Marx, Capital Formation, and Financial Parasitism

The Dismal View of Financial Capitalism

Finance capitalism has become a network of exponentially growing interest-bearing claims wrapped around the production economy. The internal contradiction is that its dynamic leads to debt deflation and asset stripping. The economy is turned into a Ponzi scheme by recycling debt service to make new loans to inflate property prices by enough to justify yet new lending. But a limit is imposed by the shrinking ability of surplus income to cover the debt service falling due. That is what the mathematics of compound interest are all about. Borrowing to make speculative gains from asset-price inflation does not involve tangible investment in the means of production. It is based simply on M–M´ (money to money), not M–C–M´ (money to commodity and go back to money). The debt overhead grows exponentially as banks and other creditors recycle their receipt of debt service into new (and riskier) loans, not productive credit.

Half a century of IMF austerity programs has demonstrated how destructive this usurious policy is, by limiting the economy’s ability to create a surplus. Yet economies throughout the world now base their pension planning, medical insurance, state and local finances on a faith in compound interest, without seeing the inner contradiction that debt deflation shrinks the domestic market and blocks economies from developing.

What is irrational in this policy is the impossibility of achieving compound interest in a “real” economy whose productivity is being eroded by the expanding financial overhead raking off a rising share. Meanwhile, a fiscal sleight-of-hand has taken Social Security and Medicare out of the general budget and treated them as “user fees” rather than entitlements. This makes blue-collar wage earners pay a much higher tax rate than the FIRE (Financial, Insurance, and Real Estate) sector and the upper income brackets. FICA (Federal Insurance Contribution Act tax) paycheck withholding has become a forced “saving in advance,” ostensibly to be invested for future “entitlement” spending but in practice lent to the Treasury to enable it to cut taxes on the higher brackets. Instead of financing Social Security and Medicare out of progressive taxes levied on the highest income brackets — mainly the FIRE sector — the dream of privatizing these entitlement programs is to turn this tax surplus over to financial managers to bid up stock and bond prices, much as pension-fund capitalism did from the 1960s onward.

Classical Progressive Era

A century ago most economic futurists imagined that labor would earn higher wages and spend them on rising living standards. But for the past generation, labor has used its income simply to carry a higher debt burden. Income over and above basic needs has been “capitalized” into debt service on bank loans used to finance debt-leveraged housing, and to pay for education (originally expected to be paid out of the property tax) and other basic needs. Although debtors’ prisons are a thing of the past, a financial characteristic of our time is the “post-industrial” obligation to work a lifetime to pay off such debts. Meanwhile, the FIRE sector now accounts for 40% of U.S. business profit, despite the tax-accounting fictions cited earlier.

Financial lobbyists have led a regressive about-face toward an economic Counter-Enlightenment. Reversing an eight-century tendency to favor debtors, the bankruptcy laws have been rewritten along creditor-oriented lines by banks, credit-card companies and other financial institutions, and put into the hands of politicians in what best may be called a financialized democracy — or as the ancients called it, oligarchy. Shifting the tax burden onto labor while using government revenue and new debt creation to bail out the banking sector has polarized the U.S. economy to the most extreme degree since statistics began to be collected.

The Progressive Era expected planning to pass into the hands of government, not those of a financial sector at odds with industrial capital formation and economic growth. Nearly everyone a century ago expected infrastructure to be developed in the public domain, in the form of public utilities whose services would be provided freely or at least at subsidized rates in order to lower the price of living and doing business. Instead, public enterprises since about 1980 have been privatized — on credit — and turned into tollbooth privileges to extract economic rent. Bankers capitalize these opportunities, which are sold on credit. Little is left for the tax collector after charging off interest, depreciation and amortization, managerial salaries and stock options. The resulting tax squeeze impoverishes economies, obliging governments either to cut back their spending or shift the fiscal burden onto labor and non-financialized industry.

Neoserfdom Parasitism Symptom

The resulting financial dynamic is more like what Marx described as usury-capital than industrial banking. In the spirit of the Saint-Simonians he believed industrial capitalism to direct credit into productive capital formation, he expected that financial planning would pave the way for a socialist reorganization of society. Instead, it is paving the road to neoserfdom. Financial operators are using credit as a weapon to strip corporate assets on behalf of bankers and bondholders. Employees can afford homes and other property (and indeed, entire corporations) only by borrowing the purchase price — on terms that involve a lifetime of debt peonage, and indeed (in most countries) bearing personal liability for negative equity when housing prices plunge below mortgage levels. Government planning has become subordinate to the dictates of unelected central bankers and the International Monetary Fund imposing austerity programs rather than funding capital formation and rising living standards.

Having analyzed finance capital’s tendency to grow exponentially, Marx nonetheless believed that it would be subordinated to the dynamics of industrial capital. With an optimistic Darwinian ring he shared the tendency of his contemporaries to underestimate the ways in which the vested interests would fight back to preserve their privileges even in the face of democratic political reform. He expected industrial capitalism to mobilize finance capital to fund its expansion and indeed its evolution into socialism, plowing profits and financial returns into more capital formation. It was the task of socialism to see more of this surplus spent on raising wages and living standards while improving the working conditions — and spent by government to freely provide an expanding range of basic needs, or at the very least at subsidized prices. Infrastructure spending and rising living standards thus would become the ultimate beneficiaries of capital formation, not landowners, monopolists or predatory finance.

This is not how matters have worked out. More of the economic surplus is being siphoned off as land rent and interest. Yet many of Marx’s followers conflate his analysis of industrial capital with the financial dynamic of “usurer’s capital.” The latter is not part of the industrial economy but grows autonomously by “purely mathematical” means, running ahead of the economy’s ability to produce a surplus large enough to pay the exponentially soaring financial overhead.35 And in contrast to his analysis of industrial capital, Marx explained why the financial overgrowth — recycling savings into new loans rather than investing them productively in tangible capital — cannot be sustained.

The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralization, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but to interfere in actual in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it.

Society therefore faces a choice between (1) saving the economy, by writing down debts to the ability to carry without stripping the economy; and (2) saving the financial sector, trying to preserve the fiction that debts growing at compound interest can be paid. For pensions and other public programs, for example, this means a choice between (1) paying them on a pay-as-you-go basis, out of the “real” economic surplus; and (2) the fictitious assumption that funds can earn annual returns of 8% or more to provide for labor’s retirement by asset-price inflation fueled by debt leveraging and purely financial maneuvering (M–M´).

The Path for Reparation

If economic evolution is to reflect the inner logic and requirements of society’s technological capabilities, then finance capital must be subordinated to serve the economy, not to be permitted to master and stifle it. That is what John Maynard Keynes meant by what he gently called “euthanasia of the rentier.” In practice it means that governments must prevent property rents and other returns to privilege from being capitalized into bank loans.

To save society, its victims must see that asset-price inflation fueled by debt leveraging makes them poorer, not richer, and that financialization is the destroyer and exploiter of industrial capital as well as of labor. The objective of classical political economy was to bring prices in line with socially necessary costs of production. This was to be achieved in large part by taxing away economic rent in order to prevent it from being capitalized into loans to new buyers. Buying rent-extracting opportunities on credit increases prices for basic needs, turning society into a “tollbooth economy.” It also forces governments to compensate by raising taxes on labor and tangible capital.

Many Social Democratic and Labour parties have jumped on the bandwagon of finance capital, not recognizing the need to rescue industrial capitalism from dependence on neofeudal finance capital before the older conflict between labor and industrial capital over wage levels and working conditions can be resumed. That is what happens when one reads only Volume I of Capital, neglecting the discussion of fictitious capital in Volumes II and III and Theories of Surplus Value.