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The Rules of the Game, Not the Players

by Michael Heinrich Friday, Nov. 13, 2009 at 7:17 AM

In the last three decades, the financial markets have grown much faster than production.. The respective players (whether public or private) are not the problem but the rules of the game.. The goals and means of production must be redefined


The financial crisis according to Karl Marx

Profit maximization and competition will produce crises again and again like the current one. A nationalization merely changes the actors without encroaching on the structure.

By Michael Heinrich

[This article published on 1/14/2009 is translated from the German on the Internet link to

Michael Heinrich, 51, is a mathematician and political scientist. He is editor of Prokla, a journal for critical social science and teaches at the Berlin Academy for Technology and Economy. Capitalism is a colorful treacherous Ferris wheel that breaks down again and again.]

Economists and politicians have trouble with the financial crisis. The neoclassical economic theory dominant at universities and in advisory bodies does not generally know any crises in its market models. "Disturbances" only occur because of incursions from outside the market Therefore neoclassical authors praised the efficient market year in and year out which will solve all our problems if we only allow it free rein - from unemployment to the costs of old age pensions and health care.

In the meantime the appearances of radical market proponents have only been awkward and embarrassing. Hans-Werner Sinn known from countless talk shows is the same man to whom in the past every low wage demand seemed too high. Now he claims he has always been for more regulation of the financial sector and that the drawbacks of a wage policy responsible for the weak domestic market are manifest.

Keynesians have it somewhat better. They always refer to the limits of the market and emphasize wage cuts do not automatically lead to full employment. Capitalism produces unemployment again and again since investments as a rule are not sufficient to employ all the workers. With an unshakeable trust in the possibilities of state action, they urge the state to counteract crises with investment incentives and economic programs.

Karl Marx did not ignore economic crises or reduce them to controllable disturbances. That he now gains public attention again is not surprising. His "Kapital" is more than 140 years old but Marx did not merely analyze the English capitalism of his time. English capitalism only served as an "illustration" of the "theoretical development." What he wanted to describe were capitalism's basic structures and mechanisms, not a certain development phase of capitalism.

The Marxian insights on simplifications found among some Marxists and many Marx critics must be differentiated. Marx' approach is often reduced to a mere theory of labor value and exploitation while his analyses on money and credit are ignored. The theory of labor value was already an element of the classical school of Adam Smith and David Ricardo. On its foundation, Ricardian socialists formulated a theory of exploitation.

Marx criticized all these theories since they only considered exchange relations, not the character of "value-creating" labor. He asked about the nature of social connections in a society based on exchange of goods. On one hand, the producing units (individual producers and whole factories) depend on each other because of the social division of labor. On the other hand, production happens "privately," independent of others. How far this private production is recognized as an element of total social labor appears afterwards on the market.

Where classical and neo-classical economists argue about the effects of supply and demand, Marx insisted the exchanging parties on the market only refer to one another through their products and therefore only show the social character of their labor as concrete qualities of exchanged goods. Outfitted with these social qualities, goods unfold a life of their own to which people are handed over. Producers stare spellbound at the development of the prices of goods. Shareholders look horrified at price drops as though they were natural phenomena.

Marx analyses this independence of the social context in its ramifications under the keyword "fetishism" through the three volumes of "Kapital" and uncovers a series of "mystified" and "confused" forms. In the dominant economy, the "practical necessities" issuing from these confused forms are reproduced unconsciously ("the market requires... "; "globalization demands... ").

Goods only generally refer to one another through money. Marx emphasizes the fundamental distinction between money-oriented circulation of goods and exchange of products. In the direct exchange of A for B, the sale of A is bound with the purchase of B. But with money-mediated exchange, the expenditure of earned money for a purchase does not follow automatically from the sale. The circulation chain can break. The "possibility of crisis" exists with money-mediation. However neoclassicism reduces money to a mere arithmetical unit. Neoclassicism starts de facto from a non-money-mediated exchange and then "proves" that there can be no crises in this fantasy world.

Capital exploits itself and produces surplus value through exploitation of human workers. This exploitation is excessive and has no inner limit. The pressure of competition forces individual capitalists to this excessiveness. Whether they are individually very greedy or not is unimportant.

In this production geared for more and more exploitation, the immediate producers, the workers, are a cost-factor to be reduced while the productivity of this factor simultaneously increases more and more. This contradiction has extremely destructive consequences for workers (and for nature). It is also an essential cause of the crisis-susceptibility of the capitalist mode of production.

The permanent enhancement of productivity, which usually requires an expansion of production, confronts a tendency to limit consumer possibilities since wage levels and employment numbers should remain low for cost-reasons. It is as though one presses the gas pedal and the brake pedal simultaneously in car driving, which cannot be good for the car in the long run. The goal of capitalist production, the constant increase of capital exploitation, underlies the crisis-prone development of capitalism, not outward disturbances.

Established economists and leftist critics often assume that completely different worlds are involved in capitalist production one side and the financial markets on the other side. Solid production here faces windy unreliable speculation there. That capitalist production also rests on speculation is forgotten. The auto manufacturer also speculates that the expensive gas-guzzler will find enough buyers. This speculation can go wrong like speculation on rising stock prices.

Current crisis explanations stress that institutions external to capitalist production are involved in the capital markets. Too much speculation and excessive readiness to take risks of banks and funds can do considerable damage.

Marx opposed these explanations since a developed capitalist production is impossible without a developed credit system. "Cars cannot buy cars." This maxim referring to the consumer goods market can be transferred to the sector of means of production: "machines cannot buy machines." As workers need wages to acquire sufficient consumer goods, capitalist businesses need sales revenue to be able to buy. In an intensely growing economy, at least a part of this revenue exists in the form of credits. A developed capitalist economy is only possible with extended credit relations. But a developed credit system only functions when the credit itself, the guaranteed debts, becomes a negotiable commodity, when there are financial markets.

Marx correctly described these negotiable financial products (stocks, loans, options etc.) as "fictional capital." While "industrial capital" is expended for production sites and wages make possible products and services that can be sold with profit, "fictional capital" does not represent real capital but merely a claim to certain payments, the claim to interest- and compound-interest payments with loans and dividend payments with stocks.

These claims are "assessed" in the stock prices. If the profit expectations of a firm increase, its stock price climbs. Expectations can change in the shortest time. Therefore prices can rise or fall very quickly. Fictional capital develops a life of its own, which always refers to the exploitation of industrial capital as an expression of the development of its future development, not as a reflection of its present situation.

Financial markets do not have much in common with gambling casinos as implied in the seemingly plausible demand "shut down the casino." In a gambling casino, probabilities and risks are largely known. This is not so clear on the financial markets. The game in the casino is a zero-sum game. The gains of one player face the great losses of others. In the casino, the sum of money is only redistributed and not changed.

The market values on the stock exchanges are different... The value of capital seems to be completely in order. Some economists try to "prove" this with new mathematical models of risk calculation. But the whole process is reversed when too many shareholders want to change the book value of their stocks into hard money for which there are many reasons. A good part of the "value" of fictional capital vanishes into nothing. Shareholders lose without others winning. In addition, the credits that are no longer covered on account of falling stock prices are recalled by the banks and drive some shareholders into ruin along with the banks when they have to write off too many credits.

Nothing has changed in the basic character of fictional capital analyzed by Marx. The forms of this capital have multiplied. For a long time there were derived claims ("derivatives"), claims to other claims for payments, not only claims for payments. The chains of claims can be lengthened and made complicated at pleasure so the assessment of a security depends on a multitude of factors.

In the last three decades, the financial markets have grown much faster than production. This mammoth growth is the consequence of enormous redistribution processes in developed capitalist countries. While real wages have only risen moderately since the 1980s, business profits and income from independent work have increased greatly. At the same time, many threshold- and developing countries have become net capital exporters. In interest- and compound interest payments, they export far more capital to the developed countries than they receive in the form of direct investments and so-called development assistance. Ever-larger parts of the growing business profits, the rising incomes of the upper income classes and capital withdrawn from third world countries, flowed into the financial markets increasingly deregulated since the 1970s.

The crucial reality is repressed when banks and financial institutions are now urged to concentrate on their "real" function of supplying businesses with capital and not indulge in an escalating speculation. As the goal of the automobile industry hardly consists in producing mobility, the goal of the banking system hardly consists in providing capital. The automobile industry manufactures cars to make profit. Banks give credits to make profit. Both try to organize their businesses so their profits are maximum. Only in that way can they ensure their economic survival.

The demand for a nationalization of the banking sector is also too narrow. If a state bank is not permanently supported with tax funds, it will not act very differently than a private bank in the capitalist market. The respective players (whether public or private) are not the problem but the rules of the game. If capitalist production is guided in socially meaningful areas or at least made less crisis-prone through a nationalized banking system, the capitalist character of this production must also be changed. The nationalization of several key industries (brought into the discussion by French president Nicolas Sarkozy) would not change much.

Unlike some Marxists, Marx did not have any naïve trust in nationalizations. To change the rules of the game, production must be subjected to social controls (which is somewhat different than state controls). The goals and means of production must be redefined. As long as profit maximization and competition prevail, we will experience crises like the present crisis again and again.

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