Financial dominance in the sunset of capitalism



Considerations on the growing exuberance of finance


The issue of financialization has been the subject of great controversy; even the validity and appropriateness of the term has been questioned. However, there is no doubt that certain facts support the thesis that a growing exuberance of finance came after the end of the Second World War and, especially, from the 1980s onwards. But what is financialization? Now, initially, it should be known that this term is used here as a synonym for financial dominance. It should also be considered that this poses a question that still requires an innovative answer (Prado, 2018b).

After 1945, two long cycles occurred in the world economy: one between 1946 and 1982, a period in which Keynesianism dominated, and another one from that last date, a subsequent moment in which neoliberalism prevailed. In the first period, the growth rate of world GDP averaged 5% per year. Between 1981 and 1990, the world economy grew by an average of 3,12% per year; between 1991 and 2010, this average rate dropped to 2,8%, to reach just 2,2% in the last decade. Due to this low growth, it is widely recognized that the world economy entered a period of stagnation after 1997, which has not yet been overcome. And this secular decline is well explained by the declining behavior of the rate of profit in the period, as shown in the graph below.

But the latter is not the only striking fact in the history of post-war capitalism. It is also necessary to mention financial dominance, a process that has also developed in the last seventy years. If its main antecedent was the expansion of the Eurodollar market, mainly in the 1970s due to the abundance of petrodollars, it effectively took off in the 1980s. world during the 1970s. As is known, this decade was characterized by two strong crises between 1974 and 1982, a period in which a long stagflation also occurred. The growth of global financial assets compared to the increase in global GDP is shown in the chart below:

Source: World Bank; Calculations: by the author.

These are evidences of the process of financial dominance: the expansion of the international financial market; the increase in the participation of the financial sector in the GDP and in the appropriation of profits in the central countries; the widespread use of new complex financial instruments (for example, derivatives); the emergence of a parallel financing system in relation to the banks; business administration starts to prioritize the interest of shareholders in the short term to the detriment of the company's productive progress in the long term; growing indebtedness of households, national states, as well as non-financial companies, etc.

The studies that accept the term financial dominance to designate this empirically verifiable phenomenon are divided according to their central concern. There is no doubt that the facts listed above mark the development of contemporary capitalism; if the process begins in developed economies, it later spreads to the world economy as a whole as a result of the third great wave of the globalization of capital (Prado, 2018a).

Here is the division: either recent research focuses on the effects of financial dominance as an unprecedented event in the history of the evolution of capitalism, which came to affect the distribution of income and wealth and, thus, the economic growth of nations, or it becomes returns to understand it as a recurrent and, therefore, endogenous phenomenon of the contradictory process of capital reproduction and accumulation, with its expansion spurts and crises, core of the capitalist mode of production.

Representative of the first orientation is Greta Krippner's seminal article written shortly after the turn of the millennium (2005). There, this author empirically shows that financialization was actually present in the US economy. To this end, she defines this phenomenon as “a pattern of accumulation in which profits are obtained primarily through financial channels rather than being earned from the production of goods” (Krippner, 2005, p. 174).

A little before her, Gerard Epstein had defined this phenomenon explicitly by its appearance: there is – he says – an “increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies” ( Epstein, 2004, p. 3).

Thomas Palley, who points to and endorses the economic tenor of these two definitions, added a political dimension to them; in a very recent article, he repeats what he said in his book on the subject: “financialization comes along with neoliberalism and is characterized by the domination of the interests of the financial sector in economic policy and in the economy itself as a whole” (Palley, 2013, p. 1; 2021, p. 465).

Now, these studies can be interesting to understand the manifest aspects and the unfolding of the phenomena associated with financial dominance in its momentary actuality, but they fail for not apprehending them as an expression of the logic that presides over the reproduction of the capital relation in historical temporality. As is known, this logic is not deterministic, as it includes both necessary and contingent determinations that affect the course of events. Here, in this particular study, an attempt will be made to understand financial dominance as a basis in the dialectical exposition of the capitalist mode of production that is found, as is well known, in the three books of The capital, in particular based on content from the third party.


The Legacy of Classical Marxism

What Karl Marx left written in his works allows us to think of the financial exacerbation observed nowadays as a consequence of the overaccumulation of capital in the sphere of commodity production. And this interpretation has been supported by authors such as Ben Fine (2013), Stavros Movroudeas (2018), Michael Roberts (2018) etc.

To present this thesis, it is necessary to start by showing the connections between the different forms that capital assumes in the process of reproduction of capitalism. For this, the complete circuit of capital in the sphere of production is presented in sequence:

D – D – M (MP and FT) …P… M' – D' – D''

In the first phase of this process, indicated by D - D, free money capital, passing from the hands of the owner of money to the hands of the industrial capitalist by means of a loan, is already committed to the purchase of commodities. In the second phase, D – M, a metamorphosis occurs, as the manufacturing capitalist uses borrowed money and acquires means of production and hires labor power. In sequence, the production process itself takes place, from which a new commodity, M', appears, which must be marketed. If its value is realized in the specific market, M' metamorphoses into M', that is, it becomes money again, which thus, in principle and for a time, regains its free, uncommitted form.

However, the industrial capitalist, in principle, has to return D to the lending capitalist plus an amount of interest corresponding to the time during which the initial capital remained tied up in commodity production. Thus, D' minus D is surplus value and D' minus D'' is the interest paid on borrowed capital. It seems obvious that, in general, surplus value must be quantitatively greater than the amount of interest paid. For Marx, this circuit as a whole is the dynamic core of the capitalist mode of production. If …P… indicates the sphere of production, to its left and right there are operations in the sphere of circulation: thus, first, money functions as a form of capital, and then as money proper; in the second half of the process, this sequence is reversed as money functions first as money and then as capital.

At the end of the process, bearing in mind this unfolded circuit, workers received the value of their workforce in the form of wages. The cost of the means of production now reappears as part of the value of the goods sold, and is thus recovered. And the surplus-value is shared between the commodity-producing capitalist, the financial capitalist and the commercial capitalist, who supposedly acted in the sale of the commodity. Thus, there are, respectively, the forms of industrial profit, interest and commercial profit. The generation of surplus value, therefore, is at the base of the system. Formally, Marx, as we know, represents the value of the commodity as the sum of the cost of the means of production, the apparent “cost” of wages and profit (apparent form of surplus value).

Money, therefore, is a central category of capitalism; behold, it functions as money in the purchase and realization of goods, but also as a means of lending, a condition in which it acts primarily as capital – and not as money. Here is its circuit of circulation: D – D', money that generates more money. To understand how money operates in this second function, Marx distinguishes between two specialties: either it acts as money-trade capital or it acts as interest-bearing capital. In the first case, money operates in the circulation of goods as a means of creating credit and, in the second, it works in the interface between monetary capital and industrial capital as a means of appropriating part of the surplus value generated in the production of goods.

The first of these two functions is exercised especially by banks: behold, with the development of capitalism, this type of capitalist enterprise monopolizes the ability to create credit money from the issuance of primary money made by central banks. The second function can be fulfilled by banks, but it is also true that a type of company is developing that is dedicated exclusively to operating as interest-bearing capital. Such capitalist firms do not create money through credit as commercial banks do, as their specific function is to mobilize and redirect already existing idle capital.

When capital is not directly committed to the production of goods, it circulates in its own sphere, called financial, in different forms and in a very complex way. Anyway, it should be mentioned that this sphere is made up of two types of markets: a credit market in general and a capital market. The specific function of the latter is to mediate the supply of capital to productive companies, a task that can also be performed by the credit market in general. The latter acts, therefore, in a much broader way in the financing of mercantile activities in general.

Interest-bearing capital is not just a way of extracting part of the surplus value produced in the sphere of industrial capital, a term that indicates, for Marx, activities that produce goods in general. He also performs, at the same time, an activity of supervision of capitalist production. Well, credit is only given to productive companies when they show current and future capacity to extract surplus value from the workers who sell their labor power to them.

In general, interest-bearing capital exists in a double form: as a value lent by the money-owning capitalist to the industrial capitalist, and as a “right” to receive back the borrowed capital plus interest. ex-ante hired. This right is therefore an “obligation” contracted by the debtor and owed to the creditor. Now, securities in general that attest to this “obligation” (bonds, shares, debentures, etc.) take on a life of their own in the financial system. Marx calls these forms of fictitious capital because they command earnings (interest, bonuses, etc.) but are not directly committed to the production of surplus value. For this very reason, government securities and private debt securities in general also take the form of fictitious capital.

Due to the fluid nature of securities circulating in the financial system, it acquires a certain autonomy. In principle, they represent the real possibility of appropriating, on certain dates, bits of the surplus value that is being generated by productive work in the sphere of industrial capital. However, as debts can be paid by contracting new debts, with their forms being interchangeable and negotiable in exchange for money (that is, they are liquid), the creation of fictitious capital becomes, to a certain extent, independent of the effective generation of value in the capital economic system. But the limits of this fortune are revealed in the bursting of “bubbles” and in general financial crises, when the fictitious nature of these securities is shown because they die in drawers, bank vaults, etc., and are then recorded as “losses” in the balance sheets of financial agents in general.

Now, the movement of the mass of fictitious capital is related to economic cycles with their three phases: prosperity, crisis and depression. In periods of strong growth in accumulation, the current and future rate of profit appears to be promising and, as a result, investments are accelerated, producing high economic growth. And this is made possible by the expansion of credit and fictitious capital within the financial sector. In the course of this process, what Marx called the overaccumulation of both industrial and financial capital takes place. Then comes the crisis.

Behold, the excess was possible because of the relative autonomy of credit creation. A bet on a bright future produces an exceptional accumulation of securities. And this financial euphoria often pushes the accumulation of industrial capital beyond its proper limit. In the meantime, real wages rise, the organic composition of capital rises, factors that lower the profitability of capital. The crisis happens because the profit rate starts to fall or even plummet and because there is an increase in idle capacity. As a dramatic consequence of this evolution, there is a growing unemployment of workers.

Capitalism, as we know, is bipolar: after periods of euphoria in which expectations are optimistic, there are always recessive or even depressive periods in which expectations become pessimistic. They are therefore characterized as depressions. It should be noted that the acceleration of the process of capital accumulation was allowed, reinforced and pushed beyond what was roughly possible by the excessive creation of credit.

The rush of productive investment in the period of economic euphoria depends on the mood of loan capital. Thus, it is to be expected that after the outbreak of the crisis there will be not only a sharp drop in the pace of accumulation, but also a triggering of a devaluation process that affects a large part of the previously accumulated capital both in the industrial sphere and in the sphere of financial capital. And this destruction is necessary for the rate of profit to recover, starting a new cycle of accumulation, a new prosperity that also, in principle, should not last forever.

From this perspective, the financial exacerbation is apprehended in its intrinsic connections with the accumulation of industrial capital, that is, in which the generation of surplus value effectively occurs. As a result, it provides a theoretical framework that allows understanding – even if at first – the process of financial dominance that occurred in the development of heavily regulated capitalism in recent decades. In this sense, this phenomenon that has lasted forty years now can be understood not as something exceptional, but as a recurrent process in history. Financial innovations that seem unprecedented are nothing more than developments in the inherent functions of money as money and money as capital. They always respond, therefore, to the needs of the evolution of capitalism itself.


Contradictions of contemporary capitalism

If this earlier theorizing – here only outlined[I] – is fair and necessary, however, it does not seem sufficient to explain financial dominance as certain authors who adhere to what they call classical Marxism believe. Mouvroudeas and Papadatos, for example, maintain that “the spectacular ballooning of the financial system in recent decades (…) does not constitute a new era, still less a new capitalism. Rather, it consists of a customary capitalist response to periods of poor profitability” (2018, p. 451).

It is therefore necessary to go further. However, before that, a more general view of contemporary capitalism is presented, as it is above all necessary to think about the main contradictions that currently hinder the development of this mode of production. The secular drop in profitability observed after the Second World War, already graphically shown here, indicates that the barriers posed by the very development of capital are now formidable and that it is having enormous difficulty in overcoming them: behold, one of them is linked precisely to to financial dominance.

Here follows Murray Smith's thesis in his book invisible leviathan (2018) according to which, since the beginning of the 1980s, we have been in the presence of the sunset of capitalism – an uneasy process that has not ceased to deepen since then. Because, in that decade, it entered – as a mode of production – a structural crisis from which it has not yet emerged and will not be able to emerge for reasons that will be presented in sequence. According to this author, only Marx offers a “necessary theoretical framework to apprehend the contradictory, irrational and increasingly dangerous trajectory of the capitalist mode of production” (Smith, 2018, p.9).

Given this perspective, neoliberalism does not portray a winning capitalism. On the contrary, as a social and economic policy, it came not to cyclically overcome the systemic difficulties of capitalism, which already appeared in the 1970s, but as a last resort so that it could continue to function, even if increasingly precariously. Bullish and bearish cycles have happened and will continue to happen, but the long-term trend presents itself as a persistent decline and this was shown by the charts presented earlier.

Four “Marxian” contradictions are at the base of this structural crisis. They are: a growing need for public goods in a system based on private property; an economic system that becomes world-wide, and therefore requires management at that level, but is organized into nations that have conflicting interests; a growing appropriation of nature in view of the limited carrying capacity of planet Earth; an overaccumulation crisis in which the destruction of capital has become politically unsustainable. It is therefore necessary to explain them in sequence.

The first mentioned consists of a result of the contradiction between the private character of appropriation and the social character of production so accentuated by Marx. As capitalism develops, the need for goods and services offered as public goods grows; behold, they are necessary to provide the infrastructure and community social protection that guarantee a certain unity to the system. Now, this provision burdens the budget of national states, which are ultimately fed with part of the surplus value extracted from workers in the productive sector of economies. Thus, faced with the need to raise the average rate of profit, they could only fall into a policy of privatization that tends to make public goods increasingly scarce. By eroding the common base of society, this policy of neoliberalism spreads poverty and nihilism, concentrates income and wealth, undermines liberal democracy, that is, certain foundations that give social and political support to capitalism itself (see Brown, 2019 , about this).

The second contradiction mentioned concerns the transnationalization of commodity production, as well as the financial system that supports it. Large North American, European, Chinese corporations, etc. now operate in dozens of countries. Production depends on global supply chains of components. The coordination of economic activities depends on digital platforms that not only operate but actually lie beyond the domain of nation states. The transnational financial system becomes nucleated in large rhizomatous banks that supposedly cannot fail.

As is known, the State is the instance of power that provides the missing unity in an economic system permeated by antagonisms between individuals, groups and social classes and in which frequent systemic dysfunctions occur. It is he, moreover, who seeks to find a solution to the problems caused by the very functioning of the mode of production. However, many problems are now being generated on a global scale, beyond the power of national states to intervene. Many of them, the weakest and least developed, find themselves constrained by private powers that thrive internationally and overlap.

The third contradiction mentioned concerns the inherently predatory character of capitalist production, which clashes with the demands of conservation and regeneration of the natural environment – ​​which include the reproduction of the workforce. There is a certain consensus in critical thinking that there is a growing “metabolic rupture” between commodity production through which capital is realized as such and the natural conditions of production.

Behold, the ecological conditions for the sustainability of human civilization are being eroded with unprecedented speed by a process of capital accumulation that cannot stop and, therefore, cannot fail to receive priority in each of the nations that make up this civilization. Even if international agreements are made, for example, to reduce carbon emissions, they continue to grow without their sources being eliminated; behold, they grow even if the generation of this type of pollution is already at a very critical level.

By not guaranteeing the sustainability of human civilization on planet Earth, capitalism has become unsustainable. “Together,” says Smith, “these interrelated crises suggest that capitalism has already entered the twilight era—an era in which humanity finds the means to create a more rational social order and economic organization, or in which progressive decay of capitalism will bring with it the destruction of human civilization” (Smith, 2019, 6-9).


Beyond classical Marxism

But no mention has yet been made of the contradiction that produced and continues to produce financial dominance and that stems from the unbridled nature of capital accumulation. Its intrinsic lack of limitation, which is in opposition to its inherent circumstantial and historical limitation, constantly produces overaccumulation. Capital itself, as one becomes aware of through The capital (2017, p. 286-290), creates barriers for himself and, even if he overcomes them, he always creates new and greater barriers. Thus, the moments of overaccumulation can only be overcome with the arrival of a new wave of accumulation if the previously constituted excess of capital – industrial and financial – is devalued and even physically destroyed. As a result, crises are, as we know, necessary events in the accumulation process.

Now, the insatiability of capital produced the overaccumulation crisis that has been hindering the very engine of globalized capitalism since the 1970s. In order to continuously increase the productivity of labor in the production of goods, capitalist competition tends to raise the ratio capital employed in production and the total value added through that production itself - and this tends to reduce the rate of profit strongly. As the political sphere of this system – behold, it is never detached from the State – can no longer allow crises to unrestrictedly destroy accumulated capital, thus allowing a recovery of this rate, itself as a world system began to face a crisis that could not be overcome. solves, that is, a structural crisis, since, in the face of accumulated capital, the production of surplus value is now always “insufficient” (see Prado, 2021).

The only alternative left for him was neoliberalism[ii]: an praxis contemporary socio-politics that sought to create, through the State and its ideological apparatuses, countertrends to the fall in the rate of profit. To this end, it sought to decompose society more and more into individuals, free the movements of finance capital, transfer labor-intensive industries to the periphery, reduce workers' real wages, etc. Well, all this generated a weak recovery, mainly in the center of the system, which lasted between 1982 and 1997, approximately. As of that last date, the downward trend in the rate of profit was imposed again with no prospects that this depressive situation could change.

A question arises here, at this stage of the exposition: why the devaluation, the destruction of part of the accumulated productive forces and the annihilation of a large portion of the mountain of existing debts – due to the disproportionate expansion of credit that occurred in the last forty years – cannot occur at a sufficient level to substantially raise the rate of profit, allowing the engendering of a new long cycle of economic growth? Now, to adequately answer this question, it is necessary to go beyond classical Marxism.

But to go beyond this Marxism it is still necessary to continue with Marx, examining how he presents the role of credit in the capitalist economy and, in particular, how he announces certain trends inherent in its development. It should be noted, to begin with, that the very term “classical Marxism”, adopted by Marxist economists mentioned above, implies a reductionism that does not do justice to this author's theses.

By correctly emphasizing the centrality of industrial capital in the development of capitalism, they overlook an inherent tendency to collectivize the ownership of companies, especially the largest ones. If for a long time a very distributed mode of ownership prevails among the members of the capitalist class – strictly private ownership of the means of production dominates –, little by little a different form develops, the latter, based on collective and social forms. of property.

For Marx, the credit system has three major functions: to allow the equalization of profit rates; reduce the cost of circulation of goods and accelerate the metamorphoses of capital; create a joint-stock company. Now, share capital is the historical form par excellence of the collectivization of capital ownership. Thus, an indefinite number of capitalists can own one or more large profitable enterprises. Behold, this form allows, above all, an “enormous expansion of production and companies, on a scale impossible for isolated capital” (2017, p. 494). There is, therefore, a point to be emphasized here: capital in the social form spreads the ownership of financial assets, whether representative or not of effectively productive assets, not only among capitalists, but also among workers, especially those who obtain better wages.[iii]

The concentration of the means of production and labor forces thus transforms private capital into social capital, that is, into “capital of directly associated individuals”. Thus, according to Marx, “the suppression of capital as private property within the limits of the mode of production itself” (2017, p. 494). The previously unified command of the companies that make up the industrial system is now duplicated. It is divided between the command of the productive, administrative and commercial processes that is now carried out by managers and the command of the destiny of the capital that now becomes an exclusive privilege of the capitalists who own the money, that is, of the financial capitalists.

It is beyond doubt that the forms of social capital expanded throughout the development of capitalism, mainly from the last quarter of the XNUMXth century onwards. Furthermore, it is also quite certain that they have grown exponentially in the period from the end of the Second World War to the present. During this period, the number and economic power of corporations indirectly subordinated to share capital certainly increased.

In addition to this, other forms of collective ownership of capital developed in parallel, such as mutual investment funds, closed or open, and pension funds. Furthermore, the volume of insurance premiums that share the risks associated with business among collectives of capitalists has also skyrocketed. By noting that the formidable growth of global financial assets (second graph shown in the introduction to this article) are now collectively owned by multinational capitalists, one can arrive at a new understanding of financial dominance: instead of being seen as an expression of “rent-seeking” or “economic vampirism”, is now seen as a manifestation of the advanced process of socialization of capital in contemporary times.

Furthermore, when understanding that financial dominance as a result of a historical trend, driven little by little by the very crises of capitalism as argued by "classical Marxism", it is understood why there is a strong resistance to allowing the devaluation of industrial capital and financial accumulated in the past. If the economic system is founded mainly on individual private property, then the losses will always be individual as well; however, when this system starts to be based in an important way on social property, that is, on the free association of monetary capitalists, the losses become collective, thus becoming politically unacceptable.

Financial dominance, as well as the climate crisis, contradictory globalization and the overload of the State in a system based on capitalist property, indicate that capitalism has entered its sunset. Will humanity survive or will it die along with it? The answer to this question is found in political struggles, in the struggle between a new enlightenment and negationism, in the ability of workers in general to face the capitalist class.

* Eleutério FS Prado is a full and senior professor at the Department of Economics at USP. Author, among other books, of From the logic of the critique of political economy (Ed. anti-capital fights).



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[I] Makoto Itho presents in one of his books a much more complete version of Marx's conception of cycles (1988) and it was useful for the elaboration of this article.

[ii] If neoliberalism first assumed a moderate or, as has been said, “progressive” form, in the course of the structural crisis it ends up assuming an extremist and reactionary form.

[iii] This theme was well treated by Bruno Höfig (2017).

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