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A Political Economy of Contemporary Capitalism and Its Crisis Demystifying Finance A Political Economy of Contemporary Capitalism and its Crisis Demystifying finance Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras A Political Economy of Contemporary Capitalism and its Crisis The recent financial meltdown and the resulting global recession have rekindled debates regarding the nature of contemporary capitalism. This book analyzes the ongoing financialization of the economy as a develop- ment within capitalism, and explores the ways in which it has changed the organization of capitalist power. The authors offer an interpretation of the role of the financial sphere, which displays a striking contrast to the majority of con- temporary heterodox approaches. Their argument stresses the crucial role of fin- ancial derivatives in the contemporary organization of capitalist power relations, suggesting that the process of financialization is in fact entirely unthinkable in the absence of derivatives. The book also uses Marx’s concepts and some of the arguments developed in the framework of the historic Marxist controversies on economic crises in order to gain an insight into the modern neoliberal form of capitalism and the recent financial crisis. Employing a series of relevant international examples, this book will be essential reading for all those with an interest in the financial crisis, and all those seeking to comprehend the workings of capitalism. Dimitris P. Sotiropoulos is Lecturer of Economics at Kingston University, London, UK. John Milios is Professor of Political Economy and History of Economic Thought at the National Technical University of Athens, Greece. Spyros Lapatsioras is Lecturer of the History of Economic Thought at the Uni- versity of Crete, Greece. First published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras The right of Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Sotiropoulos, Dimitris A political economy of contemporary capitalism and its crisis: demystifying finance / Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras. pages cm Includes bibliographical references and index. 1. Capitalism. 2. Financial crises. 3. Finance. I. Milios, John. II. Lapatsioras, Spyros. III. Title. HB501.S777 2013 330.12'2–dc23 2012049792 ISBN: 978-0-415-68408-8 (hbk) ISBN: 978-0-203-77129-7 (ebk) Typeset in Times New Roman by Wearset Ltd, Boldon, Tyne and Wear Contents List of illustrations xix Acknowledgments xxi Introduction 1 PART I The long tradition of finance as a counter- productive activity in heterodox thinking: a Marxian appraisal 7 1 The parasitic absentee owner in the Keynes–Veblen–Proudhon tradition 9 2 Ricardian Marxism and finance as unproductive activity 30 3 Is finance productive or “parasitic?” 42 PART II Financial innovation, money, and capitalist exploitation: a short detour in the history of economic ideas 59 4 Derivatives as money? 61 5 Finance, discipline, and social behavior: tracing the terms of a problem that was never properly stated 84 PART III Rethinking finance: a Marxian analytical framework 105 6 Episodes in finance 107 xviii Contents 7 Fictitious capital and finance: an introduction to Marx’s analysis (in the third volume of Capital) 134 8 Financialization as a technology of power: incorporating risk into the Marxian framework 155 PART IV The crisis of the Euro area 181 9 Towards a political economy of monetary unions: revisiting the crisis of the Euro area 183 10 European governance and its contradictions 200 Conclusion: a theoretical and political project for the future 223 Notes 229 References 248 Index 259 Illustrations Figures 3.1 While Marx describes the three “metamorphoses” of capital, the historicist reading of his text perceives each single moment as a separate fraction 47 3.2 The place of capital 52 4.1 A simple forward contract 76 6.1 Notional amount outstanding of derivatives markets (OTC and exchange), percentage of the GDP, advanced economies 109 6.2 A short straddle 113 7.1 Keynes’ and Veblen’s framework 135 7.2 Marx’s framework 140 7.3 The mainstream scheme of market efficiency 145 8.1 Normalization on the basis of risk 160 8.2 Two types of norm 166 9.1 The misinterpretation of the EA crisis 186 9.2 Cumulative growth, profitability, and current account positions (percent of GDP) for EA countries, 1995–2007 194 9.3 Rethinking current account imbalances (g is growth, r is the nominal long term interest rate, CA is the current account balance as percentage of GDP, and REER is the real effective exchange rate) 196 10.1 Cumulative contribution to debt for 1995–2007 (percent of GDP) 208 10.2 Factors contributing to increasing indebtedness in relation to growth (or growth contribution to debt, all variables are expressed as percentages of GDP), EA, cumulative changes for 1995–2007. Growth appears on the vertical axis 210 10.3 Total public revenues in Greece and EU (percent of GDP), 1995–2008 211 10.4 Direct income taxes in Greece and EU (percent of GDP) 212 xx Illustrations 10.5 Alternative scenarios for the dynamics of Greek sovereign debt. The figure shows the hypothetical trend of the debt (percent of GDP) if the level of income revenues (percent of GDP) in Greece were the same as: (a) in Germany, (b) in Euro- 12, (c) in EU- 27 213 10.6 Public expenditure in Greece and EU (percent of GDP) 214 10.7 Primary expenditure in Greece and EU (percent of GDP) 215 10.8 Factors contributing to increasing indebtedness in relation to growth (or growth contribution to debt, all variables are expressed as percentages of GDP), EA, cumulative changes for 2008–2011. Growth appears on the vertical axis 216 10.9 The political economy of EA: a summary of our argument 219 10.10 Changes in (nominal) unit labor costs, sovereign debt (percent of GDP) and unemployment in relation to final demand for 2010–2012, EA countries 220 Tables 8.1 170 8.2 171 Acknowledgments This book owes debts to several people who in international meetings and con- ferences (both political and academic) have assisted in the development of our arguments when they were still in the making. We would also like to thank the Political Economy Research Group (PERG) at Kingston University (Paul Auer- bach, Iren Levina, Simon Mohun, Engelbert Stockhammer, and Julian Wells) for suggestions and criticisms that have contributed to the improvement of the quality of our work. Finally, our students − an audience willing to discuss and challenge our ideas at their very first stage – are gratefully acknowledged. A special mention is also owed to David Gorman for having improved the style of the manuscript. Introduction The recent financial crisis is without precedent in the post- war period, a fact acknowledged by the majority of economists. At the same time, the crisis is a “marginal moment,” which unveils and helps us rethink the workings of con- temporary capitalism. The latter is mostly grasped under the term of financializa- tion in relevant discussions. A crucial aspect of almost all contemporary heterodox approaches is the idea that the hegemony of neoliberalism, and of the globalized financial sector of the economy, produces a peculiarly predatory version of capitalism, one with inher- ent tendencies towards crisis. In the relevant economic literature the term finan- cialization denotes the phenomenon of the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the opera- tion of the economy and its governing institutions, both at the national and inter- national level. Hence, for a Keynesian- like argumentation, neoliberalism is an unjust (in terms of income distribution), unstable, anti- developmental variant of capitalism whose direct consequence is a contraction of workers’ incomes and proliferation of speculation. This general perspective also seems to be prevalent in Marxist discussions. For a number of theoreticians influenced by Marxism, two strains have been present: either neoliberal capitalism has not succeeded in restoring the profitability of capital (the rate of profit) to high levels, that is to say to levels satisfactory for dynamic capitalist accumulation or, contrarily, it has gone too far in this direction (high profits), leaving the working class with incomes insuffi- cient for consuming the social product. In this fashion, capitalism appears to be entrapped (either since the mid 1970s or at some later point) in a perennial crisis, the end of which is not readily visible. The result of this process is that large sums of capital are unable to find outlets for investment, thus either engendering “bubbles,” or underpinning ineffective policies of forced accumulation that depend on lending and debt. In this book, we intend to embark upon a comprehensive assessment of the above- mentioned views; to specify their analytical origins and their capability for interpreting reality. Marx’s analysis is revisited in an effort to show that his original system of categories can serve as a comprehensive framework for the interpretation of the developments in contemporary financial markets.
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