Quarterly capitalism

You see what’s wrong with capitalism is that it is short-sighted.  Apparently, corporate chiefs, investment banks and investors are just after a quick buck.  They never look to the long term, to the bigger picture, to a strategy of investment for sustained growth.

This is what budding presidential candidate from the Clinton royal clan, Hillary, told the very eminent New York University Stern School of Business last week.  ‘Quarterly capitalism’, as she called it, just looks at the quarterly earnings results of a company as a guide to investment.  This works against proper investment.  So Hillary proposes to tax short-term capital gains on the stock market more heavily in return for incentives to invest for the long term.

Hillary Clinton did not invent ‘quarterly capitalism’ as a term to describe what previous observers of capitalism have called ‘short-termism’.  This latest slick aphorism came from the head of McKinsey, Dominic Barton.  McKinsey, as the Goldman Sachs of management consultancy, is always looking to discern and explain long term trends of capitalism.  “Lost in the frenzy [of short termism],” wrote Barton, “is the notion that long-term thinking is essential for long-term success.”

What is puzzling and worrying Clinton and Barton is that capitalism is not delivering sustained economic growth and investment in new technology that can raise the rate of productivity of labour.  Last year S&P 500 companies spent more than $500bn on share buybacks, while investment in productive assets remains in the doldrums.  So capitalism is myopic.

Well, this is not a new message.  And it’s partly true.  An economy that is based on making money or profit is inevitably going to face the continual problem that some will take a quick profit at the expense of the development of human capital and technology for the long term.

The evidence for short termism as the reason for a failure to invest is questionable actually.  One study has confirmed that publicly quoted companies with share prices to worry about tended to invest ‘substantially less’ than privately-owned non-quoted companies (John Asker, Joan Farre-Mensa, and Alexander Ljungqvist did a study). But other studies claim that there is no such evidence.

Andy Haldane, the chief economist at the Bank of England, is more convinced.  Haldane has often been ‘off message’ when it comes to defending capitalism, particularly finance capital (see my post,
going so far as to suggest that the financial sector creates no value at all for the wider economy.  Now in a recent TV interview, he argues that firms are “too short-termist, are not spending enough on investment, are returning far too much money to  shareholders, and that we should consider alternative forms of corporate governance to make sure that the wider social good is served.”

Will Hutton, the promoter of an ‘inclusive capitalism’ (see my post,
that aims to ‘meet the needs of people not speculation’ (an oxymoron, in my view), was quick to latch onto Clinton’s sound bite.  “The market is hopelessly inefficient, greedy and myopic.” Hutton tells us. “Far from market efficiency, the whole system is undermining the legitimacy of capitalism”

Yes, indeed, the legitimacy of capitalism as a productive form of economic organisation is under question.  But Hutton provides a way out.  For him, short termism and financial speculation are products of a deregulated, neoliberal ‘Anglo-American’ model of capitalism. Does that mean there are other more inclusive and productive models that presumably avoid short termism and financial crashes.  What could they be?  Surely not the social welfare model of Europe that has been crushed by the banking scandals there and the subsequent depression?  Or the Japanese corporate capitalist model with its close connections between politicians, the state, the banks and the large corporations that has seen 20 years of stagnation?

Nevertheless, Hutton gushes at Clinton’s radical move.  “She does not want to reinvent the public limited company, but she proposed the most far-reaching tax reforms of any Democrat presidential nominee to change the incentives for shareholders and executives alike.  In American terms, this is a revolution.  It is long overdue and the argument is beginning to get traction in the US.”

But tapering capital gains tax according to the length of holding a share – is that revolutionary?  Actually, it is more likely the Clinton scheme will simply increase profits for long-term shareholders (pension funds) at the expense of short-term holders (hedge funds).  That may even increase the share of capital income going to the top 1%.

The campaign against short-termism is really a diversion from recognising that there is a failure in the capitalist mode of production.  Instead, let’s look for the blame on ‘speculation’ and a bias towards a quick buck.  The fallacy in this argument is that speculation and short termism has always been part of the capitalist accumulation process.  The question is why it is worse now – if it is.

The answer might lie in the failure of the productive sector of capital to deliver high or even rising profitability, thus pushing corporations, banks and investors to speculate in financial assets (fictitious capital) to counteract. The evidence for this is much stronger than the evidence of ‘short-termism’.  See my post,

And compare the rise in financial profits as a share of total corporate profits.  Corporations have been following the money.

US share of financial profits

Although, since the global financial crash, the share of financial profits in total US corporate profits has fallen back.

6 thoughts on “Quarterly capitalism

  1. I guess this was inevitable given the threat of Bernie Sanders. It was Bill Clinton in 1996 who was first pitched the argument against unfettered capitalism that Sanders is now making

    Clinton and Blair share a benefactor in an Ukrainian oligarch who hosted the discussion on The Future of Capitalism at the Davos Philanthropic Roundtable in 2014 while Bill Clinton guested at the Inclusive Capitalism conference in London.

    Npw we have postcapitalism, without us noticing.


    1. I’ve never been a “postalist” (post-structuralist, postmodernist) for good reason. The postalist assumptions concerning the “magic of information technology” (the industry I work in here in Silicon Valley) are in particular an exercise in fetishistic mystification. Information technology is better grasped as simply the newest tier of what I call the Greater Transportation Sector (shipping, rail, highways, utilities, radio/TV, telecom, IT). IT’s “Marxist business model” combines the surplus profits secured by intellectual property – the enclosures movement of the 21st century – with the surplus profits of commercial arbitrage due to the almost instantaneous transmission of (virtually) infinite copies – but still requiring labor power! – of the intellectual property pseudo-“commodity”, a pseudo-commodity just like land.

      So don’t roll up the red flags just yet. By the 16th-17th century serfdom – the characteristic mode of production of early European feudalism – had virtually disappeared, but feudal society lived on! Because it rested upon multiple modes of production, *unlike* capitalism, which is a jealous god and economically totalitarian in this regard.

      Ultimately is took revolutions – the English and French Revolutions – to move to post-feudalism in the case of the English landlord gentry.

      It is even less likely that we would quietly move on to post-capitalism, given the inherent economic totalitarianism of this mode of production. The decay of the capitalist mode of production lies precisely in its ever-increasing and deepening and crisis-driven inter-combination with politics, the public and the state, promising a political totalitarianism as well.

      1. “The postalist assumptions concerning the “magic of information technology” (the industry I work in here in Silicon Valley) are in particular an exercise in fetishistic mystification. Information technology is better grasped as simply the newest tier of what I call the Greater Transportation Sector”

        Interesting. But in the future won’t some historians look back and say, as Marx did, that the windmill gives you society with the feudal lord: the steam-mill, society with the industrial capitalist and the computer the classless society?

  2. Marx and Engels noted the same phenomenon of periods of financial speculation draining potential investment away from productive investment. It usually arises following a period of higher rather than lower rates of profit, which results in a surplus of available money-capital, causing low rates of interest and the potential for such speculative gains.

    Engels describes the flood of money into railway speculation in 1847, which drained investment from businesses during a period of boom and high profits. But, there is an added factor here that did not apply during Marx and Engels time. In 1847 and 1857, when financial crashes occurred, the B of E acted eventually to suspend the Bank Act, and provide the required liquidity to stop the credit crunch, but allowed the collapse of prices of fictitious capital. Marx sets out the sharp drops in bond and share prices.

    But, since 1987, every time the prices of fictitious capital have dropped, whether it has been shares, bonds or property, the central banks have intervened to reinflate those prices. So, it has become a one way bet to use available financial resources to engage in such speculation. Chief Financial Officers would probably have been negligent had they not done so, if as it is, their responsibility is to promote the interests of the money lenders not the company – shareholder value.

    That process by pushing asset prices to ever higher levels, simultaneously caused yields to get squeezed to ever lower levels. To compensate, a greater proportion of profit has to be paid out as dividends. Haldane says in 1970 about 10% of profit was paid out as dividends and other returns to shareholders, whereas today the figure is more like 70%, Clinton quotes figures of around 90% for the US.

    Moreover, that cannot be separated from the political environment in which that occurs. For the last 30 years, we have had the dominance of conservative governments in the US and UK. Even the social democratic governments during that period have been dominated by conservative ideas, as a mirror image of the situation in the 30 years after WWII, when conservative government were dominated by social democratic ideas Buttskillism, Great Society and so on. The conservative regimes that have existed for the last 30 years followed policies and created an economic model, in the US and UK in particular, where the interests of fictitious capital dominated over those of productive capital, not surprisingly because its on that fictitious capital that conservatism rests, alongside the remnants of private capital, amongst the small capitalists.

    That undermines the social democratic framework of longer term planning for productive investment that developed after WWII. Even in terms of macro-economic planning that could be seen in the shift away from levers dependent on fiscal policy to monetary levers. If Haldane wanted to reverse the situation he describes of weak economic growth – which he oddly does not connect to the fact of “capital eating itself” – he would propose an immediate series of increases in official interest rates, so as to burst the asset bubbles, end the vicious circle of a belief that such speculation is a one way bet, backstopped by the central banks, and thereby give an incentive for realised profits to be used for productive investment.

    The crash in China is symptomatic. I was watching a report recently of a fairly typical Chinese speculator. He was a villager, who recounted how, he would in previous years have used his savings to have expanded his small holding, thereby creating additional real wealth, and providing himself with future income. Instead, seeing the stock market rising by over 100% he used his savings to speculate in stocks. he didn’t seem to be one of those who has also been encouraged to borrow $1 million to speculate on margin. Nevertheless, the potential capital he had for productive investment will just as effectively been destroyed, as a result of the crash in the Chinese market.

    Marx has a whole section on why not all accumulation is real capital accumulation, and on how such speculation and the growth of the power of money-lending capital is destructive of productive capital and real accumulation, when that is coupled with the power of conservative governments such as those running Europe, the potential to undermine productive capital is even greater. That is part of the reason for Clinton and Haldane’s intervention, as is the growing rift between the US and various social-democratic governments in the EU, against those conservative regimes.

    “Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

    (Marx – Capital III, Chapter 33)

  3. Next phase in the decay of the capitalist mode of production, by furthering the interpenetration of state and capital, and erasure of the differentiation of public and private, political and economic.

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