Production Capitalism vs. Financial Capitalism - Symbiosis and Parasitism. An Evolutionary Perspective.
Documents from a workshop-conference held in Oslo, September 3-4, 1998.
Prolegomenon and Bibliography. Erik S. Reinert & Arno Mong Daastøl
Organised by Norsk Investorforum, Oslo & SUM, Centre for Development and Environment, University of Oslo.
Financial issues are far from being at the core of evolutionary economics. The evolutionary focus has been on the production of goods and services (on what Schumpeter called the Güterwelt), not on money. This has, no doubt, been the right emphasis, particularly as much of our economic policy - both in the First and in the Third World - is still based on what Schumpeter called ‘the pedestrian view that it is capital perse which propels the capitalist engine.’ The view of evolutionary economics on finance has tended to be in line with what the same author, Schumpeter, saw as one conclusion from Antonio Serra’s 1613 book: ‘If the economic process as a whole functions properly, the monetary element will take care of itself and not require any specific therapy.’ However, in the context of the late 1990’s, the financial system seems to intrude into the economic process in a way that is qualitatively different from before. This, we feel, raises the need to discuss the relationship between evolutionary
economics and finance.
Traditionally, evolutionary economics deals with the dynamics within the black box of production (the Güterwelt). The dynamics of the Güterwelt require, however, a financial scaffolding in order to develop. At the best of times, then, there is a healthy symbiosis between the two worlds, between the real economy and the financial economy. The workshop is dedicated to the relationship between the two spheres above, between production capitalism and financial capitalism, between the sphere of goods and the sphere of money, between innovation and finance - in all its aspects; e.g. historical, theoretical, technological, or in terms of its effect on the distribution of income or on the clustering of innovations; within nations or internationally. This discussion is an old one, but of renewed relevance.
The relationship between production capitalism and financial capitalism is reflected in the old German distinction between ‘schaffendes Kapital’ (creative capital) and ‘raffendes Kapital’ (grabbing capital). Hilferding’s Finanzkapital from 1912 is a classic in this field. This same issue was also much discussed in 19th Century United States, when foreign (i.e. English) capital tended to be 'bad' capital and domestic capital was 'good' capital. South East Asians today will probable share this view on the roles of foreign vs. domestic capital. In his Treatise on Money (1931) Keynes sees depressions as arising when money is shifted from ‘industrial circulation’ into the ‘financial circulation’. This is again an observation that seems to fit the present situation as well. A few years later, in 1936, Harold Macmillan complained about his own party being dominated by Casino Capitalism. Today a similar distinction is found in Bill Lazonick’s ‘wealth creation’ vs. ‘wealth extraction.’ At the same time, the English Telegraph recently estimated the market for financial derivatives around twice the world GNP in size. Other estimates are even higher. Perhaps this is a good time to reread Keynes.
The aim of the conference is to contribute to public policy by attempting to answer some fundamental questions regarding the relationship between financial capitalism and production capitalism:
What can theory and history contribute in terms of an operational delimitation between ‘Production Capitalism’ and ‘Financial Capitalism’?
What have been the most efficient policy measures – in tax policy, industrial policy or otherwise - in channelling financial flows into ‘industrial circulation’ (of course also including services) rather than into ‘financial circulation’?
To what extent is the present Asian crisis a 'typical' bubble? (The term bubble was coined during the financial crisis in 1720, which was the first truly international financial crisis.) What is new about today's situation, and what are recurrent elements of all financial crises through the ages?
What are the relationships between discontinuities in technological change – systemic paradigm shifts – and financial crisis? Do financial bubbles tend to appear at a similar point in the technological trajectory? If so, what are the mechanisms at work?
How do financial cracks change the distribution of income and wealth – nationally and internationally? The 1929 crack provides and interesting case on how different sectors are affected in very different ways. In the United States, industrial labour kept their wages, and the crisis was taken out in terms of unemployment. As a result labour's share of GNP actually rose in the US during the depression, whereas in agriculture the price and wage level fell by around 50%. During recent Latin American crises whole national wage levels behave more like the US agricultural sector than like the US manufacturing sector during The Great Depression. In many nations, the financial adjustment policies have lead to a radical redistribution of GNP away from labour and the self-employed towards profits and the financial sector. In the 1930's labour's share of GNP was around 70 % in the US. In Peru in 1996 profits and the financial sector amounted to about 53 % of GNP. What can be learned from the US experience in terms of protecting real wages during a financial crisis?
Capitalism is, of course, a name for our whole economic system. From the standpoint (of one branch) of evolutionary economics, it could be considered a misnomer. The name does seem to confirm the already quoted ‘pedestrian view’ that capital per se is at the core of the system. The term ‘capitalism’ was first used by the enemies of the system - by German socialists - as a derogatory term. Was the term chosen as a protest against financial speculation? In the spirit of evolutionary economics, a more fitting term would perhaps have been idea-ism: a system which is driven by human ideas and human will, based on conscious rationality, on intuition, perceptiveness, and leadership. The demand for capital is created by these innovative ideas and this human will. Without new ideas, in a state of equilibrium, there would - as Schumpeter pointed out - not be any demand for capital (beyond that covered by depreciation). Capital would have no value and pay no interest. Ideas, then, must come first in order to give capital its value. Thus, the term idea-ism would seem to take priority over capital-ism.
There are times in the history of economics when the profession has attempted to look through ‘the veil of money’ (the title of Pigou’s 1949 book) to capture the real economic forces. Before WW I metaphors like ‘money is a wrapper in which goods come to you’ or ‘money is the garment draped around the body of economic life’ were common. First after the violent disturbances in prices and exchange rates following WW I and then again during the depression of the 1930’s, money - the passive veil - ‘took on the appearance of an active and evil genius’ (Pigou). ‘Money, after being little or nothing, was now everything.’ Although during WW II emphasis was on the real world of equipment, organisation and production, the last 50 years of abstract and formal ‘neo-classical synthesis’ in economics has again covered the world of ideas, leadership, intuition, knowledge and human will in a fairly impenetrable ‘veil of money’. How can the real forces be unveiled and understood to prevent money from again becoming ‘an active and evil genius’ which causes thereal economy to collapse?
Production capitalism depends on a working financial system, and clearly innovation in finance often accompany innovations of products and processes. There is, then, often a healthy symbiosis between the worlds of production and finance. However, at certain points in history, this relationship seems to take on a parasitic quality: the financial sector, as compared to the real economy, enters a stage of explosive and disproportionate growth and - as this bubble later bursts - the financial sector severely reduces the size and virility of its ‘host’, i.e. of the real economy (the production of goods and non-financial services). In the serious cases, the national standards of living collapse simultaneously with the collapse of the financial sector. In the United States GNP/capita did not reach its 1928 level again until the middle of WW II.
In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation? On the other hand, access to production credit is an important problem for the poor in the Third World. This has given rise to microenterprise finance among the poor as a business and as an incipient field of academic inquiry that will be covered at the conference.
As a result of the tendency towards savings being used to prop up the value of already existing assets, do we need a different theory of saving? Ragnar Frisch contributed claimed that ‘saving’ from the point of view of a nation was so different from private savings that a new and different term ought to be invented. ‘A nation’, said Frisch, ‘can only save through arrangements in the productive sphere.’ This would open up for a differentiation between two kinds of savings and capital accumulation - one adding to the ‘real world’ of goods and services, the other just inflating the value of already existing assets. A most important issue is this: What can be learned from previous efforts aiming at taxing financial operations leading towards bubbles, while sheltering productive investment. Is the Tobin tax one answer to our problems? What, if anything, can we learn from the different schemes of the 1930’s which attempted to force savings into productive schemes only, like e.g. Silvio Gesell’s ‘stamped money’ which decreased in value if not productively invested? Like theories of trade, theories of banking seem to lend themselves to an analysis contrasting the Continental (German) approach and the English approach. This contrast in approach between English and Continental theories also applies to 'the social question' which seems to recur - in slightly different versions - with every financial crisis.
Financial bubbles seem to appear in historical periods that are characterised by a zeitgeist giving priority to monetary goals above goals in the real economy; in periods when the tail (the monetary economy) is allowed to wag the dog (the real economy). One example: In the UK after WW I, it was decided to put the pound back on pre-war parity with the dollar. In order to achieve this, UK wages were deliberately forced down in an attempt to make wages match the deflated level of prices. This move caused Keynes for the first time to question the sanity of economic theory, and made him fire the first shot, in 1922, of what was to become the Keynesian Revolution. Today - in order to introduce a common currency - the European Community has set a completely arbitrary figure of 3% budget deficit for nations to qualify. The economies ruled by old-fashioned Latin American dictators – like Stroessner and Duvalier – would have been the first to qualify for the criteria for the European common currency. Just like after WW I in the UK, we seem not to mind adjusting people’s standard of living downwards in order to achieve a monetary goal which has been chosen in a completely arbitrarily manner. The fact that the economy is in the middle of a technological revolution which creates a strong deflationary tendency, makes a policy fundamentally based on the fear of inflation all the more questionable.
The relationship between money and production also raises important philosophical and historical - even anthropological - issues. To German speakers there are, as always, treasures to be rediscovered in the almost forgotten German economic tradition. What did Roscher, Schmoller and Sombart have to say about this problem? Georg Friedrich Knapp and Karl Elster (Die Seele des Geldes - ‘The Soul of Money’, 1920) combine economic theory and monetary theory, finance, law, and philosophical/theoretical issues with political science. (‘Das Geld ist ein Geschöpf der Rechtsordnung’). Schumpeter also contributed to this debate in 1917 with a paper called ‘Das Sozialprodukt und die Rechenpfennige’ and in his book Das Wesen des Geldes (‘The Nature of Money’), written in the late 1920’s, but only published in 1970. Schumpeter here discusses the relationship between the monetary economy and the real economy - between the sphere of money (Geldgrössen und monetäre Vorgänge) and the sphere of goods and services (Güterwelt). His theoretical approach here is very much in line with Schmoller’s - with the holistic tradition of the German historical school.
The history of finance and production goes back to the Codes of Hammurabi in ancient Mesopotamia, where sporadic debt cancellation was an institutionalised mechanism for preventing an increasing concentration of land into a few hands. In modern times there is plenty of literature pointing to financial bubbles and their follies. The famous Dutch tulip mania of 1636-1637 is well documented. Often already the titles of the contemporary books say much: In 1688 a book appeared describing the Amsterdam stock exchange, which was then the world’s leading financial centre. The book, entitled ‘Confusion de Confusiones’, was written in Spanish by a Portuguese Jew, Joseph de la Vega, and published in Amsterdam. In 1720 - after the South Sea Bubble in England and the Mississippi Bubble in France - appeared, among many others on the subject, a large and extravagant book with many plates, under the title ‘The Great Mirror of Folly.’ An important 19th Century contribution to this literature - ‘Extraordinary Popular Delusions and the Madness of Crowds’ by Charles Mackay - appeared in 1841, and was republished in 1980.
The crisis of 1929 was not the last financial crisis which brought down the real economy with it. There are many worrisome signs which point to the need for a better understanding between the sphere of money and the sphere of real goods and services. The standard of living of the average Mexican fell drastically as the result of a financial collapse, the ‘tequilazo’. Capitalism came to Albania in the form of a financial pyramid game, which no one seemingly tried to stop, bringing ruin to a nation which already was the poorest country of Europe by far. The official figures show that the ‘real economy’ in Russia (GNP/capita) has been more than halved since the fall of the Berlin wall, accompanied by a measurable fall in life expectancy. Real wages in Lima, Peru have been reduced by between 40 and 60 % since 1983, in private and public sector respectively. Income distribution in the industrialised world is worsening almost everywhere. Schumpeter’s ‘creative destruction’ also takes on a new meaning – one of financial creativity combined with the destruction of real wealth. One example are buyouts aimed at dismembering assets, running down plant and equipment, ‘dressing up’ earnings; all in the expectation that stock markets will continue to rise so that the assets again can be unloaded.
The relationship between production capitalism and financial capitalism through history can be seen as one of ebbs and flows, of periods of industrial capitalism maturing into financial capitalism, at one point causing a financial crack which prompts the creation of a more restrictive system aimed at reconstructing the 'real' economy, thus starting the cycle all over again. The high tides of financial crises are accompanied by a similar tidal wave of literature. The first truly international financial crash in 1720 caused the production of economic books to increase by a factor of 10 in one year. No doubt the Asian crisis will produce a similar tidal wave. The aim of this workshop-conference is to maximise the learning effects from previous financial crises, minimising the number of wheels that have to be reinvented.
Production Capitalism and Financial Capitalism: Symbiosis or Parasitism ? A Bibliography.
Compiled by Arno Mong Daastøl on behalf of Norsk Investorforum and SUM - Centre for Development and the Environment, University of Oslo.