Meister asks why, in a world dominated by finance, we should look to the future through Marx’s eyes? The answer is that the extraction of surplus value in production had the purpose of preserving and accumulating it as an instrument of investment, and is exactly what we call an asset today.
Marx assigned financial instruments exclusively to the sphere of circulation and analyzed their function separately from the functioning of the technologies or physical means of production that preserve past wealth while enabling future demand for produced goods. For Marx, when it comes to value (analogous to energy and matter), there seems to be mostly a kind of conservation principle, whereby the growth of real accumulated wealth can never be greater than the profits produced and realized in industrial production in a given period (multiplied by the rate of surplus value discounted by the rate of investment), so that any increase in the value of physical capital or constant capital in the form of the financial instruments does not even come into view for him, or is considered purely fictitious wealth. For Marx, therefore, the real growth of an economy can never be greater than the industrially produced profit. However, this can no longer apply to contemporary capital and the financial system and its financial instruments, because the assets themselves are means of financing in order to initiate and expand the investments in the so-called real industry.
Marx` esoteric argument regarding the reproduction cycle of capital, that the production of goods and services always creates a demand of investors, for financial means that serve to maintain, accumulate and increase surplus value, financial means being produced in the same process as the production of goods and services. Thus, the production of goods today must necessarily be linked to the physical production and accumulation of asset values.
We now ask the following question with respect to the workings of the financial system: what new types of financial assets must emerge today to both safeguard and expand capitalist reproduction as a whole, and how can the variable relationship between asset markets and consumer goods markets produce conditions to which new movements for social conflict respond? Marx sees in Capital that the new types of financial assets used for the purpose of accelerating capital accumulation are to be distinguished from money. ,The general formula of capital, for Marx, cannot be simply G-G` – money leading to MehrGeld, but there must first, in order to be able to generate real wealth, be a monetary investment that functions differently from money in commodity exchange. Marx, of course, sees that surplus value is produced qua wage labor, which in turn has the function of increasing the effective demand for the goods produced by the workers. However, Marx rarely sees that surplus value is maintained and accumulated by purchasing means of production, which not only serve as means (constant capital), but also function as assets, which in turn serve as a hedge against the danger that parts of the goods produced will not be realized and therefore bankruptcies will occur, or that the money created in production will only be saved or hoarded. The purchase of the production goods (constant capital) is a partial solution to the problem of how to maintain and accumulate wealth without hoarding the money. The concept of constant capital is now also understood as a relatively liquid asset, insofar as capitalist production must be financed and the surplus resulting from it reinvested in new means of production.
The production of financial instruments is definitely to be conceived as an alternative to holding or saving money, in that it preserves and accumulates real wealth. For a financial investor, this means that the purchase of financial assets must be compared as a version of the formula G-W-Gwith the formula G-G – the former now understood as a strategy of hedging the value. Indeed, in the formula G-W-G` there are two substitutes for W (commodity), namely the monetary capital invested in the labor force (W) and the monetary capital invested in the productive assets which, and this is now the crux of the matter, function on the one hand as means of production and on the other hand as more or less liquid collateral used to generate new cash.
For Robert Meister, the mode of relative surplus value production immediately introduces the logic of the financial system into the mode of production, and one of the purposes of his analysis is to examine what effects the operations and methods of the financial system have on the proper reproduction of the social relations between labor and capital. Let us attempt a first explanation: the surplus value produced in a given phase of production can (if it is not simply hoarded as money) be maintained in the next phase only through an expanded reinvestment in means of production and raw materials, on the one hand, and augmented, on the other. Without augmentation, there is no preservation of capital. Capital also invests in labor when expanding productive capacity because it hopes for a spread between the labor value of money (the contribution of workers to GDP) and the money value of labor (wages). However, there are various arbitrage opportunities to increase profits for firms, especially if they operate with different technologies and different productivities, but these arbitrage opportunities are also eliminated in the process of equalization movements to average profit rates, otherwise it would be possible for a dominant firm to maintain and expand extra profits endlessly, which would eventually end in its monopoly position. There are two different arguments in Marx’s analysis and critique of the general formula G-W-G`. With respect to absolute surplus value, the argument consists first of all in the fact that the application of labor power makes possible the production of surplus value, which is created by the workers, who are paid a lower proportion than the total value they produce as wages, with which they can buy those consumer goods which they themselves produce.
In the case of relative surplus value, the argumentation is different: Marx comes closest to the problem of representing the relation between commodity production and the production of assets in his analysis of relative surplus value production in Capital Vol.1. Relative surplus value production, when it comes to the financial system, is based on its first maxim, the law of uniform price. This states that two identical units of commodity should be sold at the same price regardless of the firms’ respective costs, whatever the forms of production in which raw materials are transformed into finished products by machinery and labor. However, the company is given a positive arbitrage opportunity in terms of its investment in means of production if it is able to have more units of goods produced in a given labor time than its competitors. The creation of arbitrage via more effective transformation of raw material (one part of constant capital) is part of the increase in productivity through investment in new machinery (another part of constant capital). The extra surplus value is generated here not by hiring new workers or, say, by labor intensification, but by the fact that the finished product can be sold at a lower price (per unit) than the same product to the competition. This accumulation of wealth through the relative production of surplus value is quite real and material, insofar as it derives from arbitrage with respect to constant capital, (and not from absolute surplus value, which corresponds to an increase in labor time or an increasing number of jobs). The esoteric Marxian argument, moreover, remains related to the need for the final product to be realized in the market, which in turn remains dependent on the consumer goods sector and the financial sector (consumer credit), the latter influencing the former. Marx concept of relative surplus value production leads to questions of real accumulation, where in the last instance it is the logic of financialization that expresses itself in relative surplus value production and finally also leads to the general law of capitalist accumulation. This law describes the creation of an increased productive capacity (of constant capital) with the simultaneous growth of the surplus population, which, due to the use of labor-saving techniques, cannot be brought to wage labor at all…,
Two arguments thus play an important role in the exposition and critique of the general formula of capital G-W-G`. Besides the absolute production of surplus value, there is also the relative production of surplus value, where first of all the financialization of production goods and workers allows capitalists to increase material output in production by investing in machines, raw materials, energy, software, etc., while at the same time always trying to reduce labor costs and the number of workers. The realization problem that inevitably follows from this involves the question of how it is possible at all to actualize and monetize the commodities produced as prices and thus generate further monetary funds; Marx deals with the problem in Capital Vol.2, which is often understood as if it were only a question of the equilibrium of the processes of reproduction in and between the two sectors of production and consumption goods. The potential possibility of commodities not being realized comes to light here, and it follows that no further monetary funds can then be generated or realized in money (non-realization is also intrinsic to financial assets, unlike money, whose secret lies in the fact that it does not have to be spent). But what Marx really does not discuss here is the relationship between the market and liquidity, because the problem of liquidity is attributed by Marx to the store of value of money.
(In the financial framework itself, the realization problem consists in the accelerated swapping from less to more liquid assets, while money itself remains absolutely liquid. Therein exists an inherent uncertainty, similar to the way capitalists must monetize their investments In commodities).
The mean term of the formula G-W-Gcannot be understood simply as a commodity productively applied in the production process, but must also be understood as a hedged portfolio priced out as capital. The hedge itself, being a marketable contract, has no use value other than its exchange value. It is quite obvious that for large corporations, such as General Motors, the productive assets are part of their own portfolio, which of course includes bonds or options on the productive assets. Randy Martin registers at this point a shift from G-W-G to G-D-G`, where D stands for the derivative that is now consubstantial to the productively consumed goods and, moreover, also drives the self-movement of capital. (Ibid.: 347) For example, by buying options on a commodity it needs for its production processes, a firm can increase its own creditworthiness, which is affected by the risk of rising commodity prices. At the same time, the operations of a whole range of other actors are affected by the price index of that commodity. In the process, risks are transferred, duplicated and multiplied, and shifted to other spaces.
In Capital Vol. 3, Marx shows that there is ever already a problem of realization for enterprises, including precisely when they invest qua credit in means of production that lose value during the production period, so that the manufactured products can no longer be sold on the market at the historical average price and the credit may then also no longer be serviced. (Ibid.; 6801f.) This is a problem that indicates that it is essential to hedge the investment. The realization problem differs from other financial instruments in that the assets here are related to produced means of production and are not solely financial vehicles or assets of accumulation. Insofar as those assets have a use-value that goes beyond their mere liquidity, they are not purely financial products whose use-value consists solely in realizing a price in a differential-immanent movement that generates returns in the financial markets. Failure to realize the market price for a final product, or to sell it below the average price, results for the firm in a decrease in monetary funds and a reduced ability to use all raw materials and to utilize capacity/machinery to generate new, higher monetary funds.
Now what Marx could not know, that is simply that the realization of the produced commodities can be hedged by the fabrication of puts and calls on options related to the means of production and raw materials; they thus tend to preserve at least the value of the investment in machinery and in raw materials during the period in which they are transformed into final products. Nor could Marx know that with the fabrication of options it is possible to intervene in the price of a finished product, which fluctuates in the market. Today, the existence of a market for puts and calls – the continuous possibility of permanently pricing and monetizing the option – generates enough liquidity for the underlying market of production and consumption goods to tend to eliminate the risks for their realization. The value of the products is now increasingly preserved in the form of financial assets and at the same time accumulated by trading the spread between the market value of the asset, if it remains liquid, and the liquidation value of the asset. A fully liquid asset is also as good as cash and is then also an alternative to the store of value of money, where there is little risk that the asset cannot be realized immediately at its market price. To finance an asset that is not fully liquid, a liquidity premium must then be paid, either by executing a hedge or by buying collateral that is more liquid than the asset itself. The liquidation value of the asset will in turn be the money received when one sells the pledged collateral, and the liquidity premium will reflect the extent to which the original value of the collateral exceeds the value of the financial asset used to hedge it.
Thus, a firm’s capitalist portfolio consists not only of bonds and debt, but also of the puts and calls of the options used to hedge. Without the correct design of the price movement of the puts and calls, there can be no robust recycling of the bonds and debt. A call is captured here as the right to acquire a potentially infinite surplus, and a put is an instrument to limit loss. They are both derivative means to indicate whether it is worthwhile for a company to invest in a new capital stock in order to increase its capital stock and its profit, the capital stock being just one of the means to increase profit, whose complementary form today is the financial asset, with which one also sees that the relative surplus production is just a way to exploit the spreads in a particular market. Thus, without pricing out the calls and puts and trading them in the derivatives markets, it is not possible to run a well-hedged portfolio today, consisting of debt and bonds, with the portfolio having liquidity at all times. The G-W-G` formula therefore also always describes W as a portfolio consisting of debt and capital stock as well as puts and calls. Unlike money, these are pure financial products and their relation can be fixed in a financial form that describes the parity of debt and capital stock in terms that are in turn related to the parity of puts and calls. Therefore, according to Meister, the investment in W must satisfy the following equation:
Stock + Put=Debt + Call.
This formula implies a simple identity: if one owns a capital stock and a put that contains a downside hedge, then a return on an investment can be replicated that is equal to owning a call that satisfies the possibility of participating in a more, related to the capital stock plus to the current value of a credit. One can now use puts or calls to obtain a fully hedged portfolio, which in turn allows a return at least equal to the risk-free interest rate. Thus, the G-W-G` spiral involves a double arbitrage opportunity, namely, on the one hand, playing with spreads in the valuation of machinery and labor, assuming that the wage can neither be invested nor insured, and on the other hand, a fully hedged portfolio based on call-put parity. The basis for hedging is the loan as well as the return on the investment. If this return of money, which always remains related to the credit that the firm borrows, is the paradigm of the portfolio side of G-W-G’ and it is also related to the investments in wages, then the effects of the financial system on the production processes of firms are more complicated than Marx ever imagined.
The price of a hedged portfolio would then be the counterpart, from the financial side of production, of the pricing out of commodities viewed from the pure production side. The possibility of hedging is precisely what preserves accumulated wealth by preventing it from fluctuating in a crisis-like manner outside a given framework in a given period. A further distinction must be made between the price stability of commodities and financial products (as vehicles of real capital accumulation). Even if the profits generated by labor exploitation fall, the returns to invested capital may rise as a result of a growing market for financial products.
Commodity goods have no liquidity, insofar as no economically realizable options are embodied in them. Therefore, the wage worker cannot invest, he must spend his money entirely on consumption, and therefore he must continuously go to the labor market to earn the money for his consumption. However, any commodity other than consumer goods has liquidity and can serve as a vehicle for the preservation and accumulation of capital. Financial products such as health insurance, pension funds, and student loans are now part of the cost of living for a household, but rather than understanding them as an investment in human capital, they should be understood as a kind of tax paid to financial capital.
Marx assumes the worker, when he enters the labor market, to be unworthy of credit and free of debt, and it is precisely these characteristics that make him a pure wage-earner, and this means that he must buy his means of subsistence exclusively with his wages: Wage labor, for Marx, is a social relation by which workers, beyond their exploitation, are forced ind to spend the money immediately on commodities after receiving the wage, which thereby cannot function as an asset that preserves and extends value. The question that arises here is the following: How can capital guarantee the consumption of the working class if it has to keep accelerating accumulation via technological and, at the same time, labor-saving innovation? Today, in order to achieve this goal, it seems adequate for wage workers to incur additional debt in addition to earning a wage. Thus, the reproduction of labor power has long ceased to run on wages alone, but also on various financial instruments such as student loans, mortgage loans, health care, insurance, automobiles, condominiums and consumer loans, which are granted to households by special credit companies at sometimes exorbitant interest rates of up to 20%. Factors such as the level of debt, income trends and interest rates play a role in the relationship between income and borrowing (debt currently accounts for 5-10% of income in developed countries). For example, student loans are divided into tranches by the government to be sold to third parties who manage them as future investments. In this way, student loans function like the infamous mortgage loans that were blamed for the 2008 financial crisis. Today, an increasingly large portion of the consumption basket of wage earners is used to buy financial products, think health insurance and real estate loans, with these products in turn serving to create new financial instruments that function as vehicles for the accumulation of further wealth. And the precariat in particular is now absolutely dependent on other financial funds besides wages to survive at all. The surplus population, on the other hand, is excluded from the sale of labor power as the sole means of securing subsistence and participates in financial resources generated in the non-wage or state sectors. For Marx, in accordance with the gesture of capitalist accumulation, it was quite clear that in the final consequence of capital accumulation leads to a huge global surplus population. Wage-dependent workers, on the other hand, usually still receive sufficient wages from the capitalists to at least ensure their subsistence and generate effective demand for the mass products of consumption, which was indeed the case under Fordism. Today, however, in many cases wages are only part of what is needed to buy the means of reproduction, so that various financial products are now needed to secure the consumption of private households and to insure their dependents against illness, old age, etc. But these possibilities remain uncertain – they must therefore be hedged and thus financed, and this in view of the fact that their timelines and their costs remain contingent with respect to future events.
If financial markets can create liquidity, in the sense that they provide funds to hedge the credit risks that in turn prevent illiquidity, they cannot provide instruments to hedge the liquidity risks themselves. Only governments, with their exclusive political power, can provide some guarantee of this and at the same time support the trading of derivatives in financial markets by issuing currencies and swapping their government bonds with illiquid assets and redeeming the bonds by printing new money, thus pumping new liquidity into the market to continue meeting the demand for funds.
Meister introduces some key concepts in finance theory that may also be important for Marxist theory. First, there is the concept of liquidity swap. Transactions consist of swapping or swapping the liquidity of money for something that is less liquid. Selling and buying assume that liquidity already exists in the markets. If one takes another, a financial perspective regarding liquidity, then one sees the following: You can get money by selling something you don’t even own (short selling).And you can buy something by borrowing money you don’t have (leveage). In leveag, you paid for something with someone else’s money, but if the loan is insured, then the lenders are obligated to accept the product you bought, even if you can’t pay back the loan. For the borrower, the loan is leveraged because you get the full price for the sale if the price goes up, while you only pay the original price plus interest and limit the loss if the price goes down. But not everyone can exercise this swapping because most lack the necessary amounts of money to do so. The wage worker gets money only by selling his labor power, and that is too little to really speculate on the financial markets.
Meister then returns to the economic implications of the Black/Scholes formula in more detail. With respect to U.S. government debt, he says that it is initially risk-free in the sense that the bonds issued by the government (Treasury bonds) are backed in the last instance by the Fed’s ability to issue the U.S. dollar as the currency in which the bonds are precisely redeemable. The fact that taxes are also collected in dollars means that the U.S. government can, at least in principle, repay its Treasury bonds with funds from tax revenues. The alternative is for the Fed to buy up these government bonds by issuing new dollars. This ever-present alternative of monetizing government debt rather than repaying it makes it possible to finance current government spending in excess of tax revenue. Before the Black/Scholes model was enforced, it was understood that profits were the principle reason for private capital markets (as opposed to public financing), and the effect of government deficit spending on the real rate of profit in the private sector was a determinant of the interest rate at which money was lent to the government, documenting precisely the power of capital markets.
The Black/Scholes model has transformed the view of the relationship between public debt and the valuation of assets in the markets in that it has substituted the risk-free interest rate on government debt for the expected rate of profit on investments as the driving factor in discounting future returns to the current value of the asset. If the interest rate on sovereign debt is taken as the discount rate, then an important question is whether sovereigns are willing to generate risk-free debt, in whatever quantities, to produce good collateral for capital markets, which is itself seen as pricing out volatility. There is a second function of government debt to note here, which is not to finance government spending, but to absorb private valuations of assets by offering adequate collateral to guarantee the risk-free interest rate when it is privately produced collateral that trades more strongly than government bonds. This process culminated in the bailouts of 2008. In the years after 1973, investors often fled to safe government bonds when market volatility became too dangerous. Now, if the Black/Scholes formula can be understood as a technology that allows private, risk-free collateral to be generated, which in turn allows the government to provide enough debt to buy it up, that is only half the truth. Pricing out volatility would be meaningless if positive and negative moves always balanced out.
Meister points out that the Chicago Board of Options opened almost simultaneously with the development of the Black/Scholes formula, which made it possible to hedge foreign exchange risk through both publicly traded instruments and over-the-counter currency instruments. Without these innovations in world trade, globaslization as we know it, based on the chronic U.S. deficit, would not have been possible because the deficits would have led to the devaluation of the dollar.
For several years now, the volume of trade in financial instruments has far outstripped that of goods and services, and its nominal value also far trumps the global national product. Since the world market is still most denominated by the dollar, the U.S. government does not have to choose between devaluing the dollar and correcting the deficit in trade. The supply of public debt, along with other risk-free collateral, is now a necessary component for pricing out derivatives. The use of public debt has become increasingly important since the 1980s, forcing governments to spend less or pursue austerity policies so that they can borrow money more cheaply and in higher quantities, and so that private sector demand for good collateral is available in sufficient quantities to trade risky derivatives.
For central banks, maintaining full employment now became less important compared to stabilizing capital markets and controlling inflation. This meant providing enough cash and good collateral in the form of risk-free debt to keep financial markets liquid and asset values storable. The growth of financial markets in dollar terms exceeded the nominal growth of global social product at an ever-increasing rate. This required an ever larger pool of good collateral that could be traded to hedge the ever larger pools of cash generated by the markets themselves. This was also the beginning of the shadow banking system.
The best collateral is still the U.S. government debt. The globalized and financialized form of global capitalism implies that as long as the U.S. government is willing to issue debt and dollars in sufficient quantities, global financial institutions will remain liquid without liquidating assets or selling them when the market falls. Support for asset prices is not price neutral, as liquidity is your important property of assets, so they can be sold at their market price without having to be converted to cash through liquidation. The liquidation value of an asset, as distinguished from its price, is the money the lender gets when it sells the security in turbulent situations. When liquidations pile up, the value of the collateral collapses much faster than the value of the debt. This is because there is never enough money in the world to liquidate all assets or repay all debts when they are called simultaneously.
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