Upon reading a piece by Nils Pratley in the Guardian (15th October 2009), titled "To get rich gradually is glorious" (http://www.guardian.co.uk/...), I realised that it was time to go back and revisit the classics once again. A book that I read many years ago, when I was in graduate school studying economics, kept on resonating through my mind. One paragraph literally felt like a broken record (that may be my tinnitus, but I am sceptical)...
The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals will beat the smaller. [...] Apart from this, with capitalist production an altogether new force comes into play – the credit system, which in its first stages furtively creeps in as the humble assistant of accumulation, drawing into the hands of individual or associated capitalists, by invisible threads, the money resources which lie scattered, over the surface of society, in larger or smaller amounts; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the centralisation of capitals (Marx, 1867, p. 626).
Yes, it is Karl Marx ... that man whom so many people deem to be completely irrelevant for understanding the current situation, whose ideas are thought to be defunct, old-fashioned and out of step with modern capitalism. Hmm ...
In the Guardian piece, which relates the questions of bonuses at the biggest investment banks, Pratley discusses the limits placed on bonuses in an agreement with the British government. What is notable is not that the banks are complying with the limits which were based on the principles adopted at the G20 summit; as Prately notes, they had no choice. In fact, the G20 principles did not place caps on bonus size, rather banks are forced to avoid "reckless payments"
Instead, the principles adopted are as follows:
What they do instead is to force banks to avoid reckless payments. Bonuses must be spread over a longer period; they must be subject to clawback; more of the spoils must be paid in shares; and more information must be published about who gets what.
What Pratley argues is that these principles are actually ones that bank management would certainly agree and actually are self-interested; they ensure stronger ties between pay and performance. Moreover, he argues that it is a transition away from the idea of "get rich quick" schemes in favour of "get rich gradually" schemes. In the face of extremely high profits for both JP Morgan and Goldman Sachs, following the financial system being brought to the point of collapse, if it were not for the effect on employment and other industries, it would almost be as if there was no horrible economic crisis.
Meanwhile, the value of a licence to get-rich-gradually becomes clearer. JP Morgan said its profits in the third quarter of this year were $3.6bn, up from $527m a year ago. Goldman Sachs will report a more spectacular return to form. It's as if the crisis never happened.
Two main factors are at work. First, the demise of Lehman Brothers and others has removed competition. Second, the system is benefiting from what even investment bankers call an "implicit central bank subsidy" in the form of a guarantee that bank creditors (unlike those at Lehman) can't lose their shirts.
Pratley then moves on to discuss the "concentration" of capital, but he really means centralisation as we shall see later:
The past 25 years have seen a gradual concentration of market-making activities in the City and on Wall Street, and the 2007-08 crisis has accelerated the trend. OK, a few enterprising start-ups may still be able to collect profitable crumbs, but the crisis has cemented the power bases of the survivors. That is why it is rational for Barclays, for example, to want to secure its place at the top table.
What we are witnessing bears a very strong resemblance to a description of the "General Law of Capitalist Accumulation" (aka chapter 25) of Marx’s Capital, volume I (quotes refer to the International Publishers edition, 1979) in which Marx discusses what is becoming rapidly apparent about the system as a whole at this time: high labour productivity, decreased relative and absolute employment of labour, and the concentration and centralisation of capital as a general law of capitalist accumulation. How can we be in a situation where a recovery can be considered jobless commensurate with an incredible amount of existent wealth?
So let’s look at Marx’s definitions and discussion of the question of accumulation or the concentration of wealth. Certainly, much of the discussion is relating not to finance capital, but industrial capital, but perhaps it is of some value after all:
Concentration of Capital:
Every individual capital is a larger or smaller concentration of means of production, with a corresponding command over a larger or smaller labour-army. Every accumulation becomes the means of new accumulation. With the increasing mass of wealth which functions as capital, accumulation increases the concentration of wealth in the hands of individual capitalists, and thereby widens the basis of production on a large scale and of the specific methods of capitalist production. [...] All other circumstances remaining the same, individual capitals, and with them the concentration of individual means of production, increase in such proportion as they form aliquot parts of the total social capital. [...] With the accumulation of capital, therefore the number of capitalists grows to greater or less extent. Two points characterise this kind of concentration, which grows directly out of, or rather is identical with accumulation: First: The increasing concentration of the social means of production in the hands of individual capitalists is, all things remaining equal, limited by the degree of increase in social wealth. Second, the part of social capital domiciled in each particular sphere of production is divided among many capitalists who face one another as independent commodity-producers competing with each other. [...] Accumulation, therefore, presents itself on the one hand as increasing concentration of the means of production, and of the command over labour; on the other, as repulsion of many individual capitals one from the other (Marx, 1867, p. 625).
Well, that is pretty clear, unless wealth and capital is concentrated in the hands of capitalists it is unable to put into motion the vast amount of production necessary for the system to actually function. But wouldn’t competition (which he described above) and the system actually be able to simply remain one limited by competition. That brings us to the notion of centralisation of capital.
Centralisation of Capital:
Centralisation, which is the process that we have been witnessing during this crisis, is another beast. In fact, according to Marx, centralisation of capital is the normal outcome of the system unless something prevents it from occurring:
The splitting up of the total social capital into many individual capitals or the repulsion of its fractions one from another is counteracted by their attraction. This last does not mean that simple concentration of the means of production and the command over labour, which is identical with accumulation. It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. This process differs from the former [concentration and accumulation] in this, that it only pre-supposes a change in the distribution of capital already to hand, and functioning; its field of action is therefore not limited by the absolute growth of social wealth, by the absolute limits of accumulation (Marx, 1867, p. 625).
So centralisation is a normal process arising from competition:
Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many. This is centralisation proper, as distinct from accumulation and concentration (Marx, 1867, p. 626).
Marx continues:
Commensurately with the development of capitalist production and accumulation there develop the two most powerful levers of centralisation – competition and credit. At the same time, the progress of accumulation increases the material amenable to centralisation, i.e., the individual capitals, whiles the expansion of capitalist production creates, on the one hand, the social want, and on the other, the technical means necessary for those immense industrial undertakings which require a previous centralisation of capital for their accomplishment. Today, therefore, the force of attraction, drawing together individual capitals, and the tendency to centralisations are stronger than ever before. But if the relative extension and energy of the movement towards centralisation is determined, in a certain degree, by the magnitude of capital wealthy and superiority of economic mechanism already attained, progress in centralisation does not in any way depend upon a positive growth in the magnitude of social capital (Marx, 1867, pp 626-7). [...] Centralisation may result from a mere change in the distribution of capitals already existing, from a simple alteration in the quantitative groups of the component parts of social capital. [...] In any given branch of industry centralisation would reach its extreme limits if all the individuals capitals invested in it were fused into a single capital. In a given society the limit would be reached only when the entire social capital was united in the hands of either a single capitalist or a single capitalist economy (Marx, 1867, p. 627).
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Essentially, centralisation of capital means that the existent social capital is further concentrated in the hands of even fewer people or firms.
The Absolute General Law of Capitalist Accumulation:
Now, ok, I understand the tendency towards centralisation, I understand the processes of accumulation. Why is it that we have a relative and absolute increase in unemployment arising from the great increase and centralisation of wealth in a capitalist system?
Marx, of course, has an answer for this as well, this derives from the tendency towards increased use of capital to increase productivity of labour; this is not even a disputed idea in classical economics as Adam Smith discusses this in the first three chapters on the division of labour in the Wealth of Nations. David Ricardo understood that introduction of machinery could lead to persistent unemployment of labour and a decrease in the gross product (total product) while at the same time increasing the net (or surplus) product, see chapter 31 of the Principles of Political Economy or my previous diary on Ricardo and the Handloom weavers: http://www.dailykos.com/.... Of course, Ricardo’s admission of this possibility provoked shock and horror from fellow political economists as the working class political movements had been insisting on this for quite some time. Moreover, Ricardo also notes that the introduction of machinery into wage good producing sectors would decrease the costs of the workers’ consumption bundle and hence lower the value of labour, the wage (Ricardo, 1821, p. 16), a point discussed in detail by Marx in his discussion of the production of relative surplus value. So these ideas are not peculiar to Marx, they were discussed by pro-capitalist classical political economists of the 19th century.
The greater the social wealth, the functioning capital, the extent and energy of its growth, and therefore, also the absolute mass of the proletariat and the productiveness of its labour, the greater is the industrial reserve army. The same causes which develop the expansive power of capital, develop also the labour power at its disposal. The relative mass of the industrial reserve army increases therefore with the potential energy of wealth. But the greater this reserve army in proportion to the active labour army, the greater is the mass of a consolidated surplus population, whose misery is in inverse ratio to its torment of labour. The more extensive, finally, the lazarus-layers of the working class, and the industrial reserve army, the greater is official pauperism (Marx, 1867, p. 644).
Unemployment is normal within a capitalist economic system. This is a fact that even Milton Friedman acknowledged. So, if we are trapped in the system, the least that we can do is have a good and coherent social welfare state to cover the poverty and unemployment that is a by-product of the system. We could also consider establishing a citizen’s income which everyone would get until their salaries or income would be greater than that agreed upon social subsistence level covering all basic needs (including health care) and independent of ability or willingness to work.
Back to the financial system and the system as a whole:
So where does that leave us? Over and over again, I have read on this site that competition is how capitalism is supposed to work. Yet, as was already clear in 1867 at the time of publication of Capital, it was evident that centralisation of wealth and capital were clearly the end process of accumulation in a capitalist system. Pratley’s piece covered the financial system. What are political leaders and taxpayers supposed to do at this time in response to the situation caused by the normal processes of the system? I am certain that Marx certainly does not have the final word on this discussion by any means, but perhaps there are insights left in the old man that can be useful.
Pratley asks the following and I will end my diary with his comment:
The question for politicians and taxpayers is whether this set-up makes sense, since investment bank profits don't appear out of thin air. Yes, many activities contribute to the efficient allocation of capital in a market-based economy. But other elements, especially when competition is weak, can be regarded as the extraction of pounds of flesh from other parties, such as companies, governments and investors.
What should be done? Tax the investment banks? Break them up to encourage competition? Or ignore the problem in the knowledge that at least the regulators have undertaken to be more vigilant next time? The last of these describes most governments' positions, but we will soon discover whether the voters will tolerate it. The third-quarter profits now are a warm-up for the end-of-year figures on which bonuses will be calculated. These will be presented in new G20-compliant wrappers, but in many cases will still be huge. [...]
These words are nice to hear, but they don't address the problem that underwriting the financial system in a way that makes life more comfortable for investment bankers is bonkers if the "too big to fail" problem remains. It's an open question whether the answer is a transaction tax or something similar. But the debate must happen because a $1bn donation to charity (one idea being considered by Goldman) is not going to cut it. "Oh well, at least those guys leave big tips," is not a solution.