by Tim Di Muzio
The capitalist mode of power
Conceptualised as a mode of power, capital is understood as commodified differential power whereby the central acts of capitalists consist in: 1) commodifying aspects of nature, humans and knowledge, thereby subjecting qualitative things to a relatively malleable price system; 2) fighting for the legal ability to organise into firms or business units; and 3) capitalising the income streams generated from ownership, exclusion and commodification. The ability to capture income streams that are greater than what you might be able to get for your own direct labour is anchored in the creation of private property and the institution of ownership. As we will find, a number of factors have a bearing on the earnings of capitalised assets such as publicly traded firms or government bonds. This is why, in the ‘capital as power’ framework, we speak of a power theory of value rather than a labour theory of value or marginal utility. For dominant capital, supply and demand do not determine price in a competitive market; power does. Below, I consider a bank, JPMorgan Chase & Co.; a software and computer services firm we know as Facebook; and an aerospace and defence firm, Lockheed Martin.
JPMorgan Chase & Co. As of November 2013, JPMorgan Chase & Co. had a market capitalisation of US$206 billion. It was the twenty-fifth largest corporation in the world by market capitalisation and the fifth largest bank in the world after the Industrial and Commercial Bank of China, China Construction Bank, HSBC and Wells Fargo. Between January 1984 and November 2013 (the time of writing), the bank’s capitalisation increased by 398%. Behind this quantitative leap is a qualitative story of how JPMorgan used its power to influence the social process to make earnings.
The earnings of JPMorgan are generated in a number of ways, including being legally able to: 1) create digital money out of thin air and collect interest on the debts created as assets for the bank; 2) assess and assign interest and fees to its customers for the use of various products such as credit cards; and 3) provide financial advice to clients.9 But while this may be the core of its business, a whole series of additional power processes impact upon the company’s profitability, from interest rates and the creditworthiness of its borrowers all the way to its offshore subsidiaries in tax havens. For example, according to its annual income statement, the overwhelming majority of the company’s profits come from interest and fees on loans – the extension of credit being its major ‘product’.10 Therefore, we can assume that the bank will do everything within its power to ensure that interest and fees are protected from regulations that might encroach upon this massive profit-making centre. During the global financial crisis and the backlash against the big banks, a series of legislation was proposed to protect consumers and curtail the power of banks; this included the Consumer Overdraft Protection Fair Practices Act, the Mortgage Reform and Anti-Predatory Lending Act, the Credit Cardholders’ Bill of Rights Act, and the Helping Families Save Their Homes in Bankruptcy Act. JPMorgan spent millions of dollars lobbying members of Congress (not to mention millions in campaign contributions) to influence these bills.11 Additional factors that have a bearing on its profitability and therefore on its market capitalisation are the court cases, settlements and investigations related to a litany of alleged corporate malfeasance, including mortgage fraud, market manipulation, credit card and overdraft abuse, rigging the Libor and predatory lending. When it comes to morally questionable practices, JPMorgan’s portfolio is highly diversified. But let us consider a closer example to demonstrate how redistribution takes place under the capitalist mode of power.
If one is born without an inheritance or significant family wealth, five options are typically available to achieve shelter and create a home: 1) construct one’s own, if land and materials are available; 2) live with one’s family in their dwelling; 3) rent from someone who owns real estate; 4) attempt to get a mortgage from a lender; or 5) move from place to place seeking various forms of illicit shelter (not a great option, particularly in colder climes). Where home ownership is valued and resources are available, average workers typically opt for renting their dwelling or obtaining a mortgage. Let’s return to our registered nurse in the United States with a median income of US$56,165 or US$38,500 after federal income taxes are taken. Now, suppose our nurse approached one of JPMorgan’s subsidiaries in Arizona for a loan to buy a home priced at US$150,000 and suppose he had a US$10,000 deposit to put down. According to Chase, for a 20-year fixed mortgage loan, our nurse would pay just over US$924 a month – over a quarter of his salary – with an annual percentage rate of 4.728%. Over the course of the loan, our nurse would pay about US$76,763 in interest, or US$3,838 a year, to Chase. In this way, the dominant owners of JPMorgan and its subsidiaries enrich themselves by capitalising a portion of our nurse’s wages. Specifically, the bank will have taken 8.3% of his total after-tax income (excluding fees) over the 20 years it took to repay the loan. Put another way, at the end of this process our nurse would be forced to pay US$226,763 for a home originally valued at US$150,000 on the market. Of course, to those who have been through this process this may seem entirely normal – even desirable, since our nurse at least has the equity in his home. But when we realise that Chase assessed the application and invented the money to pay for the house as debt by inputting digits into a computer, the entire enterprise should be viewed with grave concern (Brown 2007; Collins et al. 2011). We will take a closer look at the creation of money in the next chapter.
The dominant owners of JPMorgan Chase, then, enrich themselves from people’s need or perceived need to access credit, and its earnings are largely determined by protecting this profit centre from alternative forms of non-interest-bearing public credit, banking rivals and legal regulations that may help borrowers more than creditors. So who actually owns JPMorgan Chase? Who are the individuals or dominant owners who capitalise the extension of credit and the creation of debt? It is a fun exercise to try to find out, but, not surprisingly, it is difficult to tell. We know that at the time of writing its shares were held by 1,677 individuals and institutions – the vast majority, 74%, by institutional investors such as Vanguard Group Inc. and State Street Corp. But, as it turns out, while Vanguard Group Inc. is a privately owned investment management company, State Street Corp. is also majority owned by other institutional investors, including JPMorgan Chase. The most we can find on individuals relates to employees or former employees of the firm: James Dimon, James S. Crown, Douglas L. Braunstein, Daniel E. Pinto and Mary E. Erdoes. Collectively, they own US$217,782,856 worth of shares at the time of writing. These shares largely capitalise the interest-bearing debts of the firm’s clients.
Facebook As of November 2013, Facebook had a market capitalisation of US$113 billion, ranking it, according to the Financial Times Global 500 2013, 193 out of 500 companies by market capitalisation. Facebook is a software and computer services firm that the Financial Times called the ‘world’s dominant social networking site’ (Budden et al. 2013). After Google, Facebook is the most accessed site in the world and has over a billion active users worldwide.12 The company provides its users with a platform for social interaction and information sharing with individuals, organisations and for-profit companies. It also helps users capture ‘life events’ in the form of photos, status updates, likes and comments. According to Fuchs, Facebook users can be considered what Toffler called ‘prosumers’, or productive consumers, ‘who work without pay’ when they create content on their pages.13 Since it does not charge its user base for the use of its software platform, the monetisation and capitalisation of Facebook compelled the company to rely on revenue from advertisers. This makes up the vast majority of the corporation’s revenue stream. The second largest source of revenue comes from fees that allow users to buy digital and virtual goods and services from the companies developing its gaming platforms. Facebook will probably attempt to diversify its revenue stream over time, but the point now is to ask the following question: what is being capitalised when investors purchase shares in Facebook?
Once again, th
e simple answer is that investors capitalise the expected future earnings of Facebook adjusted for some risk factor. And since earnings come from revenue and revenue is primarily generated by advertising, then we are led to the conclusion that Facebook sells the human sociality and individual experiences of its user base to advertisers. So, in one sense, investors are capitalising Facebook’s power to maintain the website, target advertisements to its users and ensure that the user base is stable or growing so that advertising firms have a target audience for their clients. Earnings obviously depend on active users and a paid workforce – from computer programmers and designers all the way to sales people and legal and financial advisers. But Facebook’s earnings are contingent on far more than its paid and unpaid labourers and the desire to monetise user content. Facebook’s owners and directors must be concerned with shaping politics, society and culture more broadly while dealing with potential competitors: for example, Facebook was found to have hired a well-known public relations firm to plant false stories about Google in major media outlets (Kucera 2011). Facebook is also in the game of lobbying and must seek to resolve legal disputes, fend off cyberattacks, influence privacy and data protection laws, acquire potential competitors, attract advertisers, influence the tax code and intellectual property legislation … the list could continue.14 These are just some of the ways in which the firm’s earnings are contingent upon its power to shape and reshape politics, society and culture.
Lockheed Martin As of November 2013, Lockheed Martin had a market capitalisation of US$44 billion, ranking it 292 out of 500 companies by market capitalisation according to the Financial Times Global 500 2013. The firm is categorised as an aerospace and defence company, and, according to the Stockholm International Peace Research Institute, in 2011 it had the largest arms sales by value. Of its total sales, 78% comes from arms dealing.15 The company’s share price has also grown astronomically during the so-called War on Terror. Trading as low as US$17.44 a share in February 2000, shares in the arms dealer at the time of writing trade at US$138.97: this is a 697% increase over 13 years. Suppose back in 2000 you bought 1 million shares in the company, valued at US$17,440,000. Today, those same shares would be worth US$138,970,000 – a handsome return, and one that demonstrates that investing in the military industrial complex in a time of war can be an extremely profitable business, particularly for those on the inside shaping matters of war, peace and security. So what are investors capitalising when they purchase shares in Lockheed Martin?
Since earnings largely depend on arms sales revenues, innovations in military technology and the ability to sell the firm’s weaponry to a global market in the future is surely being capitalised. But investors capitalise more than the 70,000 scientists and additional workers building and coming up with more effective ways to kill humans and destroy life-supporting infrastructure. Earnings and therefore capitalisation depend on the firm’s power to shape and reshape the terrain of social reproduction as it pertains to questions of war, peace and security around the world. For example, Lockheed Martin has paid tens of millions of dollars to political campaigns. Tens of millions are also spent lobbying governments around the world on a full range of matters from nuclear policy to cyber-security. All of these actions have a bearing on the company’s net earnings and its capitalisation. Without government contracts, the ability to export arms abroad, public investment in research and development, an enduring War on Terror and the potential for future world conflicts, Lockheed Martin’s profits would plummet. The same is true for other ‘merchants of death’ (Engelbrecht and Hanighen 1934).
The architecture of capitalisation
In the ‘capital as power’ framework, capital is neither productive equipment nor dead surplus labour, but commodified differential power quantified in money units. Since anything that generates an income stream can potentially be capitalised, there is little reason to theorise capitalism as specifically industrial or ‘productive’ capital. Instead, Nitzan and Bichler convincingly argue that capital is ‘finance and only finance’ (Nitzan and Bichler 2009: 262). This does not mean that production is unimportant. It simply means that capitalists are concerned with differential income streams they can commodify, own and, if need be, sell, not with industrial production per se.
In some ways this conceptualisation accords with Braudel’s caution against thinking that capital is synonymous with the materialism of the Industrial Revolution:
On a world scale, we should avoid the over-simple image often presented of capitalism passing through various stages of growth, from trade to finance to industry – with the mature industrial phase seen as the only true capitalism. In the so-called merchant or commercial capitalism phase, as in the so-called industrial phase, the essential characteristic of capitalism was its capacity to slip at a moment’s notice from one form or sector to another, in times of crisis or of pronounced decline in profit rates (Braudel 1983: 433).
However, while there may be some points of contact between Nitzan and Bichler and Braudel’s understanding of capitalism, there are significant differences. First, Braudel makes a conceptual split between the competitive marketplace and capitalism. He argues that, at one level, capitalism is actually competitive and prices will be set by some balancing of supply and demand. Yet capitalists, for Braudel, operate at the highest level, work in secret and largely dictate prices to consumers. Capitalism occupies a non-competitive space. But for Nitzan and Bichler it is difficult to make this conceptual split since the market and the price system are the very preconditions for capitalist power (Nitzan and Bichler 2009: 306–7). In other words, the price system forms the architectural base of capital as power – the quantitative matrix through which the accumulation and redistribution of income and wealth are accomplished. Second, Braudel has no theorisation of capital as commodified differential power that can be bought and sold on the market. Since dominant owners can sell their assets to one another, or even to members of the 99%, social power is commodified under capitalism.
But if capital is finance and only finance, understanding its architecture beyond the matrix of the price mechanism means taking a closer look at the financial market. The financial market consists of the bond market, stock market, real estate, commodity market, derivatives market, foreign exchange market, money market, spot market, private equity, and the over-the-counter market. Combined with the price mechanism, credit rating and accounting agencies, institutional investors and central banks, regulatory agencies and offshore secrecy jurisdictions (commonly called tax havens), these markets make up the architecture of capital as power. They are the main avenues through which dominant owners accumulate their fortunes and organise and reorganise ownership patterns and the field of social reproduction. Since many non-specialists will be unfamiliar with these instruments and institutions, below I do my best to explain them in a straightforward manner.
The bond market The bond market is the heart of the financial market. It consists of a primary market where new debt instruments are issued and capitalised by investors, and a secondary market where these debt issues are traded (bought and sold) by investors. According to McKinsey Global Institute (2013: 2), in 1980 the financial assets outstanding (bonds, equities and loans) totalled a mere US$12 trillion. Today that number stands at US$225 trillion, or an increase of 1,775% in just 33 years (for a breakdown of current financial assets, see Figure 2.1). A full US$100 trillion of these assets are made up of bonds issued by financial corporations, non-financial corporations and governments. Government debt accounts for the largest proportion of the bond market at US$47 trillion, up from US$9 trillion in 1990 or an increase of 422%. Two countries – the United States and Japan – account for about half of all public debt.16 Despite political incantations decrying government deficits and debt, the national debt is incredibly important for the financial market and the HNWIs we call dominant owners.
2.1 Global financial assets by category (US$ trillion, total US$225 trillion) (source: McKinsey 2013)
&n
bsp; The first reason why government bonds are important is because interest rates on government debt set the benchmark for other forms of credit. As Doug Henwood explains:
Practically speaking, interest rates on public debts act as a benchmark for the rest of the credit system; interest rates for borrowers other than a central government – state and local governments, households, corporations – are usually set in reference to government rates at the same maturity. Markets in general seem to need benchmarks like this (Henwood 1997: 23).
Interest rates on the national debts of the world provide lending institutions with a benchmark for additional credit instruments. Without public debt, dominant owners and their fund managers would be lost at sea and a new benchmark would have to be conjured up. The second reason why public debt is important for dominant owners is that it provides them with a ‘no risk return’ on their money. Traditionally, the sovereign debts of Western governments have been considered ‘risk-free’ or much safer vehicles of accumulation than, for example, the stock market.17 This is why dominant owners held about 15.7% of their financial portfolio in instruments of this kind. While future studies will have to be done for each country, Hager’s research has demonstrated that, in the United States, there was a massive concentration of ownership of the ‘national’ debt in the hands of the 1% (Hager 2014). A final reason why public debt issues are important is because they provide the dominant owners of banks an income stream of fees and interest when they underwrite bonds of various kinds for governments and other organisations. For example, Goldman Sachs ‘serves as bond underwriter for many state and local governments, nonprofit healthcare systems, higher education institutions, public power and utilities, surface transportation agencies, airports and seaports, housing agencies and other public projects’.18