Zoninsein - Competition, Credit & Crisis.pdf

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Zoninsein, Jonas

COMPETITION, CREDIT AND CRISES: A CRITIQUE OF THE FOUNDATIONS OF MONOPOLY CAPITAL THEORY

PH.D.

New School for Social Research

University Microfilms International 300 N. Zeeb Road, Ann Arbor, Ml 48106 Copyright 1987 by Zoninsein, Jonas All Rights Reserved

1986

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University Microfilms International

COMPETITION, CREDIT AND CRISES A Critique of the Foundations of Monopoly Capital Theory

by Jonas Zoninsein

April 1986

Submitted to The Graduate Faculty of Political and Social Science of the New School for Social Research in partial fulfillment of the requirements for the degree of Doctor of Philosophy.

Dissertation Committee Dr. Anwar Shaikh Dr. Thomas Vietorisz Dr. Willi Semmler

©1987

JONAS ZONINSEIN All Rights Reserved

A B S T R A C T The root of the concept of monopoly capital is Hilferding's pioneering work Finance Capital, published in 1910. In this book, Hilferding aimed to develop Marx's analysis of the processes of concentration and centralization of capital. The concepts of competition, credit and crises comprise the central elements around which Hilferding formulated his ideas about the operation of capitalism. Such concepts, however, received sketchy treatment from him. It is useful to study and shape the contours of the procedures used by Hilferding, given that around these concepts and the general sense of his work itself there are sharp contrasts with Marx's conceptions. An examination of the theory of finance capital is particularly relevant in light of its outstanding role in current explanations of how the capitalist mode of production operates in the twentieth century. In this sense, this dissertation is a critical study of an important chapter in the history of economic thought.

Hilferding interprets the existence of differential profit rates as an expression of the process of general monopolization in the economy. Given Marx's conception, however, the phenomenon of differential rates of profit among capitals in one industry, as well as the differential rates of profit in different industries, are necessary phenomena of competition. Hilferding also reverses Marx's conception of the

2

relation between bank capital and industrial capital. According to Marx, an invariant characteristic of the capitalist mode of production is the subordination of interest-bearing capital to industrial capital. The development of bank capital, corporations and financial groups are, therefore, mere expressions of that subordination. It is argued in this dissertation that Hilferding's theory of crises is an insufficient explanation for the general crises of capitalism. Finally, Hilferding's theory of finance capital, as a whole, is found to contain an incongruity between the logical results of the analysis Of the processes of capital concentration and centralization vis-a-vis the theory of crisis and the analysis of finance capital's economic policies. Based on this evaluation, this dissertation demonstrates the necessity for a critical revision of contemporary theories of monopoly capital and questions the political efficacy of social democratic economic approaches.

ii

ACKNOWLEDGEMENTS I wish to express my appreciation to my advisor, Professor Anwar Shaikh, for his persistent stimulation and firm guidance throughout the elaboration of this dissertation. I am especially indebted to him for his many useful suggestions which were crucial in the strengthening of my argument. I would also like to thank the other members of my thesis committee, Professor Thomas Vietorisz and Professor Willi Semmler for their help in defining my dissertation topic and for their comments on various aspects of my dissertation. I also wish to acknowledge my gratitude to a number of professors and friends whose companionship and intellectual stimulation throughout many years contributed to the shaping of my thoughts on this subject. Amongst them, I want to explicitly thank Maria da Conceigao Tavares, Jorge Bertini, the late Roberto Gamboa, Salomon Kalmanovitz, Jose Ricardo Tauile, Eduardo Augusto Guimaraes, Luiz Ednardo Parreiras and Lazar Hristric. I am thankful to the numerous colleagues and students of the Faculdade de Economia e Administragao and the Instituto de Economia Industrial, both of the Universidade Federal do Rio de Janeiro, who graciously accompanied the evolution of this thesis, helping me to refine and clarify my ideas.

iii

Vera Ribeiro provided efficient support in translating my' original Portuguese text into a coherent English dissertation. To my parents, Judith Zoninsein and Volco Zoninsein, and also my brother Marcos Zoninsein, I am grateful for their emotional and material support throughout my academi training. Finally, I want to thank the encouragement of Leni Myra Silverstein in advancing my work and for her multiple suggestions. To her, and Manuela, Leonora and Anita,I owe special debt for their daily and continuous affection, support and tolerance, without which the elaboration and completion of this thesis would not have been possible.

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TABLE OF CONTENTS Chapter

1.

INTRODUCTION

2.

VALUE, COMPETITION AND CONCENTRATION . . 12

3.

MONEY, INTEREST-BEARING CAPITAL AND THE SYSTEM OF CREDIT

1

55

4.

FINANCE CAPITAL AND CAUSES OF CRISIS . . Ill

5.

SUMMARY AND CONCLUSIONS

BIBLIOGRAPHY

137

170

1

Chapter 1 INTRODUCTION The root of the concept of monopoly capital is Rudolf Hilferding's pioneering book Finance Capital. A Study of the Latest Phase of Capitalist Development, originally published in 1910. In this work Hilferding aimed to develop Karl Marx's analysis of the processes of concentration and centralization of capital, as well as of the roles of competition and credit within these processes. According to Hilferding, a twofold transformation in its economic appearance gives capitalism the form of finance capital. This transformation is said to be the outcome of processes which tend, on the one hand, to abolish competition through the formation of cartels and trusts, and on the other, to promote increasingly intimate relations between bank capital and industrial capital, in which the former becomes the dominant partner. The elaboration of the concept of finance capital is the object of the first three parts of the book. Its fourth part discusses economic crises, and disproportionalities among the various branches of social production are identified as causes of capitalist crises. In the last part of the book Hilferding examines the economic policy of finance capital and presents a theory of capitalist imperialism. Finance capital is the underlying concept in current

explanations of how the capitalist mode of production 'I f operates in the twentieth century. It has attracted significant attention through the works of Lenin (1968), Bukharin (1973), Sweezy (1976), Baran and Sweezy (1966), Mandel (1970), Magdoff (1969, 1978), Palloix (1972), Barrat Brown (1974), Boccara (1976), Kotz (1978), and many others who have studied different aspects of contemporary capitalism. Unfortunately, in most of these works the treatment of the concept of finance capital has been rather superficial and uncritical. In the case of Baran and Sweezy, however, finance capital has received a more in-depth

treatment, and

their work stands as the cornerstone of the theory of monopoly capital. Hilferding's classical book may thus be regarded as the seminal work of an influential

current

of

contemporary economists which distinguishes different stages in capitalist development: the stage of free competition and the stage of monopoly capitalism. In the introduction of their work, Monopoly Capital, Baran and Sweezy (1966) present in the following terms Hilferding's contribution to their famous theoretical model of the monopoly capitalist system: "Engels, in some of his own writings after Marx's death and in editorial additions to the second and third volumes of Capital, which he prepared for the printer, commented on the rapid growth of monopolies during the 1880's and 1890's, but he did not try to incorporate monopoly into the body of Marxian economic theory. The first to do this was Rudolf Hilferding in his important work, Das Finanzkapital, published in 1910. But, for all his emphasis on monopoly, Hilferding did not treat it as a qualitatively new element in the capitalist economy; rather he saw it as effecting essentially quantitative modifications of the basic Marxian laws of capitalism. As we have already noted, Lenin, who was strongly influenced by Hilferding's analysis of the origins and diffusion of monopoly, based his theory of imperialism squarely on the predominance of monopoly in the developed capitalist countries.

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But as ja-Lso noted, neither he nor his followers pursued the matter into the fundamentals of Marxian economic theory. There, paradoxically enough, in what might have been thought the area most immediately involved, the growth of monopoly made the least impression."1 Baran and Sweezy then state that the time had come to remedy this situation and that "... we cannot be content with patching up and amending the competitive model which underlies his economic theory. We must recognize that competition, which was the predominant form of market relations in nineteenth century Britain, has ceased to occupy that position, not only in Britain but everywhere else in the capitalist world... It is therefore impermissible to ignore monopoly in constructing our model of the economy and to go on treating competition as the general case. In an attempt to understand capitalism in its monopoly stage, we cannot abstract from monopoly or introduce it as a mere modifying factor; we must put it at the very center of the analytical effort."2 In a recently published article, Sweezy again emphasizes the role of Hilferding's work as a forerunner of the monopoly capital theory: "In the United States, Thorstein Veblen, who was much influenced by Marx but could not be called a Marxist, was the first social scientist to treat the subject theoretically (in his Theory of Business Enterprise, 1904); and the Austrian Rudolf Hilferding was the first to do so from an avowedly Marxist point of view (Das Finanzkapital, 1910). A few years later Lenin, who was much influenced by Hilferding's work, produced his Imperialism, the Highest Stage of Capitalism (written in 1916); and since then it has become a widely, if not universally, accepted tenet of Marxist theory that by the end of the nineteenth century the concentration and centralization of capital had proceeded to the point of transforming capitalism from its competitive stage, on which Marx had focused attention, to a new stage variously referred to as finance capitalism, imperialism, or monopoly capitalism."3 However, in another work in which Sweezy discusses the importance of the different currents of Marxist thought to the development of the analysis of contemporary capitalism,

4

he points out that HiIferding should be considered one of the founders of the Neomarxist school.4 The main axis of this Neomarxist school is a specific theory of the concentration and centralization of capital processes, from which it became feasible to foresee and analyse the functioning of monopoly capitalism. According to Baran and Sweezy, the development of this Neomarxist school also benefited decisively from the contributions of Rosa Luxemburg and Lenin and from the contemporary works of the economists Michal Kalecki and Josef Steindl.^ Hilferding's role as a precursor of the monopoly capital theory is widely recognized in present-day political economy. Semmler (1984) argues that Hilferding: "... was the first European Marxist to analyze systematically the changing character of capitalism. In his book Das Finanzkapital, Hilferding posited increasing concentration in production and circulation and the cooperation and collusion among capitals because of mergers, cartels, and trusts as the main causes of the development of monopoly capitalism."6 Many other contemporary authors emphasize the seminal contribution of Hilferding which, due to Lenin's and Bukharin's works, became paradigmatic for the development of the Neomarxist School. Besides his role as a founder of the monopoly capital theory, it is necessary to jtiention the decisive influence of Hilferding's theoretical constructs 7 on specific areas of contemporary political economy.

Bottomore, at the end of his introduction to the first English edition of Finance Capital, summarizes its importance as follows:

"Finance Capital is one of the classical works of Marxist theory, and, as I have tried to show in this

5

introduction, it possesses far more than a purely historical interest for the present generation. The ideas which Hilferding formulated here, and in some cases developed further in his later writings - about the role of cartels and trusts, both nationally and internationally, the influence of the banks, organized capitalism as a stage in the movement toward a socialized economy, the growth of the interventionist state with its inherent potentiality for becoming a system of total power, and the politics of imperialism - are all highly relevant in the analyses of recent and current economic and political trends, and they are more widely debated than at any time since the 1920s. Above all, Hilferding's book stands as a model for any renewed attempt to 'attain a scientific understanding... of the latest phase of capitalist development' in the vastly changed circumstances of today after a further seventy years of tempestuous growth."8 Capital concentration and centralization processes, in Hilferding's view, tend to eliminate competition among capitals. The diffusion of. cartels and trusts is said to enhance price rises in sectors affected by such monopolistic-oriented combinations, thereby originating differential profit rates among industries. As a result of the elimination of competition, Hilferding asserts that prices cease to be objectively determined magnitudes, while an arbitrary and incidental component therefore progressively prevails in their determination, the law of value being gradually weakened. A decisive aspect in

the monopolization process

is the influence exercised by banks. By absorbing the different modalities of credit —commercial credit, capital credit, and corporation promotion —

banking capital would

come to control the reproduction of industrial capital and guide its monopolization process toward more advanced stages, even by promoting the formation of a general cartel.

6

Hilferding's theory of crises emphasizes sectorial 'I f

disproportionalities as a central element in capitalist economy's periodic breakdowns. The influence of monopolies is likewise examined, and Hilferding argues that they aggravate a tendency toward the emergence of crises. Banking concentration, however, would tend to prevent crises in the credit system from becoming monetary crises. Hilferding's sources were basically the institutional and historical characteristics of Germany's late industrialization. However, his analytical effort is chiefly oriented toward formulating general theoretical principles about the workings of capitalism as of the late nineteenth century. When originally published, Finance Capital was even greeted by Otto Bailer and Karl Kautsky as a true development, perhaps something like a fourth volume of Marx's Capital. 9 Viewed from a theoretical perspective, the concepts of competition, credit, capital accumulation, and crises make up the central elements around which Hilferding formulates his conception about the operation of capitalism. Such concepts, however, received from him a sketchy and confused treatment. The difficulties found in elaborating those concepts certainly ensue, to some extent, from the unfinished character of Marx's work, which is especially manifested in the case of the theory of crises."^ It is useful to study and draw the contours of the procedures used by Hilferding, given that around those concepts and the general sense of his work itself there are some sharp contrasts with Marx's conception.

7

This dissertation will make a critical examination of the theory of finance capital by focusing on the following concepts: competition, credit, and crises.

This

examination of the theory of finance capital becomes relevant in light of its role as a building block of contemporary Marxist theory. In this sense, this dissertation stands as a systematic and critical study of an outstanding chapter in the history of economic thought. It is outside of the scope of this thesis, therefore, to examine contemporary models of monopoly capitalism, which were influenced decisively by Hilferding's work. This is a different task than the one proposed in this study, requiring another study. For the same reason, the links between Hilferding's paradigm and current theory of monopoly capitalism have received only cursory treatment, perforce limited to a few specific aspects. Chapter 2 will discuss Hilferding's theory of competition and argue that it rather resembles the neoclassical theory of perfect or pure competition. The existence of differential profit rates is consequently interpreted by Hilferding as representing an expression of the process of general monopolization in the economy. Yet, in the light of Mark's conception, the phenomenon of differential rates of profit among capitals in one and the same industry, as well as the differential rates of profit in different industries, are necessary phenomena of competition. The conclusion may thus be reached that monopoly is part of the concept of capitalist competition and that the law of value should be maintained as an

8

indispensable, theoretical foundation for the study of the workings of capitalism. Chapter 3 examines the concept of interest-bearing capital and its relation to the credit system. It is argued that Hilferding reverses the character of the relation between bank capital and industrial capital. What is characteristic of the capitalist mode of production is the subordination of interest-bearing capital to industrial capital, corporations and financial groups representing an expression of that subordination. The conclusion is also reached that there is no bank-originated tendency toward the formation of a general cartel and a central bank to finance industry. In Chapter 4 it is demonstrated that the theory of crises as presented by Hilferding is insufficient to account for the need for general crises in capitalism. His theory, on the contrary, restricts itself to an examination of partial overproduction crises. Finally, in Chapter 5, an evaluation is made of Hilferding's work as a'whole. The theory of finance capital is then found to possess an incongruity between the logical results of an analysis of the processes of capital concentration and centralization vis-a-vis the theory of crises and the analysis of finance capital's economic policies. That incongruity was later to be overcome after the publication of Finance Capital by Hilferding's formulation of the notion of an "organized capitalism" that could be administered by a democratic and socialist state. It is important to mention at this point that this

dissertation benefited from two unpublished works by Anwar Shaikh. I wa:t'to mention specifically Shaikh's Lecture Notes on Advanced Political Economy derived from his course "Economics 205", as part of the economics program of the Graduate Faculty in 1981, and his "A Brief History of Marxist Political Economy" (mimeo), 1985. These two works were particularly crucial for the development of my arguments in Chapters 2 and 5.

10

FOOTNOTES CI) Baran and Sweezy (.1966), p.5. In chapters X, XIV and XV of his classic, The Theory of Capitalist Development, first published in 1942, Sweezy presents a systematic discussion of the main theoretical aspects of Hilferding's Finance Capital. (2) Baran and Sweezy (.1966), p.6. (.3) Sweezy (.1981), p.6. (.4) Sweezy (1977), p.3. (5) See Baran and Sweezy (1966), p. 56 and Sweezy (1977), p.45. The contemporary works cited as their main theoretical supports are the following: Kalecki's Essays in the Theory of Economic Fluctuations, Studies in Economic Dynamics and Theory of Economic Dynamics, published in 1939, 1943, and 1954, respectively; and Steindl's Maturity and Stagnation in American Capitalism, published in 1952. (6) Semmler (.1984), p.39. See Hussein (1976), Tavares and Belluzzo (1981) and Mazzucchelli (1985), who also stress Hilferding's decisive contribution to the monopoly capital theory. (7) In the case of Hilferding's contributions to the theory of credit and of the financial control of industry,see, among others, Brunhoff and Bruini (1974), Brunhoff (1975), Aglietta (1979) and Herman (1981). In relation to the theory of imperialism and of the internationalization of capital, see Magdoff (1969), Palloix (1972), and Barratt Brown (1974), among many others who were influenced by Hilferding's work. For the theory of crisis, Bleaney (1976), Cogoy (1977), Mattick (19 77a) and Itoh (1980), for example, point out the original contribution of Hilferding. Finally, it is worthwhile emphasizing that Hilferding's concept of finance capital is widely used today to describe the contemporary characteristics of the corporate structure. See, for instance, Boccara (1976), Thompson (1977) and Carroll (1982) whose writings substantiate this point. (.8) Bottomore (1981), pp. 16-17. (9) See Bottomore (1981). (10) Marx's analysis of capitalism is incomplete in a twofold way: first, because his original project was to write six books, of which Capital was just the first; and second, because Marx lived long enough only to complete and publish Vol. I of Capital.

11

(11) The references and quotations throughout this dissertation were taken from the first English edition of Finance'Capital, published in 1981 through Tom Bottomore's initiative after a prolonged gestation period.

12

Chapter 2 VALUE, COMPETITION AND CONCENTRATION The analysis of the competition between capital is one of the pillars of Hilferding's theory about the functioning

of capitalism from the late nineteenth century

onwards. According to Hilferding, the processes of capital concentration and centralization would be such as to eliminate competition through the formation and diffusion of cartels and trusts. These combinations of capital would constitute the major instrument for the promotion of price increases and would originate differential profit rates. Rates of profit would rise in sectors containing cartels and trusts, whereas they would fall in sectors that do not benefit from such capital unifications with monopolistic aims. As a result of the progressive elimination of competition, prices would no longer be objectively determined magnitudes, an arbitrary and incidental component beginning to prevail in their stipulation. The law of value would therefore be gradually weakened. Considering the foregoing aspects, Finance Capital may be regarded as the seminal work of an influential group of modern economists which distinguishes two stages in capitalist development: the stage of free competition and the stage of monopolistic capitalism. The latter is said to originate in the structural changes undergone by capitalism in the late nineteenth century, which would have produced

13

qualitative njodifications in its essential laws. Outstanding in this current of economic thought are Sweezy (1966, 1976, 1977, 1981), Baran (1966), Dobb (1972), and Steindl (1976), among others. The analysis of competition is the chief goal of Part III of Finance Capital, titled "Finance Capital and Restrictions to Free Competition", including chapters 11 through 15. At the beginning of chapter 11 ("Overcoming Obstacles to the Equalization of Profit Rates"), Hilferding stresses that the tendency toward the establishment of a uniform average rate of profit for all capitals depends on the competition among capitals for spheres of investment, i.e., it depends upon the constant flow of capital into the spheres whose rates of profit are above the average and upon the outflow of capital from the spheres with profit rates below the average.2 Hilferding then argues that with the advancement of capital accumulation, however, capital flow into and out of the various industries meets with increasing obstacles.

3

These obstacles, which.are related to technical progress and to the increase in the organic composition of capital, would result (a) from an increase in both the size of the firms and the growing concentration of capital; and (b) from an increase in production scales and in the minimum amount of capital invested in the generation of new productive capacities. The limitations resulting thereby to the transfer of capital into the various industries could thus be defined as (a) barriers to capital outflow and (b) barriers to capital inflow.

14

The barriers to capital outflow are said to relate to an increase in'the value of fixed capital invested in each firm and to the latter's growing participation in the total value of the company's capital. Given that the value of fixed capital can only be gradually turned into money capital throughout several productive periods, the turnover period of total capital tends to become increasingly longer. This barrier to capital flow —which is an absolute one as regards the mass of social capital — may, however, be overcome by individual capital invested in the form of company shares. At this point, Hilferding argues that capital mobilization(in the form of share capital) "makes the continuous reconversion of industrial capital (including fixed capital) into money capital as independent as possible from the actual reflux of capital at the end of the turnover period during which the fixed capital has to function. Through capital mobilization and the dynamic character of the market for transfer of ownership of industrial capital (shares) it becomes possible, at the level of the individual capitalists who buy the shares, for a tendency toward the equalization of profit rates to arise. From this specific point of view, capital movement in the form of a diffusion of corporations does not interfere with the rates of profit of the capital invested in production, but the value of the shares is altered through a variation at the level of dividends, thereby enhancing a tendency toward the equalization of the rates of profit of share capital. On the other hand, the increase in company size, production scales, and the minimum investment, required to

15

start a company translates itself, in Hilferding's view, into restrictions to the flow of new capital into the different

industries. With regard to this aspect of the

question, the growing wealth of capitalist society, as well as capital mobilization, work toward overcoming restrictions to capital inflow. Through the system of corporations it becomes easier to gather larger sums of money capital. Moreover, given the possibility of profit capitalization in the form of profits in the promotion of investments, banks feel encouraged to have a direct participation in them: "The disparities in the rates of profit take the form, in this case, of differences in the amount of promoter's profit, but they are then evened out by the flow of newly accumulated quantities of surplus value into those spheres which have the highest promoter's profit. According to Hilferding, an added difficulty stemming from the extension of production scales tends to raise obstacles to the tendency toward an equalization of the rates of profit. Given that new investments in the more advanced industries entail large leaps in production scales, the fast increase in supply may have a negative effect on prices and profit rates; the latter would thus quickly change from an above average position into a below average stance. The net result pointed to by Hilferding emphasizes the barriers to capital outflow as the major restriction to capital movement: "The result is that the equalization of the rate of profit is possible, increasingly, only through the influx of new capital into those spheres in which the rate of profit is above the average, whereas the

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withdrawal of capital from those branches of production which have a large amount of fixed capital is extremely difficult... Thus obstacles to the tendency to equalize rates of profit emerge, and they increase as capitalism develops... The difficulties are greatest in the most advanced branches of capitalist production, in the heavy industries, where fixed capital is by far the most important factor, and where it is most difficult to withdraw capital once it has been invested."® Albeit with a somewhat smaller emphasis, obstacles to capital inflow are also ultimately viewed as important restrictions to free capital movement. A case in point is that of natural or legal monopolies, as well as those cases in which capital mobilization through banks becomes unfeasible, given the latter's interest either in not disorganizing formely established cartels or in protecting 7

industries dominated by trusts,

which in turn presupposes

the elimination of competition among banks. Proceeding with his argument, Hilferding then wonders what would be the effect of those barriers to capital movement on the rates of profit of the more advanced industries.

In such industries, competition

small companies faster

eliminates

(or there are no small companies

from the very beginning),

large enterprises are predominant,

and competitive advantages are progressively reduced. Thus, the competitive struggle becomes a fight between equals that may remain undefined for a long time, imposing equal sacrifices on all concerned. Under such circumstances, the continuation of free competition is highly likely to be such as to make the profit rate in those industries remain below average for a long while. On the other hand, according to Hilferding, a rate of profit below average is the rule in those industries with a

17

predominance .of relatively small individual capital. These spheres of production attract quantities of capital that are not in a position to compete in the more advanced industrial sectors, present a high rate of bankruptcy, and tend at several times to be subjected to a position of indirect subordination to large units of capital. Such spheres of activity are likely to be overpopulated and engage in a very intensive dispute for the various markets Hilferding concludes that: "for entirely different reasons, the rate of profit tends to be depressed below the average at both poles of capitalist development. Where capital is sufficiently powerful a counter-tendency emerges in order to overcome this trend. The final outcome is the abolition of free competition and a trend towards the maintenance of a lasting inequality of rates of profit, until eventually this inequality itself is eliminated by the removal of the division between different sectors of production."8 Under these circumstances, the elimination of competition is supported by two different orders of factors. On the part of industrial capital, particularly its more advanced segments, there is a clear interest in 9

the formation of monopolistic unifications,

i.e.,

unifications aiming toward price rises and above-average rates of profit. That motivation of industrial capital, however, is not enough to assure that such combinations will be actually established in a widespread manner. This is where the decisive role of bank capital comes into play its process of concentration both stimulating and being stimulated by the very concentration of industrial capital Given the participation of banks in the process of industrial capital accumulation either through loans or

18

through the promotion of corporations, or also through the obtention of deposits and the resale of shares, the level of profits

accrued in the industry is decisive for the

performance of banks. On the other hand, the unfolding of the competitive struggle, in which the relatively weaker firms are either eliminated or incur large losses, is such that it augments the risks for bank capital, leading it to reduce its credit operations and relinquish other profitable financial transactions carried out with its clients within the industry. "Hence the bank has an overriding interest in eliminating competition among the firms in which it participates. Furthermore, every bank is interested in maximum profit, and other things being equal, this will be achieved by the complete elimination of competition in a particular branch of industry. That is why the banks strive to establish monopolies. In this way the tendency of both bank capital and industrial capital to eliminate competition coincides."10 The processes presented thus far constitute causes that act in the long run and affect all advanced industrial sectors. The tendency towards a fall in the rate of profit elicited by competition tends to be eliminated, as we have seen, by the formation of cartels and trusts. Yet, Hilferding draws attention to another set of factors that work towards a decline in the rate of profit in some select industries and which have to do with the phases of the economic cycle and with linkages in industrial production. Due to the relatively longer maturation period of the investments made with a view to increasing the production of raw materials in the cycle's phases of expansion and boom, the prices of the latter grow faster than prices of

19

manufactured products. In view of this, the rate of profit in extractive industries during those phases increases at the expense of raw material processing industries. During depression, the situation is reversed, the production of raw materials showing profit rates below the average. With a view to eliminating such discrepancies in the rate of profit, a process of vertical integration begins to occur through the unification of extractive and processing firms, the initiative of companies in search for vertical integration varying in accordance with the phase of the i 11 cycle.

The advantages resulting from vertical integration would be varied, in Hilferding's view. First, as formerly noted, it allows for the elimination of fluctuations in the rates of profit of vertically integrated firms. Second, it permits the elimination of the profit formerly accrued to commercial capital in the transactions between the two firms prior to the merger. Third, by offering new opportunities for technical progress it allows for the accrual of extraordinary profits. And finally, vertical integration reinforces the competitive position of integrated companies as compared to non-integrated ones, particularly when the fall in raw material prices is slower than that of finished product prices. Vertical combinations thus tend to interact with the advance of concentration into each industry and to contribute to the elimination of competition. That interaction occurs, for instance, when there is an advance of the process of cartelization within

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the extractivefindustries that produce raw materials, increasing their rate of profit at the expense of a decrease it raw material processing industries. Under such circumstances, the defensive strategies of industrial processing firms would consist of vertical integration with the firms producing raw materials, or else they would form cartels themselves so as to confront raw material producers as an integrated body and also to control supply to those sectors positioned in a subsequent stage of the flow of interindustrial relations. As a result thereof, the industry's process of concentration and monopolization would tend to be extended to the group of industries that are both technologically and economically mature for that purpose. In chapter 15 ("Price Determination by the Capitalist Monopolies and the Historical Tendency of Finance Capital"), Hilferding notes that the stipulation of prices under monopolistic conditions cannot be acquired by economic theory starting from objectively determined conditions. The abolition of competition implies that

an objective law of

price operating on the basis of labor productivity becomes inoperant: "Classical economics (Marx included) conceives of price as the expression of the anarchic character of social production, and the price level as depending upon the social productivity of labour. But the objective law of price can operate only through competition. If monopolistic combinations abolish competition, they eliminate at the same time the only means through which an objective law of price can actually prevail. Price ceases to be an objectively determined magnitude and becomes an accounting exercise for those who decide what it shall be by fiat, a presupposition instead of a result, subjective rather than objective, something

21

arbitrary and accidental rather than a necessity which is independent of the will and consciousness of the parties concerned. It seems that the monopolistic combine, while it confirms Marx's theory of concentration, at the same time tends to undermine his theory of value."12 Hilferding argues (pp. 230-232], however, that this theoretical indetermination operates within certain limits as the increase in the rate of profit resulting from the cartel's highest price can only be reached through a reduction in the rate of profit in other industrial sectors. Hilferding then conceives of a hierarchy of rates of profit within industry as a whole. There is, first, a tendency to an equalization of the rates of profit of cartelized sectors around a specific average for those sectors, this average rate being above the average rate of industry as a whole. In addition, he establishes a tendency to equalization around an average rate for competitive sectors with a predominance of small capital, this average rate being inferior to the average rate of industry at large. To the major superior limit thus defined for cartel prices — a limit that results from the fact that the sectors of non-cartelized industries must continue to be reproduced — Hilferding adds a secondary limit, i.e., the impossibility of imposing too many restrictions to personal consumption in the classes that are not directly productive. In the picture described by Hilferding, there are no absolute limits to the process of monopolization. On the contrary, there is a constant tendency toward an expansion of cartelization whereby independent industries are

22

progressively..subordinated to cartelized industries, the ultimate result of this process being the formation of a general cartel. In this general cartel capitalist production would be consciously regulated by a central agency which would determine both the volume and the distribution of production. In such conditions, "The illusion of the objective value of the commodity would disappear along with the anarchy of production, and money itself would cease to exist... This would be a consciously regulated society, but in an antagonistic form... In its perfected form finance capital is thus uprooted from the soil which nourished its beginnings. The circulation of money has become unnecessary, the ceaseless turnover of money has attained its goal in the regulated society, and the perpetuum mobile of circulation finds its resting place."13 At this point in the presentation of Hilferding's argument it is useful to stress that at the end of Part III (the last four pages of chapter 15), the author announces his analysis of the dynamics of social capital to be systematically presented in Parts IV and V of Finance Capital. As formerly observed, this analysis of social capital accumulation is both based upon and clearly articulated in the analysis of competition presented in Part III of the book. The first question about that dynamics which involves the theme of disproportionality crisis, contains a double aspect: a) the relative delay in the development of nonmonopolized industries, due to the reduction of their profit rates'^, and b) the monopolies'ability to withhold the benefits of productivity increases, thanks to their control of prices. The second question about social capital accumulation

23

concerns realization problems and the scarcity of investment opportunities in the face of a growing accumulation of extraordinary profits. The scarcity of investment opportunities would be a by-product of both the monopolization of industries and the need to curb production increases vith a view to raising prices. The decline in the rate of profit of non-monopolized sectors would equally act toward discouraging investments. As a result of the contraction of investment opportunities, the export

of capital, even if not as a direct consequence of

the monopolization of industries, would be stimulated. "(The export of capital) is a phenomenon that is inseparable from capitalist development. But cartelization suddenly intensifies the contradiction and makes the export of capital an urgent matter."16 As we can tell from this summary of Hilferding's analysis, his major theoretical conclusions concern the progressive suppression of competition and the gradual weakening of the law of value as a result of the processes of capital concentration and centralization. However, Hilferding's theory is not a mere historical interpretation of the development of capitalism, having as its main basis the diffusion process of monopolistic combinations. In fact, Hilferding goes a step further in suggesting that in its very roots, Marx's theoretical work concerning capital accumulation is vitiated by a contradiction between his theory of concentration and his theory of value and prices, such contradiction being historically confirmed by the 17 diffusion of monopolies.

24

Hilferdipg's analysis of the processes of capital concentration and centralization, as well as his conclusions, however, are based on a poor and superficial understanding of Marx's theory. Both capital concentration and centralization are erroneously associated with the elimination of competition and a weakening of the endogenous laws of capital's movement of self-expansion. At the roots of Hilferding's procedure we find his identification of Marx's conception of competition with the orthodox conception of pure and perfect competition, which in turn is viewed as an adequate interpretation of the reality

of competition among capitals until the late

nineteenth century (the imaginary "competitive capitalism"). As a corollary, the concept of monopolistic combine and finance capital (or of imperfect competition, oligopoly, and monopolistic capital, as suggested by later economists who share ideas resembling Hilferding's) becomes an adequate signpost to characterize the new modalities of interaction among individual capitals and the conditions of reproduction of social,capital.18 The concept of pure or perfect competition finds its most elaborate formulation in F.Knight (Risk, Uncertainty and Profit, originally published in 1921), its evolution having benefited from the contributions made by A.Smith, J.B. Clark, Pigou, Marshall, Edgeworth, Jevons, and Cournot, among others.19 The major items in the list of prerequisites for perfect competition elaborated by Knight (.1971, chapter II, pp. 76-79), according to Stigler, would be as follows:

25

"2. We assume that the members of the society act with complete 'rationality'.. By this we do not mean that they are to be 'as angels, knowing good from evil';'we assume ordinary human motives...; but they are supposed to 'know what they want' and to seek it 'intelligently'... They are supposed to know absolutely the consequences of their acts when they are performed, and to perform them in the light of the consequences... "4. We must also assume complete absence of physical obstacles to the making, execution, and changing of plans at will; that is, there must be 'perfect mobility' in all economic adjustments, no cost involved in movements or changes. To realize this ideal all the elements entering into economic calculations —effort, commodities, etc. — must be continuously variable, divisible without limit... The exchange of commodities must be virtually instantaneous and costless. "5. It follows as a corollary from number 4 that there is perfect competition. There must be perfect, continuous, costless intercommunication between all individual members of the society. Every potential buyer of a good constantly knows and chooses among the offers of all potential sellers, and conversely. Every commodity, it will be recalled, is divisible into an indefinite number of units which must be separately owned and compete effectually with each other. "6. Every member of the society is to act as an individual only, in entire independence of all other persons... And in exchanges between individuals, no interests of persons nor parties to the exchange are to be concerned, either for good or for ill. Individual independence in action excludes all forms of collusion, all degrees of monopoly or tendency to monopoly... "9. All given factors and conditions are, for the purposes of this and the following chapter and until notice to the contrary is expressly given, to remain absolutely unchanged. They must be free from periodic or progressive modification as well as irregular fluctuation. The connection between this specification and number 2 (perfect knowledge) is clear. Under static conditions every person would soon find out, if he did not already know, everything in his situation and surroundings which affected his conduct. "The above assumptions, especially the first eight, are idealizations or purifications of tendencies which hold good more or less in reality. They are the conditions necessary to perfect competition. The

26

ninth,..as we shall see, is on a somewhat different footing". Only its corollary of perfect knowledge (specification number 2), which may be present even when change takes place, is necessary for perfect competition."20 This list, however, is no definition of minimum requirements. The latter would be impossible to determine as "the complete theory of competition cannot be known because it is an open-ended theory; it is always possible that a new range of problems will be posed in this framework ..." 21

Thus, the prerequisites of perfect or

pure competition, as seen from the neoclassical vantage point, could be adequately distilled from a partial reading of A. Smith's The Wealth of Nations as suggested by Stigler himself (1957).

22

The following selection of elements from

Smith's conception would be a sufficient approximation of the concept of free competition as understood by Hilferding: "1. The rivals must act independently, not collusively; 2. The number of rivals, potential as well as present, must be sufficient to eliminate extraordinary gains; 3. The economic units must possess tolerable knowledge of the market opportunities; 4. There must be freedom (from social restraints) to act on this knowledge; 5. Sufficient time must elapse for resources to flow in the . directions and quantities desired by their owners."23 As we have seen earlier in the concept of competition as suggested by Hilferding, emphasis is laid on the references to the large number of small capitals, the absence of collusion, and the free mobility of capital among the various industries. No reference is made by Hilferding to the time required to make this mobility feasible, although there is an implicit idea of a sufficient knowledge of the opportunities offered by the

27

market. The notion that each company plays a passive role (as a price taker) in the process of price determination (which is a corollary of the other conditions within the model of perfect competition) is also present in Hilferding's

conception.2^

Once this trivial conception is mistaken for Marx's, a number of phenomena of competition —which are necessary in the light of the latter"s theory — begin to be viewed by Hilferding as part of a process of generalized monopolization. This is particularly clear in the case of the differentiation of rates of profit. Marx's conception, which is rather specific in its determinations, regards this differentiation as a necessary element in the tendential process of equalization of the rates of profit on capital in different industries, as well as necessary within each industry, given the coexistence of several production methods and several levels of efficiency in the 25 use of each method. Yet, as this differentiation contradicts the conception of pure or perfect competition, this same differentiation is turned into evidence of expanding monopolistic power. The notion of competition in Marx obviously does not imply that monopolies may not occur. On the contrary, as indicated by several passages of Volume III of Capital, Marx suggests some precise analytical lines for the implications of the presence of monopolies within his theory of competition. However, the central point in this respect is that according to Marx, modern monopolies imply the existence of the system of competition, i.e., they are

28

part of it and,produce as a result a renewal of competition, and not its progressive and total elimination through a 26

general monopoly as Hilferding would have it.

Part of the same theoretical confusion stems from an identification between changes in the form of expression of the process of competition (.for example, the presence of a strong product differentiation) with a change in its essence, with its purported progressive elimination, and with a weakening of the endogenous laws of capital movement in its process of self-expansion. In particular, there is no procedure in Marx for mechanically subordinating real competition, in terms of the processes of determination of prices, profit margins, and rates of profit, to a simplistic uniform principle. To understand real competition from Marx's perspective it is necessary to develop the categories of analysis and formulation of theoretical concepts to a point where second order factors become important. Therefore, a way to reach a critical understanding of Hilferding consists of characterizing his handling of historical empirical evidence as being vitiated by a poor development of categories with a view to reaching the level of concretion required for an analysis —in this case, an analysis of the phenomenon of differential rates of profit. Given that Hilferding's conception views real competition as a process where each individual capital has an access to the means for obtention of the average rate of profit, the latter being understood as a situation of equilibrium and not as a center of gravity, the differential rates of

29

profit become an unquestionable evidence of the presence of monopolistic combinations and of the elimination of competition. In Marx's conception, the general nature of competition is given by the fact that it constitutes a struggle between capitals in their process of selfexpansion. .

.

This

competition.

27

conception distinguishes two aspects of

In the first place there are the struggles

between capitalists

in one and the same industry, which

results in the stipulation of a uniform market price for each use value and presupposes a regulating value as a center of gravity around which market prices fluctuate. The confrontation between capitalists within the same industry is thus equivalent to a war within one and the same field,or to a war for the occupation of that field. From this perspective, the development of new means of production is equivalent to an arms race, and the development of new weapons consists chiefly of the ability to reduce costs and subjugate competitors. In the second place there are struggles between capital from different industries, i. e., a war among different industries. Different

industries

mean

^either different, fields or different terrains of war. This confrontation occurs through both the inflow and outflow of capital whereby

a tendency

in different

toward

industries,

the equalization

30

of

profit

rates in the

various

spheres

of

production is created. When the prospects of gains are high in a given field, this stimulates a displacement of armies towards that area. In other words, capital mobility is analogous to the mobility of war forces. As a result, the concept of a center of gravity takes on a new determination in the form of production prices. Moreover, competition in Marx's view is a tendentially regulated process, hence it cannot be analyzed as a process of equilibrium even if the long term is taken into consideration. Its primary field of action is the circulation of individual capitals, which must be understood as a sphere of forcible articulation of such capitals in their search for self-expansion within one and the same space of accumulation. Its effects, however, make themselves felt in production, realization, and distribution of the surplus value: "The striving of individual capital for surplus profit causes the increase in productivity and the decrease in costs of production. For individual capitals the competitive fight also involves the use value of the goods, the change in quality of the products which influence the realization of the commodity value, and thus the market shares of the individual capitals. Moreover, competition includes the fight over distribution of the surplus value among the different lines of business and forces capital to accumulate and to expand."28 Both these aspects of competition — intra-industrial and interindustrial — cause the existence of differential rates of profit at each point in time. However, first Hilferding disregards the aspect of competition among individual capitals in one and the same industry, and therefore the inevitability of differential profit rates

31

resulting from, distinct levels of productivity of the labor absorbed by different capitals within each industry. Second, Hilferding conceives of competition among different industries as a process in which production prices are real equilibrium prices and not an average of past movements.29 As a consequence, the differentials in the rate of profit resulting from the fact that supply and demand never coincide and that distinct industries present different turnover periods in their capital are not perceived as part of the theory of competition in Marx. In the case of competition among individual capitals in one and the same industry, we must initially bear in mind the different production conditions of the individual capitals. In the process of giving concreteness to the category of value, Marx draws a distinction for each industry between the individual value of each commodity produced, its average value and its regulating value. This, in turn, calls for a consideration of the different monetary expressions of those categories, viz., price as a direct expression of individual value, price as a direct expression of average value, and price as a direct expression of the regulating value. Given that in each industry there are different conditions of production that relate to the various individual capitals or firms, there will be a distribution of both labor productivity levels and production costs around an average. Even if just one method of production is used, this distribution will still occur since in equivalent plants and equipment there are different forms

32

of production prganization, machines are not exactly alike, and so forth.. When we admit the existence of different production methods, each method will generate its own distribution of productivity and we will have an aggregate distribution of productivity, which will be composed of individual variations around each type of plant and equipment, as well as the variation among plants and equipment themselves. This will give rise to a distribution of the individual values of the commodities produced within one and the same industry, i.e., a distribution of the amounts of transferred and added labor required to produce those goods in each individual firm or capital. On the basis of individual production conditions, both the individual value of the commodities and their individual direct price are determined. The average or social value of those goods is therefore defined as the total labor time either transferred or added by live labor in that specific industry as a whole, divided by the total number of units produced within that industry. In other words, the average or social value of each commodity is the weighted average of individual values, in which the weight is the size of production of each firm within that industry. This average must change according to any alteration in the distribution of company sizes. Moreover, it can be admitted that the individual value of the commodities produced by certain firms coincides with the average or social value of the commodities of that industry. On the other hand, in defining this average or social

33

value it useful to take into account the twofold meaning .assigned by Marx to the labor time socially (or on the average) required for the production of a unit of any commodity. A first meaning concerns the amount of labor required as an average to produce one unit of the commodity, i.e., the labor time required to produce a unit of merchandise in average production conditions. The second meaning relates to the portion of the total production of that commodity which is absorbed by effective demand. In other words, the point is to define the correspondence between production and social necessity as expressed by the composition and volume of effective demand. With this second meaning of the socially required labor time, therefore, a possibility opens up for the exchange value of the commodities (the command of the value produced over other values through the use of money) not to be strictly proportional to their respective values. To put it differently, it opens the possibility that market prices (still abstracting production prices) steer away from direct prices, the latter being defined as the direct monetary form of the value of the commodities. With reference to the regulating value (or regulating price), Marx suggests a clear differentiation concerning the average value (or price as a direct expression of the average value). The latter reflects the average production conditions. According to Marx, however, this is not necessarily the one condition that will regulate price as well as supply in its relation to market demand. For example, in the case of agriculture,

it is the value of the

34

goods produced in the poorest soil that often constitutes the regulating'value. In the case of industry, when different firms use different production methods, the regulating production method —i.e., the one that will give rise to the regulating value — is the one that proves most accessible to capitalists willing to enter into industry, who therefore regulate production expansion as well as the market price. This means that the regulating value need not be equal to the average value. It is obvious at this point of the argument that the existence of firms with different levels of efficiency (and/or production methods)31 but selling at the same price, generally implies the existence of different rates of profit within one and the same industry. Individual capital, producing on the basis of regulating production conditions which give rise to regulating production prices, will thus tend to increase the average rate of profit found in industry at large. Capital with worse production conditions than average will tend to show rates of profit below the average, with higher unit costs and lower profit margins over costs, and will probably show smaller production scales than average and a capital/product (K/P) ratio equally lower than the average. The opposite should be true of capital with better-than-average production conditions. Let us now proceed to examine competition among industries. Marx argues that the competition between industries generates a tendency toward the equalization of the rate of profit of regulating capitals. This tendency is

35

materialized only through the inflow and outflow of capital — not necessarily new individual capital, but rather the addition or subtraction of capital, i.e., supply expansion or contraction following the movements of the demand. In other words, if a specific industry grows at a given rate, this presupposes the incorporation of new capital to make that growth rate feasible. However, if for this rate of growth and accumulation the regulating price is such that the rate of profit is higher than the average, then there will be a stimulus for the addition of new capital by the same producers, or new capital coming from new producers, so as to accelerate growth. In this way there would be a tendency to eliminate the difference between the rates of profit. There does exist, therefore, a process of equalization of the rates of profit, one that depends on the faster or slower speed with which new capital, new firms, and new plants and equipment are added, and alternatively depends on the withdrawal of capital. This speed is basically determined by the production process and, in particular, by the time required to reproduce fixed capital in the different industries. In those industries where both capital units and production scales are very large, either new investments or capital outflow take long to occur, whereas in industries where the minimum size of individual investment is small, both the inflow and outflow of capital may very easily occur. In this sense, Marx.asserts that the rate of profit in a given industry can be equalized to the average rate

36 32

only "over a cycle of lean and fat years."

Hence, the

equalization of the rates of profit of regulating capital in the different industries to the average profit rate occurs only in the course of several years. This implies that at any given point in time, the rates of profit of different industries are not equal, and if we consider a short period of time, they may not even be moving towards that equalization with the average rate. Therefore, the conception of a tendency toward the equalization of profit rates implies that there is no equality between rates of profit at every moment, i.e., it implies the existence of differential rates among industries. However, from the point of view of the conception adopted by Hilferding, this would be unmistakable evidence of the absence of competition, as well as evidence of the expanding monopolistic power. The problem of the differentiation between rates of profit provoked by competition among capitals from distinct industries cannot be mistaken for the differentiation of profit rates resulting, from competition within each industrial branch. Yet, it is necessary to understand both as processes that are complementary to and articulated with one another. As a result

of their articulation we must

realize that the abstract notion of production price contains in itself the differences between individual production prices, average production prices, and regulating production prices. The latter are the centers of gravity of market prices and represent

a transformation of

the concept of center of gravity initially defined at the

37

level of each industry, when the problem of the tendency toward an equalization of the rate of profit of different industries as part of the materialization of the notion of 33 value still had not been introduced. This center of gravity now redefined represents, as already indicated, the price resulting from the production method that is most accessible to the new capital being Invested. This inflow of new capital is what will push prices down as this is where supply is expanded. The inflow of additional capital is interrupted at the point where the rate of profit of this regulating capital approaches the average rate of profit. Thus, the tendency toward an equalization of profit rates is expressed as a tendency toward an equalization of profit rates only of the regulating capital in each industry. In other words, that tendency implies that the

hierarchy of the rates of profit of

industrial branch moves,

a

as a whole, following

given the

fluctuations in the regulating production price of

that

industry. Hence the additional conclusion that the average rate of profit of a given industry at a specific time does not have to be

equal to the

average rate

of profit of

industry at large,

even if the rate of profit of the

regulating capital

should

industry at large, given specific industrial

equal the that

average rate of

the average rate, of

branch may be either

rate of profit of the regulating capital

that

above or below the in

that industry.

This way of handling the phenomena of competition

also

comprehends the differentials of profitability deriving from the soil's agricultural or mineral productivity. In other words, the very question of the differential ground

38

rent and extraordinary profits can only be understood on the basis of competition among capitals. In short, as the tendency toward an equalization of the rates of profit between different industries is applicable only in the case of regulating capital, the 34 hierarchy of profit rates within each industry is a typical phenomenon of competition. On the other hand, as the equalization of the rates of profit of different industries is processed only as a tendency and expresses itself as an average of past movements, there will be at any specific time, differential rates of profit between the regulating capital of different industrial branches. Nor can any a priori assertion be made at this point with regard to the ranking of the different industries at different points in time.35 This approach to the determination of the rates of profit is sufficiently general. Specific results cannot be aprioristically determined at an abstract level. They will depend on the actual and historical configuration of the productive structure, on the movement of the economic cycle, and on several other factors, including the influence exercised by monopolistic combinations under different circumstances. The latter, however, cannot be brought to the foreground of the theory of industrial organization and presented as a dominant explanation, as Hilferding would have it, lest there may be a complete subversion of the concept of competition

as formulated in

Marx's theory. Marx's conception of competition, in which there

39

emerges as a necessary actual result the dispersion of the rates of profit, is perfectly in keeping with his theory of value and of production prices. And what is more, it is the theory of value, as a necessary general principle, that confers intelligibility upon competition among capitals and permits, as we shall see later on, the establishment of the limits within which the process of determination of market prices conditions the

reproduction of social capital.

We had indicated earlier that Marx assigns a twofold meaning to the notion of the socially necessary labor time. The first meaning is determined by the relation between production and the labor time required to make that production feasible, the value of the product obtained being derived from that relation. The second meaning concerns the confrontation between the total product obtained and effective demand. This double meaning implies a distinction between production and realization of value. On the other hand, in Marx's theory the notion that demand and supply are balanced presupposes the price of production, i.e., the price which permits industry's reproduction in the course of time. In other words, supply and demand are mutually neutralized only when the market price is equal to 36 the regulating production price. The result thereof is that the whole of that process of price determination entails a double process of value transfer. We initially have value transfers among industries resulting from the process of transformation of value into production price. Moreover, there is a set of value transfers resulting from the differences between market prices (which result from

40

the action of supply and demand) and production prices. Interfering with this latter type of transfer there are not only transfers between capitals from different industries, but also transfers between capitals in the same industrial branch (capital with different production conditions, and therefore with distinct individual values and individual production prices), even though these may take place via interchange relations with the other industries.37 That is to say that capitals whose production conditions determine a lower productivity in their, labor force will transfer value into the more efficient capitals within the same industrial branch. This transfer will materialize through the extra profits accrued, which will originate partly in the values produced by less efficient capitalists in that industry. This second type of transfer is not considered by Hilferding either. A specific aspect that has not

been systematically

elaborated by Hilferding, but which has an obvious interest for the discussion about competition, is the relation between price levels, profit margins, and the rates of profit. Among the authors who, in close adherence to the analytical line proposed by Hilferding, have developed the theory of monopoly and oligopoly, for instance, Kalecki (1968) and Steindl (1976), the existence

of prices above

the average cost stands as an evidence of the existence of monopoly. In this sense, the difference between total sales and the total average cost as a percentage of sales P — AC , profit margin on sales) becomes an index that (u = —p allows a mensuration of the degree of monopoly exercised by

41

an individual firm within an industrial branch or by any industry within the industry as a whole (average degree of monopoly of the different firms). However, we must ask ourselves what the process of equalization of the rates of profit implies for profit margins on sales. By definition, the rate of profit is the division of profits by the stock 7T

of capital (r = — )• This expression is equivalent to profits over sales divided by capital stock over sales *jl /p (r = j^7p)• Based on this reasoning we may assert that for each firm or each industry the margin of profit over sales is equal to the rate of profit multiplied by the capital/ product ratio (ui = ri (K/P) for the firm or industry i). If we then admit that at a given time there occurs for these firms or industries i, an effective equalization of their rates of profit to the average rate (r^~ r; u^ = r (K/P)i), we will find a correlation between the capital/product ratio and the profit margin on sales. In other words, if we base ourselves on the equalization of the rates of profit and generalize that reasoning, we shall find that the firms and industries with an above-average capital/product ratio will show a profit margin above the average, and vice versa. If, however, we interpret the profit margin on sales as an index of the degree of monopolization, we may also conclude that the capital/product ratio represents a kind of barrier to capital inflow and a differentiating factor in the competitive capacity of different firms and industries. It so happens, however, that this positive association between the capital/product ratio and the

42

profit margin appears here as a deduction based on the equalization of the rates of profit. In this way we see that what featured as a result of competition in Marx's writings (competition presupposing a differentiation among firms), if looked at from the perspective of perfect 38 competition (and of those authors who place themselves within its conceptual mark, even though they reject it), will be interpreted as an evidence of monopolistic power.

39

Another interesting aspect to consider concerns the concept of barriers to capital inflow. In Hilferding, this notion is basically associated with an increase in production scales and in the minimum investment amount required to implement new firms. His argumentation about growing barriers to inflow in the sense of a growing restriction to capital mobility, however, rests upon the neoclassical idea that individual capitals within

a

competitive system are infinitely small, and therefore the processes of capital concentration and centralization imply a progressive elimination of competition. The question that poses itself in this regard, however, concerns what one understands to be a large capital size, i.e., what standard shall one use to measure a capital size that may imply the elimination of competition? Given that with the advance of the processes of capital concentration and centralization the increase in the size of individual capital is accompanied by a capacity of mobilization of monetary capital, particularly through the development of the credit system,^ there are no grounds left to assert that there are any barriers to capital inflow related to capital size. This requires a differentiation between a barrier to inflow

43

and a condition for inflow. The concept of barriers suggests a general reduction (i.e., for each and every individual capital) in the possibility of obtaining resources to finance the entrance into new business. Inversely, the notion of a condition for inflow merely specifies the requirements to be complied with by the inflowing capital. The notion of barriers to capital inflow seeks to establish, as something of relevance to the analysis of competition, a comparison between capitalist relations at distinct times in history, rather than considering the conditions for inflow as compared to each individual capital's possibilities of fulfilling those conditions at different time. The condition for inflow

in the specific case of

industries with a larger volume of investment per unit, larger scales, and therefore a larger potential effect of the inflow on price levels, indicates that the time required to recover the investment will be longer, that the prospects of profit must be better, that the business must have greater stability, etc., so as to warrant the inflow. Moreover, this implies that small variations in sales should not produce alterations in investment decisions and should be absorbed through variations in the degree of utilization of the facilities and equipment, instead of increases in plant size or the installation of new plants. This would demand even higher investments as the point would be to utilize an excess capacity, one that was planned to absorb significant variations in both production and sales.

44

This characteristic of a normal or planned excess capacity in the case of firms and industries with largescale production and showing a high capital/product ratio, expresses itself in turn in a higher capacity to adopt variations in both the quantities produced and the utilization of the capacity, rather than price alterations as a reaction to demand fluctuations. This will be translated into more stable prices and profit margins in those firms and industries. This phenomenon of competition, however, tends to be mistaken in the light of Hilferding's conception for an expression of the power of monopolies or oligopolies to handle prices and determine their profit margins.41

45

FOOTNOTES (1) As we shall see later on, the analysis of competition as well as that of the credit system and the relations between banks and industries constitutes the conceptual complementation required at the level of "relations among various capitals" by Hilferding's theory about the general overproduction crises, which are then interpreted as disproportionality crises. (2) Incidentally, this aspect of the law of value is extensively discussed by Hilferding in chapter 2 ("Value and Average Profit") of his monograph BShmBawerk's Criticism of Marx, written a few years before Finance Capital and published in 1904. In that monograph Hilferding defends Marx's method: "In the transition from the simple to the capitalist production of commodities, the distribution of the social product undergoes change. The distribution of the surplus value is now no longer effected in accordance with the measure of the labor power which the individual producer has in his particular sphere expended for the production of surplus value, but is regulated by the magnitude of the capital it has been necessary to advance in order to set in motion the labor that creates the surplus value. It is obvious that the change in the distribution makes no difference in the total amount of surplus value undergoing distribution, that the social relationship is unaltered, and that the change in the distribution comes to pass solely through a modification in the price of the individual commodities. It is further obvious that if we are to determine the amount of divergence, we must know not only the magnitude of the surplus value, but also the magnitude and indeed the value magnitude of the advanced capital. The law of value enables us to determine this magnitude. I can thus readily ascertain the deviations as soon as the value magnitudes are known to me. Value is consequently the necessary theoretical starting point whence we can elucidate the peculiar phenomenon of prices resulting from capitalist competition...)" (p.160). "... As soon, however, as capitalist competition has definitively established the equal rate of profit, that rate becomes the starting point for the calculations of the capitalists in the investment of capital in newly created branches of production. The prices here fluctuate on either side of that price of production whose attainment makes the particular branch of production appear profitable. At the same time, the capitalist goes

46

halfway to meet competition, for he himself accepts average profit as a regulative principle, and the sole effect of competition is to prevent his deviating from the norm and from securing an above-average profit for any considerable period." (p. 172). The change in Hilferding's conception about the competitive process thus takes place between 1904 and 1906, the period in which the basic structure of Finance Capital was concluded. See in this respect Tom Bottomore1s "Introductory Note", p. 5, in the English edition of Finance Capital, quoted in the bibliography of this dissertation. (3) "In the place of the old legal restrictions imposed by medieval tutelage, new economic restrictions have emerged which limit the mobility of capital." (Hilferding, 1981, chapter 11, p. 186). (4) Hilferding, 1981, chapter 11, p. 187. (5) Hilferding, 1981, chapter 11, p. 188. (6) Hilferding, 1981, chapter 11, pp. 188-189. (7) Hilferding, 1981, pp. 202-203 and p. 233. (8) Hilferding, 1981, chapter 11, p. 191. (9) "The unification of enterprises can take two forms. The enterprises may retain a formal independence, and affirm their association only by agreements, in which case we are faced with a "consortium" (Interessengemeinschaft). If, however, the enterprises are dissolved in a new enterprise, this is called a "merger" (fusion). Both a consortium and a merger may be partial, in which case free competition continues to prevail in the branch of industry concerned, or monopolistic."[^The following note is introduced at this point: "It should be noted here that an association is already monopolistic if it has a decisive influence in determining market prices. The continued existence of some independent firms, which always follow the lead of the combination in fixing their prices, does not alter the fact that free competition in the theoretical economic sense no longer exists in this branch of production. But in order not to offend any pedantic scruples, I refer to such combinations as monopolistic rather than fullyfledged consortia or mergers."3 "A consortium comprising as many enterprises as possible, which is intended to raise prices, and hence profits, by excluding competition as completely as possible, is a cartel or, in other words, a cartel is a monopolistic consortium. A merger which is designed to attain the same end, by the same means, is a trust. A trust,

47

then, is.a monopolistic merger." The source of Hilferding's definitions is Liefman, R. (1905), Kartelle und Truste, Stuttgart, E.H.Morits. Concerning this point, it is worth drawing attention to Hilferding's argumentation (chapter 11, pp.199-203 and chapter 12, headed "Cartels and Trusts", p. 204) that the capacity to control prices is not dependent upon a unification of all enterprises. It is enough for the unification of enterprises to control that part of production which is indispensable to attend to the demand in all phases of the economic cycle, and to maintain its production costs below those of the enterprises that are not under control. (10) Hilferding (1981), chapter 11, p.191. The developments of the relations between industrial capital and bank capital, which give rise to industry's dependence on banks and to the formation of finance capital, are the object of chapter 14, titled "The Capitalist Monopolies and the Banks. The Transformation of Capital into Finance Capital." (11) One of the consequences of this verticalization process in the industry which is emphasized by Hilferding is the elimination of the function of commerce — the reduction in the field of activities of commercial capital, and therefore of that portion of surplus value which is appropriated by commercial capital. Incidentally, this is the subject of chapter 13 ("Capitalist Monopolies and Commerce"), a detailed examination of which would be secondary from the point of view of the discussion herein conducted. (12) Hilferding (1981), chapter 15, P- 228. (13) Hilferding (1981), chapter 15, P- 234. (14) Hilferding (1981), chapter 15, P- 232. (15) Hilferding (1981), chapter 15, P- 233. (16) Hilferding (1981), chapter 15, P- 234. (17) Cf. quotation of a paragraph on p. 228, chapter 15 of Finance Capital, to which we have referred some pages earlier. At this point a reference must inevitably be made to the similarity of the procedures adopted by BfJhm-Bawerk (1973) and Hilferding (1981). According to the former there would be an insurmountable contradiction between the theory of labor value and the theory of production prices. In the latter's view, a demonstration of the unsolvable contradictions between the theory of value and the determination of market prices must await the development of capitalism and the maturation of its intrinsic qualities. This is

48

all the more intriguing when we consider that Hilferding (1973) had been the major defender of Marx's method against Bohm-Bawerk's attacks. It is beyond the objectives of the present analysis to discuss the so-called "problem of transformation". The view accepted here is that the procedures adopted by Marx are perfectly general and constitute a first step in an iterative transformation of "direct prices" into "production prices". Much of the confusion that still persists in this area results frcm an inadequate understanding of the quantitative and qualitative relations between the spheres of production and circulation, as well as of the limits imposed upon circulation by production. This is expressed, in particular, in an inability to distinguish a difference between value and the form of value, and therefore in an inability to recognize the form price as the means through which exchange reflects value, and to develop on the basis of this acknowledgment the various links between value and price. Bearing in mind the distinction between value (which results from production) and monetary price (which is the form assumed by value in the process of circulation), it is possible to realize that monetary magnitudes are always both qualitatively and quantitatively different frcm magnitudes in value. Thus, if price and value are always distinct things, the question of transformation concerns a transformation in the form of value, i.e., a transformation of the direct monetary expression of value (direct prices) into a more complex expression (production prices). On the other hand, this serves to demonstrate that there are limits to the effects .of the different forms of value, such limits being determined by the magnitudes in value, whose distribution is carried out through monetary forms. See Shaikh (1977, 1982). (18) See Shaikh (1982) and Semmler (1982, 1984). (19) Stigler (1957). (20) Quoted in Stigler (1957). This sophisticated conception of perfect competition sought to highlight with precision the nature of an economy possessing complete knowledge as a preliminary stage in the analysis of the effects of uncertainty. Stigler points out that, as the definition of competition had reached such a rigorous formulation in Knight's works, it contributed to pave the way to a reaction in terms of the models of imperfect competition, which followed it in the decade of 1930. (21) Stigler (1957). A case in point is mobility. Stigler argues that even if not all units of resources present mobility, the economic system will show complete mobility for all movements up to a limit which will depend on both the nature of movements and the proportion of mobile units. Stigler further points out that one must not loose sight of the fact that the

49

objective,of that concept is to formulate in a sufficiently general and precise way the characteristics of an imaginary competitive economy, therefore renouncing any claim that it be completely descriptive of each and every phenomenon of competition. (22) Semmler (1982, 1984) demonstrates that, even though some elements in A. Smith may be interpreted from a neoclassical point of view, there are other elements present, such as the concepts of reproduction, social surplus and a center of gravity of market prices (natural prices), which distinguish his theory of competition from the neoclassical conception. With regard to the acknowledgement of A.Smith as the major forerunner of the neoclassical theory of competition, see also Arrow and Hahn (1971). (23) These are the characteristics which in Stigler's view (1957) compose A.Smith's conception of free or pure competition. (24) It must be stressed, however, that the normative implications of the neoclassical concept of pure or perfect competition, in terms of an efficient resource allocation, maximum production, equality and justice to all individuals, and an optimum of welfare, are not part of Hilferding's formulation. Even without such ideological adornments, however, Hilferding undeniably banalizes the concept of competition. In assuming that within competition individual capitals behave both passively and impotently in the determination of prices he abandons the notion of competition as a struggle (in "which capital acts offensively). Hilferding's notion of free competition at its extreme form implies the non­ existence of competition among capitals. And what is more, it assumes that the processes of capital concentration and centralization are not an organic part of competition in that they violate the idea of equality, reduced size, and an infinite number of individual capitals. See Shaikh (1982). (25) Marx (1975), Vol. Ill, chapters X and XII. (26) "M. Proudon talks of nothing but modern monopoly engendered by competition. But we all know that competition was engendered by feudal monopoly. Thus competition was originally the opposite of monopoly and not monopoly the opposite of competition. So that modern monopoly is not a simple antithesis, it is, on the contrary, the true synthesis: Thesis: Feudal monopoly, before competition. Antithesis: Competition.

50

Synthesis: Modern monopoly, which is the negation of feudal monopoly, in so far as it implies the system.of competition, and the negation of competition in so far as it is monopoly. Thus modern monopoly, bourgeois monopoly, is synthetic monopoly, the negation of the negation, the unity of opposites. ... In practical life we find not only competition, monopoly and the antagonism between them, but also the synthesis of the two, which is not a formula but a movement. Monopoly produces competition, competition produces monopoly. Monopolists are made from competition; competitors become monopolists. If the monopolists restrict their mutual competition by means of partial associations, competition increases among the workers; and the more the mass of the proletarians grows as against the monopolists of one nation, the more desperate competition becomes between the monopolists of different nations. The synthesis is of such a character that monopoly can only maintain itself by continually entering into the struggle of competition." (Marx, 1963, pp. 151-152). This is a good opportunity to warn against a misunderstanding that may rise out of the foregoing passage: "... the more desperate competition becomes between the monopolies of different nations." That mistake would result from assuming, as might also be indicated by an ill-judged reading of Lenin (1968) and Bukharin (1973), that competition would be restricted to an economic space outside national economies, while monopoly would prevail within them. Such conclusion would raise a logical problem: the world market is external if considered from the point of view of a given domestic market; yet, to other national economies that domestic market is part of the world market. See Shaikh(1981). (27) See Marx (1975), Vol. Ill, chapter X, and Shaikh (1981, 1982). (28) Semmler (1984). (29) "In reality, supply and demand never coincide, or, if they do, it is a mere accident ... Since, therefore, supply and demand never equal one another in any given case, their differences follow one another in such a way — and the result of a deviation in one direction is that it calls forth a deviation in the opposite direction — that supply and demand are always equated when the whole is viewed over a certain period, but only as an average of past movements, and only as the continuous movement of their contradiction." (Marx, 1975, Vol. Ill, p.190). (30) Such complications are introduced by Marx only in Vol.

51

III of Capital, after a definition of the production price.. The way Marx develops his theory consists, first of all, in establishing the concept of value by ignoring all of those differences. In Vols. I and II Marx discusses the concept of value without referring to individual value, save for a brief reference to the "hand loom weaver" in Vol. I, and prices are proportional to average values, i.e., price is seen as direct price, a direct expression of social value. In Vol. Ill Marx introduces the production price, which is a transformation of the average value. At that point there is still an abstraction of individual differences in the value of the goods, the average value is viewed as identical to the regulating value, and production prices are a form of average value. This is done for the purpose of introducing the notion of production prices, no approach being made as yet to the implications of individual value. But then, in the section covering competition and differential rent, Marx goes a step further. Having developed the concepts of value, direct price, and production price, Marx asserts that value is, in fact, individual value. This leads him to draw a distinction between the average value and the regulating value. A subsequent point in the analysis is the distinction between individual production price, average production price, and regulating production price. In the case of agriculture, for instance, the regulating production price would be the production price for the worst soil. In the case of industry, it being admitted that supply expansion will come to pass by the entrance of firms that are more efficient than average, the regulating production price will lie below the average production price. At this point, then, it may be stressed that at such a level of concretization of the category of value, the center of gravity of market prices will be the regulating production price through which the tendency to an equalization in the rates of profit of individual capitals invested in different industries will materialize. We shall revert to this point later on. See Shaikh (1981). (31) Let it be said in passing that nothing in Marx implies that competition should lead to one only production method, in contrast with the neoclassical conception which presupposes a convergence in long-term equilibrium. Through the entry of new plants and new firms and the exit of old ones, the hierarchy of the rates of profit is renewed. Except in the extreme case of monopoly with total control of supply by a single firm, the differentiation in the rates of profit within a given industry is the rule, and it must be portrayed in a dynamic conception of industrial organization that does not assume perfect equality among individual capitals. (32) "It has been said that competition levels the rates of

52

profit of the different spheres of production into an average rate of profit, and thereby turns the values of the products of these different spheres into prices of production. This occurs through the continual transfer of capital from one sphere to another, in which, for the moment, the profit happens to lie above average. The fluctuations of profit caused by the cycle of fat and lean years succeeding one another in any given branch of industry within given periods must,however, receive due consideration. This incessant outflow and inflow of capital between the different spheres of production creates trends of rise and fall in the rate of profit, which equalise one another more or less and thus have a tendency to reduce the rate of profit everywhere to the same common and general level. This movement of capitals is primarily caused by the level of market prices, which lift above the general average in one place, and depress them below it in another. ... Yet, with respect to each sphere of actual production,industry, agriculture, mining, etc., the transfer of capital from one sphere to another offers considerable difficulties, particularly on account of the existing fixed capital. Experience shows, moreover, that if a branch of industry such as, say, the cotton industry, yields unusually high profits at one period, it makes very little profit, or even suffers losses at another, so that in a certain cycle of years the average profit is much the same as in other branches ..." (Marx, 1975, Vol. Ill, chapter XII, p. 208). "... The general rate of profit is never anything more than a tendency, a movement to equalise specific rates of profit ... The general rate of profit, therefore, derives actually from causes far different and far more complicated than the market rate of interest, which is directly and immediately determined by the proportion between supply and demand, and hence is not as tangible and obvious a fact as the rate of interest. The individual rates of profit in various spheres of production are themselves more or less uncertain; but in so far as they appear, it is not their uniformity but their differences which are perceptible ... The average rate of profit does not obtain as a directly established fact, but rather is to be determined as an end result of the equalization of opposite fluctuations." (Marx, 1975, Vol. Ill, chapter XXII, pp. 366-368). (33) "The equalization of profit rates in practice is a movement from the concrete to the abstract, or rather, from the particular to the general. Price of production is our recognition, as an abstract category, that underlying this general tendency for regulating rates to be roughly equal we can speak of an equal rate, which is what we call the general rate

53

of profit. It never exists as such." (Shaikh, 1981). (34) This does not imply the assertion that the ranking of different firms should always be the same. (35) Drawing on the extensive and detailed examination of empirical evidence elaborated by orthodox economists, Semmler (1982, 1984) affirms that it does "not provide clearcut support for the monopoly capital hypothesis, wherein oligopolized industries and/or large scale firms should show profit rates persistently above average profit rates. Indeed, as the studies show, differential profit rates can exist for a considerable time, but whereas differential profit rates among firms clearly can be expected from the Marxian theory of competition, differential profit rates between different industries do not contradict the Marxian theory." (Semmler, 1982, p. 109). (36) Semmler (1984) draws attention to the fact that in Marx's theory of value and prices there are two sets of determinants: (a) one set determines exchange values and the prices of production; the central aspect in this case is the socially required cost of production and reproduction of goods; (b) another set determines market prices; in this context supply and demand are the relevant factors. Moreover, fluctuations in market prices around values are regulated by the values themselves and by production prices, the latter being conceived of as different determinations of the centers of gravity of market prices. As pointed out by Semmler, however, Marx makes it explicit that the laws determining both the value of goods and production prices, as well as the forces which determine the fluctuations around these centers of gravity are interconnected. Supply and demand not only produce alterations in market prices around the centers of gravity. Through their influence on capital flow into and out of different industries, as well as on the volume of investments, technical progress and labor productivity, etc., these forces cause alterations in the centers of gravity themselves in the long run. (37) See Shaikh (1981). (38) In perfect competition the firm's equilibrium presupposes that price is equal to the marginal cost, which in turn is approximately equal to the average cost. This means that the profit margin on sales must be very small, coming close to zero, and should present no systematic relation to concentration indices in sales, capital/product ratios, etc.

54

(39) See Shaikh (1981). In this theory, the premise is that profit'margins are determined by monopolistic power, which determines profits and hence differential profit rates. .Drawing on Marx's works, on the contrary, as well as on the basis of competition, on the differentiation between capitals and in the capital/ product ratio, and also on the tendency to an equalization in the rates of profit, different profit rates may be derived. The difference between Kalecki and Steindl is that, in the latter, monopolistic power features specifically as an expression of the differences among the production methods employed. (40) Marx (1975), Vol. Ill, chapter X, p. 196. In fact, it must be said in passing that ultimately, Hilferding's only way to assert that the size of capital is a barrier to inflow lies in his assumption that competition between banks has been totally abolished (see Hilferding, 1981, p. 233). At this point it is worth mentioning the alternative approach suggested by Clifton (1977), for whom "the requirement of free capital mobility in a theory of competition finds its closest approximation in the real world in the corporate structure and competitive strategy of the modern corporation, rather than the atomistic firm of neoclassical theory... "...The fixed capital of the firm has become , increasingly mobile as the firm has grown, by industrial and geographical diversification, out of its original sphere of production. Such a firm may be called a unit of general production, because it organizes production across a wider spectrum of the full range of production possibilities than the single product firm in one locale. An important effect of this structural condition is to allow the firm itself to a more efficient allocation of its capital between several activities and regions, in accordance with changing market conditions. This process of capital mobility among sectors is accomplished as an internal flow of funds within the corporation and without the intervention of the capital market as in Ricardo's day."(Clifton, 1977, pp.138 and 147). (41) In the macroeconomic theory which rests upon this conception, the power to handle prices and profit margins is translated into a tendency to the formation of excessive profits and accumulation, thereby generating increasing problems of realization. Rather than a decreasing trend in the rate of profit, a tendency to growing profits is what will inhibit the continuation of capital accumulation. See Steindl (1976) and Baran and Sweezy (1966).

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Chapter 3 MONEY, INTEREST-BEARING CAPITAL AND THE SYSTEM OF CREDIT Hilferding (1981) defines finance capital as the interest-bearing capital that is controlled by banks and invested in the industry. According to him, the processes of capital concentration and centralization stimulate an ever closer relationship between bank capital and industrial capital frcm which finance capital originates. In that relationship industry would be increasingly controlled and monopolized by banks, through which financial capitalists would exercise progressive control over social capital. These phenomena, in Hilferding's view, would express a long-term tendency inherent in capitalism towards the establishment of a central bank geared to financing capital accumulation and a general cartel in industry. Through a co-ordination of these two agencies, financial capitalists would then exercise a unitary and centralized power over the remaining functions and forms of capital, thereby consciously regulating production and distribution. As a result, finance capital in its most developed form would suppress the social division of labor and render quite superfluous both the law of value and the circulation of money, as well as the very existence of the labor force as a commodity. Private ownership of the means of production, concentrated and centralized in a few huge groups of capitalists, would emerge in direct opposition to the mass

56

of those who .own no capital at all. The notions of bank domination over the industry and of a tendency toward a conscious regulation of capitalist production stand as a watershed separating the theories of Marx and Hilferding on interest-bearing capital and the system of credit. According to Hilferding, the domination of enterprise by the banks and the progressive suppression of competition are articulated and complementary phenomena representing the central aspects of the processes of capital concentration and centralization. It is from this articulation that Hilferding draws his concept of finance capital, which introduces a marked distinction between Marx's and Hilferding's views on "the process of capitalist production as a whole. Hilferding's conceptions about money, the nature and functions of credit and banks, and their effects on the processes of capital concentration and centralization are presented in the first three parts of Finance Capital, under the headings "Money and Credit", "The Mobilization of Capital. Fictitious Capital", and "Finance Capital and the Restriction of Free Competition." Early in the first paragraph of the chapter where he introduces an examination of the functions of money in the process of circulation of industrial capital, Hilferding states the main objective of his analysis of interestbearing capital, viz.: "to discover the secret of how the processes of circulation themselves endow capitalist credit with the power eventually to dominate the whole social process."2

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In the .same chapter Hilferding also begins his analysis of the credit system and investigates the differences between commercial or circulation capital and capital credit, using the circulation of industrial capital as a reference. Circulation credit has as its basis the process of transformation of money capital into means of production (M - CMp). This form of credit thus originates in credit relations among industrial capitalists themselves and between industrial and commercial capitalists. Through this type of credit, which tends to expand parallel to the scale of the process of reproduction of industrial capital at large and to the increase in the organic composition of capital, the transfer of commodities among individual capitalists gains speed as the utilization of money as a means of circulation is eliminated from those transactions. Circulation credit allows an extension of production scales far beyond the capacity of individual capitalists in terms of availability of money capital to them. Their own capital, however, is an indispensable basis for building up the superstructure of the credit system. This system will acquire an ever more complex framework with the development of capital .credit and activities promoting share capital. Still in chapter 4, Hilferding examines the basis of capital credit. This type of credit springs from the splitting-up of the capitalist's functions as a capitalist who acts simply as owner of money capital and as an entrepreneur, whether in industry or commerce. The central aspect of that splitting-up of his functions is a periodic

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liberation of money capital from its function along the circular movement of capital in the sphere of production and from the stages of its circulation. Such periodic liberation of money capital originates in short-term fluctuations in the cash-flow and in the formation of industrial and commercial firms' depreciation and accumulation funds. Moreover, the total volume of money capital liberated by productive enterprises shows cyclical fluctuations that are chiefly due to the pace of business and to alterations in the level of prices, while on the other hand, it shows a tendency towards continuous expansion due to the increase in production scales and in the amount of commodities produced. Other factors also affecting that volume are the organic composition of capital, the development of commercialization methods that reduce capital turnover time, and the development of means of transportation and communication. Once freed from its function within the circuit of a given part of industrial and commercial capitals, money capital may again be used within the circuit of other productive capitalists if made available to them through the credit system. This type of credit is called capital credit because through its employment inactive money capital may be converted into active money capital, i.e., it represents a transfer of money to those who will use it for purchasing the various component elements of productive capital. By means of this type of credit there is an intensification of the use that a given amount of money and money capital may have in the circulation of industrial

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capital. In otfrer words, for the benefit of social capital, capital credit reduces the inactivity of monetary capital individually experienced by industrial and commercial capitalists. On the other hand, the development of this type of credit presupposes the development of the institutions in charge of money capital transfer or mediation. In chapter 5 (The Banks and Industrial Credit) Hilferding resumes his analysis of circulation credit and capital credit. This time, however, he aims to demonstrate how the development of both types of credit becomes a function of the banking system and how their combined operation constitutes the basis for bank capital accumulation and for an increase in the latter's power as compared to industrial and commercial capital. Hilferding next points out that, as regards circulation credit, one of the activities

initially

developed by the banks is the collection and interbanking compensation of the instruments of commercial credit issued by industrial and commercial capitalists. Further, through a guarantee offered by the banks for the settlement of commercial debts, those securities begin to circulate more extensively. These two activities in turn take on a new dimension when the banks begin to buy those commercial bills. For this purpose, the banks issue their own securities, and these are the liabilities (banks notes initially, and then checking account deposits) that will circulate in lieu of the bills issued by industrial and commercial capitalists.

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The institutional aspects of that procedure tend to undergo changes as the state begins to interfere . This interference, as well as the corresponding legislation, have the purpose of assuring the convertibility of bank notes into legal tender and/or currency with an intrinsic value. To this end, the legislation sets a direct or indirect limit to the amount of bank notes to be issued and turns their emission into a monopoly of issuing banks operating under the control of the state. The banks' interference into commercial credit tends to be intensified as a result of the interruptions in the normal conditions of circulation of commercial bills. Given any impossibility of settling commercial debts, resorting to the banks' loan capital becomes an indispensable measure. The institutionalization of commercial credit through the banking system presupposes, on the other hand, some development of that system as an intermediary in the transfer of money capital. With the evolution of capital credit, the function of a pure money capitalist becomes a specific function of banks. Given that for the economy at large, bank deposits and withdrawals take place with a regularity that derives chiefly from the nature and duration of the process of circulation of industrial capital, t'he banks may anticipate their reserve requirements and thereby determine the amount of their deposits to be lent. So far we have seen how the banking system develops on the basis of a double function. On the one hand, the banks interfere with commercial credit relations by

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facilitating the process of effecting payments and extending the scale of operation of this form of credit. On the other hand, the banks take charge of converting inactive money capital and the monetary reserves of the non-productive classes into active money capital through the centralization and redistribution The subsequent

of money.

aspect in Hilferding's analysis, still

in chapter 5, is a differentiation as to the use of loan capital on the part of industrial capitalists. The capital borrowed may be put to two distinct uses with a view to expanding production: it may be transformed either into fixed capital or into circulating capital. This differentiation is rather important, as Hilferding points out, in that it determines the deadlines for the borrowed money capital to be returned to the bank. In the case of loans for investment in fixed capital, money capital flows back only along several turnover periods of industrial capital. As a result of that type of operation the bank comes to participate in the fate of the enterprises in which it invests its loan capital, thus being led to take a close interest in their performance. When engaged in the provision of long-term credit for the industry, the banks are

forced to make available a larger share of their

own resources, as well as to secure investments by third parties for longer terms and to promote a significant increase in the obtention of deposits in general, with a view to expanding the amount of capital available in any given situation, so that it may be lent on a longer term basis. According to Hilferding, this implies that banks can

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make long-term.loans only after they have attained a certain minimum size and that they must expand as fast as or even faster than the industrial enterprises themselves. This process of differentiation between the forms of application of their loan capital is likely to be accompanied, as stressed by Hilferding, by a larger volume and a relative growth of the credit supplied by banks. This offers the banks certain advantages on the basis of which their domination over industry and commerce takes shape. In the first place, industrial and commercial capitalists' capacity to honor their commercial debts begins to depend increasingly on bankers' decisions. Secondly, the institutionalization of credit through the banking system changes its utilization by industrial capital into a need imposed by competition, since (a) it allows an increase in the rate of profit for each individual capitalist as a result of the difference between interest rates and profit rates; (b) the increase in the production scale of an, enterprise allows for a reduction in the production cost per unit and for the accrual of extra profits; and (c) it permits sales below production prices within certain limits, while this alternative does not imply any sacrifice of the industrial enterprise's own capital. As long as the banking activity consists chiefly of the mediation of commercial credit, the banks' concern lies basically in checking the solvency of enterprises at each given time. In this case, the sphere of banking activity would not be that of industrial capital as yet, but rather that of commercial capital; its relation to industry would

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concern mostly .transactions between industrialists and tradesmen, and not industrial production proper. This situation changes as of the time the banks come to supply loan capital basically to be invested in the production process, particularly in fixed capital: "... At the same time the bank's influence over the enterprise increases. ... The obligation can now only be liquidated over a long period of time, and in consequence the enterprise becomes tied to the bank. In this relationship the bank always disposes over capital in its liquid, readily available, form: money capital. The enterprise, on the other hand, has to depend upon reconverting commodities into money. ... Under a developed credit system, an enterprise maintains its own capital at a minimum; any sudden need for additional liquid funds involves obtaining credit, and failure to do so may lead to bankruptcy. It is the bank's control of money capital which gives it a dominant position in its dealings with enterprises whose capital is tied up in production or in commodities. The bank enjoys an' additional advantage by virtue of the fact that its capital is relatively independent of the outcome of any single transaction, whereas the fate of the entire enterprise may depend entirely upon a single transaction. ... In general, however, it is always the superiority of capital resources, and particularly disposal over freely available money capital, which determines economic dependency within a credit relationship."3 Also, the banks' dominant position, as emphasized by Hilferding, reinforces.their tendency towards concentration, which is implicit in the technical characteristics of bank operations. The influence of such technical characteristics is mostly expressed in the need to continually expand the obtention of resources, whether by increasing the number of bank agencies or by maintaining relationships with smaller banks. By increasing the resources at their disposal, banks can make their concentration progress alongside concentration in industry. These two factors of bank concentration, which are

64

already activ.e,when the banks restrict themselves to mediating commercial credit and supplying capital credit, reach their peak when the banks take on a third function and become investment institutions through operations of underwriting and promotion of share-capital in the industrial sector. In performing those activities large banks benefit from their greater access to the stock market, from more security in the placement of shares, and from their control over the sales price of the latter. The analysis of this third function of banks is resumed in chapter 7 (The Joint Stock Company), which opens Part II of Finance Capital. In this chapter Hilferding initially examines the economic significance of industrial corporations. Above all, this form of enterprise means a change in the function of industrial capitalists, who find themselves freed from their functions as entrepreneurs and administrators. As a result of that change, the capital invested in the corporation becomes pure money capital so far as the capitalist is concerned. Whether or not the shareholder will be a monetary capitalist, however, depends on the feasibility of transforming his shares into money at any given time. This is assured by the existence of the stock exchange. Hilferding is emphatic in stating that his analysis of joint-stock companies represents a considerable advance as compared to the analysis undertaken by Marx.

4

This

advance is said to take three different directions. First, Hilferding formulates the concept of profit in the promotion of corporations. His analysis of the functions of

65

the stock exchange and the role of stock market speculation stands as a second development over Marx. Finally, the most important aspect, from the point of view of his elaboration of the concept of finance capital, concerns the question of the financing of joint stock companies and the decisive role played by banks in this domain. Let us start by examining the concept of the corporation promoter's profit. Interest-bearing capital j_n its strictly monetary form competes for various (financial) investment opportunities, either in the form of fixed interest securities or shares. The latter represent a claim to company profits with no predetermination of the returns and no obligation on the part of the enterprise issuing the shares to return the capital invested in their purchase. This competition among the various forms of investment of interest-bearing capital generates a tendency toward an equalization between stock remuneration rates and the rate of interest. 5 However, given that the money transferred into a company through the purchase of shares is in turn transformed into industrial capital, just as in the case of capital that is simply borrowed, there is no reason why an industrial enterprise should yield a level of profit on this capital below the average profit rate. Given that the shareholders are the owners of the corporation, the destination of the difference between the rate of interest (i.e., dividends paid to shareholders) and the average profit rate should have to be accounted for. What actually happens, however, is that the entire mass of profits (deducted, of course, from the interest

66

paid for the use of the capital effectively borrowed from third parties) is then equally appropriated in the form of interest, albeit receiving the name of corporation dividends. This allows the price per share to correspond not to a fraction of the company capital invested in current assets, but rather to represent approximately the value of the profits generated (or to be generated) by the enterprise, capitalized on the basis of the interest rate. Shares must therefore be defined as a claim on the profits to be generated by the corporation in the course of forthcoming years. Consequently, a duplication of the value of the company's capital takes place: on the one hand, there is the replacement value of the corporation's current assets; on the other, there is the total value of the shares issued, which is determined at any moment by the expected volume of profits and by the interest rate and which need not coincide with the value of the money capital originally transformed into industrial capital. The promoter's profit (whether in the case of a newly created enterprise or an individual enterprise transformed into a corporation, or in the case of profits deriving from the market placement of new stocks corresponding to an increase of capital of a formerly existing corporation) results from the fact that, in the process of capitalization of anticipated profits, the total value of the share capital is higher than the value of money capital to be transformed into productive capital (including the net part to be kept as a reserve under any circumstances) for the purpose of generating the

67

expected mass of profits. In Hilferding's

words, this

difference emerges "from the "conversion of profit-bearing capital into interest-(or dividend-)bearing capital."® The process of circulation of the capital invested in shares is described by Hilferding in the following manner:

S "The shares (S) are issued, that is, sold for money (M). One part of this money (m^) constitutes the promoter's profit, accrues to the promoter (say,the issuing bank) and drops out of circulation in this cycle. The other part (M^) is converted into productive capital and enters the cycle of industrial capital which is already familiar to us. The shares have been sold; if they are to circulate again then additional money (M2) is needed as a medium of circulation. This circulation (S - M2 - S) takes place in its own specific market, the stock exchange. Compared to individual or family enterprises, the corporation is a form of organization of capitalist enterprises that is far more flexible from the point of view of its establishment and expansion. Viewed from the standpoint of its financing, the corporation is independent from the size of individual capitals already accumulated. Its expansion is not restricted to the investment of its own funds or of resources obtained by contracting debts. Provided there is an intense development of the capital

68

market, the corporation has access to the entire range of channels for transfer of interest-bearing capital within the capitalist class. Hilferding points out that the corporation has the foregoing reasons to thank for its advantage over other organizations in the competitive struggle. The financial barrier blocking the utilization of more advanced technology and scale economies is more easily overcome, and as a result there is an increase in the corporation's ability to make extra profits. The corporation thus develops a separation between the process of industrial concentration and the process of concentration of ownership. On the other hand, the rights of each individual shareholder are reduced as the shares assure no more than a claim to participate in the profits of the corporation, and no significant influence may be exercised on the company's administration. This limitation of ownership grants unlimited powers to majority shareholders over minority shareholders, thus reducing the group of those who actually control the corporation: "The capitalists form an association in the direction of which most of them have no say."® As regards the stock exchange, Hilferding argues that its functions in the process of capital mobilization are expanded throughout the process of capital accumulation.

9

Its peak development takes place when corporations become widespread in the industrial sector. The existence of the stock exchange is an indispensable requirement

for the

69

conversion of industrial capital into share capital

and

for the reduction of dividends to interest. Capital mobilization consists of the capitalist's possibility to withdraw his capital from any sphere of production where it has been invested and transfer it to other activities. To facilitate and expand that mobilization becomes an essential function of the stock exchange. The trading of shares which takes place in the stock exchange involves merely a transfer of securities or claims on the profit to be generated and realized, and one which occurs independently of the productive process. An indispensable element

of the stock exchange is

speculative activity. Speculation yields profits and losses deriving from fluctuations in the prices of the securities negotiated. The speculator

is solely concerned with being

able to anticipate those fluctuations and profits from the variations in their prices. Therefore, the speculator's activity depends upon differences of opinion regarding the expected movement in share prices, differences owing to the uncertainty that surrounds future profits. By means of speculation continuous fluctuations are produced in the supply and demand of shares, and therefore in their prices. In this way, as emphasized by Hilferding, speculation keeps the market permanently active and gives other groups of capitalists an opportunity to convert their share capital into money capital and vice versa. However, owing to the uncertainties that characterize this market, a possibility is created of directing the speculative activity whereby large speculators influence

70

the small ones- This is the other aspect of Hilferding's conception: "The large dealers in securities, the banks, can take advantage of this situation to push speculation in a particular direction. They need only drop a hint to their numerous customers to buy or sell certain securities, in order to bring about, in most cases, a change in the relation between supply and demand, which is thus known to them in advance, and like all foreknowledge in the field of speculation produces a profit for them."10 This aspect of the argument may be better appreciated if we consider the question of corporation financing. In examining this topic, Hilferding goes one step further in building up his concept of finance capital and the notion of the domination of banks over industrial enterprises. In its early stages, the promotion of corporations rests upon the obtention of funds directly from individual capitalists who are interested in purchasing shares. With the diffusion of corporations it is the bank that comes to mediate their access to the capital market. The bank will advance the resources needed to buy the shares to be resold later, and/or will simply take charge of their distribution in the stock market. Through this activity of corporation promotion, the bank would finally secure control over the enterprises: "It is the transferability and negotiability of these capital certificates, constituting the very essence of the joint stock company, which makes it possible for the bank to promote and finally gain control over the corporation. Similarly, a corporation can obtain bank loans far more readily than the individually owned enterprise. ... The corporation ... is able to repay these bank loans not only out of its current earnings, but also by increasing its capital through the issue of shares and bonds, by issuing which the bank also gains an additional promoter's profit. The bank can therefore provide more credit, with much greater security, to a corporation than to an

71

individually owned enterprise, and above all a different type of credit; not only credit as a means of payment, commercial credit, but also credit for the expansion of the enterprise's productive capital, that is, capital credit. ... The bank can not only extend more credit to a corporation than to an individual entrepreneur, but can also invest a part of its money capital in shares for a longer or shorter period. In any event, the bank acquires a permanent interest in the corporation, which must now be closely watched to ensure that credit is used for the appropriate purpose, and so far as possible controlled by the bank in order to make the latter's profitable financial transaction secure. The interests of the banks in the corporation give rise to a desire to establish a permanent supervision of the companies' affairs, which is best done by securing representation on the board of directors. This ensures, first, that the corporation wil conduct all its other financial transactions, associated with the issue of shares, through the bank. Second, in order to spread its risks and to widen its business connections, the bank tries to work with as many companies as possible, and at the same time, to be represented on their boards of directors."H Chapter 10 (Bank Capital and Bank Profit) adds a new aspect to the notion of banking domination over industry. According to Hilferding, the process of bank concentration is such that from a certain point in the development of credit functions

onwards, it becomes rather difficult for

new banks to be formed, for the interest-bearing capital available at any given time is continually attracted by the banks already in existence. On the other hand, this centralization of money capital is said to originate a growing tendency to completely eliminate competition among the already established banks. Such a tendency would point towards the creation of a central bank which would then exercise control over social production as a whole. Moreover, already in chapter 10 (the last one in

72

Part II) Hilferding emphasizes that the banking principle of minimization of risks makes banks intrinsically adverse to competition and predisposes them to favor the . elimination of competition in industry. This point of the argument is resumed in Part III. In chapter 11 (Surmounting the Obstacles to the Equalization of Rates of Profit), whereas he acknowledges that bank concentration has industrial concentration as its primary stimulus,Hilferding makes it plain that the bank's later interference in the process of industrial concentration is the decisive factor without which competition would not be eliminated in industry: "In general, it (the bank) can only stand to lose from competition among enterprises which are its customers. Hence the bank has an overriding interest in eliminating competition among the firms in which it participates. Furthermore, every bank is interested in maximum profit, and other things being equal, this will be achieved by the complete elimination of competition in a particular branch of industry. That is why the banks strive to establish monopolies. In this way the tendency of both bank capital and industrial capital to eliminate competition coincides. At the same time, the increasing power of bank capital enables it to attain this goal even if it is opposed by some enterprises which, on the basis of particularly favourable technical conditions, would perhaps still prefer competition. Industrial capital has bank capital to thank for eliminating competition at a stage of economic development in which, without intervention, free competition would still prevail."^ The inter-relation between the domination of industry by the

banks and the process of elimination of competition

in industry is a topic reverted to in chapter 14 (The Capitalist Monopolies and the Banks. The Transformation of Capital into Finance Capital). Hilferding initially reinstates the idea that banking concentration is an

73

outgrowth of t^e development of capitalist industry, and that on the other hand, a concentrated banking system is the decisive force in the direction of more advanced stages of concentration in the industry and the elimination

of

competition through the establishment of cartels and trusts. Then, in chapter 14, Hilferding adds that it is in this more advanced stage that the relations between the bank and the enterprise reach their maximum intensity, with banks gaining final control over the capital invested in industry in the capacity of major co-owners of industrial enterprises. In this chapter, Hilferding defines an aspect that is decisive in his understanding of the sources of banking domination over industry: in all of industry's sources of financing, the share of external financing provided to it via the banks grows faster than its own self-financing. "The dependence of industry on the banks is therefore a consequence of property relationships. An everincreasing part of the capital of industry does not belong to the industrialists who use it. They are able to dispose over capital only through the banks, which represent the owners. On the other side, the banks have to invest an ever-increasing part of their capital in industry, and in this way they become to a greater and greater extent industrial capitalists. I call bank capital, that is, capital in the money form which is actually transformed in this way into industrial capital, finance capital. So far as its owners are concerned, it always retains the money form; it is invested by them in the form of money capital, interest-bearing capital, and can always be withdrawn by them as money capital. But in reality, the greater part of the capital so invested with the banks is transformed into industrial, productive capital (means of production and labour power) and is invested in the productive process. An ever-increasing proportion of the capital used in industry is finance capital, capital at the disposition of the banks which is used by the industrialists.

74

Finanpe capital develops with the development of the joint stock company and reaches its peak with the monopolization of industry. Industrial earnings acquire a more secure and regular character, and so the possibilities for investing bank capital in industry are extended."13 At the end of chapter 15 (Price Determination by the Capitalist Monopolies and the Historical Tendency of Finance Capital), Hilferding asserts that finance capital in its more developed form presupposes the existence of both a general cartel in the productive sector and a central bank,through both of which a conscious regulation of production and distribution could be exercised. The social division of labor would be eliminated, while the technical division would continue to progress within the group of combined enterprises. The law of value would become superfluous, the same applying to the circulation of money. Through the general cartel and the central bank, both duly articulated by finance capital,all forms

of

capital would be unified. This unified power of finance capital would assert itself directly as owner of the means of production and of natural resources, and would exercise absolute command over live labor as a result of the relationships of property, now freed from their mystic veil of value and money. The foregoing theory about credit and banks suffers from serious conceptual mistakes. These flow above all from the precarious and poorly developed treatment given to the concept of interest-bearing capital. First of all, Hilferding completely mixes up the relationships between the functions of industrial capital

75

and credit with the relationships between the forms of industrial capital and bank capital. The relationships between the functions of industrial capital and credit are established as a requirement of the relations of capital production as a whole, hence they are subject to general laws. The development of these relationships between functions is completed with the constitution of the corporate system and the establishment of groups of enterprises articulated at the financial level. The relationships between the forms of industrial capital and bank capital, on the other hand, issue from competition, hence they express the historical conditions of the process of capital accumulation and the different national attitudes — including those of the respective states — toward the operation of the monetary and credit system. These relationships between forms belong in the field of the relations among individual capitals acting either independently or in association, and therefore no general laws can be formulated about their hierarchy in the . . . 14 field of political economy and its criticism. Secondly, for failing to develop a study about the functions of interest-bearing capital in capitalist production and because he adopted a functionalist 15 conception of credit and banks, Hilferdmg has uncritically appropriated unilateral views about

the

operation of the German banking system in the second half of the nineteenth century and early

twentieth

century.

These procedures are then translated into an attempt to establish, for the entire set of relationships between the forms of industrial capital and banking capital, general laws formulated on the basis of a generalization of

76

particular situations found in Germany's late industrialization. As a general result, the progressive development of capitalist credit, the diffusion of the financial form of accumulation of capital, and the increasing community of interests among individual industrial, banking, and commercial capitals resulting thereof —which, in the light of Marx's theory, are an expression of the growing subordination of interest-bearing capital to the dynamics of industrial capital — are all interpreted by Hilferding as proof of the opposite relation of domination."^ Sweezy (1976) agrees to the notion of bank domination over industrial corporations as formulated by Hilferding, but only in regard to a transitional stage in capitalist development. Using as a reference the processes of industrialization in Germany and the United States between 1890 and 1910, Sweezy reasserts the banks' decisive role in the process of eliminating competition and setting up monopolies. However, he disagrees with the idea that the banks' dominant position may represent a permanent, longterm tendency in capitalism. When once large corporations have been established, the banks' position would tend to undergo some marked changes. Thanks to their marketing power, large monopolistic entreprises would come to count on some rather elastic sources of self-financing, which would turn their access to the banks' loan capital into a complementary aspect. Under such circumstances, when the stage of prevalence of the processes of capital centralization were left behind, banking capital would end

77

its heyday and.revert again to a subsidiary position in relation to industrial capital. In short, according to Sweezy, the domination of banking capital corresponds to a transitory stage in capitalist development that is approximately coincidental with the transition from the system of competition to the system of monopoly.17 It is interesting to note that despite his criticism of Hilferding, Sweezy remains in the area of the latter's analytical horizon and accepts his theoretical tenets. The relationships between banking capital and industrial capital are considered only in the light of competition and of historical and institutional circumstances. Hilferding's conception is thus reduced to a mere interpretation of a historical stage that was specific to the industrialization of Germany and the United States. Sweezy's procedure, by the way, is facilitated by Hilferding himself, not only owing to the large number of descriptive references to the case of German industrialization, but also by his emphasis on comparing the banking systems of England and Germany and drawing generalizations from this exercise to capital as a u •, 18 whole. However, Hilferding's purpose was not actually concerned with examining the model of financing adopted in Germany's late industrialization. He sought to formulate his views on a theoretical level and attempted to deduce them from the theories of money, credit and capital formulated by Marx. There are several passages where Hilferding argues that the domination of banks over industry can be theoretically deduced from the movement of

78

capital considered as a whole. Furthermore, that is the 19 general direction of his work. In analyzing the relationship between industrial capital and interest-bearing capital, a distinction must indispensably be made between two levels or sets of characteristics.2 0 In the first place there are the characteristics that are appropriated by the analysis of capital in general. This level of analysis holds the basic definitions starting from which the study of credit — viewed as a specific result of capitalist production — may be developed. At this level the predominant characteristics concern the functions of interest-bearing capital and productive capital, as well as the sources and forms of their respective yields. Secondly, there is the level of analysis pertaining to the economic, institutional, and legal forms that emerge on the surface of the social movement through competition among individual capitals that carry out distinct functions of capital. The aspects to be stressed at this second level of analysis are the (historically dated) institutionalization of the credit and financing system in capitalist production, the reciprocal influences between financial institutions and productive capitals in the various credit markets and of financial assets, as well as in the different phases of the economic cycle, and also the different instruments created for the credit system's own use. In distinguishing these two conceptual levels, the determining aspect of the relationship between interestbearing capital and industrial capital emerges as the

79

growing subordination of the former to the latter. This subordination results from the change of the functions of interest-bearing capital into auxiliary functions in capitalist production. Viewed as a component element of the capitalist mode of production, interest-bearing capital differs from the usury capital of the pre-capitalist period in that the borrower confronting the lender of money is a capitalist who produces surplus value. The usurer in pre­ capitalist situations lends money chiefly to small producers who own their means of production (peasants and craftsmen) and who are secondary or subordinate components in other modes of production. The banks that are characteristic of the capitalist period lend money chiefly to industrial capitalists or tradesmen, which presupposes a significant development in the production and circulation of commodities.^"*" This difference between usury capital and interestbearing capital in the capitalist period points to a logical prevalence of the categories of surplus value and profit over that of interest. Money-lending capitalists and productive capitalists form two specific sections only because surplus value and profit can be separated and take on two different forms of revenues — interest and enterprise profits. In other words, in the capitalist mode of production interest is determined by surplus value and profit and constitutes merely a part of them. This implies that profit must be large enough to allow a portion of it to be appropriated as interest.

22

From a historical perspective, however, there is an

80

inverse relationship and profit seems to be determined by interest. The interest form is older than the profit form. In the relationship between usury capital and independent producers, peasants and craftsmen, the profits accrued by usury capital tend to be so high as to turn those producers into its debtors after they have added their own labor to the means of production purchased with the capital advanced by the usurer. In the capitalist mode of production interest-bearing capital is subordinated to industrial capital because the latter constitutes itself in the basic form of the dominant social relations in bourgeois society. The other forms of capital, interest-bearing

capital and commercial capital,

have secondary and dependent functions that are restricted to the circulation process. The credit system, in turn, as a specific creation of capitalist

production, constitutes

the instrument through which industrial capital subjugates interest-bearing capital. "In the course of its evolution, industrial capital must therefore subjugate these forms and transform them into derived or special functions of itself. It encounters these older forms in the epoch of its formation and development. It encounters them as antecedents, but not as antecedents established by itself, not as forms of its own life-process. In the same way as it originally finds the commodity already in existence, but not as its own product, and likewise finds money circulation, but not as an element in its own reproduction. Where capitalist production has developed all its manifold forms and has become the dominant mode of production, interest-bearing capital is dominated by industrial capital, and commercial capital becomes merely a form of industrial capital, derived from the circulation process. But both of them must first be destroyed as independent forms and subordinated to industrial capital. Violence (the State) is used against interest-bearing capital by means of compulsory reduction of interest rates, so that it

81

is no longer able to dictate terms to industrial capital.. But this is a method characteristic of the least developed stages of capitalist production.The real way in which industrial capital subjugates .interest-bearing capital is the creation of a procedure specific to itself —the credit system. The compulsory reduction of interest rates is a measure which industrial capital itself borrows from the methods of an earlier mode of production and which it rejects as useless and inexpedient as soon as it becomes strong and conquers its territory. The credit system is its own creation, and is itself a form of industrial capital which begins with manufacture and develops further with large-scale industry."23 The notion of the credit system as a creation of capitalist production and a specific form of industrial capital has a decisive importance in Marx's theory in that it expresses a different social function of the relations of borrowing and lending both before and during capitalism: "There was borrowing and lending in earlier situations as well, and usury is even the oldest of the antediluvian forms of capital. But borrowing and lending no more constitute credit than working constitutes industrial labour or free wage labour. And credit as an essential, developed relation of production appears historically only in circulation based on capital or on wage labour. ... Although usury- is itself a form of credit in its bourgeoisified form, the form adapted to capital, in its pre-bourgeois form it is rather the expression of lack of credit."24 In this way, then, it is 'possible to distinguish between the possibility and the need for the credit system 25 in capitalist production. The possibility of credit originates in the function of money as a means of payment and is therefore present in pre-capitalist situations. With the development of the capitalist mode of production this possibility gains more substance. With the generalization of the production and circulation of commodities variable amounts of money are periodically freed and made available

82

for lending as.a potential source of profit. A question then coites up as to why capitalist production should require the use of those amounts of money, thus rendering it necessary to form a system to mediate those transfers of temporarily idle capital and thereby originating an autonomous movement of interest-bearing capital. As a reply to that question, Marx specifies four 26 functions of credit in capitalist production. Initially, the function of credit is said to lie in the movements of equalization of the profit rate among the different individual capitals. Given that the total capital is distributed among several individual spheres of economic activity, credit becomes an instrument to carry out the transfers of capital that are needed to give feasibility to the joint reproduction of those different individual spheres. Secondly, there is the entire set of the effects of credit in terms of a reduction in the costs of circulation. A first effect would consist of the very economy in the use of money capital, determined by three supplementary factors: (a) by the sheer elimination of money capital from several transactions (commercial credit); (b) by the acceleration in the speed of circulation of a given amount of money; and (c) by the substitution of paper currency and entries in the banks' books for money with an intrinsic value (coins and bullion). A second effect would be overcoming the barrier represented by capital circulation time. A constant continuity in the process of capital circulation, a smooth

83

conversion of commodity capital into money capital, is an indispensable requirement

of capitalist production.

However, this transformation, i.e., the realization of commodity capital, is not assured in advance and implies a more or less prolonged break in the continuity of production and generation of surplus value. By means of credit, this fortuitous element of circulation may be restricted and eliminated. As a result there is an acceleration of the individual phases of capital circulation, an increase in the mass of surplus value generated by a given capital in a specific period of time, and therefore an acceleration of the process of capital reproduction in general. This second effect may also be viewed as a contraction of the reserve funds kept by individual capitalists. Associated with this effect, on the other hand, is the impact of credit in terms

of

overcoming the barriers set up by the dimension of 27 (productive and personal) consumption. Finally, there would be the functions

of capital

accumulation,2 8 which take up the largest part of chapter XXVII, Vol. Ill of Capital and represent a distinct development of Marx's analysis of the role played by credit in the process of capital centralization, as discussed by 29 him in chapter XXV, Vol. I of Capital. These functions are, on the other hand, the major focus of Hilferding's analysis of credit, on the basis of which he develops his own theory of finance capital. The third function of credit is, according to Marx, the promotion of corporations. Three aspects must be

84

highlighted in.this regard. First, corporations entail an enormous expansion in production scales and company size, an expansion that is quite impossible for individual capitalists. Second, corporations allow capital units to take on the form of social capital (i.e., the capital of individuals in association) as opposed to private or individual capital. It is in this context we find Marx's statement that corporations imply "... the abolition of capital as private property within the framework of capitalist production itself ... and hence a self-dissolving contradiction, which prima facie represents a mere phase of transition to a new form of production. It manifests itself as such a contradiction in its effects. It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property... ... With the development of social production the means of production cease to be means of private production and products of private production, and can thereafter be only means of production in the hands of associated producers, i.e., the latter's social property,much as they are their social products. However, this expropriation appears within the capitalist system in a contradictory form, as an appropriation of social property by a few. ... ... There is antagonism against the old form in the stock companies, in which social means of production appear as private property; but the conversion to the form of stock still remains ensnared in the trammels of capitalism; hence, instead of overcoming the antithesis between the character of wealth as social and as private wealth, the stock companies merely develop it in a new form."30 To Marx, therefore, the antagonism between private production and social property as represented by

85

corporations -ie given a negative solution, for in them the abolition of capitalist property remains latent and implicit, without leading to the formation of a new mode of production. Zeitlin (1974) draws attention to the fact that the English word "abolition" does not faithfully translate the meaning intended by Marx in the original German expression "aufgehoben" or, alternatively, "Aufhebung". For both Hegel

and Marx, "aufheben" contains the double

meaning of negation and preservation at the same time. The term "abolition" must therefore be understood as "re­ creation in the process of abolishing." The corporation as a form of social capital negates private capital while . . 31 preserving it. A third aspect of this function of credit is that corporations transform "the actually functioning capitalist into a mere manager, administrator of other people's capital, and the owner of capital into a mere owner, a mere money-capitalist."32 As a result all of the profit accrued by industrial capitalists transformed into shareholders comes to be received only in the form of interest (in this instance, as a sub-species: dividends), thereby representing, just as any revenue produced by interest-bearing cpaital, a mere compensation for the ownership of capital, totally separated from the specific function performed by the 33 enterprise in the process of capital reproduction. In this sense, corporations operate a completely new development of interest-bearing capital and institute a complete change of the form of industrial capital into

86

interest-bearing capital. The fourth function of credit in capitalist production is a widening — within certain limits — of individual capitalist's control over the capital and property of the remaining capitalists, and therefore over social labor. In this way, the individual capitalist's own capital comes to represent the basis for the entire superstructure of the credit system. Furthermore, on the basis of this fourth function, the process of capital centralization moves in a new direction: success or failure lead to the expropriation of individual capitalists, particularly the small and medium-sized ones. From this presentation of the functions of credit in capitalist production, we may deduce that even the very change in the form of industrial capital entailed by the promotion of the system of corporations acts toward strengthening industrial capital's dominant position. Contrary to Hilferding's statement, the development of credit and banking capital presupposes industrial capital's function of producing with a view to appropriating the surplus value. Interest-bearing capital (and also banking capital), however, remains a separate branch of economic activity and distinguishes itself from industrial capital and commercial capital, even after the diffusion of corporations. Its functions are entirely situated within the M - M' relationship, hence in the monetary and financial management of money capital and money. Its specific movement excludes the transformations that are

87

typical of cpmoiodity capital and productive capital. Its position is consequently determined in the intersection of two different connections: on the one hand, as indicated above, its functional subordination to industrial capital, and on the other, its relative autonomy as regards the latter, given that it has a movement that is specific to it. Its autonomy throughout the accumulation process means, in the first place, that the movements of money in the process of circulation of industrial capital become functions of a private capital that absorbs these movements 35 and makes them its own. The operations of payment, collection, accounting, and administration of funds for the capitalists as a whole convert themselves into a specific branch of business carried out in a large scale by financial institutions of variable sizes. Simultaneously, on the basis of the development of credit relations, interest-bearing capital and the banking system become powerful instruments in financing industrial capital O

accumulation.

C.

In this development there is even a 1

consolidation of a new type of money — credit or banking money — which must be articulated to other forms of money so as to be accepted as a symbol of value. The autonomy of interest-bearing

capital, however,

is not restricted to this development. A second development in the form of financial circulation must be taken into consideration. In the lending and borrowing market, in the monetary market, and in the stock and debenture market money is exchanged for financial assets with distinct

88

features in terms of maturity, guarantees, remuneration, and liquidity, whose conditions of valorization are not directly limited by the action of the law of value. Conditions are thus generated for an erratic circulation of money capital that is dissociated from the reproduction A

of productive capital. This financial circulation is necessarily articulated with the functions of credit in capitalist production. Yet, if the pace of accumulation of financial assets becomes excessive as compared to the conditions of valorization of productive capital, payment facilities become financial difficulties, thereby challenging credit relations and the monetary system itself.^ The intersection of these two connections never takes on the character of a synthesis in which the relative autonomy of interest-bearing capital — as interpreted in the restricted sense given to it by Hilferding — may reverse the terms of the relationship with productive capital and where banking capital may come to dominate industrial capital, thus originating a new phase of financial or monopolistic capitalism. Even in the most developed instances of the credit system, where capitals have adopted the form of corporations, the process of production and distribution of the surplus value continues to give relevance to the functional and institutional differentiation between industrial capital and interestbearing capital. This is so because profits (dividends) continue to be generated in distinct spheres of economic activity and appropriated by distinct groups of associated

89

capitalists (groups with a different composition in terms of the sectors and branches articulated by the relationships of borrowing and lending, shareholding, and interlocking 38 directorates). In other words, in the path covered from its generation to its final appropriation by corporation shareholders, surplus value necessarily continues to cross the differentiated circuits of industrial, commercial, and banking capital. In this way, comeptition and the variable relation of forces between capitalist lenders and capitalist borrowers continue to exist after the advent of corporations, there being no general economic rule to govern the distribution of surplus value between the industrial enterprise's profits (to be appropriated in the form of dividends) and the interest payable to the banks (to be appropriated, in the last instance, in the form of dividends, in the case of joint stock banks). The emergence of economic groups whose major element of internal cohesion is the financial variable flows from the diffusion of the corporate system and from the separation between the functions of ownership and administration observed in corporations. As a result of that splitting-up of functions, industrial capitalists become mere shareholders and profit comes to be appropriated in the form of dividends. Under such circumstances, corporation ownership and control come to be exercised through coalitions or associations of individual capitalists. Property is formally partitioned into rights represented by share titles, thus permitting the promotion of financial groups that articulate different corporations

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more or less cohesively and involve distinct activities in the process of capital reproduction, whether in the banking, industrial, or commercial sphere. In these financial groups, articulated as they are through the bond 39 of mere capital ownership, power relations are expressed in different hierarchies among individual capitalists and allied subgroups of capitalists. Such hierarchies reflect above all the conditions of competition and are therefore dependent upon multiple factors of a historical, natioanal and institutional order. The common bond that nevertheless unites these financial groups is the community of interests among their different partners.40 Studies conducted from a historical perspective unanimously acknowledge the decisive role played by joint stock banks in financing the industrialization of Germany as of the 1850s. Eight banks created in the period 1848-1881 have formed the nucleus of industrial financing operations 41 prior to World War I. Aside from their legal status as joint stock companies, what distinguished these financial institutions from traditional private banks in Germany was the fact that they combined the functions of commercial banks with those of investment banks and investment trusts, thus forming what Landes (1969, 1972) has referred to as the financial revolution of the nineteenth century.However, where the relationship between banks and industrial enterprises is concerned, most studies point out that the hierarchy between them throughout the period 1849-1914 varied considerably from one industry to the other, according to the size of capital and the historical

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subperiod involved. If it is true that in some cases (especially in some branches of heavy industry) the ascendency of banks over industrial enterprises did go beyond the mere control over the access to sources of financing and reached decision-making at the productive and commercial levels, it is also true that the terms governing those alliances underwent changes as industry developed and became independent from its original banking sources. In that process of close approximation between banks and enterprises, the point to be stressed as a general phenomenon is the conjunction of interests among the capitals involved, rather than the banks' domination over 42 industry. Portocarrero de Castro (1981) 'argues that the mechanism of German industry financing by large banks — 43 what is known as "prefinancing" — implies the need for a "close association between banking and industrial administrators, as well as a high level of public confidence in the banking system. Whereas one may identify in that operational mechanism the central role played by the banking institution, rather than its domination, the conjunction of their interests must needs be stressed."44 In examining the relationships between the bank and the enterprise during the period in question, Schumpeter equally adopts a critical stance regarding the notion of bank domination: "The close connection between banks and industries which naturally arose out of this has so often been commented upon that it is more important for us to qualify than to emphasize it. If a bank holds a controlling or, at all events, an important part of the capital stock of an industrial concern and acquires, as it then virtually will, all its current banking business, and if the fortunes of the concern and the price of its shares are associated with the

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bank's name and pecuniary interest, much closer supervision becomes of course necessary than would be the case if the bank were in a position to deal with every single transaction with the concern individually and simply on its merits. But although this supervision in many cases amounted to initiative and even to compulsion (such as enforcing mergers of, or at least understandings between competing enterprises, all customers of one bank), and although direct interest in an enterprise undoubtedly often was the motive for deviation from sound practice, the influence of banks did not in general go so far as that. The functions of entrepreneurs and banks and the essential opposition of their interests were not necessarily abolished, and the honorific positions on the board of industrial concerns usually granted to officers of the financing banks were apt to give to the financial press and to the social critic a very exaggerated idea of what those 'huge compounds of capitalist power1 really meant. It is amusing to note that bank executives were sometimes quite pleased to have the public believe in the reality of their power. This belief and the corresponding resentment were injurious and dangerous to them. But they also flattered their vanity. The efficiency of that engine for the purpose of financing and supporting new enterprise is, however, beyond question."45 At the root of the notion of bank domination over industry as formulated by Hilferding we find two elements, viz., his functionalist conception of credit and monetary phenomena, and his theory of banking concentration. The functionalist conception of credit presupposes that the agents who own the financial instruments (the banks) have the capacity to regulate financial and monetary circulation, as well as dominate the relationships between different fractions of capitalists. According to Brunhoff,46 the sole province of credit in this functionalist view is the financing of capitalist accumulation according to several modalities. This gives rise to an overestimation of the role of financial centralization and a neglect of the questions related to

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the contradictqry character of capitalist circulation of goods, financial instability and the crises of the monetary system. In his consideration of money in the simple circulation of commodities (chapters 1, 2, and 3 of Finance Capital), Hilferding departs from Marx in embracing the notion that money always remains in circulation. The main object of his concern in this context is the mass of money as a global amount that is fixed at any given time and which would ensure simple circulation, money being required merely as a means of circulation. The function of money as a means of hoarding is completely neglected.Hoarding is accidental and lacks effects of its own.48 Consequently, the procedure adopted by Hilferding to determine the amount of money that is socially necessary, an amount that would be determined by the addition of commodity prices and the velocity of circulation of currency, according to a simple equation of the type P T = M V, holds a good deal of quantitativist ingredients. This is particularly so when it comes to giving a definition of a "minimum of (monetary) circulation" capable of being socially regulated, either spontaneously or through state intervention. In analyzing money in industrial capital circulation, the credit system and the banks, Hilferding reproduces his functionalist and quantitativist view of financial instruments, according to which money is essentially an instrument for the circulation of commodities and the payment of debts. Therefore, credit utilization always occurs in the amount appropriate to finance accumulation,

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completely disentangled from the monetary conditions and effects of credit utilization. When the case of capital credit is considered hoarding comes into the picture, but only to convert itself into an element of capital circulation. The amount of credit becomes directly dependent upon the amount of money capital required for investments.49 In Hilferding's analysis of the banks' role in financing capitalist production, the functionalist conception is again reproduced. Capital credit becomes predominant and constitutes not only a modality of financing, but also an instrument of banking power, particularly if the banks guide their applications to the formation of fixed capital and corporation promotion. Thus the entire financial structure and economic activity become subject to a social regulation in which banks play the managing role. The anticipated final result of this process is the establishment of a central bank in charge of. the distribution of capital credit, completely organized within the various spheres of production. Owing to the parallel promotion of a general cartel, prices then come to be purely administrated and money loses all of its function. "In this way, not only do the structures of financial capital transform the previously existing monetary data but they also suppress them, in the last instance, and are pure agencies of capitalist financing under the domination of the b a n k s . " 5 0 The full expression of Hilferding's unilateral view of money and credit arises in his analysis of crises.Crises are said to be caused by disproportionalities in production and by the problems of realization arising therefrom.

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However, in the. age of finance capital, when production is controlled by cartels and banks, crises take on characteristics of their own in Hilferding's view. Owing to the process of capital concentration and the increase in production scales, there would also be an absolute and relative increase in the volume of production, which could be realized under any circumstances and which would be maintained even in times of crisis. Consequently, the disruption of the credit system would not be as complete in times of crisis as it used to be in the early periods of capitalism. Moreover, the evolution of a crisis in the credit system into a bank crisis, on the one hand, and a monetary crisis, on the other, would be made more difficult, as the development of banking concentration would imply a wider distribution of risks, a reduction in speculative activity, including that of the stock exchange, and a more favorable position for issuing banks to comply with the demands made upon them for additional means of , 51 payment.. For Brunhoff, the idea of disappearance of monetary crisis reflects not only a mistaken view of the power held by banks and the efficacy of monetary policies, but above all a misunderstanding of the nature of the contradictions inherent in financial and monetary circulation. This is demonstrated, according to Brunhoff, by the fact that in his presentation of the conditions of international monetary circulation prevailing in the early twentieth century, Hilferding fails to realize that the banks' increased capacity to block speculation against national

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currencies (through the

promotion of pools) merely

switched the weight of financial instability and monetary crisis onto their own bank currency. This phenomenon could be detected, for instance, in the 1907 crisis in the United States, which was a financial crisis that propagated itself internationally. A second component of the notion of bank domination over industry is Hilferding's theory of banking concentration. According to his views, the increasingly closer relationship between the banks and industry implies not only the former's effort to eliminate competition from industrial activity, but also a tendency to eliminate competition among the banks themselves, generating a process at the end of which a monopolistic bank would be created, thus exercising control over social production as a whole. An effort to give a rigorous theoretical formulation to the notion of banking domination over industry — within which there appears the theory of bank concentration — is made in different passages of Finance Capital. Early in the beginning of his Preface, Hilferding states that banking domination over industry is a mature expression of the more elementary form already observed in the relationships between money capital and productive capital. In chapter 4 he tells us that it is inherent in the very nature of credit and the banking activity to have the power to dominate industry. At a later point in his work, Hilferding justifies his position by arguing that it is the liquid and always available nature of capital in

•

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its monetary form that assures banks their domination over industry. At another point in his argument, Hilferding adds that competition among industrial capitals places them at the mercy of banks, on whose loans they depend to ensure advantages in the competitive struggle. Later he asserts that the principle of minimizing risks renders banks adverse to competition in industry, and then the banking concentration already attained (owing to the need to obtain scales that may be compatible with the demands for credit and capital mobilization by an industry that is already concentrated itself) becomes the decisive factor in the ulterior progress of industrial concentration. To these factors Hilferding adds that from a certain point in banking concentration, it becomes difficult for new banks to appear inasmuch as interest-bearing capital would then be continually attracted by the existing banks. Another point where we find an explicit concern with formulating the inevitability of banking domination over industry at a theoretical level is Hilferding's discussion of the characteristics of banking institutions in Germany. Several authors assert that the distinctive feature of the German banking system that allowed it to have an active role in the promotion of industrial accumulation was the financial innovation represented by multiple, universal, or industrial banks. In those banks the different functions of credit (capital credit and investment institution) were articulated between themselves, hence they could originate the banks' relative power vis-a-vis

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industrial capital. However, Hilferding argues that from a theoretical point of view, it makes no difference at all whether those functions are combined within each bank or exercised by different banking institutions. The combination of those functions —and hence the banks' increased power — is said to ensue from the fact that in every one of them capital emerges as money capital, as loan capital that can be withdrawn at any moment from the use to which it had formerly been put. Finally, Hilferding argues that the tendency to eliminate competition among banks themselves, and at the same time concentrate in their hands all of the money capital to be channelled to industry, is a result of the increasingly closer relationship between the banks and industry. Those tendencies in turn lead to the formation of a central bank that will then exercise control over social production. In short, Hilferding's formulation at the theoretical level may be said to rest upon the liquidity of banking capital and the resulting ease of its concentration and centralization. These would be the factors that would ultimately assure banking capitals their advantage over industrial capitals in the competitive struggle, in the fight over the distribution of surplus and the ownership and control of productive capital. Finally, given the need to reduce risks in their operation and the pursuit of a maximization of their profits, banks would be led to progressively reduce competition both in the productive sphere and within the banking system itself.

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At that goint, however, it is already plain that in his effort to give a theoretical basis to banking domination and the inevitability of a monopolistic bank, Hilferding is not able to go far beyond his own intention. The liquid form of money capital does not generally amount to a reason for banking domination. Except in times of deceleration of capital accumulation and crises, when industrial capital is faced with its own inability to honor its debts and must them subject itself to bankers' dictates and conditions, the crucial element in the power relationship involved in credit is the size of the capitals.53 Also, the idea that competition among industrial capitals places them in a subordinate position relating to banks cannot be accepted either, unless we embrace the hypothesis that the processes of capital concentration and centralization can progress faster within the banking system than in industry, as Hilferding would seem to suggest. However, this hypothesis is not acceptable as one that might correspond to the needs of the process of capital accumulation as a whole. As stressed by Hilferding himself, the central aspect of the process of banking concentration is its reflex character, i.e., banking concentration is attendant upon the process of concentration in productive activities. On the other hand, the widely ackowledged existence of scale economies that are typical of the banking activity —whether they are economies associated to technical factors involving the use of inputs or associated to a reduction of risks in asset and liability operations — is not enough to evidence a

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higher progress of banking concentration as compared to concentration in industrial activity, where those scale economies are also to be found. Moreover, the very liquidity of interest-bearing capital, as well as its divisibility, imply that its sphere of activity must always be subject to the strong pressure exercised by the entry of new capitals and the (actual or potential) formation of new banks, which compete with the existing banks and thereby restrict the process of centralization. Finally, it is worth stressing that the growing significance of financing sources external to the enterprises, which at certain times and in some industrial branches was so characteristic of Germany's late industrialization, cannot be viewed as a general tendency of capitalism, as pointed out by Sweezy. In fact, the over­ whelming presence of external financing is found only in the phases of acceleration of capital accumulation and at times of intense and generalized revolution in the technical conditions of production. Furthermore, external financing, even if it holds a major position, does not imply the domination of banks over industry. Contemporary literature about banking concentration corroborates the sense of the foregoing criticism of Hilferding's conception. The arguments and the evidence presented in several works about scale economies and banking concentration indicate, in particular, the absence of any tendency towards the formation of monopolies in banking activities.

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That literature distinguishes three kinds of determinants of the process of banking concentration: (a) concentration in industrial activities, (b) scale economies in banking activity, and (c) the regulation exercised by the state.54 In the case of concentration in industrial activity, its influence over banking concentration (a reflex concentration) expresses a displacement of the demand for services on the part of enterprises toward larger-sized financial operations, thereby generating an increase in the banks' average size. By its very definition, however, this conditioning factor does not account for an independent development of banking concentration. So far as scale economies are concerned, it is possible to distinguish factors of a technical nature and factors relating to risk. Despite the great efforts employed to overcome the problems verified in the proper quantification of scale economies —particularly those ensuing from the treatment of joint production — the results attained to this date are far from being definitive. Moreover, the magnitude found in scale economies associated to factors of a technical order (labor specialization, equipment utilization) is not significant and prevails 55 especially in the range of smaller banks. On the other hand, scale economies associated with the reduction of risks by virtue of an increase in the number of resource attraction and lending operations"^ would cease to operate owing to the regulating activity of the government and/or 57 monetary authority in the capacity of lender of last resort.

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The monetary authority's regulating activity, apart from its action designed to curb situations of financial panic and runs on the banks, is also exercised with a view to regulating the entry and formation of new banks, as well as the closing and disappearance of banks. The criterion that would seem to prevail in such cases is the assurance of a level of competition within the sector such as to make the banks' profitability resemble that of the remaining spheres of business in the long run.58 An additional argument relating to the unfeasibility of the constitution of monopolies in banking activities concerns the potential competition coming from new financial 59 assets and new banks and financial institutions.

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FOOTNOTES (1) Hilferding (1981) investigates questions that are basically found on the same ground covered by Vol. Ill of Capital, titled "The Process of Capitalist Production as a Whole." The term "watershed" is used here in the sense that some of Hilferding*s notions about the credit system resemble the foundations established by Marx, and that, by introducing the notion of domination of the banks over industry, Hilferding unilaterally develops those foundations and completely warps the meaning assigned by Marx to the processes of capital concentration and centralization. His notion of the banks' domination over industry, as well as his theory about the financing of industrial accumulation, allow us to place him as a forerunner of contemporary theories about (a) relationship patterns among distinct fractions of capitalists, (b) the models of industrial organization, corporate control and corporate power, and (c) alternative national models for financial ana industrial development. See, among others, Cameron (1967), Gerschenkron (1970), Landes (1972), Sweezy (1972, 1976), Hu (1975), Boccara (1977), Kotz (1978), and Herman (1979, 1981). (2) Hilferding (1981), Part I, chap. 4, p. 67. In a footnote at the end of chapter 4 Hilferding states that the banks1 domination over industry had been anticipated by Marx himself. See note 21, p. 385. (3) Hilferding (1981), p. 95. (4) Hilferding (1981), p. 114. (5) There is no question of an exact equalization with the interest rate obtained in a completely safe financial application; one must take into account the premium on the specific risk attributed to every type of shares. (6) Hilferding (1981), p. 111. (7) Hilferding (1981), p. 113. (8) Hilferding (1981), p. 127. (9) This is the subject matter of chapter 8 (The Stock Exchange) of Finance Capital. In chapter 9 Hilferding analyzes commodity markets and finds that there is a growing interference of banks in wholesale commercial activities. This is interpreted as an additional instance of banking domination over industry and commerce.

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(10) Hilferding (1981), p. 138. (11) Hilferding (1981), pp. 120-121. (12) Hilferding (1981), pp. 191-192. (13) Hilferding (1981), p. 225. (14) See Rosdolsky (1977), chapter 27, the scope of Marx's analysis of credit in his different works criticizing political economy. (15) See Brunhoff and Bruini (1974) and Brunhoff (1975, 1978). These authors' ideas will be examined later. (16) For a view similar to Hilferding's about the dominant role of credit in capitalist production, formulated in the decade of 1920, see Hobson (1965), ch. X. This author, however, does not come to the point of inferring an elimination of competition and the constitution of a monopolistic bank and a general cartel, which are so important to Hilferding. The notion of bank domination or control over industry continues to be reproduced today. See Kotz (1978), Fitch and Oppenheimer (1970a, 1970b, 1970c), and Fitch (1972). As is the case with Hobson, neither do these authors deduce conclusions similar to Hilferding's about the effect of bank domination on competition. These contemporary versions of the notion of bank domination have been developed with the purpose of challenging the theses formulated, by Berle and Means (1967), for whom the corporate system would imply a separation between property (capital) and corporate control rather than a simple separation between property (and control) of capital and the managerial function. See also Thompson (1977), for whom "although banking capital is dominant, it is not determinant within this .articulation (between banking and industrial capital). In other words, that aspect of the circulation of social capital concerning the provision of funds for finance dominates the other aspects, but the determinant moment in the combination is occupied by the place of productive capital within the industrial circuit. ... Thus, through its lending practices, banking capital can determine 'where' accumulation might take place ... but not that it will actually take place. It can determine the 'site' of the appropriation of nature (the place of the combinations of means of production and labour power), but cannot guarantee that any appropriation will actually take place." (p. 247). (17) Sweezy (1976), chapter XIV. It should be stressed at this point that Sweezy does accept the theory of competition formulated by Hilferding, even though he does not agree to a tendency toward the promotion of a general cartel.

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(18) In note B,f chapter 11, p. 408 of Finance Capital, for instance,: Hilferding argues that the specific features of the course taken by the English banking system, which would imply a smaller influence of banking over industry, are one of the causes of greater difficulty in the advance of the process of industry cartelization in England. Still in the same note, Hilferding points out that in both Germany and the United States the common interests of industry were chiefly represented by bank directors through personal connections, whereas in England that aspect was less important as personal relations were established among the directors of industrial corporations. Following the same line of reasoning, Hilferding emphasizes in chapter 14, pp. 224-225, that English banks were not able to keep up a continuous expansion of industrial credit and restricted themselves to providing credit to commercial activities. Therefore, corporation shares were placed directly with the public, thus competing with deposits in the banking system and restricting the banks' capacity to influence the activity of industrial enterprises. The practice of reducing the question of banking domination over industry to the national and institutional aspects of the financial system and to the conditions of competition between individual capitals in each historical context, without going into the discussion of its theoretical tenets, reappears in a large part of contemporary literature about the relationships between banking capital and industrial capital. See Fitch and Oppenheimer (1970a, 1970b, 1970c), Sweezy (1972), Thompson (1977), Cutler, Hindess, Hirst and Hussain (1978), Kotz (1980), Overbeek (1980), Minns (1981), Herman (1981), and Carroll(1982). (19) The need for a criticism of Hilferding's conception at the theoretical level is emphasized by Brunhoff and Bruini (1974) and Brunhoff (1975). This point shall be resumed later. (20) See Rosdolsky (1977), pp. 383-386. (21) Marx (1975), Vol. Ill, ch. XXXVI, pp. 594, 600, 609. (22) "To examine capital in general is not a mere abstraction. If I regard the total capital of, e.g., a nation as distinct from total wage labour (or as distinct from landed property), or if I regard capital as the general economic basis of a class as distinct from another class, then I regard it in general. Just as if I regard man, e.g. as physiologically different from the animals. The real difference between profit and interest exists as the difference between a moneyed class

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of capitalists and an industrial class of capitalists. But in order that two such classes may come to"'confront one another, their double existence presupposes a divergence within the surplus value positedby capital." (Marx, 1973, p. 852). (23) Marx (1971), Part III, pp. 468-469. (24) Marx (1973),p.535. (25) Rosdolsky (1977), p. 392. (26) Marx (1975), Vol. Ill, ch. XXVII. (27) See also Marx (1973), p. 542, and Rosdolsky (1977), p. 394. (28) "Finally, the function of accumulation, in so far as it is not conversion (of revenue) into capital but the supply of surplus value in the form of capital, becomes, in part, the responsibility of a special class, in part everything accumulated by society in this sense becomes accumulation of capital and is placed at the disposal of the industrial capitalists." (Marx, 1971, Part III,p. 519). (29) "This splitting-up of the total social capital into many individual capitals or the repulsion of its fraction one from another, is counteracted by their attraction. This last does not mean that simple concentration of the means of production and of the command over labour which is identical with accumulation. It is concentration of capital already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. ... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many. This is centralization proper, as distinct from accumulation and concentration. The laws of this centralization of capitals, or the attraction of capital by capital cannot be developed here. A brief hint at a few facts must suffice. The battle of competition is fought by a cheapening of commodities.The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller... Apart from this, with capitalist production, an altogether new force comes into play — the credit system, which in its first stages furtively creeps in as the humble assistant of accumulation, drawing into the hands of individual or associated capitalists, by invisible threads, the money resources which lie scattered over the surface of society in larger or smaller amounts; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into

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an enormqus >social mechanism for the centralization of capitals. Commensurately with the development of capitalist production and accumulation there develops the two most powerful levers of centralization — competition and credit." (Marx, 1975, Vol. I, pp. 625-626). (30) Marx (1975), Vol. Ill, pp. 436, 438, 439-440. (31) This contradictory sense of social capital has gone unnoticed to Hilferding. (32) Marx (1975), Vol. Ill, p. 436. (33) "Profit thus appears (no longer only that portion of it, the interest, which derives its justification from the profit of the borrower) as a mere appropriation of the surplus labour of others,arising from the conversion of means of production into capital." (Marx, 1975, Vol. Ill, p. 437). (34) See Brunhoff (1975). (35) Marx (1975), Vol. Ill, ch. XIV. (36) Hilferding takes only this aspect of the autonomy of interest-bearing capital into consideration, hence the agents (bankers) who concentrate financial instruments under their control are interpreted as instances regulating competition. Brunhoff (1975), p. 177. (37) Brunhoff and Bruini (1974). (38) The specific form of banking control in financial groups which was verified in some branches of economic activity during some periods of Germany's late indus­ trialization represents one of many possibilities of institutional articulation of the community of interests between banking capital and industrial capital. For a contemporary discussion of the process of establishment of financial groups as a predominant expression of the process of capital centralization, see Aglietta (1979). This author's emphasis concerning the process of formation of economic groups is laid upon the proprietary control variable and the alterations produced in the composition of those groups by major waves of mergers. (39) "Interest-bearing capital is the perfect fetish. It is capital in its finished form — as such representing the unity of the production process and the circulation process — and therefore yields a definite profit in a definite period of time. In the form of interest-bearing capital only this function remains, without the mediation of either the production process or the circulation process..."

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(Marx, 1971, p. 454). "Interest therefore appears as the surplus due to capital-as capital, to the mere ownership of capital, and the surplus value derived from the production process because it enters it as capital, and, therefore, due to capital as such independently of the production process, although it is only realised in the production process..." (Marx, 1971, p. 476). (40) The notion of financial group as a general expression of a community or coalition of interests among its members is presented in several contemporary works about the topic of corporate power and corporate control. See Aglietta (1979), Scott (1979), Overbeek (1980), Herman (1979, 1981), Minns (1981), and Portocarrero de Castro (1981). (41) The A. Schaaffhausen1scher Bankverein (Cologne), created in 1848, the Bank fUr Handel und Industrie (Darmstadt), created in 1853, the Discontogesellschaft (Berlin) and the Berliner Handelsgesellschaft, both created in 1856, the Deutsche Bank (Berlin) and the Commerz - und Disconto-Bank (Hamburg), created in 1870, the Dresdner Bank, founded in 1872, and the Nationalbank flir Deutschland (Berlin) , founded in 1881. See Neuburger and Stokes (1974). (42) See Tilly (1967), Clapham (1968), Kemp (1969), Gerschenkron (1970), Landes (1972), Milward and Saul (1973), Neuburger and Stokes (1974), Fremdling and Tilly (1976), and Gille (1977). (43) "The way in which the great banks financed industrial investment came to follow a classical pattern, described as 'prefinancing' by German writers. First, the bank finances industrial investment by means of credits which are formally short term but in fact indefinitely renewed. This leads to industrial expansion and growth, and eventually a capital issue takes place,which is managed by the bank. The eventual placing of the new securities with the general public, again through the bank's branches, serves to consolidate or replace industry's indebtedness to the bank. Thus,the bank is 'relayed' by the capital market, and the credits that it has granted to the industrial undertaking have only served to 'pre-finance' its investments until such time as the condition of the.firm and of the capital market are ripe for a capital issue." See Hu (1975). For a detailed examination of the operational activity of joint stock banks in Germany in the period studied by Hilferding, see Riesser (1911) and Whale (1930). (44) Portocarrero de Castro (1981), p. 9. (45) Schumpeter (1939), Vol. I, p. 349.

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(46) See BrunhQff and Bruini (1974), Brunhoff (1975, 1976, 1978). (47) Brunhoff's criticism echoes not only Marx's conceptions about money and credit such as they may be apprehend . throughout his work, but also the specific references about the role of credit as a detonator of crises in capitalism. At the end of the very same chapter where he introduces the functions of credit in capitalist production (Capital, Vol. Ill, ch. XXVII), Marx points out: "The credit system appears as the main lever of overproduction and overspeculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits ... This simply demonstrates the fact that the selfexpansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production.11 (Marx, 1975), Vol. Ill, p. 441. Hilferding fails to point out this contradictory character in his theory of finance capital. (48) Brunhoff (1975), pp. 128-129 and 133; Brunhoff (1976), pp. 20-21. (49) Brunhoff (1975), pp. 133-135. (50) Brunhoff (1975), p. 138. (51) Hilferding (1981), pp. 290-294. (52) Brunhoff and Bruini (1974), pp. 79-82; Brunhoff (1975), p. 144. (53) Hilferding's inability to give a theoretical foundation to his notion of bank domination, however, does not imply that other authors feel discouraged. Hussein (1976) argues that one of the key stays of that domination is to be found in the creation of credit money, hence in the banks' capacity to govern the volume of credit and liquidity. An identical argument appears in Cutler, Hindess, Hirst, and

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Hussain (1978). (54) See Portocarrero de Castro (1981). (55) Bell and Murphy (1967) and Portocarrero de Castro (1981). (56) Baltensperger (1972). In the case of resource attraction, the increase in the bank's size, which reflects an increase in the number of i-ts depositors, implies a reduction in reserve losses per period. Thus, the optimum level of reserves and their associated costs would show a relative decline with the increase in the size of banks. I.n the case of applications, the increase in bank size reduces the probability of losses in the value of its assets per period, consequently reducing the costs associated to the size of the net assets maintained as a protection against the risk of insolvency. (57) For the role of monetary authorities in the capacity of lender of last resort, see Kindleberger (1978) and Minsky (1985). (58) Motter (1968), Stigler (1973), and Portocarrero de Castro (1981). (59) Gurley and Shaw (1955).

Ill •' f

Chapter 4 FINANCE CAPITAL AND CAUSES OF CRISIS Rudolf Hilferding gives the title "Finance Capital and Crises" to part IV (chapters 16-20) of his best known work."'" The theory of crisis presented therein contains two contradictory conceptions about the need and causes of general crises of overproduction and the periodic breakdowns in capitalist economy. One of these conceptions is based on the occurrence of autonomic disturbances in the circulation or reproduction of capital as a whole,expressed in excessive investments, sectorial disproportionalities, and general problems of realization. This is the most widespread conception, being generally know as the theory of Hilferding's about the causes of crises. 2 The other conception springs from the fall in the rate of profit provoked by technical progress and by the increase in the organic composition of capital.

According to this

conception, disproportionalities assert themselves only in and through competition among capitals at the point where tendencies toward a fall in the rate of profit begin to prevail over tendencies toward an increase in prices and in the mass of profit as a result of the growing demand at the 3 end of the boom stage of the economic cycle. This chapter aims at presenting and contributing to the interpretation of this ambivalence in Hilferding's thought. Despite its abstract character, the immediacy and

112

relevance of .1;his question is undeniable. The theory of overproduction crises, regardless of the enormous analytical effort made in recent years, continues to flounder in a labyrinth of ideas in which unilateral positions are easily reproduced. We feel that Hilferding's ambivalence reflects his sketchy and undeveloped treatment of the laws of capital accumulation. Under the weight and pressure of the historical evidence of a late capitalism in Germany — as well as of his brilliant analytical effort to incorporate that evidence into the still incomplete theoretical treatment presented by Marx in Volume III of Capital — Hilferding is misled by a rather common type of conceptual inversion. In his discussion of the causes of crisis, this is reflected in a mistaken methodological approach to the phenomena of competition among capitals and the resulting contradictions at the level of circulation. In his first conception, Hilferding gives precedence to those phenomena in the hierarchy of concepts over the contradictions inherent in the process of valorization of capital; t disproportionalities would therefore generate the crisis. Alternatively, in his other conception, Hilferding aims at a type of non-existent articulation between disproportionalities and the fall in the rate of profit. The procedure is subtler here, and disproportionalities feature as an instance without which the contradictions inherent in the process of valorization of capital could not manifest themselves. The first of the aforementioned conceptions begins to

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to manifest itself in chapter 16 (General Conditions of Crisis), in which Hilferding discusses the contradictions r

of capitalism inherent in the circulation of commodities,

money and capital, as well as a central aspect of the questions related to what is now known as the principle of 4 effective demand. In the last paragraph of that chapter we find a statement to the effect that the reproductive schemes formulated by Marx in Vol. II of Capital show

"that in capitalist production, both simple reproduction and expanded reproduction can proceed without interruption as long as these proportions are maintained."5 With this statement Hilferding actually suggests that

proportionality among the various sectors and branches of production is the sole condition for the process of reproduction of capital to take place without any difficulties.

This conception receives further

elaboration in chapter 17, which deals with the causes ofcrisis. Hilferding then argues (p.257) that the responsibilitity for maintenance of the "complicated relations of proportionality" which must exist in production, given the social division of labor and the private and decentralized character of the decisions regarding production, rests on the price mechanism. This mechanism, operating through alterations in the structure of relative prices, determines production expansion or contraction in each sector or branch, as well as the beginning of a new production line, etc. — in short, the distribution of production. Therefore, Hilferding maintains

that the disruption of proportional relations must find

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explanation in the disruption of or distortion in the structure of prices, which prevents them from giving an adequate indication of the sectorial requirements of aggregate production. Following a brief description of the form of operation of the economic cycle, Hilferding renders his conception still more specific as regards the operation of this price mechanism (p. 261): "This much at least is clear: if price rises during prosperity were general and uniform, they would remain purely nominal. If the prices of all commodities were to raise by 10 per cent or 100 per cent, their exchange relationship would remain unchanged. The rise in prices would then have no effect upon production; there would be no redistribution of capital among the various branches of production and no change in the proportional relations. If production is carried on in the proper proportions... these relations need not change and no disruption need occur. It is different, however, if the character of price changes is such as to exclude uniformity. The changed price structure may then bring about changes in the proportional relations among the various branches of production; for the changes in prices and profits crucially affect the allocation of capital among these different branches. "1 Hilferding then discusses (pp. 261-266) the factors which prevent prices from varying uniformly, thus bringing about sectorial disproportionalities (relative overproduction) and crises. Four factors are indicated as being in the origin of disturbances in the mechanism of circulation of capital when considered as a whole: (1) the diversity of the organic composition of capital among the various sectors; (2) technical discontinuity in the supply of raw materials; (3) exhaustion of money capital reserves and capital equipment reserves during the boom period prior to the crisis; and (4) alterations in the proportions between consumption and investment expenses.

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As regards the first factor, Hilferding points out that the growth in the organic composition of capital attendant on the development of capital accumulation is differentially manifested in the various sectors and branches of productive activity. This process, in turn, is translated into a differential time extension, by sector and branch, of the maturity of new investments, and therefore of the time required to expand production. The longer the time required to install a new productive facility, the harder it is to adjust supply capacity to the growing needs of personal and productive consumption; and the wider the gap between supply capacity and demand, the more pronounced is the growth of prices, causing a relative increase in the pressure to transfer capitals into these activities of higher organic composition. The stimulus to expand investments in such activities is reinforced, in turn, by the effect of the increase in the organic composition of capital, in terms of a rise in productivity, cost reduction, and generation of extra profits. Thus, as a result of the differential growth in the rate of profit, deriving basically from the differential response in supply, new flows of capital give preference to those sectors with a higher organic composition of capital. This produces a tendency toward excessive investments and overproduction in the sectors with a higher organic composition of capital as compared to those with a lower one. The disproportionalities become manifest when the commodities of the former sectors reach the market, for the sale of these new products is hindered in view of the fact that production in the sectors

116 with a lower organic composition of capital has not grown at the same speed. As a consequence, the very crisis of overproduction is more severe in the sectors with a higher organic composition of capital. A second factor in the distorted and distorting movement of the structure of relative prices can

be

found in the production of raw materials (extractive activities

and agriculture)

and eventually also in the

inputs of widespread consumption (steel, power). their technical characteristics,

Given

the supply of these

products is prevented from accompanying their own demand fluently and smoothly, hence

the great

alterations in

their prices. The higher the relative overproduction of capital

equipment, the larger

the relative

underproduction of raw materials and the more pronounced the increase in prices in the latter activities. According to Hilferding, these movements of relative prices would also be at the root of a differential growth in the rate of profit, and therefore of disproportionalities and crises. Moreover, the "complicated relations

of

proportionality" are likely to be disrupted for another reason, viz., the loss of flexibility in the continuous process of adjustment among the various parts of the productive apparatus. This loss springs from the reduction in reserves of money capital(in modern terms, the potential of credit generation) and of capital equipment, which tends to manifest itself at the end of the boom stage in the economic cycle. The availability of money capital (or

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alternatively, the unused supply capacity of the credit system) and capital equipment constitute an element giving elasticity to the process of a continuous

recreation of

the conditions of reproduction of capital on an aggregate level. The reduction in reserves becomes absolute just prior to the crisis and manifests itself either in the /

financial sphere (capitalists become unable to honor their debts) or/and in the productive sphere (material means of production cannot be found in the market). In chapters 18 (Credit Conditions in the Course of the Economic Cycle) and

19

during

(Money

Capital

Depression),

and Productive

Hilferding

Capital

offers a detailed

discussion of these points, which are, however, not our immediate concern here. Finally, Hilferding draws our attention to the alterations in the proportional relation between consumption and investment, which would also participate in this process inhibiting the continuity of the reproduction of capital as a whole. In chapter 20 (Changes in the Character of Crises. Cartels and Crises),Hilferding presents an extension to the theory of disproportionalities as a cause of crises. The question then raised is whether the emergence of monopolies and the great modifications

resulting from industrial

organization, through their effect in suspending free competition, would be such as to produce qualitative changes in the operation of the economic cycle and the character of crises. According to him, "Cartels do not diminish, but exacerbate,

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the disturbances in the regulation of prices which lead ultimately to disproportionalities ... The effect of cartels is to end competition within a given branch of production, or more precisely, to make it latent, so that it does not exert a downward pressure on prices in that branch of production; and second, to establish competition among the cartelized sectors on the basis of a higher rate of profit that that which prevails in the non-cartelized industries. But cartels are powerless to alter the competition among capitals for spheres of investment, or the effects of accumulation on the price structure, and they cannot, therefore, prevent the emergence of disproportional relations.118 Hilferding points in this instance to a second mechanism producing a differential pattern in the rate of profit. The initial mechanism was the pattern of unequal responses in variations of the supply capacity deriving mainly from an uneven growth in the organic composition of capital. In the second mechanism, assuming that the degree of cartelization may be related to the degree of organic composition of capital, the differential increase in profitability would result from the fact that, in addition •to the problem of a lag in supply, there is an artificial regulation in the conditions of supply through the latter's quantitative restriction, which is designed to raise •

profitability above the competitive rate. Finally, Hilferding stresses that the development of cartels tends to change the effects of the crisis, in that they allow the crisis' worst effects to be diverted to non-cartelized industries. In the third paragraph of chapter 17, Hilferding suddenly introduces his other conception about the causes of crisis: "As we already know, the organic composition of

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capital?changes.For technological reasons, constant capital.increases more rapidly than does variable capital, fixed capital than circulating capital. The relative reduction of the variable component of capital results in a fall in the rate of profit. A crisis involves a slump in sales. In capitalist society this presupposes a cessation of new capital investment, which in turn presupposes a fall in the rate of profit. A crisis is simply the point at ~ which the rate of profit begins to fall." (p.257). Hilferding then examines the operating conditions of the economic cycle, asking himself how the change takes place — the transition from a state of intense and feverish activity, high profits and accelerated accumulation to a state of hopelessness and despair, comprising a slump in sales, a fall in profits, and widespread idleness of capital equipment. The author argues that the very conditions which initially produce and reinforce prosperity contain in themselves the potentialities which gradually render the conditions of capital valorization more difficult, until finally reaching a point where new capital investments cease coming: "As we already know, however, technical improvements are expressed in a higher organic composition of capital, and this involves a decline in the rate of profit, a deterioration of the conditions for the valorization of capital. The rate of profit declines for two reasons: first, because the variable capital diminishes as a proportion of total capital, so that the same rate of surplus represents a lower rate of profit; and second, because the larger the amount of fixed capital in relation to circulating capital the longer is the turnover period for capital, and this too involves a decline in the rate of profit." (p.260).10 Subsequently, after a brief reference to the ascending behavior of salaries and interest rates during the stage of prosperity, Hilferding makes a sudden turn to

the discussion of the "complicated relations of

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proportionality" and their relationship with crises: "A crisis begins at the moment when the tendencies toward a falling rate of profit, described above, prevail over the tendencies which have brought about increases in prices and profits, as a result of rising demand. Two questions suggest themselves at this point. First, how do these tendencies, which presage the end of prosperity, assert themselves in and through capitalist competition? Second, why does this occur in the form of a crisis, suddenly rather than gradually? The latter question is less important, for it is the alternation of prosperity into depression which is crucial for the wavelike character of the business cycle, and the suddenness of the change is a secondary matter." (p. 261)H In the foregoing quotations we note that Hilferding also conceives of the law of a tendency toward a decline in the rate of profit as a causal principle in overproduction crises. His explanation of the movements of the rate of profit and aggregate demand, however, is poorly elaborated and inaccurate. Albeit repeatedly indicated as a factor which causes a fall in the rate of profit, the increase in the organic composition of capital does not act at a more specific level within the picture of capital accumulation presented, where the fall in the rate of profit takes place. The passage where Hilferding states, contrary to Marx, that a crisis is "the point at which the rate of profit begins to fall" (p. 257), as well as his lack of a conceptualization of the point at which new investmentscease to be made (pp. 260-261), and his vague statement that the effect of the increase in the organic composition of capital on the rate of profit manifests itself only in the long run, are examples of the precariousness of the analysis which serves as a basis for his alternative 12

conception of the causes of crisis .

Moreover, the very

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mechanism which determines the increase in the organic composition of capital — whether it is the struggle for the production of surplus value or the struggle among capitals for the allocation and appropriation of the surplus value, the manner in which these two aspects interrelate, and the conditions of introduction of technical progress by each individual capitalist — is not indicated. As we have seen, Hilferding also points out explicitly that his main concern in the remainder of chapter 17 (after the brief passages quoted above, where he examines the movement of the rate of profit) is to analyse how the tendencies toward a fall in the rate of profit "assert themselves in and through capitalist competition". In the paragraph following that question, still on page 261, Hilferding resumes the discussion of the "complicated relations of proportionality", which goes on until the end of chapter 17. The issue here is precisely the one discussed in the paragraph in which he renders his conception of the operation of the price mechanism more specific ("This much at least is clear: if price rises..."), which we have quoted earlier and presented as part of his first conception about the causes of crisis (pp. 261-266). We thus see that there is a double conception in Finance Capital about the causes of periodic overproduction crises. At a certain point in the argument, those crises appear to be provoked within a certain field of contradictory forces (technical progress, increase in the organic composition of capital, increase in productivity, increase in the mass of surplus value, and fall in the rate of profit). At another point, crises are described as

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resulting from .contradictions found only in the sphere of capital circulation (value, use value, money, prices, interest rates, proportions in aggregate reproduction). In the following paragraphs, we seek to clarify the roots of this double and contradictory conception. In his treatment of crises, Hilferding makes a jumble of two heterogenous themes and confuses analyses pertaining to different levels of abstraction. This prevents him from distinguishing general crises or crises of absolute overproduction from partial crises or crises of relative overproduction, thus hindering him from correctly articulating these two movements in the process of capital accumulation. Within the critical conception of political economy which Hilferding aims at developing, a crisis cannot be viewed as a deviation from equilibrium. It is, instead, the very mechanism of equilibrium, the only one through which equilibrium may be reached in capitalist production. This implies that to understand crises is to study the dynamics of the system, as crises are the dominant form of this movement.13 According to this critical conception, there are, however, two distinct types of regulatory movements 14 In the first place (instead of positions of equilibrium!). there is the process by which market prices for individual 15 . commodities are regulated by (re)production prices, m which supply and demand interact and competition among capitals acts by reducing the different rates of profit to the average rate. Needless to say, these movements imply a process of regulation through constant unbalance and

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relative overproduction, in which the prices of (re)production act as a center of gravity for market prices. As Marx had already noted, "... there would be no overproduction, if demand and supply corresponded to each other, if the capital were distributed in such proportions in all spheres of production, that the production of one article involved the consumption of the other, and thus its own consumption. There would be no overproduction, if there were no over-production. Since, however, capitalist production can allow itself free rein only in certain spheres, under certain conditions, there could be no capitalist production at all if it had to develop simultaneously and evenly in all spheres." "... the average periods during which the fluctuations of market prices compensate each other are different for different kinds of commodities ... because with one kind it is easier to adapt supply to demand than with the other."17 The second type of regulatory movement concerns the global pace of the process of capital accumulation and the variables which determine it: technical progress, the organic composition of capital, the volume of investments and profits, the (average) rate of profit, and

absolute

overproduction. We must, therefore, distinguish the type and nature of the crisis embedded in the two types of regulatory movement, so that we may aim at articulating them later on within the theory of capital accumulation. The objective of articulating the two levels may eventually have been what Hilferding (1981) meant to suggest in formulating the question about how the contradictory tendencies which lead to a rise in demand, prices and profits, and to a fall in the rate of profit, assert themselves in and through competition. As we will see, however, this question is

124

poorly formulated. In chapter XVII, part II of Theories of Surplus Value, titled "Ricardo's Theory of Accumulation and a Critique of It (The very nature of capitalism leads to crises)", Marx distinguishes general and absolute overproduction crises from partial crises of relative overproduction. General crises represent a temporal concentration, a collective outbreak, and a violent adjustment of all

contradictions

of capitalist economy, including those inherent in the 18 circulation of capital. In such general crises, however, the predominant contradiction consists, on the one hand, of the fact that the capitalist mode of production involves a tendency toward the absolute development of labor productivity, regardless of the value and surplus value contained in commodities and of the social conditions under which capitalist production is made. On the other hand, its objective is to preserve the value of the existing capital and promote its maximum self-expansion. This contradiction, manifested in the law of the tendency toward a fall in the rate of profit, encompasses the factors which make the system progressively and structurally weak, thus allowing partial phenomena — disproportionalities in the sphere of production, financial disturbances, etc. — to manifest themselves simultaneously with absolute overproduction and general crises. Marx asserts that partial crises may emerge from a disproportionate production, when too much is produced in some spheres of activity and an insufficient production is observed in other spheres. A general form of this

125

disproportionate

production may be a relative excess in

the production of fixed capital, or a relative excess in the production of circulating capital. Nevertheless, we must not overlook the fact that proportionate production is always the result of disproportionate production, the basis of this process being competition among capitals. These partial crises, on the other hand, are not the object of analysis of the absolute overproduction of capital: "However, we are not speaking of crisis here in so far as it arises from disproportionate production, that is to say, the disproportion is the distribution of social labour between the individual spheres of production. This can only be dealt with in connection with the competition of capitals. In that context, it has already been stated that the rise or fall of market value which is caused by this disproportion results in the withdrawal of capital from one branch of production and its transfer to another, the migration of capital from one branch of production to another. This equalisation itself, however, already implies as a precondition the opposite of equalisaton and may therefore comprise crisis; the crisis itself may be a form of equalisation. Ricardo, etc., admit this form of crisis. Marx also refers to crises of disproportionality in part III, Volume II of Capital ("The Reproduction and 20

Circulation of the Aggregate Social Capital")

and again

reverts to this theme specifically in the last chapter of part II, volume III of Capital ("Conversion of Profit into Average Profit"): "It has been said that competition levels the rates of profit of the different spheres of production into an average rate of profit and thereby turns the values of products of these different spheres into prices of production. This occurs through the continual transfer of capital.from one sphere to another, in which, for the moment, the profit appears to be above the average. The fluctuation of profit caused by the cycle of fat and lean years succeeding one another in any given branch of industry must, however, receive due consideration.

126

This incessant outflow and inflow of capital between the different spheres of production creates trends of rise and fall in the rate of profit, which equalise one another more or less and thus have a tendency to reduce the rate of profit everywhere to the same common and general level... Yet, with respect to each sphere of actual production — industry, agriculture, mining etc. —the transfer of capital from one sphere to another offers considerable difficulties, particularly on account of the existing fixed capital."21 In this sense, it is clear that Hilferding's references to the need for uniformity in the movement of prices of different commodities, and therefore of stability in relative prices to avoid disproportionalities, represent a misunderstanding. As a matter of fact, the very inequality in the movement of the organic composition of capital in the different sectors, as discussed by Hilferding, implies the existence of continuous alterations in relative prices. This condition of uniformity is valid only upon examination of the formal conditions of the process of reproduction and circulation of capital as a whole. Reproduction schemes have been conceived of by Marx at a very high level of abstraction, therefore deliberately ignoring many of the characteristics of capitalist reality, such as the average rate of profit, production prices which diverge from values, foreign trade, etc. To claim that the non-fulfillrrent of the requirement of uniformity in the movement of prices represents per se a causal element

in

generating a crisis of disproportionality is to be unaware of the very mechanism through which proportions are reached, i.e., to ignore the fact that proportionality among the different spheres of production emerges from the process of continuous disproportionality, on the basis of the

127

competition of capitals. This misunderstanding arises from f

an attempt at mechanically applying the conclusions drawn from the abstract formulation of the schemes of reproduction directly to the analysis of rather concrete processes which take place in the real world of capitalist production. An analogous misunderstanding is found in Hilferding's

argumentation (1981, p. 256) to the effect that capitalist production might be indefinitely extended, provided the correct proportions could be maintained among the different spheres of production. Rosdolsky (1977) is therefore right in stating that Hilferding "looked for concrete proof of

the unlimited economic viability of the capitalist form of economy in these very same schemes",' which he (Hilferding) "knew, of course, were conceived at the highest level of abstraction and therefore ignored many key features capitalist reality..."

of

22

The development of Hilferding's analysis, in turn (chapter 17, pp. 261-266), in pointing to the factors that interfere with the operation of the price system and provoke crises of disproportionality, is already present in Marx's own analysis of the regulatory movement of the prices of (re)production. However, to say that "Marx regarded it as elementary ... that a general crisis and overproduction can result from partial disturbances in the process of production and circulation", in Sweezy's

23

words,

represents an inaccuracy as regards Marx's

conception concerning the articulation between partial crises and a general crisis. Moreover, it is a unilateral

128

approach to say. that Marx simply denied any validity to the theory of disproportionalities, as stated by Sweezy (1976) on page 190. Marx had indeed tried to demonstrate that disproportionality crises are partial and restricted, and that they do not reflect the absolute obstacles to capitalist production imposed by capital itself. Furthermore, Marx endeavors to present the specific level of analysis at which the concept of crises of disproportionality may be relevant, a level which must be analytically articulated with general crises of absolute overproduction. In item 14, chapter XVII of part II of Theories of Surplus Value, Marx offers a specific discussion of these questions, to which we shall make reference in the text which follows. Rosdolsky (1977, p. 485 and note 108 of p. 486) asserts that Hilferding's theory of crisis represents merely another version of Ricardo's theory of crises, and that both coincide in terms of their fundamental features. By examining this point, some clarification should hopefully emerge with respect to the articulation between the two types of crisis. In Ricardo's conception, general overproduction,i.e., simultaneous overproduction in all productive activities is hindered by the "metaphysical equilibrium of purchases and sales."24 This hindrance is idealized as of the negation of the possibility of a crisis, i.e., the negation of the existence of general conditions and of a basic structure within which a crisis may occur. Speaking more specifically, this hindrance springs from regarding money as a simple

129

means of exchange, an instrument through which interchange takes place, leaving aside the fact that money is, at the same time, the means through which interchange is divided into two acts — purchase and sale — which are mutually independent and separated in time and space. And that, therefore, the person who effects a sale is not compelled to buy again, and the re-transformation of money into commodities may differ in time. A second possibility of crisis, equally negated by the "metaphysical equilibrium of purchases and sales", results from the function of money as a means for the settlement of debts. This possibility becomes prominent as commercial credit and financial intermediation develop . If the chain of debtors is broken at certain crucial points, the inability to honor debts tends to be generalized, thus interrupting the circulation of capital. Finally, Ricardo's conception is translated into a negation of the possibility of crises at a third level,where the two possibilities previously mentioned receive a new content. This is the process of reproduction of capital as a whole, which coincides with its circulation and in which the role of aggregate expenditure (effective demand) takes on a decisive significance for the delimitation of the value of the total production flow. 2 5 If we consider the movement of capital from the moment when the production process in the form of commodities is completed up to its subsequent transformation into commodity capital to be used in a new productive cycle (C'-M'.M-C), the separation between purchase and sale will manifest itself, insofar as the

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transformation -of capitals in the form of commodities into money depends on and must correspond to the re-transformation of other capitals from the form of money capital into that of commodity capital. This interweaving and union of the processes of reproduction and circulation of different capitals is necessary in view of the social division of labor, but on the other hand,it is incidental and depends on the sum of individual decisions made by capitalists. Ricardo, on the other hand,admits that there may be an excessive production of certain goods — a relative or partial overproduction. This partial overproduction, however, is not such as to turn into a general overproduction, i.e., overproduction in some spheres is not likely to produce overproduction in other spheres, and so on. This form of crisis is accepted by Ricardo, since in acknowledging the social division of labor and the interdependence among various private activities, he admits of a need to obtain continuous adjustments by means of the competition among capitals and alterations in relative prices. Hilferding's theory of crisis uses as its starting point precisely the discussion of the general conditions of crisis and the various forms assumed by the possibility of crisis (chapter 16 of Finance Capital). Furthermore, in the version of this theory according to which disproportionalities are the cause of crisis, relative overproduction and partial crises are only a starting point, the outcome of which is a general crisis. On the other hand,

131

in his alternative conception of the causes of crisis, Hilferding subtly suggests that disproportionalities are an element without which'the long-term trends found in the process of valorization of capital could not be manifested. In any event, therefore, in Hilferding"s view partial disproportionality crises are always an element in general crises, in contrast with the views held in Ricardo's theory. What ought to be discussed, then, is the relationship between partial crises and general crises. In his second conception, although he presents partial crises in subordination to the tendencies toward a general crisis originating in the movement of the rate of profit,. Hilferding diverges from Marx, for whom it is necessary to distinguish (once again) two types of relative overproduction, which are distinguishable only if we consider the very difference between absolute overproduction and relative overproduction: "That is why Ricardo admits that a glut of certain commodities is possible. What is supposed to be impossible is only a simultaneous general glut of the market. Th'e possibility of overproduction in any particular sphere of production is therefore not denied. It is the simultaneity of this phenomenon for all spheres of production which is said to be impossible and therefore makes impossible (general) over-production and thus a general glut of the market. (This expression must always be taken cum grano salis, since in times of general over­ production, the over-production in some spheres is always only the result, the consequence of over-production in the leading articles of commerce ... it is always only relative, i.e., over­ production because over-production exists in other spheres."26 For Marx, then, there is a relative overproduction associated with partial disproportionality crises, and a relative

132

overproduction associated with general crises of absolute overproduction, which in turn begin by an overproduction in "the leading articles of commerce". Thus, according to Marx, what happens is that in periods of absolute overproduction, which start from a relative overproduction of "the leading articles of commerce", partial crises of relative overproduction may also manifest themselves. Under such circumstances, there would be (a relative) overproduction within (an absolute) overproduction.27 Crises of absolute overproduction, however, do not depend —neither as a causal factor, nor as a transitory instance for its manifestation at the level of competition — on disproportionalities, as Hilferding would have it. Finally, in concluding this chapter, two preliminary questions must be raised with respect to the specific aspect of the effect of monopolies on disproportionalities and crises. In fact, this point would refer us to a wider discussion of the relationship between the fall in the rate of profit and monopolies,

28

which must be developed later

on. In the first place, the formation of cartels and trusts is associated with the setting up of barriers

to

the penetration of new investors, which would aim at restricting the tendency toward a relative overproduction. On the other hand, Hilferding's argumentation seems to presuppose some kind of inability on the part of capitalists and in particular on that of entrepreneurs to foresee increases in capacity, and therefore distinguish a conjunctural lag from an effective and more permanent

133

restriction in .supply capacity. As a basis for a theory of general crises, this argument would be too narrow and insubstantial, to say the least.

134

FOOTNOTES (1) Hilferding, R., 1981. (2) See, for instance, Sweezy (1976) pp. 186-192; Mandel (1968), pp. 366-368; Rosdolsky (1977), pp. 483-490; and Mattick (1977), pp. 125-128. (3) This conception is suggested by Baran and Sweezy in the introduction to their book on monopoly capitalism: "Engels, in some of his own writings after Marx's death and in editorial additions to the second and third volumes of Capital which he prepared for the printer, commented on the rapid growth of monopolies during the 1880's and 1890's, but he did not try to incorporate monopoly into the body of Marxian economic theory. The first to do this was Rudolf Hilferding in his important work, Das Finanzkapital, published in 1910. But for all his emphasis on monopoly, Hilferding did not treat it as a qualitatively new element in the capitalist economy; rather he saw it as effecting essentially quantitative modifications of the basic Marx's laws of capitalism." (Baran and Sweezy, 1966, p.5). Likewise, Marx's ideas on the proportions required in the process of reproduction of capital as a whole, specially those presented in item 14 of chapter XVII —"Ricardo's Theory of Accumulation and a Critique of It. (The very nature of capital leads to crises)" — , in Part II of Theories of Surplus Value (Marx, 1968), as regards "an over-production within the over­ production", contain valuable indications about this other conception. Finally, Hilferding's own text is clear in this respect, as we will shortly see. (4) See Kenway (1980),where some connections are established between Marx's theory on the abstract possibility of crisis and the principle of effective demand in Keynes and Kalecki. (5) Hilferding, 1981, p. 256. (6) Cf. Rosdolsky, 1977, p. 483. (7) Hilferding > 1981, chapter 17,P- 261. (8) Hilferding, 1981, chapter 20, P- 296. (9) Hilferding, 1981, chapter 17, P- 257. (10) Hilferding, 1981, chapter 17, P- 260 (11) Hilferding, 1981, chapter 17, P- 261 (12) According to Marx (1975), the point at which the flow

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of investments collapses is when over-production of capital Becomes absolute and capital growth equals zero: "The so-called plethora of capital always applies essentially to plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit ... There would be absolute over­ production of capital as soon as additional capital for purposes of capitalist production =0 ... at a point, therefore, when the increased capital produced just as much or even less surplus-value than it did before its increase ... i.e., the increased capital C + AC would produce no more or even less profit than capital C before its expansion by AC... The fall in the rate of profit would then be accompanied by an absolute decrease in the mass of profit ..." Capital, vol. Ill, chapter XV. (13) See Dobb (1978), chapter IV. (14) See Shaikh, 1980a. (15) According to Marx (1975), Vol. Ill, chapter X, "The price of production includes the average profit. We call it price of production. It is really what Adam Smith calls natural price, Ricardo calls price of production, or cost of production, and the Physiocrats call prix necessaire, because in the long run it is a prerequisite of supply, of the reproduction of commodities in every individual sphere." (16) Marx (1968), part II, chapter XVII. (17) Marx, 1982. (18) See Marx (1968), part II, chapter XVII, specially pp. 510 and 534. Due to space limitations, an exposition of the law of the .tendency toward a decline in the rate of profit will not be made at this point. For a recent discussion on the matter, see Hodgson (1974), Rosdolsky (1977), Itoh (1980), and Shaikh (1978, 1980a, 1980b). (19) Marx (1968), part II, chapter XVII ,p. 521. (20) Marx (1975), Vol. II, for instance p. 469. (21) Marx (1975), Vol. Ill, p.208. (22) Rosdolsky (1977), p. 451. (23) Sweezy (1976), p. 186. (24) See Ricardo (1978), chapter XXI, and Marx (1968),part II, chapter XVII.

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"Ricardo.'.^ statements here are also based on James Mill's proposition of the 'metaphysical equilibrium of purchases and sales', which I examined previously — an equilibrium which sees only the unity, but not the separation in the processes of purchase and sale." Marx (1968), pp. 503-504. (25) "The general possibility of crisis is the formal metamorphosis of capital itself, the separation, in time and space, of purchase and sale. But this is never the cause of the crisis. For it is nothing but the most general form of crisis, i.e., the crisis itself in its most generalised expression. But it cannot be said that the abstract form of crisis is the cause of crisis. If one asks what its cause is, one wants to know why its abstract form, the form of its possibility, turns from possibility into actuality." Marx (1968), p. 515. (26) Marx (1968), p. 592. (27) Marx (1968), chapter XVII, item 14, pp. 530-531. (28) See, for instance, Steindl (1983) and Baran and Sweezy (1966).

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Chapter 5 SUMMARY AND CONCLUSIONS The root of the concept of monopoly capital is Hilferding's pioneering book, Finance Capital, completed in 1909 in which Hilferding aimed to develop Marx's analysis of the processes of concentration and centralization, and of the roles of competition and credit within these processes. According to Hilferding, a twofold transformation in its economic appearance gives capitalism the form of finance capital. This transformation is the outcome of processes which tended, on the one hand, to abolish competition through the formation of cartels and trusts, and on the other, to promote increasingly intimate relations between banking capital and industrial capital, whithin which banking capital becomes the dominant partner. The construction of the concept

of finance capital is the

object of the first three parts of Hilferding's book. The fourth part analyzes economic crises. There, disproportionalities between sectors of production and the problem of realization of surplus value are identified as major causes of capitalist crises, or alternatively as aspects of competition through which crises should manifest themselves. Hilferding also maintained that to the extent that cartels and trusts intervene in the mechanisms of price formation, they reinforce the tendency toward crises. Those four parts of the book form the theoretical portion

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of Finance Capital. Finally, in the fifth part, Hilferding discusses the economic policy of finance capital and develops a theory of capitalist imperialism. In building up his theory of finance capital and crises, however, Hilferding treated the concepts of competition, credit, and accumulation of capital in a very sketchy way. According to Hilferding, the processes of capital concentration and centralization would be such as to eliminate competition through the formation and diffusion of cartels and trusts. These combinations of capital would constitute the major instruments for the promotion of price increases and originate differential profit rates. Rates of profit would rise in cartelized and trustified branches, whereas they would fall in those branches that did not benefit from such capital unifications with monopolistic aims. As a result of the progressive elimination of competition prices would no longer be objectively determined magnitudes, and an arbitrary and incidental component would progressively prevail in their determination. The law of value would therefore be gradually weakened. In the argument developed by Hilferding there are no \ absolute limits to the process of monopolization. On the contrary, there is a constant tendency toward an expansion of cartelization whereby independent industries are progressively subordinated to cartelized industries, the ultimate result of this process being the formation of a general cartel. In this general cartel capitalist production would be consciously regulated by a central agency

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that would determine both the volume and the distribution of production. This presentation of the processes that lead to the elimination of competition would be incomplete if we did not take into consideration the influence that, according to Hilferding, the credit provided by banks exercises upon them. The processes of banking concentration originate in the concentration of industrial capital. However, in Hilferding's view, from a certain point of their evolution onwards banking capital would become the decisive influence on the continuity of concentration processes toward more advanced stages. This would be so because, by absorbing the different modalities of credit as part of its operation — commercial credit, capital credit, and corporation promotion — banking capital would come to exercise control over the financing of industrial corporations and from that point on would dominate the reproduction and monopolization of industrial capital. For Hilferding, therefore, banking domination over industry and the progressive elimination of competition are articulated and complementary phenomena. It is from this articulation that Hilferding deduces his concept of finance capital. Banking domination over industry constitutes, according to Hilferding, a mature expression of the relationships that may be observed between money capital and productive capital in the circuit of industrial capital. This domination is said to occur especially because banking capital predominantly takes on a more liquid form than industrial capital, and because in the competitive struggle

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among themselves individual industrial capitals become increasingly dependent upon external sources of financing to expand production scales and reduce costs. Hence, in making use of capital credit to finance their formation of fixed capital, industrial capitalists are compelled to submit to bankers' supervision. Their dependence is said to increase if they associate in the promotion of corporations as their successful access to capital markets can then only be had through the intermediacy of banks. So, whether owing to the links of long-term loans, to the ownership of the shareholding capital of industrial corporations, or to its participation in the boards of the latter, banking capital would come to be the dominant partner in that integration of the different fractions of capital embodied in finance capital. Finally, given their inherent aversion to the risks of competition, both in the industrial sphere and in the banking one, large banks would be led to form a central bank that would take charge of credit distribution and thus of the determination of the volume and allocation of social production. The central bank and the general cartel would therefore be the final manifestations of the processes of capital concentration and centralization. As we may conclude from this summary of Hilferding's analysis, his major theoretical argument concerns the progressive suppression of competition and the gradual weakening of the law of value as a result of the processes of capital concentration and centralization. Hilferding does not develop a mere historical interpretation of the evolution of capitalism using as his main reference

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Germany's

late industrialization. What he actually does is

suggest that in its very roots Marx's theoretical work about capital accumulation is vitiated by a contradiction between his theory of concentration and his theory of value and prices, such contradiction being historically confirmed by the diffusion of monopolies. Considering the foregoing aspects, finance capital is the underlying concept in current accounts of how the capitalist mode of production operates in the twentieth century. Hilferding's classical book may be regarded as the seminal work of an influential group of modern economists which distinguishes different stages in capitalist development: the stage of free competition and the stage of monopoly capitalism. The latter is said to originate in the structural changes undergone by capitalism as of the late nineteenth century, which would have produced qualitative modifications in its essential laws. Outstanding in this school of economic thought are Sweezy and Baran (1966), Sweezy (1976, 1977, 1981), Mandel (1968), Dobb (1972), Steindl (1976), and Boccara (1977), among many others. Baran and Sweezy (19 66), for instance, argue that Hilferding was the first author to attempt to incorporate monopoly into the body of Marx's theory, but did not go so far as to treat monopoly as a qualitatively new element in capitalist economy, and that "he saw it as effecting essentially quantitative modifications of the basic Marxian laws of capitalism."''' The massive influence of Hilferding's theory, along with the fact that in most of these works the treatment of the concept of finance capital has been rather

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superficial an4 uncritical, make it essential to debate the basic tenets that support it. Hilferding's analysis of the processes of capital concentration and centralization, as well as his conclusions, are based on a poor and confused understanding of Marx's theory. Both capital concentration and centralization are erroneously associated to the elimination of competition and banking domination over industry. At the roots of Hilferding's procedure we find, in the first place, his identification of Marx's conception of competition with the orthodox conception of pure and perfect competition, which in turn is viewed as an adequate interpretation of the reality of competition among capitals until the late nineteenth century. As a corollary, the concept of monopolistic combines and finance capital (of imperfect competition or oligopoly, as suggested by later economists who share ideas resembling Hilferding's) becomes an adequate signpost to characterize what are said to be the new modalities of interaction among individual capitals. In Hilferding's concept of competition emphasis is laid on the large number of small capitals, the absence of collusion, the free mobility of capital among the various industries, and the notion that each enterprise plays a passive role as price taker in the process of price determination. These are all basic elements of the concept of pure or perfect competition. When once this trivial conception is mistaken for Marx's, a whole number of phenomena of competition —which are necessary in the light of the latter's theory — begin to be viewed by Hilferding

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as part of a process of generalized monopolization. This is particularly clear in the case of the differentiation of profit rates. Marx's conception regards that differentiation as a necessary aspect in the tendential process of equalization of the rates of profit on capital in different industries, as well as necessary within each industry,given the co-existence of several production methods and several levels of efficiency in the use of each method. Yet, as this differentiation contradicts the conception of pure or perfect competition, the very same differentiation is turned into an evidence of the expanding monopolistic power. In Marx's conception, the nature of competition is given by the fact that it constitutes a struggle between capitals in their processes of self-expansion, or an "arms race", to use Shaikh's analogy. 2 This arms race contains two aspects. In the first place there are the struggles between capitalists in one and the same industry, which result in the determination of a uniform market price

for

each commodity and presuppose a regulating value as a * center of gravity around which market prices fluctuate. This confrontation between capitalists within the same industry is equivalent to a war within one and the same field, or to a war for the occupation of that field. Furthermore, the development of new means of production is equivalent to an arms race in which the development of new weapons consists chiefly of the ability to reduce costs and subjugate competitors. In the second place, there are struggles between capitals from different industries, i.e.,

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a war among different industries. Different industries mean different battlefields. This confrontation occurs through both the inflow and outflow of capital in different industries whereby a tendency toward the equalization of profit rates in the various spheres of production is created. When the prospects of gains are high in a given field, this stimulates a displacement of armies toward that area. In other words, capital mobility is analogous to the mobility of war forces. As a result, the concept of a center of gravity for prices takes on a new determination in the form of production prices. Both these aspects of competition — intraindustrial and interindustrial — give rise to the existence of differential rates of profit at each point of time.However, Hilferding disregards, first of all, the aspects of competition among individual capitals in one and the same industry, and therefore the inevitability of differential profit rates arising from distinct levels of productivity of the labor absorbed by different capitals within each industry. Secondly, Hilferding conceives of competition among different industries as a process in which production prices are real equilibrium prices and not an average of past movements. Consequently, the differentials in the rate of profit resulting from the fact that supply and demand never coincide and that distinct industries present different turnover periods in their capital are not perceived as part of the theory of competition in Marx. The problem of the differentiation between rates of profit provoked by the competition among capitals from

145

distinct industries cannot be mistaken for the differentiation of profit rates resulting from competition within each industrial branch. Yet, it is necessary to understand both as processes that are complementary to and articulated with one another. As a result of their articulation we must realize that the abstract notion of production prices holds in itself the differences between individual production prices, average production prices, and regulating production prices. The latter are the centers of gravity of market prices and represent a. transformation of the concept of center of gravity initially defined at the level of each industry, when the problem of the tendential equalization of the rate of profit of different industries as part of the

;

materialization of the notion of value still had not been introduced. This center of gravity now redefined represents the price resulting from the production method that is most accessible to the new capital being invested. This inflow of new capital is what pushes prices down as this is where supply is expanded. The inflow of additional capital is interrupted at the point where the rate of profit of this regulating capital approaches the average rate of profit. Thus, the tendency toward an equalization of profit rates is expressed as a tendential equalization of the profit rates only on the regulating capital in each industry. In other words, that tendency implies that the hierarchy of the rates of profit of a given industrial branch, generally speaking, follows the fluctuations in the regulating price for that industry.

146 In shorty as the tendency toward an equalization of the rates of profit among different industries is applicable only in the case of regulating capital, the hierarchy of profit rates within each industry is a typical phenomenon of competition. On the other hand, as the equalization of the rates of profit of different industries is processed only as a tendency and expresses itself as an average of past movements, there will be, at anv specific point in time, differential rates of profit between the regulating capitals of different industrial branches. Therefore, Marx's conception of competition, in which the dispersion of the rates of profit emerges as a necessary actual result, is perfectly in keeping with his theory of value and production prices. And what is more, it is his theory of value, as a necessary general Principle, that confers intelligibility upon competition among capitals and defines the limits within of determination of market

which the process

prices will condition the

reproduction of social capital. Hilferding's

analysis of the processes of capital

concentration and centralization is based on a double misunderstanding

concerning the credit system. On the one

hand, he mistakes the relationships between the functions of interest-bearing capital and the functions of industrial capital, which are conditioned by capital movement as a whole, for the relationships between the forms of banking capital and industrial capital as they have manifested themselves for a short while in some branches of heavy industry in Germany's late industrialization. On the other

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hand, Hilferding adopts a functionalist conception of credit according to which the financing of capital accumulation endows banks with the power to regulate financial and monetary circulation as well as the very competition among capitals. Consequently, a complete reversal is produced in the meaning of the diffusion of the corporate system and the financial accumulation of capital. These cease to express the growing and complete subordination of interest-bearing

capital to the

industrial capital's functions of producing and appropriating surplus value, and become elements in capitalist economy's

march towards a conscious regulation

by a group of financial capitalists. Contrary to Hilferding's assertions, the dominant partner in the relationships between industrial capital and interest-bearing capital is industrial capital. The subordination of interest-bearing capital to industrial capital flows from the fact that in the capitalist mode of production, interest is determined by surplus value and profit. These must be sufficiently large to allow a fraction of themselves to be appropriated as interest. In other words, the difference between the enterprise's profit and the interest rate expresses the difference between a moneyed class of capitalists and an industrial class

of

capitalists. However, this double existence of the capitalist class presupposes a divergence in the surplus value produced by capital. The different functions of credit —equalization of the profit rate among capitals from different industries, reduction in circulation costs,

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promotion of corporations, and an increased control of individual capitalists over the capital of the remaining capitalists — must then be jointly understood as an instrument for the development of capitalist production. Even if we assume the diffusion of the corporate system, which is in turn a component part of the generalization of the financial form of capital accumulation or accumulation of financial assets, the functions of interest-bearing capital will continue to lie entirely within the M - M' circuit. That circuit is consequently positioned at the intersection of two different connections: on the one hand, its functional subordination to industrial capital, and on the other, its relative autonomy in regard to the latter, given that it has its own specific movement. That specific movement restricts itself neither to the purely technical movements performed by money in the circulation process of industrial and commercial capitals nor to the financing of capitalist accumulation, both of which originate banking capital. A second aspect of the movement of interest-bearing capital is financial circulation (and the resulting liquidity of bank capital) which allows its valorization process not to be directly limited by the action of the law of value. Given, however that this valorization rests upon speculation, hence upon the erratic circulation of money capital, dissociated from the reproduction of industrial capital, a good deal of instability is characteristic of financial circulation. Furthermore, when the pace of accumulation of financial assets ceases to be sanctioned by the actual conditions of

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production of. surplus value by industrial capital, financial difficulties come up and challenge the relations of credit and the monetary system. This element of instability in financial circulation shows the contradictory character of credit in capitalist production. Banks are periodically subject to suspicion on the part of their depositors and thus call for an intervention by the monetary authority and/or the state in the capacity of lender of last resort. The regulation of the inflow and outflow of capitals in banking activity resulting thereof interrupts the operation of scale economies and sets up restrictions on the process of concentration and centralization of bank capital. Hence the non-existence of any grounds to aprioristically presume that banking concentration will progress any faster than industrial concentration, thus making it easy for the former to control the latter. Neither is there any reason why.we should presuppose a tendency toward the formation of a central bank. Finally, the growing presence of external sources in •

industry financing manifests itself during certain phases of capital accumulation where there is an intensification and generalization of a revolution in the technical conditions of production in some industrial branches. Those conditions are not sufficient to set up a general state of banking domination over industry. Therefore, not even in the most developed instance of the credit system, when capitals have assumed the form of corporations, does the relative autonomy of interest-

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bearing capital ever take on the form of a synthesis through the domination of industrial capital by banking capital. Even in that advanced stage in

the constitution

of the capitalist mode of production, in following the path that leads from its production to its final appropriation in the form of dividends, surplus value continues to cross the differentiated circuits of industrial, commercial, and banking capital. Not only do competition and the confrontation of forces between lending capitalists and borrowing capitalists continue to exist, but also profits (dividends) continue to be appropriated at distinct institutional loci, i.e., by distinct groups of associated capitalists with a wide diversification in terms of the sectors of economic activity covered by their investments. In those economic groups (conglomerates), more or less cohesively articulated as they are chiefly by the bonds of capital ownership, power relations express themselves in different hierarchies between individual capitalists and allied subgroups of capitalists. Such hierarchies reflect variable historical conditions including state action. The common bond unifying those economic groups is the community of interests among their different partners or allies. In this sense, some partial experiences of banking control over industrial enterprises, such as observed in some branches of industry and for variable lengths of time in Germany's late industrialization, represent but one of a range of possibilities of the relationship between the forms of industrial capital and bank capital. Hilferding's theory of crisis contains two

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contradictory conceptions about the causes of overproduction crises and the periodic breakdowns in capitalist economy. One of these conceptions emphasizes the occurrence of disturbances in the circulation or reproduction of capital as a whole, as expressed in excessive investments, sectorial disproportionalities, and general problems of realization. This conception is the more elaborate one developed by Hilferding, therefore it prevails in his argument at large. It is also the most widespread conception, being generally known as the theory of Hilferding about the causes of crises. The other conception, presented as it is in a sketchy and incomplete way, ensues from the fall in the rate of profit provoked by technical progress and the increase in the organic composition of capital. According to this conception, disproportionalities assert themselves only in and via competition among capitals at the point where the tendencies toward a fall in the rate of profit begin to prevail over the tendencies toward

an increase in prices

and in the mass of profit, at the end of the boom stage of the economic cycle. This ambivalent and scarcely sound formulation of the theory of crises, in turn, reappears in a wider incongruity between the theory of crises and the theory of the processes of capital concentration and centralization. That incongruity was suppressed from Hilferding's conception in the years following Finance Capital's original publication by means of his formulation of a notion of "organized capitalism

According to this new notion, the processes

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of capital conqentration and centralization completely eliminate crises and allow capitalist production, if managed by a democratic and socialist state, to become the basis for a peaceful, benign development that will enrich human society. According to Hilferding's first conception of crises, proportionatlity among the various sectors and branches of production is the sole condition for the process of reproduction of capital to take place without any difficulties. Given the social division of labor and the private and decentralized character of the decisions regarding production, the maintenance of the relations of proportionality that must exist in production as a whole depends on the operation of the price mechanism. This mechanism, operating through alterations in the structure of relative prices, determines production expansion or contraction in each sector or branch, i.e., the distribution of production. Therefore, Hilferding maintains that the disruption of proportional relations must find its explanation in the disruption of or distortion in the structure of prices, which prevents them from giving an adequate indication of the sectorial requirements of aggregate production. The main factor that may prevent prices from varying uniformly, thus bringing about disproportionalities, is the diversity of the organic composition of capital among sectors. Hilferding points out that the growth in the organic composition of capital attendant on the development of capital accumulation is differentially manifested in the

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various sectors and branches of production. This process, in turn, translates itself into a differential time extension, by sector and branch, of the maturity of the new investments, and therefore of the time required to expand production. The longer the time required to install a new productive facility, the harder it is to adjust supply capacity to the growing needs of personal and productive consumption. The wider the gap between supply capacity and demand, the more pronounced is the rise in prices, causing a relative increase in the pressure to transfer capitals into activities with a higher organic composition. The stimulus to expand investments in such activities is reinforced, in turn, by the effect of the increase in the organic composition of capital in terms of a rise in productitivity, cost reduction, and generation of extra profits. Thus, as a result of the differential growth in the rate of profit, deriving basically from the differential response in supply, new flows of capital give preference to those sectors with a higher composition of capital. This produces.a tendency toward excessive investments and overproduction in the sectors with a higher organic composition of capital as compared to those with a lower one. Disproportionalities become manifest when the commodities of the former sectors reach the market, for the sale of these

new products is hindered by the fact that

production in the sectors with a lower organic composition of capital has not grown at tne same speed. As a consequence, the overproduction crisis itself is more severe in those sectors with a higher organic composition

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of capital.

.. ..

Up to this point, the foregoing conception of crisis is basically a new version of Tugan-Baranowsky's theory.

O

According to this author, cutbacks initiated by accidental overproduction in some key industries would damage sales in other industries and thus lead to cutbacks in the latter and so on, until such time as that which initially constituted a partial overproduction crisis becomes a general overproduction crisis. Hilferding's addition to this view concerns particularly the effects of the formation of cartels and of the monopolization process. In Hilferding's view, cartels are unable to alter the competition for investment spheres, hence they cannot prevent the emergence of disproportionalities. Furthermore, cartels prevent prices from dropping and thereby aggravate disturbances in the regulation operated by the price system, which in turn lead to disproportionalities. This is said to occur also

because cartels put up with crisis

situations by reducing production. Cutbacks in production imply an interruption of investments and the maintenance of high prices, making the effects of the crisis more serious to non-cartelized or less cartelized sectors and producing as a result a widening of the disproportionalities. In his second conception of the causes of crises, Hilferding emphasizes the effects of technical progress and of the increase in the organic composition of capital as a whole on the rate of profit. However, his argument is rather brief and situates overproduction crises merely as a point in the cyclic movements of capitalist economy while

155

failing to account for their nature. In this conception disproportionalities become simply

an indispensable

element of the manifestation of crises at the level of competition, without which they could not become effective. The relationship between his levels of analysis, however — the movement of a fall in the rate of profit in the economy as a whole and the movement of sectorial disproportionalities —remains unexplained. In his treatment of crises Hilferding makes a heterogeneous mixture of two themes. This hinders him from distinguishing general crises or crises of absolute overproduction from partial crises or crises of relative overproduction. Partial crises are related to the process whereby market prices for individual commodities are regulated by (re)production prices, in which supply and demand interact and competition among capitals operates toward establishing an average rate of profit. These movements imply a process ,of regulation through constant imbalance and relative overproduction. Proportionate production is always the result of disproportionate «

production. In this sense, Hilferding's references to the need for uniformity in the movement of prices of different commodities represent a misunderstanding. As a matter of fact, the very inequality in the movement of the organic composition of capital in different sectors, as discussed by Hilferding, implies the existence of continuous alterations in relative prices. This condition of uniformity is valid only for the examination of the formal conditions of the process of reproduction and circulation

156

of capital as a whole. Reproduction schemes have been conceived of by Marx at a very high level of abstraction, hence they deliberately ignore many of the characteristics of capitalist reality, such as, the average rate of profit, production prices which diverge from direct prices, foreign trade, etc. To claim that the non-fulfillment of the requirement of uniformity in the movement of prices represents per se a causal element in generating a crisis of disproportionality is to be unaware of the very mechanism through which proportionality is reached. Hilferding appears, therefore, to ignore the fact that proportionality among the different spheres of production flows from the process of a continuous disproportionality on the basis of competition among capitals. This misunderstanding arises from an attempt to mechanically apply the conclusions drawn from Marx's abstract formulation of the schemes of reproduction directly to the analysis, or rather to the concrete processes that take place in the real world of capitalist production. Hilferding is consequently wrong in asserting that general crises result from partial crises or crises of relative overproduction. It is indeed a fact that in general crises, absolute overproduction begins to manifest itself as an overproduction of the main commodities and branches of production. However, those general crises are a phenomenon of an altogether distinct nature enveloping technical progress, the increase in the organic composition of capital as a whole, the increase in labor force productivity, and the drop in profitability. Thereby a fall

157

in the pace of investments and generalized problems of realization of surplus value

is promoted. For this reason,

Hilferding's argument that those general overproduction crises necessarily manifest themselves through sectorial disproportionalities cannot be accepted either. The simultaneous occurrence of absolute overproduction, bringing about the collapse of the capitalist system and of partial overproduction, is possible and points to the simultaneous presence of the results of two different self-regulating mechanisms in the system, except that in the case of a general crisis the very existence and historical continuity of the system are at stake. Thus, in either of his two conceptions about the causes of crises Hilferding deviates from a conception of capital accumulation governed by the contradictory character of its endogenous laws as

expressed in the

general law of capitalist accumulation and the law of a tendential fall in the rate of profit. In contrast with Hilferding, who saw in the diffusion of monopolies only a factor aggravating crises, Steindl (1976) presents a theory of capital accumulation and crises that is decisively based upon the notion of oligopoly and excess in productive capacity. In this way, Steindl complies with Baran and Sweezy's (1966) requirements according to which the diffusion of monopolies implies a qualitative change in the laws of capitalism, rather than merely a quantitative one as in the case of Hilferding's theory. According to Steindl (1976, chapters IX, X, and XIV),

158

the crises of capitalism in the twentieth century originate in the diffusion of oligopolistic market structures. Oligopoly diffusion is said to imply a reduction in the degree of competition, i.e., a weakening of the intensity in the struggle for different markets, as a result of which the profit margin and the rate of profit would increase. However, given that the demand for consumption goods would not increase, the additional resources obtained would be invested in non-utilized productive capacity (at the level of economy as a whole rather than sectorially, as in Hilferding) and thus give rise to problems of realization of accumulated profits. An alternative mentioned by Steindl would be the investment of those additional resources in a modification of the structure of capital, thereby solving the problems of realization of surplus value as increased by oligopolies. However, that alternative is disregarded on the grounds that the intensification of capital utilization would cause a fall in the rate of profit, something that capitalists seek to avoid at all costs. The increase in the rate of accumulation is thus translated into an overproduction of capital with formerly existing production methods, generating undesirable excesses in productive capacity. Those excesses in capacity tend to be eliminated by competition among capitals, but owing to the growth of oligopoly itself, competition is continually less operative allowing excesses in capacity to persist for a long while without causing their elimination. Those undesirable excesses in capacity are then said to bring about a

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depressing influence upon capitalists'

decisions

concerning investment, with a resulting decline in the rate of accumulation. Grounded on that reasoning, Baran and Sweezy (1966) identify a need for exogenous measures to overcome the gap in aggregated demand originating in monopoly capital's tendency toward overproduction. They then offer their interpretation of a number of phenomena in contemporary capitalism,such as, the state's civil and military expenditures, expenses for propaganda and conspicuous consumption, foreign investments and imperialism. These would be compensatory forces to offset monopoly capital's tendency to overproduction. As a general result, the theory of monopoly capital implies a complete abrogation of the endogenous laws of capital movement. Instead of a tendential fall in the rate of profit, there is a tendency to an increase in the mass of profits which finds no endogenous possibilities of realization. We have already seen how the law of value is virtually displaced as the central element in the process of price formation. This flows from the conception that the processes of capital concentration and centralization cause a progressive elimination of competition, thereby turning the fixation of prices into a process that is either regulated or managed by financial capitalists. Another central aspect in that process of price determination (in this specific case, production prices) — i.e., the constant imbalances between supply and demand, thus

160

determining tije necessary existence of idle capacity in different spheres of production — is transformed into empirical evidence of a presumed excess of accumulation of capital as a whole. Productive capacity reserves, which are normal owing to the forcible articulation between enterprises and independent production branches, are thus transformed into evidence ,of redundant productive capacity at the level of the economy as a whole, a capacity that should be utilized by manipulating the exogenous factors of demand. The abrogation of the general endogenous laws of capital movement takes place, moreover, because the capitalist stimulus to increase the production of surplus value by every means available, particularly by the growing mechanization of industry, which is inherent to the labor process and the concept of capital, simply disappears from Steindl's and Baran and Sweezy's analyses. The tendency

to

mechanization is a first-order factor that, independently of competition among capitals, conditions technical progress and sets the limits to the process of capital accumulation. Furthermore, competition among capitalists — which is a second-order factor in the mechanization process and acts in the sense of sorting out and selecting those alternatives in technological innovation that may be translated into lower costs, hence into effective weapons in the competitive struggle — is increasingly less operative as a stimulus to the process of capital accumulation as a result of the diffusion of oligopoly. The general result to which we are led by the theory

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of monopoly capital is a tendency to the stagnation of capital accumulation and crises of realization, which can be overcome only by the manipulation of exogenous factors in aggregated demand, where the state occupies a central position. As we shall see below, the displacement of the contradictions that are inherent in the capitalist mode of production into the strict sphere of political activity is another common link between Hilferding's theory and its contemporary versions. A central aspect of the theory developed by Hilferding, and one which was even projected in his intellectual and political activities in the years following the publication of Finance Capital, is the contradiction between the theories of capital accumulation and crisis and the theory of the processes of capital concentration and centralization. As we have seen, Hilferding argues in Part IV of Finance Capital that monopolies aggravate crises in, capitalism. In the fifth and last part of his book (The Economic Policy of Finance Capital), the development of finance capital is associated with an intensification in the struggle for power among surviving capitalists. Political power and state support become increasingly decisive factors in the competitive struggle. Disputes among capitalists, in their turn, transcend national borders, each country's finance capital seeking to develop national policies designed to expand their economic scope as well as defend the territory already under control. Among the major aspects of the emerging sharp international

162

economic rivalry are protectionist commercial policies, political support for foreign investments, and the marked growth in the military capacity of nation states. On the other hand, within each individual nation, Hilferding points out that the development of finance capital also aggravates the system's contradictions. In the economic sphere finance capital contributes to an increase in the incidence of sectorial disproportionalities, thus strengthening the tendency to the appearance of crises. In the political sphere, the increasing evidence of a reduction in the class of large capitalists contributes to heighten class consciousness in a growing mass of workers. In the final part of his book Hilferding thus asserts that the development of finance capital proceeds in the direction of a violent clash between nation states, stimulating

an unprecedented increase in poverty and

social upheavals of a revolutionary nature. Hilferding next argues that the proletariat's response to such circumstances should be socialism, the organization of production, and the conscious control of economy by and for the benefit of society at large. He feels,however, that this process of overcoming capitalism may have a slow maturation through the control of the labor class over the state apparatus. For the socialization of production has already been largely carried out by finance capital's control over the more important production spheres. Therefore, rather.than proposing a revolutionary transformation of the capitalist mode of production, Hilferding favors its reform so as to gradually transform

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capitalism intq socialism. According to Shaikh (1985), these political conclusions in favor of the evolution and reform of capitalism, are made possible in the context of Finance Capital, in spite of Hilferding's theory of crises and his analysis of the economic policy of finance capital, thanks to the fact that Hilferding separates the laws of capitalism from the laws of capital. Such separation flows from his conception of the state as an independent and neutral power whose loyalty and obedience could be transferred from capitalists to workers. In rejecting the notion that the capitalist society's economic structure ultimately dominates political and legal relationships, Hilferding rejects the notion of the capitalist state as a class state. In so doing he can be said to be rejecting the very notion of mode of production. Lenin's criticism of the concept of state could then have been the one that allowed him to make an extensive use of Hilferding's arguments, while at the same time reaching radically different 4 political conclusions..

The tendency of finance capital to aggravate the contradictions in the capitalist system, as expressed by economic crises and in the clash between different nation states, however, does not correspond to the rationale of Hilferding's analysis of the processes of capital concentration and centralization. A central topic in his analysis of such processes is the increasing economic and social control exercised by monopolies and finance capital. Separately viewed, his analysis presented in the first

164

three parts of .Finance Capital emphasizes the conscious regulation of production to be exercised by a general cartel and a central bank. This implies denying the existence of an intrinsic tendency toward economic crises in a system dominated by finance capital, as well as denying the tendency to a confrontation between the distinct national forms of finance capital and their respective states. What happens, however, is that both in his analyses of crises and of the economic policy of finance capital, Hilferding succeeded in avoiding the logical conclusion that a sufficient degree of cartelization and development of finance capital at the national and international levels would reduce the probability of sectorial disproportionalities, economic crises, and armed clashes between nation states. The formation of a general cartel and the unification of the different national segments of finance capital were thus transformed into a very remote possibility.5 As a corollary, Hilferding managed in Finance Capital to evade the conclusion that monopolies do indeed render capitalism more manageable. As we have observed, however, his theory of the causes of crises in either of its two versions does not succeed in adequately grounding the need for general crises in capitalism. In the first version partial crises may eventually become general crises of absolute overproduction. In the second one, disproportionalities are viewed as simple manifestations of general crises deriving from the cyclic evolution of capitalist economy, whose features,

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however, are nqt duly clarified. This hesitation in the theory of crises, as well as the contradictory character of his analyses of crises and of the processes of capital concentration and centralization, such as presented in Finance Capital, are later overcome by Hilferding's development of the notion of "organized capitalism". The notion of "organized capitalism" emerged in the historical period following 1918, when Hilferding became a leader in Germany's Social Democracy, which held power through a coalition in the Weimar Republic (1918-1933). With his notion of "organized capitalism" Hilferding definitively abandoned the notion of general crises as a necessary feature of capitalist dynamics, the latter, in turn, coming to be conceived of as a force pushing in the direction of a benign, peaceful, and enrichening development of human society, if properly managed by a socialist

—and democratically — oriented state.

Bottomore (1981) sums up Hilferding's conception of "organized capitalism" in the following words: "This conception.involved three main elements: first, that modern capitalism at the national level had succeeded — as a result of the economic dominance of the large corporation and the banks and the changed relation of the bourgeoisie to the state, which had led to extensive state intervention in the economy — in introducing a degree of planning into economic life; second, that such planning had spread, to some extent, into the international economy, with the consequence that the postwar relations between capitalist nation states had come to be characterized, in Hilferding's view, by a 'realistic pacifism'; and third, that these developments had necessarily altered the relation of the working class to the state. On this last question,Hilferding argued that, in the new democratic system of the Weimar Republic, the task of the working class was to extend democracy by reforming the educational system and the administration of justice, reducing

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the powers of the president of the Reich, and providing real opportunities for the mass of the people to participate in political life; and at the same -time to use its political power to transform an economy organized and planned by the great corporations into one which was planned and controlled by the democratic state." (p.14).^ Finance capital is the underlying concept in current explanations of how the capitalist mode of production operates in the twentieth century. It has attracted significant attention mainly through the works of Lenin (1968), Bukharin (1973), Sweezy (1976), and Baran and Sweezy (1966). In the case of Baran and Sweezy, finance capital has received a more in-depth treatment and their work stands as the cornerstone of the theory of monopoly capital. This paradigmatic characteristic of Hilferding's work defines the relevance for its critical examination. In this sense, this dissertation should be considered as a study of an oustanding chapter in the history of economic thought. For this reason, an analysis of the contemporary works of Sweezy and Baran, as well as the contributions of Kalecki and Steindl, which helped to give a more robust structure to the analysis'of monopoly capitalism, were considered outside the scope of this dissertation.

g

For

this same reason a systematic examination of the links between Hilferding's work and contemporary versions

of

monopoly capital theory have received only cursory treatment, perforce limited to a few specific aspects. The conclusions reached in this dissertation suggest a further step — a critical examination of the contemporary models of monopoly capitalism. This examination has already

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been initiated.by some authors, thereby developing a new area of critical work in political economy. 9 In drawing this conclusion, it is in order to consider a brief methodological observation about Finance Capital. In this work Hilferding demonstrated an enormous creativity in conceptually appropriating and synthesizing the complex realities of a specific historical period in capitalism. However, given the superficial character of his discussion of theoretical concepts, the passage from the more abstract categories to the more concrete ones is made in such a way that the limits of variation in the concrete and more complex forms are not clearly established. Monopoly, which is an actual expression of capitalist competition, is thus perceived as something opposite, which denies the essence of competition itself. Corporations and financial groups, which are an actual expression of capital development in the form of interest-bearing capital, are perceived as a dominance of banking capital over industrial capital and as the negation of the private character of capitalist property. The increasing subordination and widening of the state's functions as a capitalist state are perceived as a separation of the state from the laws governing the movement of the capitalist mode of production As a corollary, this process of conceptual appropriation of the new forms translates itself into an abandonment of the very essence of the phenomenon that

is being

interpreted. The new forms, incorrectly interpreted as they are, become a new substance.

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The incorporation of new forms into the theory, i.e., the appropriation of reality by increasingly complex concepts, is indispensable for the development of a critical view of political economy. However, the concretization of abstract concepts is not a scientifically neutral procedure. Concretization is guided by the practical application of the knowledge being generated. In this sense, the concept of finance capital as formulated by Hilferding cannot be dissociated from his social practice as a theorist and leader of European Social Democracy during the first three decades of the twentieth century.

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FOOTNOTES (1) Baran and 'Sweezy (1968), p. 5. (2) See Shaikh (1981, 1982). (3) Jacoby (1975). (4) See Shaikh (1985). On the first page of Imperialism, the Highest Stage of Capitalism, in a reference to Finance Capital, Lenin (1968) points out that "In spite of the author1s mistake regarding the theory of money, and in spite of a certain inclination to reconcile Marxism and opportunism, this work affords a very valuable theoretical analysis of the latest phase of capitalist development, as the subtitle of Hilferding's book reads." (5) See Shaikh (1985). At the end of chapter 20 Hilferding points out (p.297) that "In itself, a general cartel which carries on the whole of production, and thus eliminates crises, is economically conceivable, but in social and political terms such an arrangement is impossible, because it would inevitably come to grief in the conflict of interests which it would intensify to an extreme point." (6) Concerning Hilferding's public life as an intellectual, politician, and economist, see Edinger (1956), Sweezy (1973), Bottomore (1981), Rabinbach (1983), and Hajek (1985), among others. At the end of the 1981 edition of Finance Capital Bottomore has listed a series of works about Hilferding's life and work. (7) See also the article "The Organized Economy", originally published by Hilferding in 1927. See Hilferding (1983). (8) In the case of Kalecki (1939, 1943 and 1954), one of the most relevant aspects is his introduction of the concept of "degree of monopoly" in the analysis of the capital accumulation processes. Sweezy (1977) argues that as a result of the continuous increase of the "degree of monopoly", surplus value should progressively grow and reduce wages' share in the product, thereby generating a permanent tendency to overaccumulation and stagnation. This issue is subsequently addressed by Steindl (1976), who intended to demonstrate, on the basis of detailed research on U.S. industrial structure and performance, how the growth of monopoly became a "slowing down factor" in the process of capital accumulation. (9) In this connection, salient works are: Cogoy (1977), Mattick (1977b), Shaikh (1978), Castro (1979) and Semmler (1984).

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