[Marxism] How Does Finance Capital Work?

Charles Brown cbrown at michiganlegal.org
Mon Dec 13 07:55:34 MST 2004


Thanks for asking your question, Comrade Junaid. I think it's the 64
trillion dollar question.

And thanks for your brilliant , as usual , answer, Jurriaan.

Is GDP an annualized figure for products produced ? Is there a figure for
total value consumed in one year ? What of values that are not consumed in
one year ?

Charles

^^^^^^^ 

Quick response - here's a few IMF estimates again which you could consider:

World GDP (i.e. world salary and gross profit income directly generated by
annual production) $36.1 trillion (in 2003).

2003 value of the world's stock market capitalisation (i.e. the market value
of equity capital of publicly listed companies) $31.2 trillion (of which EU
$7.7 trillion, USA $14.3 trillion, Japan $4.9 trillion)

2003 value of the world's debt securities (bonds, derivatives etc.) $52
trillion (of which EU $16.7 trillion, USA $22 trillion,
Japan $8.4 trillion)

2003 value of the world's commercial bank assets $40.6 trillion
(of which EU $18.1 trillion, USA $5.7 trillion, Japan $6.2 trillion)
(Source: http://www.imf.org/external/pubs/ft/gfsr/2004/02/pdf/statappx.pdf)

You can get some other estimates on the financial markets from:
http://www.ifsl.org.uk/uploads/London_financial_capital_of_Europe_2004.pdf

As you can see, the value of the assets owned by the world's commercial
banks is estimated to be larger than the total mass of the world's total
share-capital. These bank assets are of course not "net worth", because
obviously banks also have liabilities. When Rudolf Hilferding was talking
about "finance capital" he meant basically the fusion of industrial capital
and bank capital. But in the modern world, this is much more developed, e.g.
investment companies which buy and sell companies and fund managers trading
in all sorts of things - companies, currencies, properties, futures, hedges
etc.

Worldwide, 7.7 million millionaires and billionaires together own about
$28.8 trillion of assets, about of third of that is stocks (Merrill Lynch
estimate of those with financial assets of more than $1 million, excluding
the value of their homes).
http://moneycentral.msn.com/content/Retirementandwills/InvestYourSavings/P86
555.asp
http://www.us.capgemini.com/DownloadLibrary/requestfile.asp?ID=413

Can't get into the Cap-Gemini site tonite, but the average portfolio of a
high-net-worth individual in 2002 looked like this: 30 percent fixed income,
25 percent cash, 20 percent equities, 15 percent real estate and 10 percent
alternative investments (e.g., hedge funds).
http://money.cnn.com/2003/06/11/pf/millionaire/millionaires/?cnn=yes

So as you can see, the haute bourgeoisie hasn't exactly got a lot of dynamic
"entrepreneurial spirit" themselves judging by their placements, but of
course if you own that much capital, you cannot personally control it - a
whole chain of people and institutions develops to manage that capital, and
use it in various ways. Hence the notion of corporate governance - the mass
of capital gets so big, that nobody can control it anymore, and the distance
between owners and controllers grows very long. Companies own other
companies which own other companies, and so on. In that case, more and more,
capitalists are concerned with surplus-value as such, i.e. a net income
regardless of source or form (interest, rent, profit etc.). It isn't so much
that they don't want to invest in a "responsible" way, but that it may
become very difficult to trace the real revenue-generating element.

As regards the Fortune Global 500 largest corporations in 2003, they were
said to have issued share-capital worth about $6.8 trillion and together
owned assets worth $60.8 trillion. (Source: Fortune Vol. 150, No. 2, Europe
edition 13, July-August 2004, p. F-10). Banks, finance and insurance
companies are strongly represented in the list, and a number of them have
assets close to or larger than $1 trillion (e.g. Citigroup, ING, Deutsche
Bank, Mizuho, Mitsubishi).

So how does it work? Well the simplest thing I say about it, that capitalism
as chrematistic activity is essentially about capitalising on trade, i.e.
the principle of "buying cheap and selling dear". Production is one aspect
of that, but of course you can also trade in existing property, in
currencies, and in claims to (future) income or claims to (future) assets.

The more capital you have, the more capital you can make, and also, the more
capital you can borrow. Thus, with a capital asset of a significant size,
you can typically actually claim far more capital than you actually have.
The capital you have, acts as a sort of "collateral" for additional capital
claims. With those additional claims, you can extract additional net income,
that's the point.

The main function of the working class and the peasantry is to conserve the
value of assets and create new assets. There has to be a constant stream of
new assets, because otherwise capital value is lost or destroyed.
Workers themselves invest mainly in houses, the value of which can of course
also appreciate (but you may not be able to capitalise on that because you
have to live somewhere).

Claims on capital wealth ultimately presuppose new net additions to real
asset wealth, so, there's certain limits on the ratio of financial claims to
tangible assets. Governments can issue bonds etc. but ultimately they still
require current revenue and assets to finance all that, and that revenue is
ultimately generated by the production of new asset wealth. But, basically,
what the haute bourgeoisie (or its financial staff) does mainly, is trade
and invest in the assets, including existing assets and future assets. In
the last 200 years, the working class and the peasantry has created a lot of
asset wealth, so really there is plenty to trade in.

At the point however where capital invested in trade of all kinds yields
more secure profit than capital invested in production of tangible assets
for which demand-growth is reduced, or basically stagnant, then the real
economic growth rate declines. But obviously, that is itself not an obstacle
for capitalist activity, at least not in the shorter term, because there are
plenty existing assets that can be traded in.

Jurriaan
 
^^^^^^

Comrades, I am looking to figure out the basic notions and dynamics 
behind finance capital as it relates to certain specific concerns. By 
which I mean, looking at the theory of commodity fetishism and 
alienation and LOTV, these are fundamentally simple to grasp when you 
talk about a piece of yarn or a factory worker producing toys - in fact 
I thought about commodity fetishism, ie. price as the great masking of 
social history and relations, as such before I even read Marx. But I 
have no idea, then, how it is possible that billions and billions of 
dollars are made by speculating on money. How does money make money? How 
can you assign the percentage of the interest made and how does anyone 
know what to speculate on and what not to speculate on? How is it 
tangible? Is it factored into GDP? Is it true that something like 90% of 
all  money is from finance capital, not production of material goods?

As you can see I have no grasp of the issue.  Thanks in advance.



 
 
 









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