A People's Guide to Capitalism
A study guide of Hadas Thier’s 2018 book ‘A People's Guide to Capitalism.’
Summary, part 4
Chapter Seven: Credit and Financialization
“Blame lies with a system that is based on low-wage and precarious labor, where people work hard all their lives, and still find that basic needs like decent shelter are luxuries for the rich.” (p. 227)
Another facet of the economy that contributes to these contradictions and crises is the world of credit and financialization, which is discussed in-depth in chapter seven. Credit expands capitalists’ ability to invest in production and increases consumers’ buying power, and these functions contribute to the process of overproduction and falling profitability.
Credit is capital lent out in a variety of forms (direct loan, cash advance, mortgage, stocks/bonds). Capitalism relies on mountains of debt, and corporations often borrow more than their actual earnings, meaning that credit is an integral part of capitalism. Since companies must “grow or die,” and production must be constant under capitalism, credit is necessary so that corporations don’t have to wait for profits after each round of production (which would cause the economy to stall out).
Finance capital is the sector of economy devoted to lending money, and it is a necessary component of capitalism. Lending companies have existed to give out loans for as long as large corporations have been around (e.g., English East India Companies of the 17th century, the New York Stock Exchange of 19th century, etc.), and these companies and capitalists cannot exist without each other. Lenders depend on shares of the profits of capitalists through interest rates or dividends, and capitalists need money lent to them to keep the production process going. Banks and other financial capitalists don’t invest in production of their own goods and services, but rather enable other capitalists to do so, and their entire work depends heavily on the exchange of fictitious capital.
Fictitious capital, as defined by Marx, is not real, existing capital, but the claims made on future capital. Just as credit card companies assume that you will continually pay back money you owe on a debt, banks expect that corporations will stay in business, maintain their profits, and pay back their loans. When this does not occur, the fictitious state of capital is made clear, just as it was when trillions disappeared during the Great Recession of 2007-09. Adding to this fictitiousness, banks are only required to keep three cents per dollar on hand in cash, meaning that for every hundred dollars one deposits, the bank can lend out 97 dollars, and once it’s deposited in another account, they can lend out $94.09 to someone else. In this manner, more money is available for banks to lend than the banks must have in liquidity (cash) to return.
Finally, fictitious capital is embedded in capital markets, where the issuing and trading of stocks and bonds occurs.
Bonds, which are publicly traded debt, are used when a company borrows from public markets through the issuing of certificates stating that they agree to pay back the bond at a set time with a set interest rate. Bonds are issued based upon the assumption that a capitalist’s company will remain profitable and be able to pay back the funds it was advanced.
Stocks, on the other hand, are claims to the total value of a company (its assets minus its debts, or its equity). Each share is a claim to a fraction of the company’s worth, based upon the assumption that the capitalist’s company will pay out dividends from their profits.
The stock market functions like an auction, where the “value” of stocks is estimated by buyers and sellers many times during the day based on their confidence in future streams of profits. Share prices are recorded each time a sale of stock occurs, so they fluctuate constantly as buyers and sellers agree to their personal terms of trade.
These convoluted processes do not make fictitious capital devoid of worth, but assigning value to them requires a large amount of speculation since they are products of the future expectations of growth. Speculation, in economic terms, refers to the act of conducting a financial transaction with a large amount of risk of losing value but that also holds the possibility of a significant gain. Additionally, when someone uses claims on a future value to make further investments, a facade is created where exchanges can be made apart from the productive economy, or part of the economy where things are actually produced and sold.
According to Thier, when capital is invested across various industries in the market, it is redistributed from one to another and equalizes the market, which is made possible through the use of credit. Credit mechanisms like stocks and investments help to reallocate money quickly without starting new companies from scratch, and the process can instead take hours rather than years.
This is the primary role of credit—to speed up and expand production and consumption, which can occur at a much more accelerated pace than centuries ago.
There are many ways that people in modern-day society rely on credit, bourgeois and proletariat alike. While credit is another means towards centralization and maintains continuity of production in the capitalist class, consumers also rely on credit; we wouldn’t be able to purchase homes or go to college for much longer if we had to wait until we had enough money saved. Working class people also have increasingly become paid lower than the worth of their labor, so the need to utilize larger amounts of credit has deeply enmeshed them in the financial market. Additionally, business industries with higher-cost goods like auto and construction would all go out of business because credit speeds up the rate at which the working class can purchase products. In these ways, credit greases the wheels of production and circulation under capitalism.
Credit also plays (and has played) a large role in the severity of market crashes because capitalists see limitations in the market as obstacles to be overcome, leading to overproduction, and since credit can be used to overcome these obstacles, it can temporarily mask problems in the market and hide the growing divides between supply and demand. However, credit dries up when earnings start to shrink and a crisis of profitability will eventually cause credit to squeeze and further hinder production. Banks are in the business of betting on the future, which is an inherently risky business under capitalism, and it can very easily contribute to an economic crisis.
Thier makes a point of examining the roots of the Great Recession in this chapter and how the world of financialization was inextricably linked to it. Marx stated that crises do not originate in the field of credit but do first appear there, and while the crisis may have appeared to have been a completely credit-based and monetary one, it only gives this appearance because of how heavily the system depends on credit. The expansion of this credit both prolongs the expansion of production and then dries up when corporate investments overshoot effective demand.
Before the Great Recession, the housing market boomed, and many investors began to invest well beyond their means through credit and financialization. Banks offered working class and poor people predatory loans with small deposits (called subprime loans), but as their wages stagnated, they became unable to pay the rising costs of their mortgage interest rates. As profits began to slow, the market began to drag, and those who had invested heavily no longer had means to repay their debts. The U.S. government ended up bailing out major corporations, leaving most of the shockwaves to adversely affect the poor and the working class while large capitalist corporations bounced back. Additionally, the ruling class opposed any new regulations suggested following the Recession, showing how capitalists were perfectly fine to have their businesses upheld by state money and bailouts but were completely against any new regulations to prevent future crises, which would inevitably fall on the backs of the working and lower class.
When the housing market went bust, a common talking point among mainstream economists was the idea that working class and poor people were to blame for buying houses that they could not afford, and we were expected to believe that the poor cheated banks out of this money. This was untrue because more than half of those who took out subprime loans had credit scores high enough to take out conventional loans.
They also commonly blamed the Community Reinvestment Act (CRA) of 1977, which addressed discriminatory loan practices called redlining (which is still incredibly prevalent to this day), where bankers would not lend in predominantly African-American and Latinx neighborhoods. This argument is untrue because the CRA never mandated loose lending requirements or extortionary interest rates.
In actuality, Wall Street and bankers preyed upon the dreams of working-class people and took advantage of their weak position to drive them towards subprime loans, and those loans had growing interest rates unable to be maintained with stagnant wages. This was particularly true for the Black and Latinx communities, who had been kept out of home ownership for decades due to redlining (and still are to this day). When money was to be made from these populations, banks practiced what African American Studies Professor and writer Keeanga-Yamahtta Taylor called “predatory inclusion” (p. 229).
According to Thier, the housing market’s overproduction of goods and overaccumulation of capital was, at the root, the cause of the Great Recession. Those who bore the brunt were not those who had over-accumulated and over-invested; they were the poor, working class, Black, and Latinx people who had fallen victim to predatory loans and an exploitative system.
Conclusion: Capitalism’s Gravediggers
“Capitalism, with its immense productive capacity, has created, for the first time, the ability to wipe out hunger, want, and poverty. The fact that it won’t —and in fact can’t—is its crime.” (p. 234)
Thier’s conclusion begins by telling of how capitalism pervasively ingrains itself into every aspect of life, even death. She speaks about how the Financial Times callously recounted Japan’s rising death toll in 2016, where it detailed how unprofitable Japan’s citizens’ deaths were for the funeral industry. The article, titled, “‘Peak Death’ Might Not Be Enough to Save the Japanese Funeral Industry,” details how, unfortunately for the industry, peaking deaths are not turning out higher profits, a sentiment often shared by capitalists but rarely spoken so plainly.
Thier notes how capitalism and the drive for profits dictates every aspect of our lives and our deaths. The profit motive also drives ecological destruction, deep social isolation (due to spending most of our waking hours laboring), and more dehumanizing practices. Thier goes on to state how we often see this as, if not the way things should be, the way things must be, despite capitalism rearing its ugly, destructive head in every sector of society. The list goes on; from public schools and hospitals being crushed under poverty to billions of dollars being invested in meaningless financial cocktails, from climate summits with no clear resolutions to millions of poor people dying of curable diseases because of both the global debt industrial complex and the pharmaceutical industry. Capitalism always puts profit over humans.
Thier states that, if there are three things that you take away from her book, it be the following:
That these are not accidents or isolated incidents of greed. This is exactly how the system was created to work, with competition being the bedrock of capitalism. Capitalism cannot become softer because it requires profits and constant accumulation to survive.
These processes of accumulation create contradictions that threaten the very profits capitalists are after, and each of these contradictions causes crises that directly affect the working class and poor. They show and create cracks in the system, and these crises can be a point in which to organize; if it is an impenetrable system, we must find its weakest links.
While understanding the systems of capitalism is an important first step, it is just that: a first step. It helps us to assess the forces, strengths and weaknesses, and power dynamics of capitalism, but there is more to be done. Marx spoke of how, while capitalism concentrates capital in few hands, it also concentrates workers together in a way in which they can organize to challenge the system.
The working class has their hands “on the gears of production,” as Thier says, and because capitalists cannot make a profit without our labor, the exploited are in a unique position to bring the system of exploitation down (p. 233). She also notes that the work of bringing these systems down is a collective effort:
“Finally, working-class struggle cannot be wielded individually. I can’t simply throw down my shovel (or my laptop) and go on strike, but need the participation of all my coworkers to effectively stop production. Nor can the goal be to win only individual gains. Taking home a shovel, a coffee machine, or a printer will do me little good, but the entire workplace, owned collectively by my coworkers and me could be put to use.” (p. 233)
This organizing is made difficult by the ways in which racism, sexism, and nationalism have pitted workers against one another through manipulation, with racism prevailing as the “most important tool in protecting the status quo” in the United States (p. 234). While being weaponized to destroy the lives of immigrants, Muslims, and people of color, it has also been used to undermine the solidarity of people in the working class.
Additionally, the police, National Guard, and those looking to root out socialists and radical organizers from union organizations have all attempted to break efforts of the working class to organize, but, according to Thier, “Only the working class has the interest and collective power to bring about a system based on wants instead of profits, by organizing the massive productive powers unleashed by capitalism in collective and sustainable ways.” (p. 234)