Financial Capitalism v. Industrial Capitalism Michael Hudson
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Bears reading in full but some key passages highlighted below:
In America, emperors of finance and the real estate kings they enthroned were gaining the upper hand over captains of industry. Thorstein Veblen analyzed how pecuniary relations – its financial and monetary structure – distorted the economic system away from how it would be run rationally by engineers. In Germany, whose banking and industrial structures had become more closely integrated than was the case either in England or the United States, the socialist Rudolf Hilferding coined the term ‘finance capitalism’ in 1910.
The most serious problems lie in the financial sphere, where the economy’s debt overhead has grown more rapidly than the ‘real’ economy’s ability to carry this debt. One might call its demands for interest and amortization ‘debt pollution’, stifling the economic environment much as bad air and water plague the earth’s biosphere.
If the world economy is becoming more closely integrated, the financial forces of corporate globalism are leaving less room for national governments to shape the economic environment within which their labor and capital operate. This globalism emanates from the United States, taking a centripetal form rather than spreading the wealth from the wealthy center to the poorer periphery.
Instead of being used productively, privatization proceeds have been dissipated mainly to finance tax cuts for the wealthy and to un-tax foreign investment, while subsidizing capital flight. Privatization of the political process itself has turned control over to the largest campaign contributors and media owners.
Whereas the old industrial capitalism sought profits, the new finance capitalism seeks capital gains mainly in the form of higher land prices and prices for other rent-yielding assets. Partly this is an attempt to sidestep income taxation. Since the income tax was introduced, a growing portion of businesses revenue has been reclassified as non-taxable ‘cash flow’. In the real estate sector – the economy’s dominant sector in terms of asset size – re-depreciation and indeed, over-depreciation of buildings and the payment of mortgage interest leaves almost no taxable income at all! Much the same situation is found in the oil and gas business, in mining and forests, insurance and banking.
At least the old industrial capitalists made their profits by building factories and investing in capital equipment to employ wage-labor to produce products and services. Whereas these old capitalists found their epitome in manufacturing, the new rentier capitalism is centered in the FIRE sec-tor. The new objective is to recycle the economy’s savings into real estate and the stock market to bid up land and equity prices, not to create new assets. In the stock market, capital gains are achieved by down-sizing the labor force and scaling back production so as to squeeze out more revenue rather than seeking to expand market share by undertaking new direct investment.
Marx held that profits under the old industrial capitalism stemmed from the employment of wage labor, which he defined ipso facto as exploitation. (The capitalist made his profit by selling the products of labor at a higher price than the labor cost him. Wage labor thus was the source of surplus value.) Modern finance capitalism has found a new way of exploiting labor, by mobilizing pension funds, Social Security and other retirement savings to bid up stock-market, bond and real estate prices. Meanwhile, a widening wedge of wage revenue is being siphoned off to pay interest on personal debts.
The old capitalism used public-spirited rhetoric while relying on government for support (including police). The new finance capitalism uses an individualistic rhetoric while buying control of governments and depending on them to lend defaulting debtors the funds to pay their creditors, and to guarantee security of financial assets for their holders.
Ancient economic thought also viewed wealth and income as addictive. It coped with the threat that wealth tended to lead to abusive hubristic behavior on the part of the rich. A designated role of religious and social values was to counter this human tendency toward addictive selfishness. But modern economic theory is based on a view of human nature that unrealistically assumes diminishing marginal utility for each successive unit of wealth. The problem of wealth addiction – and hence, drives for personal power – is not recognized, nor are problems of consumer addiction.
In this sense today’s rentier culture is dehumanizing. As the leadership of corporations has passed from what Thorstein Veblen called the ‘engineers’ to the financial managers, the objective is not to produce more or expand market share, but to increase the price of stocks, other securities and real estate. If executives find their self interest in ‘working for the stockholders’, it is largely be-cause they take more of their remuneration in the form of stock options than in salaries. They use corporate revenue not to fund new direct investment but to buy up their own stock to support its price. They also cut back on low-profit activities so as to increase earnings, and hence to increase the per-share price.
The role of real estate has changed largely because the modes of financing long-term mortgage credit changed in the 1930s. The S&Ls and mutual savings banks mutated away from something aimed at small home-buyers to large real estate developers. They were gobbled up by the large FIRE-sector complex and made part of the globalization process.
The problem of pre-capitalist rentier formations has survived, however, in the capitalist DNA molecule. This DNA may have imparted a fatal flaw to modern capitalism, a disease that has broken out as a cancerous form. The debt overhead rising to crush economic takeoffs signals the dominance of finance over industry, of ‘virtual wealth’ (that is, debt-claims on wealth) over what economists still call ‘real’ wealth, as if finance were less real than tangible physical structures.
Today’s finance capitalism also has disappointed hopes for further progress in medical technology. Privatizing the health-care system shifts the decision-making objective from curing diseases to making a profit. Like banking and finance, the highest-cost medical technology may move offshore to tax-avoidance ‘banking’ centers where expensive new medical technology need not be extended to cover large numbers of patients.
Having become autonomous, the debt-cancer has gained control of national and global policy. Indeed, we are seeing today the dollarization of debt in countries whose debt-service forces a chronic currency depreciation. At the end of the 1970s, Canadian municipalities managed to save a few tenths of a percentage point of interest by borrowing in d-marks and Swiss francs. As the Canadian dollar fell, debt service in these currencies rose. Likewise in Asia today, when capital flight undercut the currencies of Thailand, Indonesia, Korea and neighboring countries, their currencies fell, bankrupting many indebted companies.