Commentary on Political Economy

Saturday, 13 June 2020

MADNESS IN THE METHOD: The Destructive Tendency of Casino Capitalism

There must be some kind of way
out of here,
Said the Joker 
to the Thief.
There's too much confusion,
I can't get no relief.

Businessmen they 
drink my wine,
Plowmen dig my earth.
No-one of them 
along the line
Knows what any of it is worth.

No reason to get excited,
The Thief he kindly spoke.
There must be many among us
Who think that life is but a joke.

But you and I, we've been through that,
And this is not our fate.
So let us not speak falsely now,
The hour is getting late!

- Bob Dylan, All Along the Watch Tower.

The phrase, “There is method in the madness” is supposed to indicate that behaviour that is seemingly irrational can, in certain circumstances, display a “method” that is apparently paradoxical to the irrationality of the behaviour. The obvious intent of this phrase is to indicate that method is inconsistent with madness because methodical behaviour is, by its very “methodicity” or “predictability”, at least rational in this regard, whereas irrational behaviour, by its very “irrationality”, is inconsistent and therefore unpredictable. This does not mean, of course, that methodical behaviour cannot be irrational or that rational behaviour cannot be methodical. But the overriding understanding is that method and rationality go hand in hand, whereas irrationality is almost always unmethodical.

What we are witnessing in the latest developments of capitalist economics and society are the most irrational aspects such as that of the recent behaviour of financial markets whereby it is the very “methodical” approach to capitalist industry and finance that is leading to the most catastrophically irrational aspects of the behaviour of capitalist agents, from investors to firms to governments. Thus, we can truly say that, in these recent developments but also in the entire “logic” of capitalism, there is madness in the method! The madness of capitalism has method; and indeed it is the capitalist method itself, the “logic” of capitalism, that is mad!

The madness of the capitalist method has several aspects which we shall treat very tersely here. In the first place, we must consider that capitalism is the control on the part of capitalists of the living labour of workers in exchange for the dead labour (the product) produced by workers themselves. Capitalists control the living labour of workers by expropriating workers from the means of production and then claiming ownership of the industrial product, which they then “exchange” with workers as payment through money wages for the living labour that they have “sold” to capitalists. Only a fool would fail to see the “madness” of this arrangement.

But there is another consequential aspect of this madness of dividing living labour from dead labour – of separating living activity from its “product”. This aspect concerns the difference or separation between industrial and financial capital. Because capitalists pay workers’ wages with money, there is a separation between the physical activity of capitalist production – the process of valorization of that production by means of living labour - and the financial realization of that production by means of its “sale” in the capitalist market. In other words, the value that a capitalist invests in production (means of production plus wages) may well not be “realized” profitably by the time the product is brought to market for sale. There is therefore a new divide or separation in capitalism not just between living labour and dead labour, but also between financial and industrial capital. As Keynes coarsely but tersely put it, "Money [especially money capital] is a bridge between the present and the future".

The problem with this second divide is that when finance capital invests money capital for industrial production by lending it to industrial capitalist entrepreneurs, finance capitalists “expect” to receive a “return” on that invested capital that is a portion (interest) of the profits made by the entrepreneur from industrial production. Eventually, however, there comes a time when the profits of industrial capital do not materialize and therefore the interest payable to financiers gets slimmer and slimmer until not only is there no “return on capital” for the financiers – but indeed there is no “return of capital” because the investment is done at a loss!

At such a point, the entire financial pyramid of capitalism begins to collapse, bringing industrial production in its wake and, with it, resulting in unemployment and immense destruction of capitalist value! It is at such a point that monetary authorities and governments intervene to ensure that the collapse of finance and then of industrial investment and production do not result in the apocalyptic destruction of capitalist enterprise and of society as a whole! The way governments and monetary authorities try to resolve the problem can take two directions: the first path is that the authorities allow the unprofitable capitalist enterprises to go bankrupt and die so that the financial pyramid can be restructured in new more profitable ways. But the second path is that authorities can simply redistribute social wealth and resources by means of fiscal and monetary action so as to help the existing financial pyramid to continue without a thorough restructuring of production.

This second path is achieved through monetary expansion: although it avoids an immediate and painful crisis, if carried too far, this path can lead to the exacerbation and the exasperation of the unproductive and unprofitable capitalist investments that led the system to the brink of crisis in the first place. Further, the printing of money has the combined effect of inflating asset prices which, combined with lower profitability, lowers even more the rate of interest or yield of financial instruments and bank deposits - which leads finance capitalists into a downward vicious spiral of ever more "speculative" investments and credit to entrepreneurs!

Now, this is exactly what is happening right now, and what has happened since the end of World War Two in the capitalist world. In a nutshell, monetary authorities (central banks and Treasurers) have held up the financial pyramid by simply injecting more funding in distressed investments to ensure that finance capital does not collapse and that industrial capitalists stop employing workers in unprofitable enterprises (“zombie” firms). The problem with this kind of “Greenspan put” is that each time the financial pyramid is about to collapse because of the unprofitability of capitalist enterprise the problem or proverbial “can” is “kicked down the road” by inflating asset prices (securities or sticks and bonds) and so maintaining employment and social stability.

Of course, this “asset inflation” is not registered as actual inflation because asset prices do not form part of the assessment of “consumer price indices” through which inflation is officially measured. But asset inflation is real and has real consequences in that it results in the ever more inequitable redistribution of social wealth and resources (income and real assets) away from producers (which includes workers and industrial capitalists) to the owners of finance capital (the rentier class). As one can well imagine, by “socializing” the losses of financial capital, governments and monetary authorities do nothing but increase the burden of social production through inflation and taxation on the shoulders of producers. This problem has been intensified by the gradual erosion of productivity through disinvestment occasioned by the rise of "distributive" - and therefore non-productive - businesses ranfing from Google and Facebook (the worst), to Amazon (middling worst) to Apple and Microsoft (only slightly better). These are supposedly "growth stocks" that - dear Lord! - have absolutely nothing to do with economic growth or productivity!

It is stunningly obvious that eventually the “madness” of this “method” will result in two things: both the catastrophic deflation of the “asset bubble” induced by the “Greenspan put” of central-bank monetary expansion, and also, concomitant with the bursting of this financial bubble, the complete collapse of capitalist industrial production and employment due to the fact that by now the price distortions in the allocation of capital investments induced by the misallocation of capital as a result of “the Greenspan put” make it impossible to separate solvent from insolvent enterprises!

This is precisely the point that we are about to reach. Those fools who think that there can be no end to financial market speculation on Wall Street because “the Fed has our backs covered” simply fail to realize that no matter what the Fed does there will have to be a “Minsky Moment” or “Wile E. Coyote Moment” when even the most foolhardy stock-exchange speculators realize that the “zombie” companies they are investing in will never be able to repay their mounting debts (bonds) because they do not generate the earnings and profits needed to repay the “face value” of those bonds let alone any “interest” due on them! Tersely put, no amount of liquidity can make an unprofitable (or "insolvent") business or enterprise suddenly profitable (or "solvent")!

So, if you have any money in the stock market right now, be very very afraid because sooner or later - "something has got to give"!

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