Re: [OPE-L] The Financialization of Capitalism

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Wed May 16 2007 - 06:03:43 EDT

was it attached this time? please include within body of the message.
The attachment is clearly being cut out here is the body of it without
1  Rentiers 

Rentiers are a class of people deriving their income from financial titles to property. It makes an analogy with the old rent earning class of great landowners, but the rentiers are distinguished from the latter by their more distant relationship to the property they own. Rather than living in an estate in the midst of their property, they own a variety of anonymous income earning assets, most typically shares and instruments of debt. From the rentiers, all vestiges of the paternalism, noblesse oblige, and personal dependence that once characterised the landowning aristocracy have vanished, leaving them as pure consumers of financial revenues. 
Whilst, with industrialization, a portion of the landowning class, particularly those like the Duke of Westminster whose lands becam urban, transformed themselves into rentiers, the existence of a rentier class can be seen as an inevitable consequence of the development of capitalist financial institutions.
The term Rentier came to prominence a hundred years ago, and remained influential in economic discourse during the 1920s and 1930s. Today it is again attracting attention as the financial sector comes to be dominant in mature capitalist economies. 
What causes the financial sector to replace manufacturing as the bedrock of the economy? 
Its supposed role is to fund investment. Savings are meant to be channelled through the banks, investment trusts and the stock market into firms that want to carry out investment in new capital stock. This process obviously does occur, but in many capitalist countries the financial accounts show that industrial and commercial companies are net suppliers rather than users of funds, and it is by no means obvious why, in the face of continuing improvements in information processing technology, the sector which carries out this channeling of funds should, over time, absorb a larger and larger portion of national resources, and appear to contribute an increasing share of national income. 
Channelling funds is manipulation of information. The `funds' are records kept by the banking system and their channelling is a sequence of transfers between records. The records have long ago moved from paper to computer databases. The power of computers has improved by leaps and bounds. One would have thought that the labour required to manage this system would have declined. The mechanisation of agriculture eliminated the peasantry, but computers have not laid waste to the City of London. Why? 
The key to this paradox is to realise that despite the modern jargon of a financial services `industry' that offers financial `products' to customers, the financial sector is not a productive industry in the normal sense. It's structural position in capitalistic information flows ensures its continued command over resources despite changes in technology that would decimate any other industry. 



Figure 1: Flows into and out of the financial sector.
Consider Figure 1, it shows in summary form the flows of funds into and out of the financial sector. Savings by individual capitalists, by firms, and also from the pension schemes of employees enter the system. Funding flows out to firms carrying out capital investment, and also typically to the state to fund the public debt. However money also flows out as costs: the income of the financial sector itself. This comprises wages of its employees, the bonuses it pays, the distributed dividends of financial companies, and the costs of buildings and equipment that the sector uses. Let us denote savings by S, bonuses and costs by B and funding of investment by F. 
The residual, which we will denote by D is made up by the change in the money balances of the financial sector itself: D = S-B-F. We need to explain why B, the costs/income of the financial sector rise as a share of national income over time. 
It has been argued [10][1,2,3,12,7,11] that the real rate of return on capital tends to decline over the course of capitalist development. If the rate of interest does not fall at a corresponding rate then the level of voluntary fundraising by firms will decline, since a diminishing portion of firms will be making enough profits to cover the rate of interest. However, the level of savings will not necessarilly decline at a corresponding rate. 
The distribution of income in capitalist societies will be highly uneven[9,8,13,14]. A large proportion of income goes to a small part of the population. People with very high incomes tend to save most of it. A decline in the rate of profit on capital will not alter this. It just means that the book value of the assets of those on very high incomes rises. So savings going into the financial system will not decline. The disproportion between share issues and savings tends to make share prices rise this in turn will induce a rise in the costs of the financial sector ? through bonuses etc. 
A feedback mechanism is at play here. The average price of shares rise until the extra bonuses earned by the financial sector absorbs any excess of savings over investment. The argument above takes certain things as given - in particular the separation of the capitalist class into a set of rentiers and a set of firms engaged in direct production. Whilst a realistic portrayal of mature capitalism, it is not an aboriginal condition. In an earlier phase of capitalism, the rich did not save through financial intermediaries, they saved by investing in their own businesses. One has to ask what mechanism caused an initial population of capitalist masters to polarise into these two sub-groups: functioning businessmen and rentiers who invest only indirectly. 
The transition process can be understood as a consequence of the dispersion of profit rates within an initial population of capitalists. Capitalists whose profit rate is above average, find it beneficial to borrow funds to invest in their own business, those whose profit rate is below the interest rate, gain more by depositing their profits with financial institutions than they would by reinvesting. Borrowing raises what is called the 'gearing ratio' of borrowing firms, and lowers that of lenders. Industrial capitals initially earning a low rate of return in industry, come, by lending to aquire negative gearing ratios. In the process they transform themselves from entrepreneurs into rentiers. 
The designation rentier is initially applied to individual people, but it applies equally well to any legal personality in the same situation. Today we have limited companies, which, with respect to their fellows, have begun to function as rentiers: deriving their income primarily from their financial rather than their industrial assets. As the demand for funds within the industrial and commercial sector dries up in the face of high interest rates, lending comes to be directed increasingly towards the funding of the state debt and consumer credit. With a growing portion of capital depending on interest rather than industrial profit, there grows an increased political pressure to maintain high interest rates. This baneful effect of the rentier interest which was already lambasted by Hobson[4] and Keynes[5][6] , for its role in consuming capital and hindering investment, looks set to grow. Early 20th century critics  of the rentier class like Hobson, Keynes Veblen and even Lenin, identified another trait – its predatory charcter. To this trait they attributed the disaster of the Great War, and the deferred disaster that was the Versailles treaty. 
The rentier interest stood ultimately on moral grounds quite alien to those of natural right. Speaking of the absentee ownership of natural resources, Veblen said “The owners own them not by virtue of having produced or earned them, … These owners own them because they own them, .. title is traceable to an act of seizure, legalized by statue or confirmed by long undisturbed possession.”[15]  This trait  is best exemplified in Russian rentiers like Abramovich, whose billions derive from an undisguised  seizure of natural resources within living memory.

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[15]     Veblen, Thorstein, Absentee Ownership, Allen and Unwin, London 1923.

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