The destructive dominance of finance capitalism

Finance capital is typified by the drive to increase profits and to subordinate the production of goods and services for people’s needs. It has developed since the middle of the nineteenth century to become the malign global financial system we know today.

The greatest transformation of finance capital is quite recent. Increased financialisaton of capitalism from the 1970s onwards led to new ways of shaping the economy, further stifling productive industry. But finance capital has grown across four distinct historical phases.

Early phases

Up to the first part of the nineteenth century, finance capital played a subordinate role to early industrial capitalism. It acted as a facilitator to the expansion of industry, enabling growth and production.

The next phase began in the second half of the nineteenth century. Finance capital grew enormously in size, power and influence, shifting from a servant of industrial capital to becoming its master.

This period lasted from the 1870s until the end of the 1930s. Over that time finance capital amassed such vast economic and political power that it ended up dominating industry. This development was recognised by some economists as it was taking place, for example by J. A. Hobson in 1902 (Imperialism: A Study) and Rudolf Hilferding in 1910 (Finance Capital: A Study of the latest phase of Capitalist Development).

These two writers had different political viewpoints, but both showed in detail how imperialism grew with the increase in power of finance capitalists and monopolies and explained how banks became masters of industrial capital through interlocking directorates and corporate ownership.

Imperialist rivalry

Imperialist economic rivalry, in which finance capital was deeply implicated, led to the first world war a few years later. During the course of that war and before the Bolshevik revolution in Russia, Lenin studied the growth and development of imperialism.

In Imperialism, the highest stage of capitalism Lenin developed earlier ideas and identified the basic features of imperialism. Concentration of production and capital created monopolies which dominated economic life. And the subsequent merging bank (finance) capital with industrial capital produced financial oligarchies.

Then the export of capital by the leading economies acquired exceptional importance. International monopoly-capitalist combines based in Britain, Germany, France and increasingly, the USA, sought to control the world. The territorial division of the whole world among the biggest capitalist powers began.

The period from 1870 to 1939 – which saw the growth and establishment of finance capital – was littered with wars: countless colonial wars, and a world war (with another about to start). This was the effect of imperialism.

Capitalism restricted

The third phase of finance capital began in the wake of the second world war. During this time capitalism was heavily restricted and was forced by events to modify its direction.

Many countries, in an effort to ensure victory, had created nationally organised war economies during the second world war. This state direction and regulation lingered from 1945 to the early 1970s.

The victory of the Soviet Union against Nazi Germany had also contributed to post war change. Capitalism was nervous about the possibility of more revolutions and national liberation movements.

Previous free market, or laissez faire, economics went out of fashion. Many regulatory initiatives were introduced; and to a certain extent globalisation and capital movements were suppressed. State intervention, and even the creation of state monopolies (nationalisation), became common.

‘Production appeared socialised, but capitalist exploitation remained.’

Production during this period appeared more socialised, but capitalist exploitation remained. Although the working class took advantage of this changed landscape it never attained full control. State-owned capitalist enterprises do not equate to socialism nor do they remove ruling class control of the government machinery.

In the 1950s and early 1960s, industrial capital was still in control, usually financing its investment through its own internal funds. But that was about to come to an end.

Overturned

Capitalism as it had operated since the end of the second world was not running in the interest of finance capital; it had to be overturned. The ruling elites across the world began to clamour for “free” markets. The increased strength of workers across the world was a threat – as were the existence of socialist USSR and China and successful national independence movements at that time.

The liberalised financial sector, increasingly free of national control or influence, really took off worldwide in the 1980s. It became increasingly complex, commandeering economies and in the process drastically altering the structure and functioning of the previous capitalist economic model, predominantly based on corporations.

The leveraged buy-out (LBO) – funded by borrowings – was a key technique that enabled financial speculators to take over even the largest capitalist corporations using borrowed money. The trick was that once the takeover was complete, debt on the loans was dumped on the targeted firm. In effect, the acquired company paid for its own takeover, and was then looted of its value.

This was an enormous change to the corporate capitalist universe. It forced firms to load themselves down with debt in order to be less attractive to the financial wolves looking for targets.

Control over the economy shifted from corporate boardrooms to financial markets. Corporations were now viewed as bundles of assets, the more liquid or saleable the better, rather than productive wealth-creating entities.

In turn this fed new outlets for money-capital speculation – making money from money. Financial markets were targeted in preference to investment in capital goods which would provide future GDP growth. Effectively industrial capital, investment in production, has become an aspect of finance capital.

Concentration

The financialisaton of monopoly capital has come to characterise world capitalism over the past 50 years. Ownership of the largest companies across the world is increasingly concentrated in a few hands. And those owners are predominantly the various forms of finance capital.

This financial explosion has brought unprecedented increases in company and sovereign debt – along with economic stagnation.

Finance capitalists turned to a separation of the real physical assets used in production from their underlying value. Corporate securities acquired the attribute of liquidity – instant convertibility into cash. Once this stage was reached, the way was open for limitless proliferation of new financial instruments – stock futures, options, derivatives, hedge funds and so on.

This speculative finance spawned a climate of financial euphoria with no root in production or the real economy. Financial bubbles inevitably burst in the end, as happened in 1987, 2000 and 2007-2008 with destructive financial crises.

These cycles of ever-larger speculative financial bubbles together with a run of underlying stagnation and declining growth rates is not accidental. They are increasingly interdependent.

‘Speculative finance spawned a climate of financial euphoria with no root in the real economy…’

A system geared to speculation needs constant new infusions of cash. Much that comes from the working population through drastic increases in exploitation and social deprivation. Real wages remain stagnant, taxes increase and public services decline. And without real investment job creation weakens.

The City, the pinnacle of finance capital in Britain, serves no wider public, social or economic purpose. Its claims to place resources where they maximise growth are bogus. It claims to help the economy by directing investment into production and growth, but that’s not been true for many decades.

Draining the economy

Instead the City takes money out of the economy, away from production and enables seizure of the wealth created by real work, as well as people’s savings and pensions. The interests of amoral international capital conflict with Britain’s real interests, particularly our industry.

Successive governments have embraced the treachery in the City. Instead, we need to put Britain, and Britain’s industry, first. The idea of making finance serve our national interest of employing our people in useful work, making what we need, is not radical – but the recent development of capitalism shows its unable to do that.

Capitalism is heading in the other direction. Finance is a predatory monopoly feeding off the real economy. But the dreadful nature of finance capital goes further – it is both anti-democratic and a threat to peace.

Power is now wielded not by elected governments or parliaments, but by unelected figures in Wall Street, the City of London and other financial centres. The views and needs of an exceedingly small number of finance capitalists outweigh the needs of working people who are the vast majority of the population – and who are never asked.

This lack of democracy is the underlying reason for abysmal, aimless, government and why parliament is largely irrelevant.

Rival empires have always competed to carve up the world – but now those modern empires are the creatures of finance capital. Outside national control they start imperialist wars and even the threat of another world war. The stakes are high.

• A shorter version, titled “The financialisation of capital” appears in the January/February 2023 edition of Workers.