Speculative capital as dominant sector

The concept of a "dominant sector" of capital is based on the idea that power is not distributed evenly throughout a class. One or more sectors may contest for political control; political control provides that sector with the ability to re-align, or even reorganize the economy through government spending, tariffs, taxation, law enforcement, military action, regulation and all of the other instruments of political power.

While wealth is the basis, ultimately, of capitalist power, more important is the control of wealth. This was implied by Lenin in his definition of finance capital as the merger of industrial and bank capital under the control of the banks. This distinction is important because, although finance, and in particular, speculation, does not produce value, it may control the sectors that do, and through that control, dominate (in the sense of setting the political agenda) the class and the economy. Here is an attempt to answer some questions about the concept of "dominant sector" today.

First, how does speculative capital come to be the dominant form of capital in the age of electronics? It does this by coming to control wealth.

1. Globalization (transnationalized production) requires hedging in order to maintain a stable production environment. Hedging is the participation in speculative capital markets to protect assets. Speculative capital comes to control larger pools of capital as a result.

2. Idle money is not capital (it is no longer being used in the self-expansion of capital). Banks historically have provided a way of keeping that money working as capital, by taking the industrialists money and lending it to other industrialists. The faster that money can be loaned out, or, if speculated with, the faster and cheaper and more frequent the transactions, the busier and more profitable that capital can be. Because modern speculation is based on digital networks operating at nanosecond speeds, modern speculation allows that capital to always be active in financial trading. And because of this hyperactivity, the opportunity for additional profit exists, attracting capital to speculation. (This profit is not generated by speculation per se, rather it is re-distributed from producers of values to speculators. Speculative capital attracts and accumulates surplus value produced elsewhere in the economy.)

3. Speculative capital offers a means of gaining a higher return on investment, so money flows into speculation and speculative capital comes to control more wealth. Capital seeks the highest return on investment. In a period of low interest rates, low rates of return, and large pools of money capital (it can't be invested in current production techniques because, with the productivity of robotics et al, investment in production will only flood the market with commodities), companies put that money to work in speculation. As financial observer James Grant said in the recent (6/12/06) Business Week article, "The world is stretching for return."

4. Within the financial sector, speculative operations are more profitable, causing a shift in the focus and activity of finance capital. The tail comes to wag the dog. "Investors argue that trading is booming now while most traditional banking businesses are languishing. Big firms can no longer subsist on underwriting or stock and bond trading as the combination of more rivals and cheap electronic trading drives down profit margins. 'Wall Street doesn't get paid to not take risk anymore,' says Merrill Lynch & Co. financial-services analyst Guy Moszkowski." (6/12/06 Business Week).

5. Through leverage, speculative capital controls sums of capital far in excess of actual holdings. Leverage is basically borrowing money to invest.

According to a Business Week chart (from the 6/12/06 issue), every $1 of major security firm equity controls $18 of assets. This underestimates the reach of speculative capital though: When the hedge fund Long Term Capital Management's troubles became public in 1998, its leverage ratio (that is, the amount of the capital it was investing compared to its own capital) was 28-1 according to a GAO report (Saber, in his Speculative Capital, said it was 50-1). That is the equivalent of a bank lending someone $2.8 million, or $5 million, depending on whose figures you use, using a $100,000 house for collateral. Which of course in normal financing for production a bank would never do. Saber argues that because arbitrage, the heart of speculation is in theory a "riskless investment", that there is a certain rationale to leverage ratios like that. LTCM's leverage ratio according to the GAO report was not out of line with other securities firms; Goldman-Sachs leverage ratio was 34-1 at the time, according to the GAO report. (Due to differences in calculating the ratio, these numbers may not jive with the Business Week numbers above). One additional note on leverage: according to Saber, as the spread on arbitrage shrinks due to competition and better technology, more leverage is required to maintain the same returns.

6. Speculative capital is also the arena in which speculation takes place -- the exchanges, the traders, the computer systems -- and speculative capital accumulates capital via the trading fees it charges everyone to participate in the mayhem.


Second, how does speculative capital exercise that dominance? Control over the economy is exercised in several ways.

1. Through influence on money market funds, speculative capital wields tremendous power over national currencies, which affect the cost of imports (in particular oil, priced in dollars) and exports, and access to money for production. See, for experience of various Asian countries in the Asian financial crisis in 1997. Through the speculative financial markets, capital can quickly flow into and out of markets and financial instruments -- is what is meant by "hot money", or the "instant plebiscite" that Walter Wriston talked about in his 1996 Wired interview.

2. Through stock markets, speculative capital (in the form of hedge funds) can affect the fortunes of companies by affecting their stock price, which can affect the ability of companies to raise additional money, or force shareholder activity to boost share price, or play a more active role as a company shareholder. Although traditionally connected to production only abstractly, in some cases speculative capital is taking a more hands on approach (see, e.g., "How U.S. Firms Are Pulled To the Mat by Hedge Funds", 2/11/06).

3. In a similar way, speculative capital, through hedge funds, is playing a more active role in private equity, that is financing start-up companies. See the 6/12/06 Business Week article, also the 4/5/06 WSJ article "Need Cash? Call a Hedge Fund". Speculative capital also provides sources of capital for venture funds, and ways for investors to speculate on new technologies.

5. As capital involved in the trade of commodity futures, speculative capital wields power over commodity pricing -- e.g., historically corners on the grain market; and more recently Enron and other energy traders and the California electricity crisis.

6. Control of wealth enables speculative capital to push for particular solutions that benefit it. Enron, which was transitioning in the 1990s into a speculative trading company, lobbied for the Kyoto protocol, in part because it focuses on the trading of pollution permits as the solution to global warming.

7. Control of wealth enables speculative capital to push for general policies that provides a climate in which it can thrive: free capital flows, controlled inflation and low interest rates, privatization and commodification (more trading opportunities), open capital markets. (E.g., Robert Rubin, Treasury Secretary under Clinton and also a Goldman-Sachs alumnus, used the Asian currency crisis to force open the relatively closed South Korean financial system.) What Hank Paulson does at Treasury after his expected confirmation may provide some indication as to what an "agenda of speculative capital" looks like.

Third, what is the relationship of speculative capital to other sectors of capital?

1. The production of use values, as always, is the foundation of the economy. The source of profit, as always, is surplus value expropriated during the production of values. Speculative capital "only" re-distributes this surplus value -- that is the source of gain from the trading of stocks and options and other kinds of derivatives. Speculative capital cannot exist independent of productive capital. But like the Old Man of the Sea, speculative capital rides on the shoulders of productive capital, overseeing and controlling it.

2. As capital becomes more mobile, all capitals are quickly merged into a big digital ocean of capital. To a great extent, this is made possible by the technology of finance. As soon as cash is deposited in a bank, that money becomes available to the bank for speculation. The boundaries between productive sectors like agriculture, industry, and transportation melt as their capitals mix in finance and become employed as speculative capital. Every industry must keep its capital active when not used for production, whether because expanded production is not feasible (e.g., how many more factories can Toyota build?), or because reserves are needed for future contingencies. Speculative capital puts that capital to work trading financial instruments.

3. Speculative capital works in the same way as finance capital in general, pooling individual capitals under its control. The main difference is that classic finance capital is directed back into production -- loaned out to expand production. If that capital cannot find a place in production (again, because production opportunities are constrained by hyperproductive new technologies and exhausted markets), it is put to work in speculation.

4. Speculative capital is the culmination of the process of the formation of a general rate of profit, the overall system of capital that Marx talked about, where all capitalists partake in the exploitation of labor even if they do not directly produce use values.

5. Speculative capital permeates all sectors of the economy, as a kind of spirit (Hilferding referred to finance capital as the holy ghost of capitalism; speculative capital is the perfection of that permeation) in and behind and around production, connecting everything together. Because it profoundly affects raw material prices and interest rates, speculative capital affects the daily operations of production and transport. Through complex derivatives and other kinds of hedging, speculative capital dissolves boundaries between sectors in other ways connecting distant markets in the same commodities as well as markets in different commodities. The complexity of these financial interconnections is not feasible without computers and digital communication networks.

jd