Notes
1 The parasitic absentee owner in the Keynes–Veblen–Proudhon tradition
1 In this section we shall just provide a general outline without entering into a thorough discussion of classical political economy. For more on this issue, see Milios et al. (2002), Postone (2003), Heinrich (1999), and Arthur (2002).
2 Hence, the value of a commodity (as a characteristic or property of the “economic good”) derives from labor and (quantitatively) is proportional to the labor time which has been expended on its production.
As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land. […] Profit, makes a second deduction from the produce of the labour which is employed upon land.
(Smith 1981: I.viii.6 and 7, emphasis added)
4 As Smith has already pointed out, profit as such has nothing to do with the coordination and surveillance functions of production, carried out by the entrepreneur or company executive. Given this, one could also consider capital remuneration as rent, in the same way as land remuneration.
5 At this point, we need to make a necessary remark. We use the term “problematic” according to Althusser’s definition. In brief, “problematic” designates “the particular unity of a theoretical formation and hence the location to be assigned to this specific difference” (Althusser 1969: 32). A problematic is not a particular theoretical argument but a more systemic term: a way of asking questions about the world, introducing new principles and establishing new research methods (see also Althusser and Balibar 1997).
6 Of course, in the case of land, “natural” scarcity in the same context of property relations adds to the outcome of scarcity, but it does not explain its “absolute” component.
7 See for instance Hayek (1931), Schumpeter (1994).
8 See Garegnani (1979), Eatwell (1983).
9 Cited in Chancellor (2000: 97). See also Chapter 4.
10 See Rubin (1989), Chancellor (2000: 98).
11 For a more complete description of these changes and related literature see Milios and Sotiropoulos (2009; Chapter 7).
12 For the notion of “monopoly” according to the analysis of Marx, see Milios and Sotiropoulos (2009; Chapter 6).
13 In 1927, John Moody, founder of the credit ratings agency, declared that “no one can examine the panorama of business and finance in America during the past half-dozen years without realizing that we are living in a new era.” In April of that year Barron’s, the investment weekly, envisaged a “new era without depressions” (Chancellor 2000: 193). It is very funny to consider how this belief about the taming of the business cycle becomes ‘common sense’ before the outbreak of a severe crisis. In quite the same mood, Robert Lucas (a well-known professor at the University of Chicago and Nobel prize winner of 1995), in his presidential address at the annual meeting of the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes” (cited in Krugman 2008: 9).
14 “The excessive build up of inventory was believed to be the most common cause of the economic cycle” (Chancellor 2000: 193).
15 In fact, the unprecedented internationalization of capital flows had made the practice of diversification dominate the organization of the movement of capital worldwide, even before the start of twentieth century (see Obstfeld and Taylor 2004: 57).
16 We shall revisit these issues in the light of our reasoning in Chapters 7 and 8.
17 See Fox (2009: 16–18); for a general presentation of these two different views see Fama (1965).
18 It is well known that (the increase of) capitalist exploitation is always based on the production of both absolute and relative surplus-value. As Marx puts it:
The prolongation of the working-day beyond the point at which the worker would have produced an exact equivalent for the value of his labour-power, and the appropriation of that surplus-labour by capital – this is the process which constitutes the production of absolute surplus-value […] The production of absolute surplus-value turns exclusively on the length of the working-day; the production of relative surplus-value completely revolutionizes the technical processes of labour, and the groupings into which society is divided.
(Marx 1990: 645).
And further: the “methods of producing relative surplus-value are, at the same time, methods of producing absolute surplus value” (Marx 1990: 646). However, the whole historical period of pre-industrial capitalism as well as the first period of the Industrial Revolution is characterized by a social relation of forces that renders production of absolute surplus-value the dominant role in capitalist expanded reproduction. As Marx describes it:
After capital had taken centuries to extend the working day to its normal maximum limit, and then beyond this to the limit of the natural day of 12 hours, there followed, with the birth of large-scale industry in the last third of the 18th century, an avalanche of violent and unmeasured encroachments. Every boundary set by morality and nature, age and sex, day and night, was broken down. Even the ideas of day and night, which in the old statutes were of peasant simplicity, became so confused that an English judge, as late as 1860, needed the penetration of an interpreter to explain “judicially” what was day and what was night. Capital celebrated its orgies. As soon as the working-class, stunned at first by the noise and turmoil of the new system of production, had recovered its senses to some extent, it began to offer resistance, first of all in England, the native land of large-scale industry. For three decades, however, the concessions wrung from industry by the working class remained purely nominal.
(Marx 1990: 389–90)
Capital’s drive towards a boundless and ruthless extension of the working-day is satisfied first in those industries which were first to be revolutionized by water-power, steam, and machinery, in those earliest creations of the modern mode of production, the spinning and weaving of cotton, wool, flax, and silk. The changed material mode of production, and the correspondingly changed social relations of the producers first gave rise to outrages without measure, and then called forth, in opposition to this, social control which legally limits, regulates, and makes uniform the working day and its pauses.
(Marx 1990: 411–412)
For our full argument see Milios and Sotiropoulos (2009; Chapter 7).
19 Marx (1990: 437).
20 For more comments on this issue see Milios and Sotiropoulos (2009; Part II).
21 For instance, almost all the Marxist approaches of the period – and despite their severe debates – explicitly or implicitly shared the viewpoint that Das Kapital was no longer adequate for the description of capitalism. See Milios and Sotiropoulos (2009; Part I and Chapter 11).
22 We are referring here to The Theory of Business Enterprise (see Veblen 1958) and Absentee Ownership (see Veblen 1997).
23 A very interesting theoretical attempt to analyze contemporary capitalism using the logic of Veblen’s approach is to be found in Nitzan and Bichler (2009).
24 In particular, “With the advance into the new era, into what is properly to be called recent times in business and industry, the capitalization of earning-capacity comes to be the standard practice in the conduct of business finance, and calls attention to itself as a dominant fact in the situation that has arisen. The value of any investment is measured by its capitalized earning-capacity, and the endeavors of any businesslike management therefore unavoidably center on net earnings” (Veblen 1997: 60).
It is the ownership of materials and equipments that enables the capitalization to be made; but ownership does not of itself create a net product, and so it does not give rise to earnings, but only to the legal claim by the force of which the earnings go to the owners of the capitalized wealth. Production is a matter of workmanship, whereas earnings are a matter of business.
(Veblen 1997: 61)
26 As we mentioned above, the conceptualization of profit as absolute rent has tended to become dominant in recent heterodox discussions.
27 The very same line of reasoning is reproduced in the famous argument of Chapter 12 of the General Theory (Keynes 1973). We shall return to Keynes’ approach in the following section. See also Sotiropoulos (2011), Milios and Sotiropoulos (2009).
28 For the same conclusion see Dillard (1980) and Wray (1998).
29 In this sense, he imitates the hesitations of Ricardo: admitting that “everything is produced by labor” but not formulating that “profit is part of that expended labor.”
30 For the nature of this debate see Harcourt (1972), Howard (1983).
31 We shall agree with Mattick (1980: 20) that Keynes’ “theoretical revolt” against neoclassical analysis “may better be regarded as a partial return to classical theory […] and this notwithstanding Keynes’ own opposition to classical theory.” This paradoxical conclusion is not baseless. Through this formulation Mattick highlights one of the key aspects of critique. In order to be critical of neoclassical dogma, he had to rethink (among other things) the way that income is distributed between social classes. This point of departure is therefore what links him to classical political economy. Smith’s analysis (and to a lesser extent Ricardo’s) focused attention on issues that have to do with the institutional determination of income distribution. The same issues come to the fore in post-Keynesian readings of Keynes (Garegnani 1979).
32 The radical interpretation of Keynes’ point is given by the following passage:
the attitude toward the rentier is not fully explained until the emphasis on the role of the active entrepreneur has been clearly indicated. Disappearance of the functionless rentier is incidental to the practical program which makes the entrepreneur the initiator of economic activity. Society has no particular stake in the inactive, nonfunctional rentier. On the other hand, anything that dampens the ardor of entrepreneurship is inimical to the welfare of society as a whole. In an economy in which enterprise is carried on largely with borrowed capital, the payment of interest to the rentier-capitalist acts as a brake to progress. A reduction in the cost of transferring purchasing power out of the hands of inactive rentiers into the possession of active entrepreneurs is obviously a stimulus to enterprise.
(Dillard 1942: 68)
33 This is Keynes’ famous illustration:
or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
(Keynes 1973: 156)
34 Some useful remarks on this issue can be found in Jameson (2011: 45–46).
35 For an interesting presentation of Proudhon’s ideas in the light of Keynesian thinking see Dillard (1942).
36 In what follows, we shall refer to the mail exchange between Bastiat and Proudhon, which took place as a mini debate in 1849–1850 (see Proudhon 1849–1850). Our references will mention the number of the letter and the paragraph.
Is it possible, yes or no, to abolish Interest on Money, Rent of Land and Houses, the Product of Capital, by simplifying Taxation, on the one hand, and, on the other, by organizing a Bank of Circulation and Credit in the name and on the account of the people? This, in my opinion, is the way in which the question before us should be stated.
(letter 7.§9)
See also Chapter 5.
But the Capitalist lender not only is not deprived, since he recovers his Capital intact, but he receives more than his Capital, more than he contributes to the exchange; he receives in addition to his Capital an Interest which represents no positive product on his part. Now, a service which costs no Labor to him who renders it is a service which may become gratuitous: this you have already told us yourself.
(letter 5.§30)
Here, however, Capital never ceases to belong to him who lends it and who may demand the restoration whenever he chooses. So that the Capitalist does not exchange Capital for Capital, Product for Product: he gives up nothing, keeps all, does no work, and lives upon his rents, his Interest, and his Usury in greater luxury than one thousand, ten thousand, or even a hundred thousand laborers combined can enjoy by their production.
(letter 11.§56).
39 For this connection see Dillard (1942: 69–70).
In 1792, Great Britain held a subordinate position in the financial system of Europe, the London money-market had yet to come into its own, and the movement of capital was still into and out of England. In 1815, though the fact was scarcely appreciated at the time, the situation had radically changed. Amsterdam had fallen; and London had not only taken its place as the predominant financial market of Europe, but was able to play the part in a way that dwarfed the earlier efforts of the Dutch city.
(Acworth 1925: 81–82)
41 This line of reasoning has no relation to Marx’s argumentation. See Chapter 3 and also Milios and Sotiropoulos (2009; Chapter 9). The attempt is quite obvious in the contemporary analyses of workerism, to subordinate Marx’s thought to that of Keynes and Veblen (for instance see Vercellone 2010, Fumagalli 2010, Marazzi 2010, Negri 2010).
42 See Hobsbawm (1999), Economakis and Sotiropoulos (2010).
43 We base our exposition in Rajan (2010) and Jensen (2001). The message of the mainstream approach to finance is central in all the relevant textbooks: see Brealey et al. (2011).
44 We shall return to the discussion on EMH in the Chapters 7 and 8.
45 For instance, see Lapatsioras et al. (2008).
2 Ricardian Marxism and finance as unproductive activity
The value of commodities is the very opposite of the coarse materiality of their substance, not an atom of matter enters into its composition. Turn and examine a single commodity, by itself, as we will, yet in so far as it remains an object of value, it seems impossible to grasp it. […] Value can only manifest itself in the social relation of commodity to commodity.
(Marx 1990: 138–39, emphasis added)
2 “Equal value” implies value measured independently in terms of quantity of “labor expended” for the production of such commodities.
3 “It has become apparent in the course of our presentation that value, which appeared as an abstraction, is only possible as such an abstraction, as soon as money is posited” (Marx 1993: 776).
4 [A]s the dominant subject of this process […] value requires above all an independent form by means of which its identity with itself may be asserted. Only in the shape of money does it possess this form. Money therefore forms the starting-point and the conclusion of every valorisation process.
(Marx 1990: 255)
Within the value relation and the expression of value immanent in it, the abstractedly general [i.e., value] does not constitute a property of the concrete, sensorily actual [i.e., of the monetary form] but on the contrary the sensorily actual is a simple form of appearance or specific form of realisation of the abstractedly general (…) Only the sensorily concrete is valid as a form of appearance of the abstractedly general.
(MEGA II, 5: 634, emphasis added)
6 It is worth mentioning here that Marx named his theoretical system “critique of political economy” (which is actually the title or subtitle of all his economic writings of the period 1857–1867) to underline his radical deviation from classical political economy and value theory.
7 From our point of view core interventions for this kind of Marxism are the ones by Althusser and his students.
8 We shall just offer two brief examples:
Value as a specific form of appearance of labor in the commodity-producing society. (Value as historic, temporary appearance). During our above exposition we arrived at a puzzling, from first sight, conclusion: The value of a commodity is determined by labor, although it does not express itself in quantities of labor (measured in labor-time).
(Duncker et al. 1930: 16)
and:
Value is a reflection of the social relationships of the producer with the commodity-producing society. […] The exchange value of a commodity is only revealed in exchange, however. It does not emerge from it. […] Like each commodity separately, so the whole world of commodities has two poles: at the one pole is use-value, i.e., different commodities, at the other is values, i.e., money.
(Pouliopoulos 2004: 11)
9 The question arises of what may be the possible causes of Marx’s ambivalences towards classical political economy. Answering in a general way, one may say that the issue simply reflects the contradictions of Marx’s break with Ricardian theory, contradictions that are immanent in every theoretical rupture of the kind. See also Althusser (1976).
10 Heinrich (1999) and Garnett (1995) are excellent examples of a contrasting, undogmatic stance, irrespective of the fact that they identify various types of ambiguity in Capital.
11 See Milios and Sotiropoulos (2009; Chapters 6 and 11), Milios and Sotiropoulos (2011).
12 Hilferding’s argumentation heavily influenced the formation of the so-called classical approaches to imperialism (Luxemburg, Bukharin, Lenin …). With few exceptions, basically the vacillations of Lenin’s writings and aspects of Bukharin’s intervention, the latter shared a common belief: capitalism has undergone radical and structural transformations, with the result that Marx’s analysis is no longer sufficient for a comprehensive description of it. In other words, the “latest phase of capitalist development” (whose scientific understanding Hilferding was attempting to arrive at) was explicitly or implicitly considered as obviously divergent from the capitalism described in Das Kapital. Nevertheless, this theoretical project has one fundamental premise: the abandonment of the theoretical category of social capital (“Gesamtkapital” in the German text), which plays a crucial role in the analysis of Marx. See also Milios and Sotiropoulos (2009; Chapters 1 and 3).
13 Embodied in the structural framework of social capital, the individual “capitalist is simply personified capital, functioning in the production process merely as the bearer of capital” (Marx 1991: 958). In this regard, the capitalist is not the subject of initiative and change but is subjected to the laws of evolution and change of social capital, imposed as incentives on their consciousness through competition (Marx 1990: 433).
14 The resulting decline in the average profit rate due to the “enormous inflation of fixed capital” (Hilferding 1981: 186) can only be overcome by the formation of capitalist monopolies. At the same time, “combination smoothes out the fluctuations of the business cycle and so assures a more stable rate of profit for the integrated firm” (ibid.: 196). The elimination of competition also serves the interests of banks: big enterprises can achieve maximum profits without endangering the borrowed capital that they have raised from the bank (ibid.: 191).
15 We do not have the space here to go through the details of this argument. For more see Milios and Sotiropoulos (2009). The notion of individual capital in Hilferding’s analysis resembles more the Weberian conception of a profit-making organization (“Verband”; see Weber 1978: 48–62, 90–100).
16 We can interpret the vacillation in Hilferding’s writings as follows. He adhered to the (classical) labor theory of value while at the same time he followed closely Marx’s text, which, despite its contradictions, parts profoundly with the Ricardian reasoning. In this regard, Hilferding, without realizing it, reproduced in his writings different discourses about finance: a dominant one based on the Ricardian context and a subordinate one which is closer to Marx’s problematic.
17 See Hoffman et al. (2007: 60–63).
18 For Morgan and Company, protection consisted in repeatedly defending foreign investors in the boisterous American market. For the Rothschilds it involved rescuing the Bank of England and persuading weak states like Spain and Brazil to resume their debt payments after a crisis. A reputation of this sort could, of course, generate extraordinary expectations: in a crisis, investors might expect a fabled intermediary to step in and solve the problem. And such expectations are still with us. When the investment bank Salomon Brothers was jolted in 1991 by a bidding scandal in the market for government debt, Warren E. Buffett took over as interim CEO to salvage the firm’s reputation—a sign that such matters are still important, particularly after a crisis (Hoffman et al. 2007: 62).
19 This is Fine’s own sketching (ibid.: 112) which obviously coincides with the general spirit of the institutionalist line of reasoning. It is institutionalist in the sense that, given the fundamental asymmetry in their nature, the unity of different fractions of capital into a single power against labor can be secured only under the hegemony of one of them. We shall return to this issue in the Chapter 3.
3 Is finance productive or “parasitic?”
1 As we discussed in Chapter 2, this line of thought is already clear in Hilferding. For instance, following Shaikh and Tonak (1994), Mohun (2006: 350) argues as follows:
activities purely involving the sale of the output and the purchase of inputs (commercial activities), or the mobilizing of sums of money and credit to finance production (financial activities) are not part of production. For all that these activities employ large numbers of people in wage labour relationships, they are concerned with alterations of the form in which produced value exists, or with organizing precommitments and claims on future produced value. Because they circulate value rather than create it, they are unproductive.
2 The enterprise (i.e., the individual capital according to Marx’s terminology), and not the isolated worker, is the actual producer. It is impossible to distinguish between “productive” and “non productive” workers within the enterprise. As Marx puts it (1990: 1039–1040):
With the development of the real subsumption of labour under capital or the specifically capitalist mode of production, the real lever of the overall labour process is increasingly not the individual worker. Instead, labour power socially combined and the various competing labour powers which together form the entire production machine participate in very different ways in the immediate process of making commodities, or, more accurately in this context, creating the product.
3 For a general discussion of the financial intermediation see Goodhart (1989), Hoffman et al. (2007), Steinherr (2000), Borio (2007).
4 For a thorough discussion of Marx’s “epistemological break” see Althusser (1976).
5 For instance, we can indicatively mention here the following interventions: Minsky (1993), Palloix (1977), O’Hara (2006), van der Pijl (1998), Duménil and Levy (2011), LiPuma and Lee (2004), Davisdon (2002). The following statement by Callinicos (2010: 30) is characteristic: “Marx distinguishes between three kinds of capital – productive, commercial and money-dealing capital. […] Commercial and money-dealing capitalists are able to secure a share of the surplus-value generated in production thanks to the economic functions they perform.”
6 We do not find a single argument in the literature. What we see is a spectrum of converging approaches, which, by and large, share the same analytical line. In this section, we attempt to present the “average” outline of them by tracing their shared problematic.
7 For a first discussion of the issue of Marx’s expositions and the difficulties it poses see Althusser (2006).
8 For a nice review of this perspective see Streeck (2009).
9 For a systematic elaboration of these issues see Milios and Sotiropoulos (2009) and Chapter 2.
10 As we mentioned in Chapter 2, the origin of this historicist or institutionalist approach in Marxist discussions can be traced to Hilferding’s intervention.
11 This is indeed a core idea in the modern financial theory upon which the valuation models of derivatives are based (see Steinherr 2000: 18). We shall return to this issue in Part III.
12 See Part III, also Borio (2007), Steinherr (2000).
The value of commodities stands in inverse ratio to the productivity of labour. So, too, does the value of labour-power, since it depends on the values of commodities. Relative surplus-value, however, is directly proportional to the productivity of labour. It rises and falls together with productivity. The value of money being assumed to be constant, an average social working day of 12 hours always produces the same new value, 6s., no matter how this sum may be apportioned between surplus-value and wages. But if, in consequence of increased productivity, there is a fall in the value of the means of subsistence, and the daily value of labour-power is thereby reduced from 5s. to 3, the surplus-value will increase from 1s. to 3. […] Capital therefore has an immanent drive, and a constant tendency, towards increasing the productivity of labour, in order to cheapen commodities and, by cheapening commodities, to cheapen the worker himself.
(Marx 1990: 436–437)
14 We shall return to these issues in Part III of the book.
15 For instance see, Borio (2007), Atkinson et al. (2011), Milanovic (2011), Stockhammer (2012), Onaran, Stockhammer and Grafl (2011).
16 We shall review heterodox approaches to financialization in Chapter 7.
17 It is, indeed, very difficult to imagine a different causality for a long period of time: if households face a continuous squeeze in incomes, the last thing they will do is to take more debt.
The form of interest-bearing capital makes every definite and regular money revenue appear as the interest on a capital, whether it actually derives from a capital or not. […] Let us take the national debt and wages as examples. […] Moving from the capital of the national debt, where a negative quantity appears as capital – interest-bearing capital always being the mother of every insane form, so that debts, for example, can appear as commodities to the mind of the banker – we shall now consider labour-power. Here wages are conceived as interest, and hence labour-power as capital that yields this interest. […] Here the absurdity of the capitalist’s way of conceiving things reaches its climax, in so far as instead of deriving the valorization of capital from the exploitation of labour-power, they explain the productivity of labour power by declaring that labour-power itself is this mystical thing, interest-bearing capital.
(Marx 1991: 595–596)
4 Derivatives as money?
1 On these issues see Bryan and Rafferty (2006: 198–199).
2 See for instance Mill (1976; IV.I.§5).
3 We would like to thank Richard Van den Berg for highlighting this point for us and making the translation from the French original text.
4 For a comprehensive discussion of the origins and the contemporary models of this theoretical idea see Goodhart (1989, 1998). For the same issue see Chapter 9.
5 See also Goodhart (1998), Itoh and Lapavitsas (1999: 233).
6 For a discussion on the origins of the Keynesian account for money see Wray (2004) and Lavoie (2011).
7 For a similar viewpoint see Bryan and Rafferty (2009).
8 See Markham (2002a: 265–266). “The first documented appearance of what are now called puts and calls occurred on the Amsterdam bourse during the tulip mania of the 1630s” (Allen 2001: 44–45).
9 Undoubtedly there are many possible explanations, but these issues fall beyond the scope of this chapter.
10 See Markham (2002a: 267–269), Markham (2002b: 93–94), Allen (2001: 40–55), Steinherr (2000).
11 For instance see Weber (2000). At the same time, in a paper published in 1880, Engels wrote:
the German Empire is just as completely under the yoke of the Stock Exchange as was the French Empire in its day. It is the stockbrokers who prepare the projects which the Government has to carry out – for the profit of their pockets.
(Engels 1989: 280)
We see that in this intervention, Engel reflects the problematic of Ricardian Marxism (see Chapter 2).
12 To what extent Hilferding was actually inspired by Cohn’s perspective remains an open question to be addressed in future research. It is clear that Hilferding did not quote Cohn directly but only indirectly from the “Börsen-Enquete-Kommission” reports (the commission which was established in 1892 and focused on the commodity exchanges; with speculation being one of the main issues). In the chapter dealing with futures, Hilferding refers many times to these reports. The link between the approach to speculation in these reports and Hilferding’s line of reasoning is another open question for future research.
13 For an analytical account of Hilferding’s argumentation see Sotiropoulos (2012a, 2015).
14 See Sotiropoulos (2012a).
15 See Markham (2002b), Obstfeld and Taylor (2004).
16 In brief, Fisher puts forward the “first formal equilibrium model of an economy with both intertemporal exchange and production” (Rubinstein 2006: 55); and a rough version of the random walk hypothesis (Fox 2009: 13). His 1930 book, The Theory of Interest: As Determined by Impatience to Spend Income and Opportunity to Invest It, actually refines and restates his earlier theoretical outcomes.
17 We have to mention that the same idea about speculation was also applied by Hilferding to the analysis of the stock exchange (see Hilferding 1981: 134).
18 Once more, he repeats: “by reducing the circulation time for productive capitalists, and assuming the risks, speculators can have an effect upon production itself” (Hilferding 1981: 161). In this way, the “most important function” of futures markets is “the possibility of insuring oneself by unloading the losses due to price fluctuations upon the speculators” (ibid.: 159).
19 The analysis of this chapter is focused on this particular part of Finance Capital. In other parts of the book, Hilferding revisits the issue of speculation offering additional grounding for the same line of thought. For instance, in Chapter 20, he argues that the “mass psychoses which speculation generated at the beginning of the capitalist era […] came to an end in the crash of 1873. Since then, faith in the magical power of credit and the stock exchange has disappeared” (Hilferding 1981: 294). In this respect, losses from crises make the public wiser and as a result speculation becomes less destabilizing, at least in the period after the crisis of 1873. We see that the reasons offered to downplay the destabilizing role of speculation are much wider than those mentioned in the section of the book devoted to futures. It is obvious that this type of reasoning is unable to explain past and recent developments in capitalism.
20 From this point of view, he seems to agree with the reasoning of Weber and Cohn concerning the issue of speculation and how it is interlinked with the logic of capitalism (see Weber 2000: 309–310; Lestition 2000: 299).
21 See Chapter 2, Milios and Sotiropoulos (2009; Chapter 6).
22 The idea of finance capital is indeed a notion of banks controlling the capital titles, which exist as financial securities. In general this is a “portfolio management” type of reasoning, whatever the criteria of this management (and it is clear that for Hilferding, institutional criteria other than profit maximization may also be taken into account). In this section we suggest a reconsideration of Hilferding’s viewpoint, which must also be read in the context of a broader understanding of Finance Capital.
23 For a detailed account of Hilferding’s argumentation and its shortcomings see Sotiropoulos (2012a, 2015).
24 Bryan and Rafferty have recently put forward an influential argument about the same point. Their assumption is that derivatives serve as a new form of global money, playing “a role that is parallel to that played by gold in the nineteenth century”: the role of “anchor to the financial system” (Bryan and Rafferty 2006: 133). Another approach that meets (to some extent) with the argumentation of Hilferding is the one offered by Rotman (1987). We shall comment on both in this chapter.
25 According to Hilferding, there were other important causes of the establishment of monopoly capitalism. Nevertheless, the existence of monopolistic combines obviated the need for risk management (see Section 2 above). For a general presentation of Hilferding’s point with regard to the monopoly capitalism and a critique of it, see Milios and Sotiropoulos (2009, Chapter 9).
26 The workings of the futures and forward markets that will be analyzed in the section can be found in any relevant textbook. For instance, see Hull (2011).
27 See Durbin (2010: 86).
28 We shall not go through the preconditions of this type of valuation. In brief, the basic idea is that markets must be efficient in the sense that the no-arbitrage principle applies.
29 For the issue of abstract risk see LiPuma and Lee (2004), Sotiropoulos et al. (2012), Sotiropoulos and Lapatsioras (2012, 2014). For an interesting perspective on derivatives see also Bryan, Martin, and Rafferty (2009), and Martin (2007).
30 We shall follow here Marx’s point as it is developed in the first part of the first volume of Capital. See also Balibar (1995: 58–59) and Milios and Sotiropoulos (2009; Chapter 5).
31 The overall message of this essay exceeds the scope of this chapter. We shall focus on the part of Rotman’s argument only in so far as it relates to our discussion on derivatives and money.
Though it dispenses with the apparatus of signature, personal witness, and attachment to an original owner, paper money retains its domestic, national indexicality; it relies as a sign on its use within the borders and physical reality of the sovereign state whose central bank is the author of the promise it carries. In contrast, xenomoney is without history, ownerless, and without traceable national origin. If paper money insists on anonymity with respect to individual bearers but is edictally bound on the level of sovereignty, xenomoney anonymises itself with respect to individuals and nation states.
(Rotman 1987: 90)
33 For an interesting discussion of the historical trends of this market see He and McCauley (2012). In what follows we shall draw heavily upon the information they provide.
34 In this line see also Sotiropoulos and Lapatsioras (2012, 2014).
35 See also Balibar (1995: 59).
5 Finance, discipline, and social behavior: tracing the terms of a problem that was never properly stated
1 See Chapter 1 and Hayek (1979).
2 For a nice summary of his argumentation see Schapiro (1945: 719–723).
Central banks were generally set up initially in the eighteenth and nineteenth centuries to provide finance on beneficial, subsidized terms to the government of the day, and were often awarded in return with certain monopoly rights in note issuing. This combination led, all too easily, to circumstances in which the Central Bank’s note would be made, at moments of crisis, inconvertible legal tender, in order to provide, in effect, the receipts from inflationary tax to the authorities. Distrust with paper currency sprang primarily from such occasions: e.g., John Law’s Banque General in France in 1716, the suspension of convertibility in the United Kingdom of the Bank of England, 1797–1819, and the issue of assignats by the Caisse d’ Escompte in 1790.
(Goodhart 1991: 20)
4 For a systematic account see White (1999).
It is not to be denied that, with the existing sort of division of responsibility between the issues of the basic money and those of a parasitic circulation based on it, central banks must, to prevent matters from getting completely out of hand, try deliberately to forestall developments they can only influence but not directly control. But the central banking system, which only 50 years ago was regarded as the crowning achievement of financial wisdom, has largely discredited itself.
(Hayek 1978: 100)
6 This was indeed the dominant perspective, but not by any means the only one. Discussions within Marxist revolutionary circles in the period were rich in scope and content. The key issue was not the replication of the efficiency of capitalism, but the overcoming of the nature of capitalist political and economic domination. For this line of reasoning, the key problem with socialism is not the role of the central planning bureau but the structure of “soviets” as forms of workers’ democratic control over the power and violence of capital, and of course the revolutionary destruction of the state. These issues remain beyond the aims of this chapter.
7 Clearly Rubin and his value form analysis was one of those (see Chapter 2; Milios et al. 2002).
8 We shall follow Postone’s argument (see Postone 2003; ch. 2). Here, we refer to Hilferding’s dispute with Böhm-Bawerk on the labor theory of value (see Hilferding 1949).
9 For a clear summary of Mises’ argument see Lavoie (1985).
10 See Milios and Sotiropoulos (2009; Chapter 10).
11 In this sense, Lange simply repeated Taylor’s earlier point (see Lange 1936: 56, 66; Lavoie 1985: 118–119). In 1929, Taylor offered a planning model in which the socialist central bureau could achieve a practical equilibrating solution using a trial and error method (thus resembling the Walrasian auctioning process).
12 See Lange (1936: 60–71), Lavoie (1985), Block et al. (2002: 53–54).
13 These are versions of socialism that lie in between socialism and the free-market system (Hayek 1945: 521).
14 In what follows we shall base our analysis on the following papers: Hayek (1935a; 1935b; 1945; 1948a; 1948b; 1978).
15 For these issues see also Kirzner (1992; Chapters 6 and 8).
16 See Hayek (1948a, 1978). See also Kirzner (1992; Chapter 8), Lavoie (1985).
17 See Polanyi (2001), Milios and Sotiropoulos (2009).
18 See Moggridge (1992: 573), Keynes (1982: 233). The same paper was also published by the journal The New Statesman immediately after the World Economic Conference of 1933.
19 In this regard see Crotty (1983).
20 See Helleiner (1994: 33–38), Bryan and Rafferty (2006: 111–113).
21 See Keynes (1973: Chapter 24).
22 For instance, Hayek and Mises (see Hayek 1935b and Mises 1935) attacked the ideas of Otto Bauer, who argued that the anarchy of capitalist production was responsible for the economic recessions and demanded planning of production and finance.
23 For an introduction to Lacan’s conceptual system see Žižek (2006), Sean (2005).
6 Episodes in finance
1 In describing the historical details for this episode we draw heavily upon Hoffman et al. (2007: 149–151), Rajan (2010: 120).
2 This line of reasoning is very close to Foucault’s formulations (1977: 23–4).
3 Over-the-counter (OTC) or off-exchange trading involves non-standardized products which are negotiated bilaterally between two different parties. This type of transaction gives investors the opportunity to tailor-make contracts close to their risk appetites but with low liquidity and a higher credit risk.
4 We follow here the argument of Borio et al. (2012: 10) and Dooley (2009).
5 These definitional issues with regard to options can be found in any elementary textbook; for instance see Hull (2011; Chapter 9).
6 One example of such disqualifiers is a bad credit rating, that is to say delays of more than ninety days in paying instalments. Other examples include having an income insufficient to justify the taking out of a loan of such high value, or being employed in a job which does not guarantee a regular flow of payments, or lacking suitable documents that could justify the size of the loan in relation to the client’s declared income, etc.
7 A more complete and elaborated version of the argument of this section can be found in Sotiropoulos (2012b).
8 See Buiter et al. (1998), Eichengreen (2007), Volz (2006).
9 See Garber (1998), Volz (2006).
10 We have implicitly assumed that exchange rate risk premiums are zero. For the argument see Svensson (1992), Volz (2006), Buiter et al. (1998).
11 The logarithms can be explained by the fact that continuous interest rate compounding has been implicitly assumed.
12 When Se > S, one unit of the foreign currency is expected to correspond to more units of domestic currency in the future. This is practically a depreciation of domestic currency.
13 See Bryan and Rafferty (2006; Chapter 5), Obstfeld et al. (2008).
14 For the development of this point see Buiter et al. (1998: 69).
15 For a general account of contemporary foreign exchange investment strategies including carry trade see Gyntelberg and Schrimpf (2011).
16 See Buiter et al. (1998: 25).
17 See for this example Easley et al. (2012: 7–8), Buiter et al. (1998: 57–58).
18 See Easley (2012: 8).
7 Fictitious capital and finance: an introduction to Marx’s analysis (in the third volume of Capital)
1 Special Report on Financial Risk, The Economist, 13 February, 2010, p. 3.
2 To set up this figure we have been inspired by the analysis of Nitzan and Bichler (2009: 171).
3 See our analysis in Chapter 1. For this reading of Keynes see Wray (1998), Minsky (1975).
4 For a very interesting account of approaches that share this viewpoint see Streeck (2009). In this category someone might include many other authors than those mentioned before in this book: for instance Jameson (1997), LiPuma and Lee (2004), Duménil and Lévy (2011), Toporowski (2009).
5 For a general presentation of the underconsumptionist argument and related debates see Milios and Sotiropoulos (2009: Chapter 1).
6 Husson (2012: 16) suggests that we should “go beyond the ‘purely financial’ explanation of the crisis.” Wages decline, the rate of profit increases, profitable investment opportunities are scarce and therefore “finance is not a parasite on a healthy body but a means of ‘filling the gap’ in the reproduction of neoliberal capitalism” (ibid.: 25). For Resnick and Wolff (2010: 176–177), “starting from the late 1970s and continuing thereafter,” real wages of industrial workers stopped following the rise in productivity. This generated a great amount of surplus value in the hands of capitalists while the rapid growth in financial enterprises “enabled capitalists with rising surpluses to lend a good proportion of them to workers” (ibid.: 181). In this sense capitalists had, “although without acknowledging the fact, substituted rising loans to their workers in place of the rising real wages their workers had enjoyed for the previous century” (ibid.: 182). In exactly the same way, Mohun (2012: 23) sees the 2008 crisis as a market-based one in which: “too much surplus value is produced relative to demand, and, since wages are too low because of rising inequality, surplus value is channelled into speculation rather than investment.”
7 The key idea of this group is captured by Foster and Magdoff (2009: 108): “financialization is merely a way of compensating for the underlying disease affecting capital accumulation itself.”
8 We must also notice the puzzling issue that each author usually comes up with his/her own calculations which do not agree with the others.
9 A very interesting approach of modern financialized capitalism and its recent crisis can be found in Albo, Gindin and Panitch (2010). The authors put emphasis on the leading role of the USA in the global capitalist economy and they analyze contemporary capitalism in a different analytical way from our argument. Yet, many of their conclusions are really close to ours.
10 In fact, we assume that: Et[Rt+1] = R. In other words, at every moment the expectation of next period’s return is constant. This is a rather “brave” and unrealistic assumption which is only useful for our exposition.
11 This general pricing formula is based on the assumption that stock price is not expected to grow forever at rate R of faster (see Campbell et al. 2007: 255–256).
12 In a more philosophical formulation: “Substance has no existence apart from the attributes in which it is expressed and therefore cannot be said to pre-exist its own expression, through which alone, on the contrary, it can come into existence” (Montag 1989: 94). This Marxian type of “structural causality” was first articulated by Althusser (1997: 187–190).
13 On this issue see LeRoy (1989), Shiller (2000), Campbell et al. (2007), Bryan and Rafferty (2006).
14 We follow the analysis of Campbell et al. (2007: 30–31), LeRoy (1989), and Samuelson (1965). We must note that there is a difference between the random walk model and the martingale one, which is a less restrictive version of the former. For reasons of simplicity, in this text we shall ignore this distinction. We shall continue referring to the random walk but in principle we shall analyze the martingale model, which from Samuelson’s famous paper of 1965 has replaced the restrictive random walk model in mainstream discussions (see Samuelson 1965).
Unlike the random walk, the martingale model does constitute a bona fide economic model of asset prices, in the sense that it can be linked with primitive assumptions on preferences and returns which, although restrictive, are not so restrictive as to trivialize the claim to economic justification. […] The word martingale refers in French to a betting system designed to make a sure franc. Ironically, this meaning is close to that for which the English language appropriated the French word arbitrage. The French word martingale refers to Martigues, a city in Provence. Inhabitants of Martigues were reputed to favour a betting strategy consisting of doubling the stakes after each loss so as to assure a favourable outcome with arbitrary high probability.
(LeRoy 1989: 1589, 1588)
15 For an elementary discussion on all these issues see Malkiel (2011).
16 For all these issues see Chapter 1.
17 In what follows we draw heavily upon Althusser (1997: 34–40).
18 The theory of the ideological state apparatuses stresses also the fact that the economy does not constitute the genetic code for all ideological forms (such as, e.g., German, US or Greek nationalism, racism, sexism), but an element, which is combined with the political and the ideological element in the complex structured whole of the capitalist mode of production.
19 “Sensible supersensible thing” (Marx 1990: 163); Balibar (1995: 64).
20 For the same line of reasoning see Milios and Sotiropoulos (2009: Chapter 9), Sotiropoulos (2011).
21 For an interesting reading of Veblen in this light see Nitzan and Bichler (2009).
22 This point was properly grasped by Hilferding (1981: 149): “On the stock exchange capitalist property appears in its pure form, as a title to the yield, and the relation of exploitation, the appropriation of surplus labour, upon which it rests, becomes conceptually lost.”
23 For a thorough discussion on Marx’s concept of fetishism and the different interpretations see Althusser (2006); Balibar (1995); Milios et al. (2002: Chapter 4).
24 Marx extended his reasoning to other aspects of capitalization as well, e.g., the financing of both state expenditure and private consumer expenditure, reminding us that capitalization does indeed tend to encompass every aspect of daily life (Marx 1991: 597–599). In this regard, he pointed out that the potential for securitization is inherent in the circulation of capital as such and could be generalized as a process applying to every possible movement of revenue (financialization of daily life, as Martin (2002) has called it; see also Martin 2007 and Bryan et al. 2009).
25 We borrow some of Marx’s expression from the first volume of Capital (Marx 1990: Chapter 1, §4).
26 These formulations belong to Balibar (1995: 66–67).
27 In this section we draw upon Milios and Sotiropoulos (2009: 179–183).
28 We understand the latter in the light of the analysis of Milios and Sotiropoulos (2009: Chapter 10).
29 See also Chapter 2, Milios and Sotiropoulos (2009: Chapters 6, 10 and 11).
8 Financialization as a technology of power: incorporating risk into the Marxian framework
1 We have to stress here that prices as signals can be mostly “wrong,” but it is the pricing criteria that really matters, that is to say, the context (representation) upon which any “information” is judged.
2 In the light of our reasoning it can be argued that there is some sense of homogeneity due to the fact that the subjective estimations are based on the interpretation offered by capitalist ideology. Nevertheless, this fact does not seccure the singularity of the different perspectives.
3 We do not intend to embark upon a discussion of the rather naive theoretical premises of CAPM. We shall just mention that in spite of its appeal to investors, this model has been largely discarded in mainstream academic discussions due to poor econometric evidence. One might suggest that in the framework of CAPM the term “beta” carries out a quantified estimation of every asset’s riskiness. In this sense, different groups of risks (that are linked to a particular asset) can be measured against each other. So, all securities with a given “beta” could be seen as perfect substitutes from the viewpoint of risk. As we mentioned above, this is not a real development in the workings of finance, but a simplifying assumption of the model itself, which is accompanied by poor empirical results. Even given this naiveté of homogeneous expectations, CAPM does not hold for every concrete risk involved but only for the resulting total risk that drives the asset returns. But even if someone suggested that “beta” is a good measure for every single risk embodied in a security, this would not be enough to commensurate them because “beta” is a calculation which is not necessarily accepted by everyone, while the monetary value of derivatives is an “objective” measure faced by every market participant in daily market transactions.
4 We understand the problematic of empiricism in the light of Althusser’s analysis (see Althusser 1997: 34–46).
5 For these issues, see our analysis of the role of ideology in the previous chapter. See also Althusser (1990: 27–29), Althusser (2006), Balibar (1995).
6 Here we build upon the argumentation of Ewald (1991).
7 For a very nice, but not so easy introduction to Foucault’s line of thought, see Deleuze (1986).
8 This issue was properly analyzed by Althusser (1997); see also Milios and Sotiropoulos (2009).
9 It “does not simply do away with the disciplinary technique, because it exists at a different level, on a different scale, and because it has a different bearing area, and makes use of very different instruments” (Foucault 2003: 242).
10 Our viewpoint about the role of the state can be found in Milios and Sotiropoulos (2009: Chapters 4, 5, 7, and 10). See also Althusser (2006).
11 In all these examples we are necessarily schematic.
12 On these issues see Althusser (2006: 126–139), Milios and Sotiropoulos (2009: Chapter 5).
13 See Martin (2002: 105) and Ewald (2002).
14 The picture of finance is much more complex. Nevertheless, we think that this example captures its essential structure. Its details have been taken from the analysis of Mehrling (2010).
15 Since they have different overall risks, this implies that they are linked to different income streams (in magnitude and maturity). None of these technical details will concern us in the context of this example.
16 Nevertheless, we shall agree with Fabozzi and Markowitz (2002: 28) that: “prior to the development of portfolio theory, while investors often talked about diversification in these general terms,” they did not possess sophisticated analytical tools by which to guide their investing practices.
17 For reasons of simplicity we do not take into consideration transaction costs: derivatives have lower transactions costs than the underlying bundle of assets (see Steinherr 2000: 18).
18 Black and Scholes (1973: 649–650), see also Miller (2000: 13). The no-free-lunch principle means that the replicating portfolio pays off the same amount as the derivative. The seeking of arbitrage profits will eliminate any possible divergence between them.
19 In the relevant literature it is striking how rare are the analyses that attempt to touch upon the issue of the commensurability of different concrete risks (Rescher 1983 and LiPuma and Lee 2004 are worthy of mention as remarkable exceptions).
20 We agree with Bryan et al. (2009: 460) that the “ramifications of financialization are extensive” and thus can only be addressed in general terms in the analysis of a chapter. At the same time, all these financial developments are “trends rather than universal re-definitions” (ibid.). First, “these trends are not all necessarily new, but they are accelerated and take on new meaning in the context of ‘financialization’” (ibid.). Second, “they are not empirically uniform in their individual or spatial impacts” (ibid.).
21 For our point about value-form analysis see Chapter 2.
22 As we mentioned above in the text, LiPuma and Lee (2004) draw attention to this line of thought. Their analysis motivates ours but also differs in many ways, which will become clear in the rest of this section.
23 While the influential intervention of Bryan and Rafferty (2006) is important for the understanding of contemporary capitalism and the organization of financial markets, the argumentation of this chapter differentiates itself in a crucial way: derivatives should not be conceived as the new global money.
24 Indeed, this is quite similar to the following remark of Marx: the necessity “to express individual labour as general labour is equivalent to the necessity of expressing a commodity as money” (Marx 1974: 133).
25 The more or less accurate pricing of a derivative always comes after its ability to bear a price. Every derivative issued has a price, even those that belong to the over-the-counter (OTC) market and conform to a particular portfolio’s needs: this is enough to place them in the dimension of abstract risk. Their initial pricing has been based on a systemic assessment of the concrete risks involved. These titles are not always marked-to-market, that is, they are not always openly traded. But even in this case, the internal portfolio testing made by firms themselves always reckons the possible gains or losses. In any case, these discussions belong to a different level of abstraction.
26 For a critical assessement of the approach of these authors see Sotiropoulos and Lapatsioras (2012, 2014).
9 Towards a political economy of monetary unions: revisiting the crisis of the Euro area
1 We take the distinction between “good” and “bad” imbalances from Eichengreen (2010).
2 For an analytical account of the econometric evidence with regard to intra-European current account imbalances see Stockhammer and Sotiropoulos (2012).
3 Mainstream econometric research offers evidence which supports one of the three following arguments: (1) mere differentiations from Blanchard and Giavazzi’s neoclassical point, (2) Eichengreen’s counter argument, and (3) approaches which highlight the imbalance of competiveness as explanation of the current account imbalances. For a discussion of these approaches see Stockhammer and Sotiropoulos (2012).
4 In this equation we follow the trivial notation: Y stands for national income, C for consumption, I for investment and G for government spending.
5 Net savings equals saving minus investment.
6 For a critique of this approach see Milios and Sotiropoulos (2009: Chapters 2 and 8), Milios and Sotiropoulos (2011).
7 For a critique of this long standing approach in international political economy see Milios and Sotiropoulos (2009).
8 See Althusser (1969; 1997).
9 For an analytical development of all these issues see Milios and Sotiropoulos (2009 and 2011).
10 The basic idea was perceptively summarized by Busch (1978) in the context of more or less the same discussion, albeit in a different historical context.
11 We will not revisit here the historical episodes that led to the rise of the idea of the common currency. For a more or less convincing account of the historical background see Buiter et al. (1998) and Eichengreen (1997). See also our comments in Chapter 6.
12 Here we are referring to the Trans-European Automated Real-time Gross Settlement Express Transfer System (Target2), which is similar to the US Federal Reserve’s Fedwire system – and which is:
a recording, clearing and settlement system used by both public and private market participants and operated by the ECB. While the net balances of other members are settled daily or even in an intra-day fashion, Eurozone NCBs can build up gross and net claims and liabilities vis-à-vis Target2 over time, in principle without limit. In other words, Eurozone NCBs can borrow from or lend to other Eurozone NCBs through Target2.
(Buiter et al. 2011: 1)
An interesting description of how the crisis of 1992–1993 led to the need to Target2 can be found in Garber (1998). Target2 was designed, in the first place, to protect the EMU from “speculative” attacks. Unlimited inter central bank credit can be used to accommodate capital flight out of one or more EMU member countries into other member countries (for this point see Garber 1998). In the case of a crisis, a flight of capital or a re- specification of private capital flows could occur independently, to some extent, from the overall adjustment of the current account balance. This mechanism makes the adjustment process less severe and the project of the common market more stable. The current account balance (let’s say the trade balance), reflects the reproduction needs of an economy and cannot be as flexible as the financial flows. The Target2 system intermediates the adjustment in the balance of payments by making the current account less sensitive to the shifts of the financial flows.
13 See in this connection Eichengreen (1997: 249–256) and Wyplosz (2006).
14 See Bryan and Rafferty (2006), Obstfeld, Shambaugh and Taylor (2005), Milios and Sotiropoulos (2011).
15 Characteristic is the analysis by Bryan and Rafferty (2006: 121–123). Also see McKinnon (1993).
16 Milios and Sotiropoulos (2011: Chapter 12).
17 We shall mention one more time that this reasoning must be read in the light of our general argument with regard to finance.
18 Among the EA countries Luxemburg and Ireland have been excluded from the panel. The first is an exceptional case of a sui generis economy. For the second there are important limitations in the data provided by AMECO with regard to the corporate sector. Cumulative current account positions have been estimated as the simple sum of annual positions as ratios of GDP. As an index for absolute profitability we use the net primary balance of the corporations, plus other taxes, minus other subsidies on production. Practically this is equal to what is left to corporations if we abstract wages and we add net property income. From this variable we get two alternative definitions of profit ratios when we divide it, first, by GDP (profitability 1), and, second, by the gross value added of the corporate sector as a whole (profitability 2). Cumulative profitability is the rough sum of these ratios in each case. With the available data, it is very difficult to measure the Marxian profit rate for all these cases during the same time period. That’s why we introduced two other alternative profit rate proxies in order to make our point. The fact that both are positively correlated with growth proves that the profitability of the “periphery” was higher, both in sectoral and economy-wide terms.
19 In the next chapter, we shall touch upon these institutional reasons for the convergence emerging out of the monetary structure of the EA.
20 Another important tendency that may add to the build up of the financial imbalances is portfolio diversification. International investors and hedge fund managers could include assets in their portfolios from a wider range of choices now encompassing the countries of the so-called European “periphery.” In this section we will not exhaust the issue but focus on one of its main aspects.
21 In many cases access to cheap loans contributed to a revival in the housing market. Between 1999 and 2005, house prices in the EA increased at around the same rate as the corresponding figures in the USA (moving around levels approximately 40 percent higher than the corresponding average for the last thirty years), while in specific areas such as e.g., Ireland and Spain, price inflation was higher than the corresponding figure for the USA (we should also note that, in these countries, the proportional contribution of house building to the GDP was higher than in the USA). Indeed, in 2005 and 2006, when the runaway increases in house prices reached their peak in the USA, the corresponding increases, not only in Ireland but also in Spain and Belgium, were even higher (see Eichengreen 2009).
22 At the beginning of the crisis, overall private sector debt in Portugal amounted to 239 percent of GDP, that is to say 29 units higher than in neighboring Spain and 116 units higher than in Greece (the corresponding debt levels in France and Germany are 130 percent and 140 percent). It is characteristic that short-term real interest rates in the 1990s for Greece averaged around 5.4 per-cent but, after 2000, fell almost to 0 percent and for long periods went even lower (see Deutsche Bank 2010).
23 For an early critique of these models see Dooley and Isard (1987), Borio and Disyatat (2011).
24 See Milios and Sotiropoulos (2010), Milios and Sotiropoulos (2011).
25 This idea can also be found in the analysis of Dooley et al. (2007a: 109).
26 Dooley et al. (2007a) apply a similar reasoning to the case of imbalances between the USA and China. At the same time, the economies of the “centre” finance (to some extent) the development in the European “periphery” (with their current account surpluses) contributing to the boost of demand there and, in this sense, indirectly encouraging their own exports. It is true that one of the reasons Germany and France have played such an important role in defusing the crisis is the overexposure of their banks to the countries of the “periphery.” In 2010, the direct exposure of German banks to Greece, Spain, Portugal, and also Ireland and Italy, comes to 20–23 percent of German GDP, in the order of 3.6 trillion dollars. The exposure of French banks to the same countries is calculated to 27–30 percent of the GDP of France, in the order of 2.8 trillion dollars. It should be noted that this borrowing also includes the sovereign debt (yet, government debt accounted for a smaller part of the Euro area Banks’ exposures to the countries facing market pressures, compared to claims on the private sector). The states in the EA borrow primarily from the banking systems of the EA. Indeed, at the end of September 2009, the foreign claims of European banks against the public sector of member countries amounted to 2.1 trillion dollars, corresponding to more than 60 percent of the total foreign bank claims against the states of the EA (see BIS 2010).
10 European governance and its contradictions
1 This section must be read in line with the general argument of this book as developed in previous chapters.
2 See Althusser (2006: 54–150) and Milios and Sotiropoulos (2009).
3 For a nice summary of this viewpoint see Obstfeld and Taylor (2004), Rajan (2010).
4 See for instance Dooley et al. (2007b).
5 See Borio and Disyatat (2011).
6 This point must be read with regard to the argument outlined in Part III.
7 Under the Emergency Liquidity Assistance (ELA) – an integral part of the European System of Central Banks – national central banks can in exceptional circumstances provide liquidity (against collateral) to distressed credit institutions under terms which are not publicly disclosed. During the recent crisis this liquidity channel was put in motion, with the cases of Germany and Ireland being the most indicative examples.
8 For this argument see Kopf (2011: 2).
9 At this stage of our analysis we are not interested so much in the roots of this shift in the perception of markets.
10 See Kopf (2011: 4–5).
11 We have excluded Luxemburg from this sample. Ireland has also been excluded from 2a, 2c, and 2d. This does not change the message of the charts.
12 Here we treat the group of EA countries as a panel. We are interested in isolating the general trend despite the different institutional settings that hold for any single country, particularly with regard to sovereign debt dynamics.
13 For a thorough discussion of the three following points, see Lapatsioras, Milios and Sotiropoulos (2011).
14 See Strauss-Kahn (2010).
15 The tax coefficients for firms have fallen to 25 percent in 2007 from their previous value of 40 percent. The implicit tax rate on capital is by far the lowest in Europe: it is around 15 percent, while the European average exceeds 25 per-cent. The reduction of capital taxes after 2000 is extraordinary, turning the Greek economy into a sort of a tax paradise. According to the OECD’s data, the 11 percent reduction in tax factors for firms between 2000 and 2006 was one of the greatest among OECD countries (see Lapatsioras, Milios and Sotiropoulos 2011: 135–137).
16 This is a hypothetical exercise – an abstract “illustration” – because we assume a different system for secondary macroeconomic distribution while keeping all other factors stable. In other words, we base our estimates on the hypothesis that a big change in the forms and terms of the expansive reproduction of the Greek social formation (a fact that in its own right presupposes a different correlation of class power) would not affect public expenditure and economic growth rates. Nevertheless, while we acknowledge the limitations of our estimations, we must also emphasize that they are not oversimplifications of the reality. This is because the increase in the taxation of capital and rich households would by no means endanger the high growth rate of the Greek economy (or, at least, the evidence to the contrary is poor and highly disputable even within mainstream research).
17 We have excluded Luxemburg from the sample. Ireland has also been excluded from 2a, 2c and 2d. This does not change the message of the charts.
18 See for instance Stockhammer and Sotiropoulos (2012).
Conclusion: a theoretical and political project for the future
1 In this last chapter we shall repeat arguments which have already been developed in the previous chapters. Therefore we shall not use references.