From the perspective of economic analysis, therefore, profit is produced by capital, whereas interest is the market price that has to be paid for the use-value of capital. Consequently, those who loan capital to a firm are only entitled to the average rate of interest on the money equivalent of the capital they have loaned, whereas the firm itself, the socialised capital is entitled to the remaining profit, after the deduction of this interest.
If we take a co-operative, for example, it may be established by consumers, who each contribute a certain amount of money, which they loan to the firm to buy premises, equipment and stock to sell. Considered, purely from an economic perspective a) all of this productive capital is the collective property of the co-op, not of the individual members, b) each member who has loaned capital to the co-operative is entitled to receive the average rate of interest on the capital they loaned to it, c) any profit over and above this belongs to the co-operative, and not to the members.
The same is true if the money loaned to the co-operative comes from its workers, rather than from consumers, i.e. if it is a worker co-operative rather than a consumer co-operative. But, the same is true if the capital is borrowed by a company that issues shares generally to the public, i.e. a public limited company, or joint stock company. Considered from a purely economic standpoint, the only thing that any such shareholder is entitled to receive is the average rate of interest on the money-capital they have loaned to the company, and for which they have received, in return, a share certificate. The share certificate is not a certificate indicating a part ownership of the firm's capital, but only a certificate indicating an entitlement to a share of the firm's future profits, payable as a dividend. But that share of future profits is not itself an entitlement to a share of all of those profits, but only a portion equal to the average rate of interest, on the money-capital loaned. The rest of the firm's profits over and above this, belongs economically to the firm itself. It is, as Marx describes it, the “profit of enterprise”
But upon these different social forms that arise in the way the capital is loaned to the company, arise different structures of corporate governance. In a consumer co-operative, it is the individual customers of the business, who, as members, exercise the right to elect the governing boards, who exercise control over the socialised capital; in a worker co-operative, it is the workers in the enterprise itself; in a joint stock company it is the shareholders; and in a nationalised industry it is the capitalist state.
All of these different structures of corporate governance mean that those who exercise this control are able to make decisions over the distribution of revenues irrespective of the economic laws, up to a point.
Marx says that this is clear in respect of the worker owned co-operatives that were formed in the Lancashire textile factories, compared with the capitalist factories. In the co-operatives, the manager's – functioning capitalists, as Marx describes them - whose social function, in the labour process, was rather like that of a conductor in an orchestra, were employed by the workers to undertake that work, and were paid wages accordingly. Sometimes, these managers were the former owners of these factories, but their wages, as owners, were far higher, reflecting the fact that they had taken a portion of what economically, was profit, belonging to the firm, and converted it into their own wages.
“The wages of management both for the commercial and industrial manager are completely isolated from the profits of enterprise in the co-operative factories of labourers, as well as in capitalist stock companies. The separation of wages of management from profits of enterprise, purely accidental at other times, is here constant. In a co-operative factory the antagonistic nature of the labour of supervision disappears, because the manager is paid by the labourers instead of representing capital counterposed to them. Stock companies in general — developed with the credit system — have an increasing tendency to separate this work of management as a function from the ownership of capital, be it self-owned or borrowed. Just as the development of bourgeois society witnessed a separation of the functions of judges and administrators from land-ownership, whose attributes they were in feudal times. But since, on the one hand, the mere owner of capital, the money-capitalist, has to face the functioning capitalist, while money-capital itself assumes a social character with the advance of credit, being concentrated in banks and loaned out by them instead of its original owners, and since, on the other hand, the mere manager who has no title whatever to the capital, whether through borrowing it or otherwise, performs all the real functions pertaining to the functioning capitalist as such, only the functionary remains and the capitalist disappears as superfluous from the production process.”
(Capital III, Chapter 23)
These managers, or functioning capitalists, that Marx describes, here, who are paid only wages in the co-operatives and joint stock companies have to be distinguished from the Boards of Directors, appointed by shareholders, and the top executives appointed by those boards. The former “functioning capitalists” are the personification of the socialised capital itself as productive-capital, whereas the latter directors and executives are the representatives of shareholders, and so the personification of the interests of fictitious capital.
“Co-operative factories furnish proof that the capitalist has become no less redundant as a functionary in production as he himself, looking down from his high perch, finds the big landowner redundant. Inasmuch as the capitalist's work does not originate in the purely capitalistic process of production, and hence does not cease on its own when capital ceases; inasmuch as it does not confine itself solely to the function of exploiting the labour of others; inasmuch as it therefore originates from the social form of the labour-process, from combination and co-operation of many in pursuance of a common result, it is just as independent of capital as that form itself as soon as it has burst its capitalistic shell. To say that this labour is necessary as capitalistic labour, or as a function of the capitalist, only means that the vulgus is unable to conceive the forms developed in the lap of capitalist production, separate and free from their antithetical capitalist character. The industrial capitalist is a worker, compared to the money-capitalist, but a worker in the sense of capitalist, i.e., an exploiter of the labour of others. The wage which he claims and pockets for this labour is exactly equal to the appropriated quantity of another's labour and depends directly upon the rate of exploitation of this labour, in so far as he undertakes the effort required for exploitation; it does not, however, depend on the degree of exertion that such exploitation demands, and which he can shift to a manager for moderate pay. After every crisis there are enough ex-manufacturers in the English factory districts who will supervise, for low wages, what were formerly their own factories in the capacity of managers of the new owners, who are frequently their creditors.”
(ibid)
Whilst the wages of these managers are determined by the same laws as those governing all other wages, and, Marx outlines, tend to fall, as public education is extended by capitalism, the remuneration of the directors is governed by no such laws, but rather tends to their inverse.
And Marx details this.
“On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth. Very curious details concerning this are to be found in The City or the Physiology of London Business; with Sketches on Change, and the Coffee Houses, London, 1845.
"What bankers and merchants gain by the direction of eight or nine different companies, may be seen from the following illustration: The private balance sheet of Mr. Timothy Abraham Curtis, presented to the Court of Bankruptcy when that gentleman failed, exhibited a sample of the income netted from directorship ... between £800 and £900 a year. Mr. Curtis having been associated with the Courts of the Bank of England, and the East India House, it was considered quite a plum for a public company to acquire his services in the boardroom" (pp. 81, 82).
The remuneration of the directors of such companies for each weekly meeting is at least one guinea. The proceedings of the Court of Bankruptcy show that these wages of supervision were, as a rule, inversely proportional to the actual supervision performed by these nominal directors.”
(Capital III, Chapter 23)
Similarly, these Boards of Directors, and the executives they appoint act in the interests of shareholders, i.e. fictitious capital, rather than of the the actual productive-capital, in the shape of the business itself, but the laws of capital again place limits upon this. The ways that these directors may work against the interests of the business and in the interests of the fictitious capital are by paying out higher dividends than are justified by the average rate of interest; by transferring the firm's capital to shareholders by various means; by using profits to buy back shares merely to boost share prices, and earnings per share figures, and so on.
But, in doing so, and undermining the actual capital, they ultimately undermine the interests of the owners of that fictitious capital too, because ultimately it depends upon the ability of capital to expand, and thereby to produce ever larger masses of profit. As the price of this fictitious capital rises, purely on the back of speculation, in the hope of capital gain, so the yield on this fictitious capital falls further and further, unless an ever increasing proportion of what economically belongs to capital is appropriated, as dividends, by the owners of fictitious capital. This is the process of “capital eating itself” described by Andy Haldane, but which should more correctly be described as capital being devoured by fictitious capital, capital being devoured as revenue.
It indicates a need for the forms of corporate governance of this social capital to be changed to reflect the social and economic reality. It requires that socialised capital, the capital that belongs collectively to the business, as a collection of associated producers, should be under the control of those associated producers, and not external forces, be they capitalist shareholders, consumers, or the capitalist state. All of these external forces are merely lenders of capital and entitled only to the average rate of interest on the capital they lend, and nothing more.
In the consumer co-operative, the atomised nature of the members means that control can fall into the hands of a relatively small group of activist members with a similar interest, and into the hands of a permanent bureaucracy. Not only can this happen, but it usually quickly does happen. In a joint stock company, it is the simple possession of larger concentrations of shares in a small number of hands, which brings about this control. This may be a small group of individual private money-capitalists, or as Marx says, here, and as Hilferding analysed in Finance Capital, it may be via the banks and financial institutions themselves, who wield control over such shares. The situation today in respect of those institutions' control over workers' pension funds, illustrates how this can be done.
Marx comments,
“However, this expropriation appears within the capitalist system in a contradictory form, as appropriation of social property by a few; and credit lends the latter more and more the aspect of pure adventurers. Since property here exists in the form of stock, its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange wolves. There is antagonism against the old form in the stock companies, in which social means of production appear as private property; but the conversion to the form of stock still remains ensnared in the trammels of capitalism; hence, instead of overcoming the antithesis between the character of wealth as social and as private wealth, the stock companies merely develop it in a new form.”
(Capital III, Chapter 27)
As Engels points out, since Marx had made these comments, this concentration had developed even further.
“And in every country this is taking place through the big industrialists of a certain branch joining in a cartel for the regulation of production. A committee fixes the quantity to be produced by each establishment and is the final authority for distributing the incoming orders. Occasionally even international cartels were established, as between the English and German iron industries. But even this form of association in production did not suffice. The antagonism of interests between the individual firms broke through it only too often, restoring competition. This led in some branches, where the scale of production permitted, to the concentration of the entire production of that branch of industry in one big joint-stock company under single management.”
(ibid)
The most developed form of this kind of socialised capital, where control is exercised by external forces, is the nationalised industry, or state capitalism. Here the control is exercised by the capitalist state on behalf of the capitalist class as a whole.
Engels notes in Anti-Duhring,
“The modern state, no matter what its form, is essentially a capitalist machine, the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers – proletarians. The capitalist relation is not done away with. It is rather brought to a head” (p 360).
As Kautsky put it, in the Erfurt Programme,
“If the modern state nationalises certain industries, it does not do so for the purpose of restricting capitalist exploitation, but for the purpose of protecting the capitalist system and establishing it upon a firmer basis, or for the purpose of itself taking a hand in the exploitation of labour, increasing its own revenues, and thereby reducing the contributions for its own support which it would otherwise have to impose upon the capitalist class. As an exploiter of labour, the state is superior to any private capitalist. Besides the economic power of the capitalists, ii can also bring to bear upon the exploited classes the political power which it already wields.
The state has never carried on the nationalising of industries further than the interests of the ruling classes demanded, nor will it ever go further than that. So long as the property-holding classes are the ruling ones, the nationalisation of industries and capitalist functions will never be carried so far as to injure the capitalists and landlords or to restrict their opportunities for exploiting the proletariat.”
It is then only in the shape of the worker co-operative that the nature of the socialised capital is reflected in the governance structure of the company. As Marx puts it,
“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.”
(Capital III, Chapter 27)
As Kautsky put it in the Erfurt Programme,
“It is supported by facts of economic development that show an actual growth toward Socialism. It was Marx and Engels who first set forth these facts and explained the scientific laws that govern them…
“The corporation renders the person of the capitalist wholly superfluous for the conduct of capitalist undertakings. The exclusion of his personality from industrial life ceases to be a question of possibility or of intention. It is purely a question of POWER.
This preparation for Socialism through the concentration of capital is meanwhile only one side of the process of gradual growth into the future state. Along with it there is proceeding an evolution within the working class that is no less of an indication of growth in the direction of Socialism.”
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