Finance and the "other exploitation"

Posted in martin's blog on Thu, 01/01/2015 - 16:37,

Review of Costas Lapavitsas: Profiting without producing, Verso 2013

Capitalist exploitation is not just by the boss extracting from the worker, in return for a meagre more-or-less “living wage”, an expansible value-added which may be something like three times what’s paid out in wages.

It also comes from making working-class households pay interest on debts which they run up, often on disadvantageous terms, because of their relative poverty and relative lack of power in the markets.

This “other” exploitation is not a new idea. Costas Lapavitsas quotes references to it from Marx’s Theories of Surplus Value, and Marx also wrote about it in the Communist Manifesto:

“No sooner is the exploitation of the labourer by the manufacturer, so far, at an end, that he receives his wages in cash, than he is set upon by the other portions of the bourgeoisie, the landlord, the shopkeeper, the pawnbroker, etc.”

It is, Lapavitsas suggests, a bigger factor now because of the “financialisation” of capitalism.

He attempts no numerical estimate of the size of the “other” exploitation. US figures show that in recent times debt service payments have taken up to 13% of household disposable income, easing after the 2007-8 crash to about 10%: and

These are figures for payments both of “principal” (the actual amount borrowed for a mortgage or on a credit card) and of interest, so overestimate the exploitation. According to J W Mason (cited further below) interest payments were about 8% of household disposable income from the late 1980s to the crash.

That is a noticeable exploitation, though still much smaller than exploitation-in-production, which has been estimated by Fred Moseley and others at about 300%.

By far the bulk of the stock of household debt, Lapavitsas shows, is mortgage debt rather than credit card debt or other forms of consumer credit. Indeed, and surprisingly, in the USA (the only country for which a good long run of statistics is available), consumer credit ballooned from 1945 to the early 1960s, but has been fairly static as a percentage of GDP since then. Mortgage debt has expanded much more than consumer credit.

Since interest rates on credit cards, payday loans, and the like are much higher than on mortgages, it may be that consumer-credit interest payments are a much bigger proportion of household interest payments than consumer-credit debt is of household debt. US figures show that monthly debt-service payment on consumer credit totals about the same as monthly debt-service payment on mortgage debt.

According to, 34% of US households are carrying forward credit-card debt from month to month, and it was 44% in 2009. About 15% roll over $2,500 or more in credit card debt each month. Average credit card debt per borrower is $5,234, so many of that 15% must have way over $2,500 outstanding. In the USA, people seeking credit counselling in 2013 had nearly six cards, on average, and average unsecured debt of over $17,500, equivalent to half their average yearly income.

This is a big thing, though maybe not more “other” exploitation than in the heyday of the pawnbroker. In England, in 1870 a parliamentary enquiry found that over 200 million items had been pawned the previous year (an average of 40 per household). The ordinary legal rate of interest for pawnbrokers was 27%, and they were legally entitled to charge rates up to 1014% for small loans for short periods. Pawnbroking reached its peak just before World War One in England, and just after that in the USA.

Lapavitsas comments that the crash of 2007-8, unlike previous capitalist crises, grew almost entirely from relations between financial enterprises and households (the mortgages crash) and relations within finance. Unlike with most crises, there was no big rush of productive investment, or blow-out of non-financial corporations’ debt, in the run-up to the crisis. yet finance was weighty enough for the crash to work through to a large global depression.

Three things are commonly said in left-wing discussions about the fact of working-class households being increasingly drawn into the circuits of capitalist finance. One: that financialisation (not just in this aspect, but more generally) has been an escape-hatch for capital unable to find profitable investment in production. It has been driven by a shortage of productive capitalist investment outlets. Two: that household financialisation has been a means for capital to keep consumer demand buoyant while wages stagnate. Three: that it draws people into living neo-liberalism, and absorbing neo-liberal values through the pores of market transactions.

Lapavitsas does not comment on the third idea. He accepts the second, but his figures, and others, refute it. He refutes the first.

Capitalists selling to working-class consumers of course benefit here and there from people buying things on credit. But Lapavitsas’s figures show that the outstanding total of consumer credit has not risen markedly faster than GDP in recent decades. Most of the increased household debt is mortgage debt. That has been rising steadily for decades, even before “financialisation”. It rose in eras of faster-increasing wages, too. The reason why, in short, is that it has become more and more advantageous for workers to buy houses if they can (because they themselves can pocket a bit of the “other exploitation”, by way of capital gains on their houses, instead of paying "other exploitation" tribute to landlords); more and more workers stretch their budgets, sometimes grotesquely, to do that; and, from decade to decade though not year to year, more workers can afford to. They squeeze their consumption of consumer goods in order to “get on the housing ladder”.

Some older people then cash in their gains from “other exploitation”, by remortgaging, to buy consumer goods; but the net effect on day-to-day consumer spending of more people paying bigger mortgages is downward rather than upward.

On the other hand, if a lot of working-class consumers become crippled by consumer debt, then they spend less on day-to-day consumption, not more. The capitalists to whom they pay interest benefit, but not (longer-term) the capitalists whose consumer products they might buy.

J W Mason finds: “The rise in [household] debt [in the USA] in the 1980s is explained by a rise in non-demand expenditures [i.e. expenditures which do not generate consumer demand]. Specifically, it is entirely due to the rise in interest payments, which doubled from 3-4 percent of household income in the 1950s and 1960s to over 8 percent in the late 1980s. Interest payments continued around this level up to the Great Recession, falling somewhat only in the past few years” –

Lapavitsas cites Robert Pollin asking: “Where do the [financiers’] profits come from, if not [ultimately] from the production and exchange of commodities?” (p.138). A growth of finance can allow more of the surplus value created in production to surface at a distance from source, in the accounts of financial enterprises, but, aside from the “other” exploitation it operates on households, which is much smaller than surplus-value exploitation in production, it cannot create a new stream of surplus value. He writes: “Finance is a well-defined field of capitalist economic activity; not a nebulous realm into which capital seeks to escape when, and if, profitability is low in production” (p.36). Again: “Financialisation represents neither the escape of productive capital into the realm of finance in search of higher profits, nor the turn of productive capital toward financial activities at the expense of productive investment. It stands, rather, for a transformation of the mix of financial and non-financial activities that are integral to the circuit of productive capital” (p.217).

Lapavitsas includes brisk summaries of Marx’s writings on money and finance, much of it disordered remarks in the unfinished volume 3 of Capital; the most important later discussion of those writings, Suzanne de Brunhoff’s Marx on Money (1967); Hilferding’s 1910 classic Finance Capital; and the big turn of global capital to “financialisation” from the 1970s.

Marx showed in volume 2 of Capital that the circuit of productive capital necessitates the creation of hoards of money-capital at points in that circuit. He also showed that speed is vital to capital. Capital’s drive is not only to extract and realise surplus-value, but to do that quickly.

The capitalist financial system, collecting some capitalists’ for-the-moment idle hoards, putting them together with some households’ idle hoards, packaging them into usable quantities of capital, and lending them to capitalists who need a just-in-time hoard to proceed in production, is thus integral to capitalism. Lapavitsas argues that the development of a financial system, as distinct from the emergence of a bundle of sometimes sophisticated financial operations, is unique to capitalism.

From World War Two to the 1970s, capitalist economies pursued a policy of “financial repression”, where banks and other financial enterprises were deliberately restricted in what they could do, and government control of nominal interest rates plus rapid price inflation limited interest revenues. “In sum, the system of market-negating regulation after the Second World War transformed the returns of financial institutions partly into rents that had state backing” (p.310). They could not make the zany profits they would make in the neo-liberal era, but the profits they did make were safe and easy.

That regime broke down with the breakdown in 1971-3 of the Bretton Woods system of the dollar (convertible into gold) as world money, heavy exchange controls, and fixed exchange rates between major currencies modified only by period devaluations.

By that point finance had seeped through the regulatory walls substantially, creating the Eurodollar market and other “Euro-markets” which escaped the government controls, and multinational corporations, especially US ones, had taken capital global to an extent not seen since before World War One.

Because of those gradual developments since 1945 (I think: Lapavitsas does not commit himself), the dominant way out for capital from the crises of the 1970s was to reconfigure on the basis of floating exchange rates, free flows of capital, and gearing of each capitalist government’s policy to making its terrain a good site for global capital rather than to building up its own more-or-less integrated industrial complex. That went together with government acting as agency for imposing the constraints of world competition in its domain, and thus for capitalist counter-offensives against working classes and what they had gained in the relatively placid regime of the 1950s-60s.

The drive for a class counter-offensive and the drive for what would be called “globalisation” went together, each, I think, pushing along the other.

An integral part of the new regime was much larger and more febrile international flows of finance. Together with other factors, those flows helped the globalisation of production. According to Unctad, value chains embedded in the operations of transnational corporations and their networks of suppliers now account for 80 per cent of world trade:

Then those global chains of production foster the growth of further financial flows. A corporation paying suppliers, workers, and lenders in half a dozen currencies, and getting revenue in half a dozen different ones, must manage the trajectory of its various necessary hoards with care or suffer big losses. Thus the trade in “derivatives”, which are essentially insurance policies (and, on the flipside, gambles) on the relative movements of exchange rates, interest rates, prices of shares and bonds, etc.

So far as I can find figures, most big transnational corporations use derivatives systematically, but their holdings of derivatives are tiny compared to the vast superstructure of derivative trading which has no direct connection to global production but goes on between banks and other financial enterprises on a world scale. Lapavitsas starts his book by quoting research from Duncan Lindo on derivatives trading, which was about US $12.6 trillion a day in 2010, when world output of goods and services was about $ 0.2 trillion a day, but then says almost nothing about derivatives after page 10 of his book. I don’t know how holdings of derivatives (which are concentrated in relatively few banks which deal on a huge scale) relate to the figures he gives on p.205ff for financial assets held by the financial sector.

Oddly, in a way, one of the four dimensions by which Lapavitsas defines financialisation is that “non-financial enterprises have become relatively more remote from banks and other financial institutions” (p.4). The other three are that banks have reoriented, for profit, to fees and cuts on financial trading, rather than straightforward interest income; that banks draw more on household money; and that households have become more financialised.

Lapavitsas means that non-financial enterprises rely more on their own retained profits to finance investment than on borrowing on the market. That is a long-standing trend, from before the 1970s but continuing, and it undermines the claim by the apologists of high finance that their work is necessary to give productive capitalists the access to credit they need in order to get off the ground.

But non-financial enterprises can borrow less from banks, but not yet really become “more remote” from them. Management people say that the CFO (chief financial officer) in big corporations has become a strategist and top advisor to the CEO, rather a backroom tidier-up. And whom do CFOs deal with? Banks and financial enterprises. Through them they manage their assets, organise their derivatives trading, do their mergers and acquisitions. And from those transactions the banks make the fee and middleman’s-cut income which Lapavitsas refers to. From where else? The banks can’t get rich just by charging each other fees.

Lapavitsas concludes with a section on the euro crisis. Oddly, in it he does not advocate what he has proposed in political debates over recent years: that the first demand should be for Greece to quit the euro (and then presumably also Italy, Spain, Portugal, Ireland, etc., leading to the break-up of the euro). On the contrary, he refers to the collapse of the euro as an especially “dangerous” possibility. He describes the EU’s response in the crisis (correctly, I think) as “fumbling” rather than as a clearly worked-out policy which will maximise the gains of the biggest capitalist interests.

It is true, as Lapavitsas shows, that the euro is an ill-designed system which has led to a “centre-periphery” relationship in the EU and the European Central Bank refusing to allow afflicted states anything like the “bail-outs” liberally supplied to banks hit by the crisis. But cross-European working-class mobilization which can force cancellation or easing of the countries’ debt burden is the proper class response (and if it leads to countries being expelled from the euro, that is a secondary result and happens on different terms than if exit as such is proposed as the escape from debt peonage, which it is not).

Instead, Lapavitsas calls on the left to campaign for publicly-owned banks, operating as public services; public controls on financial trading; and a reconstruction of public services and welfare.

I think he is right. As Trotsky put it: “The socialist program of expropriation, i.e., of political overthrow of the bourgeoisie and liquidation of its economic domination, should in no … hinder us from advancing, when the occasion warrants, the demand for the expropriation of several key branches of industry vital for national existence or of the most parasitic group of the bourgeoisie…

“(1) We reject indemnification… we call upon the masses to rely only upon their own revolutionary strength… we link up the question of expropriation with that of seizure of power by the workers and farmers”.

Marxist Theory and History

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