Sweezyian Financial Instability Hypothesis—Monopoly Capital, Inflation, Financialization, Inequality and Endless Stagnation

Abstract

From the standpoint of monopoly capital theory, this paper argues that oligopolistic capitalism is internally unstable. The instability manifests from the historical evolution of finance within oligopolistic capitalism. The historical rise of oligopolistic capitalism has given rise to price fluctuations; (non-financial) firms have increasingly relied on financial firms to guarantee prices. At the level of the individual firm, this increase in future markets has reduced risk and tended to increase production. However, at the macro-economic level the increase in financial speculation has generated greater instability and inequality. This paper theorizes this macro-economic instability and inequality, along with the increase in the rate of exploitation by means of “financial expropriation.”

Keywords:

• instability
• inequality
• Paul Sweezy
• financial expropriation

Notes on Contributor

Hans G. Despain is the chair of the Department of Economics at Nichols College in Dudley Massachusetts.

Notes

¹Lapavitsas (2013) updates this argument. Although primarily drawing from Japanese Marxian political economy, Lapavitsas is remarkably consistent with monopoly-finance capital theory of the Monthly Review tradition.

²In an earlier version of this paper I dubbed this “Sweezy's financial instability hypothesis.” I am indebted to an anonymous reviewer for critically pointing out that the argument in this paper is not strictly speaking the concerns of Baran and Sweezy or Sweezy and Magdoff. I agree. The argument is an implication of monopoly capital theory. Thus, the question becomes what to call the instability generated by this implication. I have chosen “Sweezyian” rather than “Sweezy” to draw a distinction between the letter of Sweezy's work and the implication of monopoly capital theory unfolded in this paper.

³The historical emergence of financialization is beyond the scope of this paper. Nonetheless, the Japanese Marxian tradition provides some useful historical insight.

Lapavitsas distinguishes between the banking system and the financial system. The banking system emerges as a rentier endeavor to usurp surplus value through loaning idle funds. The banking system takes in short-term deposits (paying small amounts of interest) to loan long term (at higher rates of interest). But such usurpation runs into very serious problems historically.

What develops is an integrated, pyramid-like, credit system with successive layers of credit relations embedded in historically specific conditions (Lapavitsas 2003, 71). The fundamental first layer is commercial credit relations. These are business to business and business to consumer credit relations that arise spontaneously among capitalist enterprises in the normal course of accumulation. “Commercial credit facilitates commodity transactions among industrial and commercial capitals by deferring payment” (Itoh and Lapavitsas 1999, 86).

The second layer of “banking credit” relations typically emerges upon the foundation of the first layer of commercial credit relations. Once commercial credit reaches a certain point, an arbitrage process emerges whereby “pools of idle money,” i.e., hoards, exist and banking capital mediates the allocation and “direct it toward production and generation of profit” (Lapavitsas 2003).

These first two layers constitute what Lapavitsas calls the banking system. However, there are serious contradictions in a banking system that has short term deposits, but long term loans. Thus, a third layer of credit relations emerges upon the fundamental banking system, or a real financial system of “money market relations” develops to provide “liquidity” and limit the potential for banking crises due to “runs-on-banks” (Itoh and Lapavitsas 1999, 96–98). The fourth and apex of the financial system is central banking relations. This layer, like the third, is created to avoid, otherwise manage, financial crises. The central bank is a bank of banks, typically with relative independence from the state (Itoh and Lapavitsas 1999, 170–75), which operates especially in the money markets (Itoh and Lapavitsas 1999, 98–100). The activity of the central bank is aimed mostly at banks operating in the money markets and to assure “liquidity” for member banks (Lapavitsas 2003, 71), typically by means of monetary policy (Itoh and Lapavitsas 1999, 163–66), overseer of the credit system, and lender-of-the-last-resort (Itoh and Lapavitsas 1999, 166–69).

The reason for the emergence of a full-fledged financial system, in distinction to a banking system more narrowly conceived, is to provide “liquidity” (level three), and “stability” (level four) for, banks. “From this [Unoian] perspective the money market is, at its core, an interbank market for reserves of liquidity” (Lapavitsas 2013, 131).

For Marx (1978, 158–59, 572–74, 410–12) money always has a dual presence, it is continuously in movement or circulating, and ubiquitously found in its state of rest or hoarded (Lapavitsas 1994). In this account the money supply of an economy is constituted by “a part in movement and a part at rest, the dividing line shifting incessantly in line with the requirements of commodity circulation” (Itoh and Lapavitsas 1999, 46). Hoards act as regulators of the quantity of circulating money (taken up later by central banks). Hoards either absorb excess amounts of money or meet shortfalls of money demand (Itoh and Lapavitsas 1999, 43).

The argument here is threefold. First, for Marx the money supply is endogenous (Itoh and Lapavitsas 1999, 239–46). Second, the turnover time or lag whereby the hoard is held as a stock is costly. Marx (1978) called this “The Costs of Circulation.” These costs of circulation are in essence what give rise to modern financial markets. Rather than hold idle hoards, banks begin trading various assets. Banks with a liquidity shortfall borrow idle hoards (or idle liquidity) from other banks with some income stream or asset as collateral, for example a customer's loan. Over time this activity between banks emerged in money and stock market activity (Itoh and Lapavitsas 1999, 83–102).

The borrowing and loaning between banks is essentially, or effectively, the same role played by financial derivative markets today. In other words, financial derivative markets provide liquidity to banks.

Third, the financial system, thus, emerges endogenously from the process of accumulation (Lapavitsas 2013, 123). More accurately, the financial system emerges from the processes of accumulation, concentration, and centralization. As firms get bigger, hoards get bigger, and become ever more centralized through mergers and crises (i.e., bankruptcies).

Thus, the Japanese Marxian tradition and monopoly-finance capital theory are in remarkable agreement concerning that financialization is innately capitalistic. “Finance is not a parasitical entity but an integral element of the capitalist economy. Developed capitalism without a developed financial system would be unthinkable. The financial system offers key services to capitalist accumulation and improves the profitability of industrial and commercial enterprises” (Lapavitsas 2013, 122).

⁴A full historical account of financialization would have to trace out the effects it has on, households, non-financial enterprises, financial enterprises, public governments, educational institutions, and the dialectical relationships between institutions. The literature here is vast. Our intention is only to trace on the implications of financialization on macro-economic instability.

⁵Unfortunately Sotiorpoulos, Millios, and Lapatsioras do a bit of hatchet-job of monopoly–finance capital (see Despain 2014, who points this out in his review of the book).

⁶Sotiorpoulos, Millios, and Lapatsioras are correct to underscore the commodification of risk of financial derivatives, but underappreciate the effect on money supply (see Despain 2014).

⁷Sotiropoulos, Millios, and Lapatsioras (2013) draw from Bryan and Rafferty (2006, 2–3, 203–13); Bryan, Martin, and Rafferty (2009); and Martin (2002). Another important book with a similar argument for issuing of international economic development is Sasha Breger Bush (2012), but does not seem to have influenced the authors here under review.

⁸What is being sold is a loan; the income stream is being given up for portions of pennies on the dollar. In other words, for example, the bank sells a $300,000 30-year mortgage with an interest rate of 7%. In 30 years, 360 payments would be made, for a grand total of $718, 526, or $300,000 in principal and $418, 526 in interest payments. It is easy to understand why someone would pay (say $1000 dollars today), for an income stream of $418,526. But why would a bank sell for $1000 an income stream of $418,526? Very simple, because they get $1000, plus the $300,000, which they then loan out again. Thus, they get to both keep and eat their cake, because the bank simply loans the $300,000 to another borrower at 7% and they have both a $418,525 income stream and the additional $1000. Now repeat this process 1000 times and the bank still retains the $418,525 income stream plus $1,000,000.

⁹Indeed, in a way the double digest inflation generated by monopoly capital in the 1970s was shifted from consumption markets to asset/finance markets. This is not the abeyance disproportionalities (as argued by Sweezy [1942] 1970), but a shift. Disproportionalities shift from between Department I and Department II, to a balance between these two departments, with a disproportionality between these activities and financial activity.

¹⁰Galbraith (2012) identifies and pronounces this law over and over, from the rise in inequality in the United States (141–46) to inequality and macro-economic performance in Europe (179–81), from dynamics of inequality in China to dismal effects of inequality on the economies of Argentina and Brazil (265–67), from India and East Asia (87–91) to the performance of Cuba after the fall of the Soviet Union (269–87), from the egalitarian social democracies of Scandinavia to the non-egalitarian “emerging” democracies (102–3).