced, their former skills are taken over by the machine itself. They can now only sell their labour-power as factory labour.

As capital accumulates on this basis, the number of capitalist families increases, but alongside that, a process of concentration and centralisation occurs. The more efficient capitals make bigger profits and accumulate faster – concentration. But, also, as these capitals get bigger, and particularly during crises, these larger capitals are able to simply swallow up the smaller capitals, buying their machines and so on at knock down prices - centralisation. So, this productive-capital as private capitalist property, increasingly becomes a monopoly in the ownership of this relatively diminishing number of capitalists.

But, this very process brings changes with it. First of all, the larger these productive capitals become, the less able the capitalist themselves become to fully exercise the function of supervision and control of production. They have to take on professional managers, so that increasingly they become removed from the production process itself. Secondly, as the scale of production increases further, not even the biggest of these private capitalist families can mobilise the resources required for capital accumulation. This is what Marx means when he says that this “monopoly of capitalist private property becomes a fetter on further development”.

That fetter must be burst asunder, as he says, and it is. In its place arises socialised capital in the shape of the joint stock company and the co-operative. 

“Aside from the stock-company business, which represents the abolition of capitalist private industry on the basis of the capitalist system itself and destroys private industry as it expands and invades new spheres of production, credit offers to the individual capitalist; or to one who is regarded a capitalist, absolute control within certain limits over the capital and property of others, and thereby over the labour of others. The control over social capital, not the individual capital of his own, gives him control of social labour...

The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

As Marx describes in Volume III, the extension of public education increasingly means that these professional managers, along with other commercial workers, are drawn from the ranks of the working-class. They are indeed nothing more than skilled workers, and whose wages often fall to below those of other skilled workers. Yet, by their function within the production process they are the personification of productive-capital, the means by which that capital pumps out surplus value from the workers. Their true nature, in that respect is indicated, as Marx says, inside the worker owned co-operatives, where these managers are employed by the workers themselves to perform that function. It can also be seen later in the relation between the Taylorists and trades unions, particularly in the US. US trades unions, at a shop floor level, were frequently critical of the amateurishness of old style managements, and saw an ally with the Taylorists, who often were able to codify it. The workers saw an advantage in their labour being organised efficiently so as to raise productivity, and this is a central aspect also of the ideas that lie behind social democracy.

But, the other side of this process is that the private capitalists become purely the suppliers of loanable money-capital, which they do via the extension of the limited liability companies. As Engels states,

“Since the crisis of 1866 accumulation has proceeded with ever-increasing rapidity, so that in no industrial country, least of all in England, could the expansion of production keep up with that of accumulation, or the accumulation of the individual capitalist be completely utilised in the enlargement of his own business; English cotton industry as early as 1845; the railway swindles. But with this accumulation the number of rentiers, people who were fed up with the regular tension in business and therefore wanted merely to amuse themselves or to follow a mild pursuit as directors or governors of companies, also rose. And third, in order to facilitate the investment of this mass floating around as money-capital, new legal forms of limited liability companies were established wherever that had not yet been done, and the liability of the shareholder, formerly unlimited, was also reduced ± [more or less] (joint-stock companies in Germany, 1890. Subscription 40 per cent!).”

(Capital III, Supplement, p 908-9)

There is then a clear separation between productive-capital, now personified by the professional manager, and the loanable money-capital that can only be provided on a sufficient scale by pooling society's resources, via the capital markets, and stock exchange, and which is personified by the shareholder and bondholder, i.e. owners, no longer of productive wealth, but only of fictitious capital. The former has direct control of the productive forces, but the latter seeks to protect their own interests, and so as Engels says, this provides a role for “people who were fed up with the regular tension in business and therefore wanted merely to amuse themselves or to follow a mild pursuit as directors or governors of companies..” They take on the role of Chief Executives and Chairmen and so on.

Its on this basis that these Boards of Directors, who represent not the interests of the business, but the private interests only of the shareholders then come to act in ways such as those described above, which, in Andy Haldane's words, leads to the business eating itself. It should not be that way. The property of the company is separate from the property of the shareholders, as was set out in law back in the 1930's. 

"A company is an entity distinct alike from its shareholders and its directors.” (Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ. 

It is the company, which is the legal owner of the productive-capital employed by it, not the shareholders, who act merely as the lenders of money-capital, in the same way that money-capital is loaned to the company by a bank, or by bondholders. It is only the legal form of this loan, and the entitlements of the lender that is changed by these different instruments. The directors elected or appointed by the shareholders, under the companies articles of association, act not as the representatives of the company, but of the shareholders. In other words, they act not in the interests of the company, but of the lenders of money-capital to the company.

It is this latter fact, that enables them to act in a way that is anti-business, by furthering these private interests of the money lenders. This is what enables those directors and executives, to take decisions to transfer the businesses resources away from it, and into the hands of the money lenders, by the various means above. In Germany, and elsewhere, social democracy, which arises as the reflection of the interests of that big industrial capital, socialised capital, has placed limits on the ability for the representatives of fictitious capital to undertake these anti-business activities. For example, companies have worker representatives on their Boards.

An irony is that Marx had foreseen that it was the socialised capital, particularly in the shape of giant joint stock companies, which represented “the abolition of capitalist private industry on the basis of the capitalist system itself”. As he puts it, “as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out. The rate of profit is the motive power of capitalist production.” (Capital III, Chapter 15)

And this is exactly what happens when the monopoly of private capital is expropriated by this socialised capital. The professional managers of these firms seek to maximise the production of surplus value, because they are the personification of productive-capital, but they do so under different conditions from those of the private capitalist. They are able to take a longer term view. The shareholders do not receive profits, but only interest in the form of dividends, and this means that they now operate under different laws than previously did the productive capitalist.

“...these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, after all costs have been deducted.” 

These socialised capitals should, therefore, have been able to expand production on a much greater scale than the privately owned capitals, and indeed they were. That is not just because they are able to mobilise this much greater mass of capital, but also because as Engels writes, these joint stock companies, and then the trusts are able to also plan their production.

“Capitalist production by joint-stock companies is no longer private production but production on behalf of many associated people. And when we pass on from joint-stock companies to trusts, which dominate and monopolise whole branches of industry, this puts an end not only to private production but also to planlessness.” 

Yet, as Clinton described in her address, some private productive capitalists have today themselves become so wealthy, that they can themselves act to mobilise huge amounts of capital, and it is often these individuals who have been the ones recently that have been the ones undertaking productive investment. Elon Musk has sunk huge amounts into developing the Tesla electric cars, as well as putting money into Spacex. The owners of Google have invested in a range of new technologies, and so on.

A task for social democracy in the period ahead, is to address these issues of the way, fictitious capital today acts as an anti-business force, that acts as a fetter on the investment of profits back into production, and instead diverts it into the promotion of financial and property bubbles that are extremely damaging to the real economy as 2008 demonstrated.

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