Financialization, Corporate Governance and Labour: A Critical Introduction
1. Introduction
On September 15, 2008, Lehman Brothers, which had held over $600 million worth of assets, collapsed, filing for Chapter 11 bankruptcy in the United States . This marked a turning point in world history, similar to the Wall Street Crash of October 29, 1929, that had signaled the beginning of the Great Depression. Once again the material crisis of the world capitalist economy has brought human kind to a point of transition where ideas and forces behind these engage in an attempt to forge or re-forge a new order, re-formulate policies and construct new (or re-hashed) paradigms for the disciplines and practice of economics, politics, finance and international relations.
Concepts and processes of ‘financialization’, ‘corporate governance’ and ‘globalization’ which have come to assume front burner positions in the last thirty years of neo-liberal globalization of capitalism, now take on even more critical importance. The different views on what they entail and the consequences of these have not only been at play in the pre-September 15, 2008 world (particularly in the two years preceding it, when the financial cycle’s downturn threw up its cash crunch beginnings), they will shape what steps will or could be taken in attempts to salvage the world from the consuming aspects of capitalism’s “animal spirits”, to use Keynes words.
In this essay, we intend to conduct a critical introductory analysis of financialization, corporate governance, and labour. Our standpoint is Marxist and thus a critique of the very logic of the dynamics of these three variables as elements of an eternal order, as capitalism as not always been and will not always be society’s mode of production.
While taking note of the merits of Keynesian and Post-Keynesian formulations and the acceptance by these traditions of the inherent instability of capitalism , we do not share their optimism on the possibility of a lasting regulation of financial markets, resolution of the structural or cyclical crises of capitalism or the taming of the beast of capital for the overall good of society. Every regulation, de-regulation, or re-regulation of the capitalist economy at conjunctures of transitions in history has been merely re-arrangements in some form or the other of the relations between state, capital, and society; ultimately to the benefit of capital as a social going concern. This is to say in other words that; capitalists and their representatives to defend the capitalist order have always executed these.
We are of the view that despite its seeming intent, on the face of it, to make possible a more just, if not an entirely just society possible, as a major bye-product of its effective demand quest, Keynesianism suffers from deeper theoretical flaws that mark bourgeois economics as a whole. Onimode (1985, 5 – 13) captures these succinctly as “the problem of paradigm” and “the methodological defects” .
At the heart of our thesis is the argument that capital and indeed the capital accumulation process are not merely, things in themselves. They are social relations driven by competition within and between the capitalist class in the same countries and globally. The institutions of governance at the corporate and broader societal levels are mechanisms fashioned within the crucible of this reality. The only value-adding factor in the process of capital accumulation, however, is labour. Thus social wealth creation is dependent on labour employed or more properly put labour power exploited to appropriate surplus value (Cf: Marx, 1976, 283 – 306). This is the source of profit.
Profit is thus a function of value added only by labour. This has no meaning for the capitalist who considers labour as just another ‘factor of production’, in his quest for an ever-expansive accumulation of capital. Investment rests primarily on the profit-motive over and above the real value creating necessity for sustained capitalist production. The replacement of regulation with de-regulation and liberalist re-regulation that stir the jinni of financial markets once again is always just around the corner for capitalism once it feels strong enough.
We thus sum up our theses as follows: the capitalist economy tends towards financialization and this in itself is fraught with instability and; re-configurations of the manifestation of capital’s dominance of society through regulatory frameworks in the wake of crises can only but be temporary due to the profit-motive logic of capitalism, which eventually smashes through these.
We shall present our argument in the next section by situating financialization within the capital accumulation process. Here we shall scrutinize the dynamics between liquidity, investment, income, production, and consumption. In section three we shall look at corporate governance in relation to views on labour and the class struggle and relate this to financialization. Finally we shall draw our conclusions.
We must point out the limitation of space and time for this essay, which is one of the reasons why we present it as an introductory analysis. It should at best, be considered as broad brush strokes initiating the beginning of our own commitment to better understanding the discipline of macroeconomics, coming from a Marxist political-economy background.
2.0 Financialization and capital accumulation
The term “financialization” is today a well used one. Financialization entails the growing predominance of the financial system in a capitalist economy. According to Epstein in Financialization and the World Economy: “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international markets” (Epstein, 2005, 3).
Stockhammer asserts that ‘financialization is a recent term to capture transformations within the financial sector as well as in the relation between the financial sector and the economic sectors’ (2002, 720), while Dumenil and Levy present it as ‘a prominent feature of neoliberalism’ (2005, 8).
From the views above, which we largely agree with, financialization, is in a sense, a relatively new phenomenon. It is however new in the sense of old wine in new skin, as it is an inherent tendency of the capitalist accumulation process to tend towards the predominance of interest-bearing capital as capital strives to attain its most liquid form and indeed its sole being of commodity itself, i.e. money generating money . Foster (2007) reiterates this in what he describes as the “financialization of capital” .
We shall attempt to look at why and how this is not just characteristic of capitalism but indeed manifests itself within the aggregates of investments, savings, consumption, and income, being the constituents of macroeconomics.
2.1 Liquidity, investment and production
At the crux of financialization are two key interrelated dynamics. The first is the continued quest of capital to valorize. The accumulation process ordinarily produces both use value and value. Being subject to the dictates of the market though, the amount of use-values produced is limited; not by people’s needs, which are still yawning, but by ineffective demand borne out of the relative poverty of the immense majority of the population. The second is the need for confidence in the uncertain future, “in the form of claims to capital” . It is not possible for even a seer to see all what could happen in the future. Nevertheless, despite this hazard, without some form of certainty that the an economic activity would result in expanded value, no capitalist would invest in any endeavour no matter to what extent human beings would benefit from this.
Capital accumulation starts for the entrepreneur as investment. It is the initiation of a flow and a flow itself of resources employed to generate returns, an income, or what he sees simply as profit later. Sullivan and Sheffrin thus consider investment as the use of resources considered as assets to generate profit (2003, 271). A ‘universal equivalent’ (Marx, 1976, 159 -161), which is money is the life-blood with which this employment of resources, otherwise stated as investment does itself assume life as it is used as a measurement, standard and ‘store of value’ to pay for each of these. These flow and (constant) setting into motion of the circulation of capital is for the purpose of profit and the building up of a stock of wealth, which is capital.
The ‘universal equivalent’, or money as it were, is a capital-commodity itself, but one set aside as the mediator for all commodities intercourse in the matrix of the market. It is thus the most liquid of assets. The extent of ‘liquidity’ of all other assets, or forms of capital, then becomes determined by how easily convertible they are to money. With the growth of capitalism money, being a store and standard of value as much as its medium of exchange becomes more than mere ‘money’ and covers all forms of financial instruments , as an economy’s money supply.
In summary on one hand, investment to the capitalist as a whole is the utilization of assets for generating as their income, profit (and thus, one could assume; capital as a stock). As Keynes puts it:
When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset .
For that individual man though, he most likely would need more than what he could raise as his equity-assets for his investment, thus requiring liabilities more often than not in the form of credit, which tends to be more convertible to money or which is obtained as money itself . The liability incurred by the entrepreneur-capitalist is a financial asset of the ‘rentier-capitalist’ or “functionless investor” as Keynes puts it and the entrepreneurial-capitalist pays the later an interest for the use of this credit. Thus on the other hand investment tends to involve financial leverage reflected in the money liabilities entered into in and as a consequence of investment.
Since production is a social reality, the aggregate of these as the economic activities of a myriad of entrepreneurs manifests itself, at the macroeconomic level, as the Debt-to-GDP ratio of a country. Financialization as spurred by the ideology and new economics of neoliberalism in the past three decades leads to the expansion of this ratio and consequently credit bubbles, initially, and with its continued logic outside an interventionist containment leads to a depression as (Keen, 1995), brilliantly analysis.
This position of Keen rests on Minsky’s financial instability hypothesis which we will now give a closer attention to.
Minsky’s thesis is a development of Keynesian views and interest in making capitalism work, despite its inherent instability. It is a leading current of post-Keynesianism. While traditional Keynesian analyses presents the capitalist economy as a tri-markets pyramid with the labour market at the bottom, the product market at the middle and the financial market at its peak, it took Minsky to integrate “financial institutions and usages…into the analysis” and in doing so, present a clearer “theory of the cyclical behaviour of a capitalist economy” (Minsky, 1980, 95).
The Minskian thesis can be summed up in our view, thus: “investments generate profits” and profit expectations make debt financing a possibility; at every point in a capitalist economy, there is a “…mix of hedge, speculative, and Ponzi finance in existence” which is both historically established and dependent on expected future profits; a financial cycle can be distinguished , at its bottom or initiating phase, there is much confidence in the future and the economy’s finance is largely hedged while as it reaches its peak it tends towards the speculative (and the Ponzi); this situation emerges from policy thrusts that encourage “growth through investment”; to keep “it from happening again there is a need for the capitalist economy to shift emphasis rather “to the achievement of full employment through consumption production”.
Could an acceptance of the Minskian thesis as a basis for policy-formulation have led to avoiding a crisis like the current one? We would say yes, theoretically speaking. Its logic is almost flawless, especially as Minsky himself accepted the temporality of not just his own thesis, but indeed of all economic theory .
The reality of capital’s expansion though, is that it is a double movement of production and valorization. The capitalist is however less interested in the commodity-in-itself or the use-value which is the end-product of production. His interest as the personification of capital is in valorization, the expansion of the value of what he represents. Thus where and when social wealth is to an extent as abundant as is the case in advanced or later capitalism (even though this remains concentrated more and more in a few hands), the financial market, or its bulk, which is “fictitious capital” can not but continue to play an ever more important role. While for its self-preservation at crisis points such as this, the views of a Minsky or a Stiglitz could find ready ears amongst policy-makers, it is very unlikely that capital will allow for any lasting reining in of itself, before it shoots itself in the foot, again and again.
2.2 Investment, consumption and income
Keynesianism economics is concerned with maintaining relations of stabilization between investment, income, employment and effective demand . We have looked at investment above in relation to production and liquidity and shall start here by engaging with income and consumption to now relate these to investment in a capitalist economy, from a Marxist stand point.
Case and Fair (2007, 54) define income as “the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time", in an economy . It is the sum total of the ability or substratum available for possible consumption encompassing both monetary and non-monetary resource, even though it is expressed as a total in monetary terms (Barr, 2004, 121 – 124). Income thus in a social sense is manifested inflows reflecting enhanced assets or decline in liabilities, without these being borne out of more in-put of resources by the country or firm concerned. It is generated from economic activities, which entail the employment of the so-called ‘”factors of production”.
We see here a relationship emerging between income and investment. Since, income represents the ability to consume; it also presents the possibility for this ability to be rather used (or at least a part of it) as investment in the hope of expanding subsequent income. In the ceteris paribus language of bourgeois economics thus, an increase in income tends to lead to an increase in investment .
It is noteworthy though that economists’ thinking generally allows for and actually considers some level of income inequality within a given society as necessary. It is merely “excessive inequality” that is considered a problem and this largely from the perspective of efficiency and social injustice (Cf: Barr, Ibid). Thus flowing from this, even though Keynesian economics is a redistributive theory, it does not aim at eradicating social inequality. It is aimed at emboldening capital’s offensive through reformist tokenism for the working class rather than being emancipatory in providing alternative economic thinking for social progress. This is why Keynes posits the problem as one of under consumption.
Effective demand which is the touchstone of Keynesianism comprises aggregate consumption and investment. This fluctuates and Keynes analysis the dimensions of this fluctuation through the interactions of the propensity to consume, the marginal efficiency of capital and the rate of interest. A “pragmatic-utilitarian justification of ad hoc state intervention” serves as the outlet for introduction of government spending, to ensure the going concern of capital. The enhanced consumption of working people in this sense is not one based on a perceived need for maintaining a just or humane living for humans, but rather one with the ulterior motive of jump-starting the workings of the profit-making, self-expanding machinery of capital. Simply put; it is about re-awakening the production process and its output towards ensuring continued valorization of capital.
3.0 Corporate governance, labour, and class struggle
Oman of the OECD Development Centre avers that: “Corporate governance” comprises the public and private institutions – both formal and informal – which together govern the relationship between those who manage corporations (“corporate insiders”) and those who invest resources in them
He further goes on to point out that:
These institutions typically include a country’s corporate laws, securities regulations, stock-market listing requirements, accepted business practices and prevailing business ethics.
The foregoing gives a fairly concise conceptualization of corporate governance. Corporate governance exists at the micro or firm, national and global levels of economic activities. The increasing importance of economic governance at the global level is for example reflected by Tabb’s conceptualization of multilateral economic institutions as being actually what he calls: Global State Economic Governance Institutions (Tabb, 2004). At the micro/firm level, Orghanzi (2004), studies the relationship between corporate governance and financialization in the United States, in an in depth survey which rests heavily on Stockhammer’s earlier work. The differences in “corporate governance” at national levels are at the heart of the literature on varieties of capitalism . This designates two major “varieties” or “models” of capitalist accumulation the Liberal Market Economy (LME) and the Coordinated Market Economy or according to Abe (2006, 2); the A-B (American-British) and G-J (German-Japanese) models, respectively.
Critical engagements with the phenomenon of corporate governance see the increasing influence of the financial sector on Non-Financial Corporations within the paradigm of the subsisting architecture of neo-liberalism as having a tendency to slowdown the accumulation process of real production (Cf: Stockhammer, 2002). The reason for this is not far-fetched. The drive to increase “share-holders’ value” and the incorporation of the managerial strata through share options have driven firms investments more towards short-termism and greater investments in the financial market as against in the production of goods.
Dumenil and Levy (2005) locate the origin of corporate governance in the distilling out of a managerial class as an impersonal category from the capitalist owners, noting however the binding of both as the “upper classes”. In an opposite class location they place the “popular classes” comprising the clerical and production workers. They see the Keynesian compromise with its corporate governance architecture as entailing “containment”, indeed “repression” of the highest echelons of capital which is represented by the finance-owning capitalist and the institutions of the financial system. Neoliberalism represents a restoration of this stratum and indeed the domination of finance over not just production but society as a whole. They further in their investigation show that while the A-B model we referred to above from Abe might characterise this the more, the process of increasingly financialization-driven; class patterns in the economy, power within state and hegemony over society is palpable as well in the G-J model, for example . The main thesis in their methodology was summed up as “that the transformation of capitalism and the perspective for the future must be assessed in relation to class relations and power configurations” .
The determinacy of the various elements of corporate governance emerge precisely from these; “class relations and power configurations”, between and within the popular classes (or labour) and the upper classes (personifications of capital) in which with financialization and driving financialization, the representative fractions of finance capital hold sway. Stockhammer (Ibid, 722 - 723), problematizes this phenomenon also through a class analysis in a similar manner. On one hand he argues that the managerial representatives of capital receive both wages , even while they also receive “rentier income” in the form of stock options. On the other hand, we also find pension funds as one of the two main “institutional representations of previously decentralized savings”, playing the role of de-personalized rentier-capitalist. He however leads then to the fact that the situation is not as simple as it would seem, with this scenario. Why is this so?
With financialization or the “shareholder revolution” as the corporate governance architecture it structured in its own image amounts to, “a market for corporate control” was won and the trade off between growth and profit supplanted by emphasis on short-term profit and consequently lower investment activity in production (Ibid, 739). Capital accumulation slowdown is the consequence of this.
The direct consequence of this could be gleaned from Kalecki (1970, 6). He shows that the power of trade unions impacts on the mark up of the capitalist-entrepreneur in his drive for profit, where and when there is the “the existence of excess capacities”, such that there could be increases in output and employment/increase in wages as well. The slowdown in capital accumulation depresses the excess of capacities and with consequent depression as we seem to be in now, where output is further curtailed due to grave downslides of effective demand, the trade unions tend to get weaker thus allowing for wage cuts. This however, as he argues “contributes to the deepening of unemployment rather than reliving it” and consequently the spiral of ineffective demand worsens.
These analyses we consider as very insightful. We however consider some inadequacies in it. This, one could say, is captured by Roemer (1986, 88) thus: “the elimination of capitalist exploitation might require significant incursions against the institution of private property, not simply its redistribution”. While the issue of corporate governance as a concept might have come to acquire greater significance in the past thirty years of neoliberal globalization , corporate governance is a feature of capitalism which with the expansion of capitalism beyond its earlier beginnings into incorporation and managerial de-personalization has always existed.
Within the Keynesian compromise, this is geared towards some effective demand resuscitation-targeted redistribution of income which nevertheless still upholds inequality. Indeed “effective demand” and tinkering for it had at its heart, getting the capitalist machine moving again and not necessarily full employment in itself. Labour thus, remains even to Keynesians as just another resource or more properly put, so to speak, “factor of production” (with wages as “factor costs”), and not the creator of wealth .
The reformist tilt to income redistribution to stimulate effective demand which the capitalist system might want to take again in the present crisis, very much as was the case between Roosevelt’s New Deal and Keynes under consumptionist theory, serve to try blunt the possible thorough going manifestation of the class struggle. It aims to steal the possibility of revolutionary winds from labour’s sails, containing it ideologically and psychologically as much as economically from demanding more than merely making the system of capitalism and it’s for profit motive, work.
4.0 Conclusion
In this introductory essay, we have tried to come to grasp with the dynamics of financialization, corporate governance and labour. Our point of critical departure has been one of Marxian analysis, which places the exploitation of labour at the heart of its discourse of the economic process.
In engaging with more mainstream, or rather bourgeois economic thinking in our analysis, the Keynesian traditions have been our focus. This is not accidental; we consider Keynes reformist conclusions from his realization of the instability of capitalism as being inadequate for an emancipatory approach to economics as theory and practice. We have in a sense beyond the Marxist been influenced, even if not explicitly by the perspective of Polanyi (1957, 29 – 50) on the divide between the substantive and formal meaning of the economic and think that bourgeois economics masks this presenting its deductive formal economics as given even for the substantive economic with the consequence of ideas of economists reflecting specific interests being taken as given.
The significance of the above to the analysis we have attempted above is that financialization could not have enthroned itself and played the role it has for the last three decades outside ideological as much as theoretical ascendancy.
In summing up, we posit the financial instability thesis of Minsky as an apt reflection of the tendency of capitalism. Corporate governance is seen as the format at different point sin time that the re-arrangement of relations between capital, society and the state is manifested and has as its primary goal, the furtherance of capitalism as a social going concern, under circumstances of boom (in which it sooner or later gets geared towards liberalization) and in times of depressions (when as with the policy thrust of most capitalist economies being debated now, it is ready for some Keynesian compromise or the other.
We consider the redistributive element in Keynesianism as being of benefit to labour, but merely as a bye-product in its quest at jump-starting an ailing capitalist economy. We hold that if another world is possible as the alternative globalization movement asserts and which we believe, another economics beyond the Keynesian as much as beyond the new classical school is as well both desirable and possible.
Such economics would place at its heart the overcoming of the exploitation of the vast majority of the human race and the despoliation of our continent now in peril. We are not doctrinaire about such new economics being Marxist in a sense bearing on dogma. But we strongly believe that Marxist political economy would be of utmost importance in forging such economics in general and here and this instance in understanding the dynamics between financialization, corporate governance and labour in a capitalist economy as we have tried our best to do.
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On September 15, 2008, Lehman Brothers, which had held over $600 million worth of assets, collapsed, filing for Chapter 11 bankruptcy in the United States . This marked a turning point in world history, similar to the Wall Street Crash of October 29, 1929, that had signaled the beginning of the Great Depression. Once again the material crisis of the world capitalist economy has brought human kind to a point of transition where ideas and forces behind these engage in an attempt to forge or re-forge a new order, re-formulate policies and construct new (or re-hashed) paradigms for the disciplines and practice of economics, politics, finance and international relations.
Concepts and processes of ‘financialization’, ‘corporate governance’ and ‘globalization’ which have come to assume front burner positions in the last thirty years of neo-liberal globalization of capitalism, now take on even more critical importance. The different views on what they entail and the consequences of these have not only been at play in the pre-September 15, 2008 world (particularly in the two years preceding it, when the financial cycle’s downturn threw up its cash crunch beginnings), they will shape what steps will or could be taken in attempts to salvage the world from the consuming aspects of capitalism’s “animal spirits”, to use Keynes words.
In this essay, we intend to conduct a critical introductory analysis of financialization, corporate governance, and labour. Our standpoint is Marxist and thus a critique of the very logic of the dynamics of these three variables as elements of an eternal order, as capitalism as not always been and will not always be society’s mode of production.
While taking note of the merits of Keynesian and Post-Keynesian formulations and the acceptance by these traditions of the inherent instability of capitalism , we do not share their optimism on the possibility of a lasting regulation of financial markets, resolution of the structural or cyclical crises of capitalism or the taming of the beast of capital for the overall good of society. Every regulation, de-regulation, or re-regulation of the capitalist economy at conjunctures of transitions in history has been merely re-arrangements in some form or the other of the relations between state, capital, and society; ultimately to the benefit of capital as a social going concern. This is to say in other words that; capitalists and their representatives to defend the capitalist order have always executed these.
We are of the view that despite its seeming intent, on the face of it, to make possible a more just, if not an entirely just society possible, as a major bye-product of its effective demand quest, Keynesianism suffers from deeper theoretical flaws that mark bourgeois economics as a whole. Onimode (1985, 5 – 13) captures these succinctly as “the problem of paradigm” and “the methodological defects” .
At the heart of our thesis is the argument that capital and indeed the capital accumulation process are not merely, things in themselves. They are social relations driven by competition within and between the capitalist class in the same countries and globally. The institutions of governance at the corporate and broader societal levels are mechanisms fashioned within the crucible of this reality. The only value-adding factor in the process of capital accumulation, however, is labour. Thus social wealth creation is dependent on labour employed or more properly put labour power exploited to appropriate surplus value (Cf: Marx, 1976, 283 – 306). This is the source of profit.
Profit is thus a function of value added only by labour. This has no meaning for the capitalist who considers labour as just another ‘factor of production’, in his quest for an ever-expansive accumulation of capital. Investment rests primarily on the profit-motive over and above the real value creating necessity for sustained capitalist production. The replacement of regulation with de-regulation and liberalist re-regulation that stir the jinni of financial markets once again is always just around the corner for capitalism once it feels strong enough.
We thus sum up our theses as follows: the capitalist economy tends towards financialization and this in itself is fraught with instability and; re-configurations of the manifestation of capital’s dominance of society through regulatory frameworks in the wake of crises can only but be temporary due to the profit-motive logic of capitalism, which eventually smashes through these.
We shall present our argument in the next section by situating financialization within the capital accumulation process. Here we shall scrutinize the dynamics between liquidity, investment, income, production, and consumption. In section three we shall look at corporate governance in relation to views on labour and the class struggle and relate this to financialization. Finally we shall draw our conclusions.
We must point out the limitation of space and time for this essay, which is one of the reasons why we present it as an introductory analysis. It should at best, be considered as broad brush strokes initiating the beginning of our own commitment to better understanding the discipline of macroeconomics, coming from a Marxist political-economy background.
2.0 Financialization and capital accumulation
The term “financialization” is today a well used one. Financialization entails the growing predominance of the financial system in a capitalist economy. According to Epstein in Financialization and the World Economy: “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international markets” (Epstein, 2005, 3).
Stockhammer asserts that ‘financialization is a recent term to capture transformations within the financial sector as well as in the relation between the financial sector and the economic sectors’ (2002, 720), while Dumenil and Levy present it as ‘a prominent feature of neoliberalism’ (2005, 8).
From the views above, which we largely agree with, financialization, is in a sense, a relatively new phenomenon. It is however new in the sense of old wine in new skin, as it is an inherent tendency of the capitalist accumulation process to tend towards the predominance of interest-bearing capital as capital strives to attain its most liquid form and indeed its sole being of commodity itself, i.e. money generating money . Foster (2007) reiterates this in what he describes as the “financialization of capital” .
We shall attempt to look at why and how this is not just characteristic of capitalism but indeed manifests itself within the aggregates of investments, savings, consumption, and income, being the constituents of macroeconomics.
2.1 Liquidity, investment and production
At the crux of financialization are two key interrelated dynamics. The first is the continued quest of capital to valorize. The accumulation process ordinarily produces both use value and value. Being subject to the dictates of the market though, the amount of use-values produced is limited; not by people’s needs, which are still yawning, but by ineffective demand borne out of the relative poverty of the immense majority of the population. The second is the need for confidence in the uncertain future, “in the form of claims to capital” . It is not possible for even a seer to see all what could happen in the future. Nevertheless, despite this hazard, without some form of certainty that the an economic activity would result in expanded value, no capitalist would invest in any endeavour no matter to what extent human beings would benefit from this.
Capital accumulation starts for the entrepreneur as investment. It is the initiation of a flow and a flow itself of resources employed to generate returns, an income, or what he sees simply as profit later. Sullivan and Sheffrin thus consider investment as the use of resources considered as assets to generate profit (2003, 271). A ‘universal equivalent’ (Marx, 1976, 159 -161), which is money is the life-blood with which this employment of resources, otherwise stated as investment does itself assume life as it is used as a measurement, standard and ‘store of value’ to pay for each of these. These flow and (constant) setting into motion of the circulation of capital is for the purpose of profit and the building up of a stock of wealth, which is capital.
The ‘universal equivalent’, or money as it were, is a capital-commodity itself, but one set aside as the mediator for all commodities intercourse in the matrix of the market. It is thus the most liquid of assets. The extent of ‘liquidity’ of all other assets, or forms of capital, then becomes determined by how easily convertible they are to money. With the growth of capitalism money, being a store and standard of value as much as its medium of exchange becomes more than mere ‘money’ and covers all forms of financial instruments , as an economy’s money supply.
In summary on one hand, investment to the capitalist as a whole is the utilization of assets for generating as their income, profit (and thus, one could assume; capital as a stock). As Keynes puts it:
When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset .
For that individual man though, he most likely would need more than what he could raise as his equity-assets for his investment, thus requiring liabilities more often than not in the form of credit, which tends to be more convertible to money or which is obtained as money itself . The liability incurred by the entrepreneur-capitalist is a financial asset of the ‘rentier-capitalist’ or “functionless investor” as Keynes puts it and the entrepreneurial-capitalist pays the later an interest for the use of this credit. Thus on the other hand investment tends to involve financial leverage reflected in the money liabilities entered into in and as a consequence of investment.
Since production is a social reality, the aggregate of these as the economic activities of a myriad of entrepreneurs manifests itself, at the macroeconomic level, as the Debt-to-GDP ratio of a country. Financialization as spurred by the ideology and new economics of neoliberalism in the past three decades leads to the expansion of this ratio and consequently credit bubbles, initially, and with its continued logic outside an interventionist containment leads to a depression as (Keen, 1995), brilliantly analysis.
This position of Keen rests on Minsky’s financial instability hypothesis which we will now give a closer attention to.
Minsky’s thesis is a development of Keynesian views and interest in making capitalism work, despite its inherent instability. It is a leading current of post-Keynesianism. While traditional Keynesian analyses presents the capitalist economy as a tri-markets pyramid with the labour market at the bottom, the product market at the middle and the financial market at its peak, it took Minsky to integrate “financial institutions and usages…into the analysis” and in doing so, present a clearer “theory of the cyclical behaviour of a capitalist economy” (Minsky, 1980, 95).
The Minskian thesis can be summed up in our view, thus: “investments generate profits” and profit expectations make debt financing a possibility; at every point in a capitalist economy, there is a “…mix of hedge, speculative, and Ponzi finance in existence” which is both historically established and dependent on expected future profits; a financial cycle can be distinguished , at its bottom or initiating phase, there is much confidence in the future and the economy’s finance is largely hedged while as it reaches its peak it tends towards the speculative (and the Ponzi); this situation emerges from policy thrusts that encourage “growth through investment”; to keep “it from happening again there is a need for the capitalist economy to shift emphasis rather “to the achievement of full employment through consumption production”.
Could an acceptance of the Minskian thesis as a basis for policy-formulation have led to avoiding a crisis like the current one? We would say yes, theoretically speaking. Its logic is almost flawless, especially as Minsky himself accepted the temporality of not just his own thesis, but indeed of all economic theory .
The reality of capital’s expansion though, is that it is a double movement of production and valorization. The capitalist is however less interested in the commodity-in-itself or the use-value which is the end-product of production. His interest as the personification of capital is in valorization, the expansion of the value of what he represents. Thus where and when social wealth is to an extent as abundant as is the case in advanced or later capitalism (even though this remains concentrated more and more in a few hands), the financial market, or its bulk, which is “fictitious capital” can not but continue to play an ever more important role. While for its self-preservation at crisis points such as this, the views of a Minsky or a Stiglitz could find ready ears amongst policy-makers, it is very unlikely that capital will allow for any lasting reining in of itself, before it shoots itself in the foot, again and again.
2.2 Investment, consumption and income
Keynesianism economics is concerned with maintaining relations of stabilization between investment, income, employment and effective demand . We have looked at investment above in relation to production and liquidity and shall start here by engaging with income and consumption to now relate these to investment in a capitalist economy, from a Marxist stand point.
Case and Fair (2007, 54) define income as “the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time", in an economy . It is the sum total of the ability or substratum available for possible consumption encompassing both monetary and non-monetary resource, even though it is expressed as a total in monetary terms (Barr, 2004, 121 – 124). Income thus in a social sense is manifested inflows reflecting enhanced assets or decline in liabilities, without these being borne out of more in-put of resources by the country or firm concerned. It is generated from economic activities, which entail the employment of the so-called ‘”factors of production”.
We see here a relationship emerging between income and investment. Since, income represents the ability to consume; it also presents the possibility for this ability to be rather used (or at least a part of it) as investment in the hope of expanding subsequent income. In the ceteris paribus language of bourgeois economics thus, an increase in income tends to lead to an increase in investment .
It is noteworthy though that economists’ thinking generally allows for and actually considers some level of income inequality within a given society as necessary. It is merely “excessive inequality” that is considered a problem and this largely from the perspective of efficiency and social injustice (Cf: Barr, Ibid). Thus flowing from this, even though Keynesian economics is a redistributive theory, it does not aim at eradicating social inequality. It is aimed at emboldening capital’s offensive through reformist tokenism for the working class rather than being emancipatory in providing alternative economic thinking for social progress. This is why Keynes posits the problem as one of under consumption.
Effective demand which is the touchstone of Keynesianism comprises aggregate consumption and investment. This fluctuates and Keynes analysis the dimensions of this fluctuation through the interactions of the propensity to consume, the marginal efficiency of capital and the rate of interest. A “pragmatic-utilitarian justification of ad hoc state intervention” serves as the outlet for introduction of government spending, to ensure the going concern of capital. The enhanced consumption of working people in this sense is not one based on a perceived need for maintaining a just or humane living for humans, but rather one with the ulterior motive of jump-starting the workings of the profit-making, self-expanding machinery of capital. Simply put; it is about re-awakening the production process and its output towards ensuring continued valorization of capital.
3.0 Corporate governance, labour, and class struggle
Oman of the OECD Development Centre avers that: “Corporate governance” comprises the public and private institutions – both formal and informal – which together govern the relationship between those who manage corporations (“corporate insiders”) and those who invest resources in them
He further goes on to point out that:
These institutions typically include a country’s corporate laws, securities regulations, stock-market listing requirements, accepted business practices and prevailing business ethics.
The foregoing gives a fairly concise conceptualization of corporate governance. Corporate governance exists at the micro or firm, national and global levels of economic activities. The increasing importance of economic governance at the global level is for example reflected by Tabb’s conceptualization of multilateral economic institutions as being actually what he calls: Global State Economic Governance Institutions (Tabb, 2004). At the micro/firm level, Orghanzi (2004), studies the relationship between corporate governance and financialization in the United States, in an in depth survey which rests heavily on Stockhammer’s earlier work. The differences in “corporate governance” at national levels are at the heart of the literature on varieties of capitalism . This designates two major “varieties” or “models” of capitalist accumulation the Liberal Market Economy (LME) and the Coordinated Market Economy or according to Abe (2006, 2); the A-B (American-British) and G-J (German-Japanese) models, respectively.
Critical engagements with the phenomenon of corporate governance see the increasing influence of the financial sector on Non-Financial Corporations within the paradigm of the subsisting architecture of neo-liberalism as having a tendency to slowdown the accumulation process of real production (Cf: Stockhammer, 2002). The reason for this is not far-fetched. The drive to increase “share-holders’ value” and the incorporation of the managerial strata through share options have driven firms investments more towards short-termism and greater investments in the financial market as against in the production of goods.
Dumenil and Levy (2005) locate the origin of corporate governance in the distilling out of a managerial class as an impersonal category from the capitalist owners, noting however the binding of both as the “upper classes”. In an opposite class location they place the “popular classes” comprising the clerical and production workers. They see the Keynesian compromise with its corporate governance architecture as entailing “containment”, indeed “repression” of the highest echelons of capital which is represented by the finance-owning capitalist and the institutions of the financial system. Neoliberalism represents a restoration of this stratum and indeed the domination of finance over not just production but society as a whole. They further in their investigation show that while the A-B model we referred to above from Abe might characterise this the more, the process of increasingly financialization-driven; class patterns in the economy, power within state and hegemony over society is palpable as well in the G-J model, for example . The main thesis in their methodology was summed up as “that the transformation of capitalism and the perspective for the future must be assessed in relation to class relations and power configurations” .
The determinacy of the various elements of corporate governance emerge precisely from these; “class relations and power configurations”, between and within the popular classes (or labour) and the upper classes (personifications of capital) in which with financialization and driving financialization, the representative fractions of finance capital hold sway. Stockhammer (Ibid, 722 - 723), problematizes this phenomenon also through a class analysis in a similar manner. On one hand he argues that the managerial representatives of capital receive both wages , even while they also receive “rentier income” in the form of stock options. On the other hand, we also find pension funds as one of the two main “institutional representations of previously decentralized savings”, playing the role of de-personalized rentier-capitalist. He however leads then to the fact that the situation is not as simple as it would seem, with this scenario. Why is this so?
With financialization or the “shareholder revolution” as the corporate governance architecture it structured in its own image amounts to, “a market for corporate control” was won and the trade off between growth and profit supplanted by emphasis on short-term profit and consequently lower investment activity in production (Ibid, 739). Capital accumulation slowdown is the consequence of this.
The direct consequence of this could be gleaned from Kalecki (1970, 6). He shows that the power of trade unions impacts on the mark up of the capitalist-entrepreneur in his drive for profit, where and when there is the “the existence of excess capacities”, such that there could be increases in output and employment/increase in wages as well. The slowdown in capital accumulation depresses the excess of capacities and with consequent depression as we seem to be in now, where output is further curtailed due to grave downslides of effective demand, the trade unions tend to get weaker thus allowing for wage cuts. This however, as he argues “contributes to the deepening of unemployment rather than reliving it” and consequently the spiral of ineffective demand worsens.
These analyses we consider as very insightful. We however consider some inadequacies in it. This, one could say, is captured by Roemer (1986, 88) thus: “the elimination of capitalist exploitation might require significant incursions against the institution of private property, not simply its redistribution”. While the issue of corporate governance as a concept might have come to acquire greater significance in the past thirty years of neoliberal globalization , corporate governance is a feature of capitalism which with the expansion of capitalism beyond its earlier beginnings into incorporation and managerial de-personalization has always existed.
Within the Keynesian compromise, this is geared towards some effective demand resuscitation-targeted redistribution of income which nevertheless still upholds inequality. Indeed “effective demand” and tinkering for it had at its heart, getting the capitalist machine moving again and not necessarily full employment in itself. Labour thus, remains even to Keynesians as just another resource or more properly put, so to speak, “factor of production” (with wages as “factor costs”), and not the creator of wealth .
The reformist tilt to income redistribution to stimulate effective demand which the capitalist system might want to take again in the present crisis, very much as was the case between Roosevelt’s New Deal and Keynes under consumptionist theory, serve to try blunt the possible thorough going manifestation of the class struggle. It aims to steal the possibility of revolutionary winds from labour’s sails, containing it ideologically and psychologically as much as economically from demanding more than merely making the system of capitalism and it’s for profit motive, work.
4.0 Conclusion
In this introductory essay, we have tried to come to grasp with the dynamics of financialization, corporate governance and labour. Our point of critical departure has been one of Marxian analysis, which places the exploitation of labour at the heart of its discourse of the economic process.
In engaging with more mainstream, or rather bourgeois economic thinking in our analysis, the Keynesian traditions have been our focus. This is not accidental; we consider Keynes reformist conclusions from his realization of the instability of capitalism as being inadequate for an emancipatory approach to economics as theory and practice. We have in a sense beyond the Marxist been influenced, even if not explicitly by the perspective of Polanyi (1957, 29 – 50) on the divide between the substantive and formal meaning of the economic and think that bourgeois economics masks this presenting its deductive formal economics as given even for the substantive economic with the consequence of ideas of economists reflecting specific interests being taken as given.
The significance of the above to the analysis we have attempted above is that financialization could not have enthroned itself and played the role it has for the last three decades outside ideological as much as theoretical ascendancy.
In summing up, we posit the financial instability thesis of Minsky as an apt reflection of the tendency of capitalism. Corporate governance is seen as the format at different point sin time that the re-arrangement of relations between capital, society and the state is manifested and has as its primary goal, the furtherance of capitalism as a social going concern, under circumstances of boom (in which it sooner or later gets geared towards liberalization) and in times of depressions (when as with the policy thrust of most capitalist economies being debated now, it is ready for some Keynesian compromise or the other.
We consider the redistributive element in Keynesianism as being of benefit to labour, but merely as a bye-product in its quest at jump-starting an ailing capitalist economy. We hold that if another world is possible as the alternative globalization movement asserts and which we believe, another economics beyond the Keynesian as much as beyond the new classical school is as well both desirable and possible.
Such economics would place at its heart the overcoming of the exploitation of the vast majority of the human race and the despoliation of our continent now in peril. We are not doctrinaire about such new economics being Marxist in a sense bearing on dogma. But we strongly believe that Marxist political economy would be of utmost importance in forging such economics in general and here and this instance in understanding the dynamics between financialization, corporate governance and labour in a capitalist economy as we have tried our best to do.
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