Dialectical materialism

An addition to the Wikipedia entry on dialectical materialism:

New discoveries in physics (including x-rays, electrons, and the beginnings of quantum mechanics) challenged previous conceptions of matter and materialism. Matter seemed to be disappearing. Lenin disagreed:

'Matter disappears' means that the limit within which we have hitherto known matter disappears and that our knowledge is penetrating deeper; properties of matter are disappearing that formerly seemed absolute, immutable and primary, and which are now revealed to be relative and characteristic only of certain states of matter. For the sole 'property' of matter with whose recognition philosophical materialism is bound up is the property of being an objective reality, of existing outside of the mind.

Lenin was following on from the work of Engels, who had noted that "with each epoch-making discovery even in the sphere of natural science, materialism has to change its form." (Ludwig Feuerbach and the End of Classical German Philosophy.) One of Lenin's challenges was distancing materialism as a viable philosophical outlook from what he referred to as the "vulgar materialism" expressed in statements like "the brain secretes thought in the same way as the liver secretes bile" (attributed to 18th century physician Pierre Jean Georges Cabanis, 1757-1808); "metaphysical materialism" (matter is composed of immutable, unchanging particles); and 19th-century "mechanical materialism" (matter was like little molecular billiard balls interacting according to simple laws of mechanics). Lenin's (and Engels') solution to this challenge was "dialectical materialism", where matter was understood in the broader sense of "objective reality" and consistent with new developments in science.

The ecosystem of globalization

"The ecosystem of globalization" is a condensed version of my "Speculative capital and the ecosystem of globalization" paper. The new paper focuses on globalization and the environment in general, and has a lot less detail on speculative capital.

jd

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

Mr. Speculative Capital

President Bush nominated Henry Paulson, CEO of investment bank Goldman-Sachs as secretary of the Treasury Department last Tuesday (May 30, 2006). The June 12, 2006 Business Week called it "Mr. Risk goes to Washington." Mr. Speculative Capital that is.

I have argued that speculative capital -- capital involved in the trade of financial instruments -- is a subset of finance capital in general, but comes to dominate not just finance, but capital in general during the stage of capitalism known as "globalization." (For more on see a paper on speculative capital, also a paper of networks and globalization which has more on this.) The transition of Goldman-Sachs from private partnership investment bank -- making its money primarily from advising corporate clients, helping companies go public, and facilitating mergers and acquisitions -- to speculation powerhouse underscores the dynamics of how speculative capital rises to the position of control. As a companion Business Week piece (" Inside Wall Street's Culture Of Risk" by Emily Thornton) noted:

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. The big investment banks add value by 'absorbing the risk that their clients are looking to get rid of.'"

The article quotes financial market historian James Grant: "The world is stretching for return." Speculation can achieve that, while traditional banking activities can't. (Another aspect of speculative capital's clout is the number of Goldman-Sachs alumni in positions of political power: see "The Leadership Factory", another Business Week item.)

I think it is also important to note that large volumes of risk cannot be managed without the aid of computers and digital networks; or, speculative capital can only come to the fore with the introduction of electronics into production. E.g., according to Thornton's article,

Yet for all the risks they're taking on, banks insist they're safer than ever. They've hired many of the greatest mathematical minds in the world to create impossibly complex risk models...

The bank [Bear, Stearns & Co. -- the transition is happening throughout the financial industry - jd] has built such powerful computing systems that Alix [chief risk officer at Bear, Stearns] can reevaluate every day the risks of thousands of positions across the firm's trading businesses under various stressful scenarios to be sure the firm doesn't hold too much of any risky investment at any one time. That type of analysis used to take a week to complete. "The machine works," he says. The degree to which risk management has evolved in the past few decades is astonishing, say analysts.

The transition at Goldman-Sachs from old-line banking services to speculator was overseen by Paulson, including investing mightily in the technology that required to successfully manage the risk. According to a May, 2000 Forbes cover story on Paulson and G-S, "Goldman Sachs will by year's end have spent $5 billion in five years on all this technology, building an arsenal aimed at making money whichever direction the market goes. So long as it goes somewhere. 'Volatility is our friend,' Hank Paulson says serenely. 'If it wasn't for volatility, why would you need Goldman Sachs? Why would you need to take positions or risk?'". Michael Mandel, in Business Week noted that "Goldman, under Paulson's leadership, became one of the greatest and most profitable risk-taking machines ever built."

So what does Paulson's nomination to head up the Treasury Department mean? Because Paulson is such a big deal on Wall Street, the general assumption in the news of the nomination is that Paulson was guaranteed a seat in Bush's inner circle and more clout in domestic and international economic policy than his two predecessors. Paulson's nomination might help calm jittery markets, the "Rubin effect" as Liz Moyers reported on Forbes.com. Through G-S dealings with China, Paulson might have influence on economic relations with China, including moving them to a market-based currency exchange rate. As a big-time conservationist (Paulson is chairman of the Nature Conservancy) he might bring some sanity to the government's policy on climate change.

Michael Mandel argues that Paulson brings to Washington is the ability to explain to Congress and the public the nature of risk in the new economy. This can be translated into explaining why the sources of risk for most people -- cuts in government programs, "free trade", job flight, downsizing, market volatility, etc. -- are good. Neoliberalism is creative destruction of the old bureaucratic, timid ties that bind, freeing up the entrepreneurial risk-taking adventurous spirit blah blah blah. The two previous secretaries of the Treasury came out of old-economy industry (aluminum and railroads), where debt and risk are "bad". In new-economy terms, growth means risk, risk means debt, and no risk, no reward. Goldman-Sachs increased its long-term debt five-fold from 1999 to 2005 ($20 billion to $100 billion). Looked at in "new economy" terms, the U.S. national debt, trade deficit and currency weakening can be seen as "leveraging up" -- taking on risk for big rewards down the road. Paulson will be able to explain why this is good. And maybe he will be able to explain why privatizing social security will be ... ummm ... good. Mandel writes, "Within Goldman, Paulson is known as an exceedingly effective communicator. If he can translate Wall Street's language of speculation into something the public and politicians understand, the President's gamble in appointing him will pay off for everyone."

Paulson has been a supporter of Bush (helping to raise over $100,000 for his campaign in 2004). As a Wall Street Journal article by Deborah Solomon the day after the announcement noted:

Mr. Paulson has generally taken positions that hew closely to the Bush administration's. He has called for open markets, favored Bush economic policies and said deficit reductions should come through spending cuts, not tax increases. In an op-ed article in this newspaper in 2003, Mr. Paulson said the Bush dividend tax cut would spur growth and said the notion that such a reduction "somehow favors the wealthy at the expense of the poor harkens back to an earlier era when only the rich held equities." Last year, Mr. Paulson said that while he was "concerned" about the deficit, he viewed it "as being a necessary and understandable side-effect of what needed to be done to stimulate the economy."

However, the economic policies listed above are not that much different from Clinton's policies. They describe the general neoliberal program of the past 25 years. And one could argue that Bush's actual policies -- the cost of establishing the police state, the cost of the war in Iraq, Congressional pork -- run counter to the neoliberal agenda.

Another, entirely (pardon me) speculative thought: Speculative capital requires some degree of stability in the underlying world economy -- volatility yes, but not so much that it reaches a systemic tipping point. And the Bush administration is making a total mess of things, from the war in Iraq to oil prices to climate change to China to budget deficits and trade imbalance, that "Wall Street", or the representatives of speculative capital, are saying "Enough!" And Paulson is stepping up to try and restore some order.

Time will tell.

jd

Malthus and crisis point

Someone asked me a question about globalization and the ecosystem of globalization -- I argue that globalization as a new stage of capitalism (or an "epochal shift" in the terms of William Robinson et. al.) leads to a new ecosystem, in contrast to the ecological narrative of the "end of nature". How does such a viewpoint fit with the Malthusian idea of carrying capacity and crisis point? (For a bit more on population and environment, see this little paper: Human population and ecology)

Here was my response:

Re: Malthus and carrying capacity and crisis -- I think that Malthus is a political story and not a scientific one. Or hypothetical but simplistic, because the factors that contribute to carrying capacity are complex and political in the sense that carrying capacity has to do w/ historical/cultural factors and technology (which is political in the sense of what gets researched and deployed). So "crisis point" is not fixed but "depends."

One might argue that we are already at an ecological crisis point, having already exceeded carrying capacity as indicated by mortality from poverty-related causes (curable diseases, starvation, exposure, etc.) But this would be the carrying capacity of globalization-as-a-stage given the current advance of technology. Some other form of social organization might (I would hope) raise the carrying capacity, assuming some more rationale understanding of affluence, and accompanied by an intense research and development program of renewable energy sources.

I think the tendency in globalization is towards more artificial or managed environments that will continue to provide the conditions for the economy to stumble along. It won't be a particularly "wild" or "natural" environment (except maybe for areas reserved as private parks or ecotourist havens). There may be localized ecological crises, that even spill over their local boundaries, but they will be absorbed in the same way that localized economic crises are absorbed at the global level.

However, I don't think that globalization is the only choice available, in big historical terms, so hope springs eternal. Environmental questions quickly slip from the realm of science into the realm of politics.

Climate change is something else, and if the worst case scenarios, or close-to-worst case scenarios happen, all bets are off.

jd

More on emissions markets

Here are some links to more info on the carbon emissions markets (I lifted news and commentary ones from the Gristmill post and comments).

News:

Emissions-Trading Profits in Europe Plunge as Data Questioned (Bloomberg report)

EU gives green light to pollution hike (Times of London)

Data Leaks Shake Up Carbon Trade (New York Times)


Commentary:

EU carbon-trading market hullabaloo from Gristmill, the Grist online magazine blog

Emissions impossible from the Guardian

Question marks over EU CO2 trading scheme from EurActiv, includes a number of links for additional background info.


Background: These articles came out within the past two years, but include good analysis

Marketing and making carbon dumps: Commodification, calculation and counterfactuals in climate change mitigation A very good analysis by Larry Lohmann of The Corner House, appeared in Science as culture, September, 2005.

Climate fraud and carbon colonialism: The new trade in greenhouse gases by Heidi Bachram, appeared in Capitalism nature socialism December, 2004.

jd

Speculative capital and the environment, plus carbon markets

Here is a link to a draft of a paper I presented at the 2006 Global Studies Association here in Chicago. The paper is titled "Speculative capital and the ecosystem of globalization". It will undergo a significant re-write before I am done with it.

Related to this, the New York Times carried an article in Tuesday's paper (5/16/06) called "Data leaks shake up carbon trade" by Heather Timmons (I'm not sure how long that link will be good). It has been one year since the Kyoto protocol went into effect for the 163 signatory countries, and several European countries started leaking out their emissions numbers ahead of the May 15 release date. The initial numbers from France, Sweden and a few other countries were significantly below their allotted permits, meaning that those permits would be available for sale on the carbon market. This drove down the price of carbon permits from about 30 euros per metric ton of CO2 to a low of 9.40 Euros in a matter of days. But on May 15, prices doubled from the day's low to the day's high. (If you are curious about the carbon markets, check out the European Climate Exchange website, which has historical prices, and a good news section.)

It looks like European countries exaggerated their current emissions levels, used to create and allocate the permits. By exaggerating the baseline of pollution used to measure Kyoto reductions, national government's were cutting their local industries some slack. With a high baseline, industry has had to do little or nothing to meet reduction guidelines. Or maybe industries provided faulty numbers: "Governments have been cheated by the big industries, which gave them the wrong assumptions for their emissions," charged Stephen Singer of the World Wildlife Fund. Or possibly industry was on their way to reducing emissions anyway, through cleaner technology, and the Kyoto targets weren't set low enough.

The extreme volatility in the market has upset some traders as well, who taken by surprise by early release of data and data leaks.

The charge that baselines were faulty reinforces the idea that the Kyoto Protocol terms are a joke: open to fraud and deceit, and shooting for targets that will do little to reduce emissions or global warming. "So far, the permit market appears to have done more for the balance sheets of power companies than for pollution control," per the NYT article, since companies were granted the inflated number of permits, which they can turn around and sell on the open market. And the markets themselves, including the brokers, which make money as long as trading is taking place.

jd