Wednesday, April 28, 2010


"When Chiang Kai-shek started his offensive against us in 1946, many of our comrades and the people of the country were much concerned about whether we could win the war. I myself was concerned. But we were confident of one thing. At that time an American correspondent, Anna Louise Strong, came to Yenan. In an interview, I discussed many questions with her, including Chiang Kai-shek, Hitler, Japan, the United States and the atom bomb. I said all allegedly powerful reactionaries are merely paper tigers. The reason is that they are divorced from the people. Look! Wasn't Hitler a paper tiger? Wasn't he overthrown? I also said that the tsar of Russia was a paper tiger, as were the emperor of China and Japanese imperialism, and see, they were all overthrown. U.S. imperialism has not yet been overthrown and it has the atom bomb, but I believe it too is a paper tiger and will be overthrown. Chiang Kai-shek was very powerful, for he had a regular army of more than four million. We were then in Yenan. What was the population of Yenan? Seven thousand. How many troops did we have? We had 900,000 guerrillas, all isolated by Chiang Kai-shek in scores of base areas. But we said that Chiang Kai-shek was only a paper tiger and that we could certainly defeat him. We have developed a concept over a long period for the struggle against the enemy, namely, strategically we should despise all our enemies, but tactically we should take them all seriously. In other words, with regard to the whole we must despise the enemy, but with regard to each specific problem we must take him seriously. If we do not despise him with regard to the whole, we shall commit opportunist errors. Marx and Engels were but two individuals, and yet in those early days they already declared that capitalism would be overthrown throughout the world. But with regard to specific problems and specific enemies, if we do not take them seriously, we shall commit adventurist errors. In war, battles can only be fought one by one and the enemy forces can only be destroyed one part at a time. Factories can only be built one by one. Peasants can only plough the land plot by plot. The same is even true of eating a meal. Strategically, we take the eating of a meal lightly, we are sure we can manage it. But when it comes to the actual eating, it must be done mouthful by mouthful, you cannot swallow an entire banquet at one gulp. This is called the piecemeal solution and is known in military writings as destroying the enemy forces one by one."

- Mao. November 18, 1957.

Monday, April 26, 2010

Notes on the 'Volker Rule' and the Financial Crisis of 2008.

The ‘Volker Rule’, proposed by the Obama administration early in 2010, has generated considerable controversy. The two main features of the ‘Volker Rule’ is: 1) a ban on proprietary trading and bank involvement in hedge funds and private equity funds for their own profit independent of their customers, and 2) the introduction of measures to bar the further consolidation of the financial system. Much depends upon the exact wording of the planed legalization, but the ultimate aim is to rectify issues of moral hazard and to mitigate the systemic treat to the financial system posed by reckless financial operations. In terms of moral hazard, the proposed reforms will attempt to demarcate between speculative financial operations and commercial banking operations which are insured by the public. Therefore, according to the Administration’s position, undue risk will not be insured by the public and the costs of which will remain with those who have generated it, thereby reducing moral hazard. Concurrently, financial stability will be further served by the reduction of moral hazard and the interdiction placed upon increased consolidation of the financial system. In an effort to evaluate the proposed ‘Volker Rule’, an analysis of the financial crisis will be rendered, therefore allowing the White House’s position to be compared with prior experience of financial instability and the problem of moral hazard.

The proximal cause of the financial crisis was the increased rate of defaults among holders of sub-prime mortgages toward the end of 2006 and the beginning of 2007 (Blackburn, 2008, p. 64). The burst of the housing bubble and the free fall of mortgage-backed securities led to a classic liquidity trap. Bank increased their propensity to horde and ipso facto the credit market contracted. The underlying cause of the sub-prime market collapse, which precipitated the wider financial crisis, had deep roots within the evolution of the American financial system and the conditions of the consumption-led and debt-fed growth of the 2001-2006 period (Blackburn, 2008, p. 71; Gowan, 2009, pp. 7-9).

The growth exhibited in the 2001-2006 period was not predicated upon increased levels of productivity, evidenced by the enlarged levels of both corporate and private debt. Between 1997 and 2007 total debt in the U.S. economy grew by almost 100% of gross domestic product (GDP), from 255.3% in 1997 to 352.6% in 2007 (Blackburn, p. 66). Of this, debt in financial institutions grew the fastest with 63.8% of GDP in 1997 to 113.8 % of GDP in 2007, compared with an increase from 66.1% to 99.9% of GDP held by households in the same period (Blackburn, p. 66). This coalescence of debt within the American economy was itself a product of numerous factors, not least of which was the development of pension funds (injection of cheap credit) and the formation of what Peter Gowan (2009, pp. 6-8) has called the “New Wall Street System” that involved excessive levels of leveraging and a series of adjunct financial institutions that have been characterized as a “shadow banking system”.

The first plank of the Volker Rule, the proposed ban on proprietary trading in commercial banks and their involvement in hedge and private equity funds, is aimed at the shadow banking system. However, Paul Volker’s emphasis on commercial banking misses most of this system which is primarily based around investment banks. Senator Mike Johanns responded to Volker’s skewed focus upon commercial bank, he said: “I don’t think the Volcker rule would have stopped the behaviour of A.I.G.” (Chan, 2010). Volker dogged this counterfactual point by stating he wished to foresee future treats to the system and reaffirmed his commitment to end “taxpayer support for speculative activity” (Chan, 2010). The point still remains, however, that the financial crisis emanated from the highly leveraged position of investment banks and the shadowy system of associated financial institutions that facilitated balance-sheet expansion and ultimately debt saturation.

Of central importance to this picture, the shadow banking system was not only founded upon a new institutional framework (often referred to as the ‘lender-trader model’ and ‘prime brokerage model’) that linked traditional banks to hedge funds and private equity funds, but also the proliferation new financial product that dressed liabilities as assets (Gowan, 2009, p. 14). Credit derivatives, in the form of Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs), were two key financial products that caused much of the damage in the financial crisis (Blackburn, 2008, p. 75). Between 2001 and 2006, the total nominal value of sub-prime mortgages increased from $160 billion to $600 billion (Blackburn, 2008, p.72). Bank then bundled these loans into CDOs and sold them over the counter (OTC) to their clients without a market mechanism to determine the CDOs fundamental value. Rating agencies, who often underwrite CDOs for a free, would for a second fee rate these credit derivatives as ‘Triple A’, in terms of credit worthiness (Gowan, 2009, p. 14). The complexity of CDOs and the OTC nature of the transaction meant that they are extremely difficult to price effectively. This is because, unlike traditional commodity based derivatives, the notional value of mortgage tranches was not determinable as the components of any given CDOs were not known (Gowan, 2009, p. 15).

The proposed reforms entailed in the Volker Rule do not address the issue of credit derivatives and the effective pricing mechanism for such financial instruments, a process that fouled up the financial system with toxic assets. Nor does the Volker rule address the issue of leveraging within banking institutions. In fact, in 2004 the Securities and Exchange Commission agreed to effectively render “net capital rule” redundant, therefore allowing investment banks to determine their own debt/equity ratios (Gowan, 2009, p. 15). The thin capitalization that this allowed and the development of high-risk and complex financial instruments combined to cause extreme uncertainty within the financial system and therefore extreme instability. None of the Volker Rule recommendations rectify these underlying issues of financial instability. The attempt to demarcate between proprietary trading and commercial banking activities may decrease issues of moral hazard, depending upon the exact wording of the proposed legalization which remains unknown. The second stipulation of the Volker Rule, the ban on future consolidation of the banking system through a deposit cap, does nothing to address the already highly consolidated nature of the financial system and the spectre of ‘too big to fail’. In many respects, the Volker Rule is well intentioned but wholly inadequate in dealing with either the issue of moral hazard and financial instability.


Blackburn, R. (2008), “The Subprime Crisis”, New Left Review, 50, pp. 63-106.

Chan, Sewell. (2010), “Dodd Calls Obama Plan Too Grand”, New York Times, [], retrieved: 28th of March 2010.

Gowan, P. (2009), “Crisis In The Heartland: Consequences of the New Wall Street System”, New Left Review, 55, pp. 5-29.

Thursday, April 15, 2010

Sketches of Historical Capitalism: From The Protestant Ethic to The Capital-Labour Relation.

Maurice Dobb’s commenced his “Studies in the Development of Capitalism” with the question of definition. He argued that quite apart from pedantry, questions of definition and definitional stances “ipso facto” implied the implementation of a “principle of classification” and therefore shape the scope of analysis(1).In reference to capitalism, he identified three major perspectives that applied counterpoised principles of classification and causal explanations of historical capitalism. The first popular approach outlined by Dobb, was that of Werner Sombart who attempted to ascertain the essence of capitalism through an appreciation of the “bourgeois spirit”(2). Max Weber followed a similar approach to the problem of capitalism with the proposed connection between Protestantism and the spirit of capitalism(3). The second position, linked capitalism to the separation of production and retail sale with the introduction of intermediaries. The third conception, and the position taken by Dobb, is derived from the works of Karl Marx who defined capitalism as a “mode of production”, that entailed a unique set of social relations of production(4). The adoption of any of these three classifications has the obvious effect of informing historical analysis and the question of capitalist development. Immanuel Wallenstein once argued that, if the accumulation of previously objectified labour-power was the only criterion of capitalism than all historical economic systems could be characterized as capitalist(5). Such a definition would of course, be of little use to explaining the unique social transformations experienced in Western Europe from the fiftieth century onwards.

The development and characteristics of Western European capitalism (and that of the North-American colonies) was a consistent feature of Max Weber’s scholarly output, much of which had been an attempt to challenge and modify the Marxian standpoint(6). Weber identified modern capitalism with; “the rational utilization of capital in permanent enterprise and the rational capitalistic organization labour”(7). He argued that the source of this rationalization was not liberal enlightenment, but the practical rationalism of the Protestant ethic (8). In evidence of his claims, Weber highlighted the social stratification between Protestants and Catholics in many localities of Europe which showed a consistent trend towards Protestant’s attaining higher socio-economic standing (9). However, the correlation between Protestantism and the development of capitalism as posited by Weber is deeply spurious given the historical fact that capitalistic enterprise was first developed in Catholic Italy and later Catholic Belgium before Protestant England(10).

In many respect, the history of Italy between the 12th century and the 16th century is analogous to later developments in Western Europe, though, of course, it diverges in important aspects. During this period, many Italian city-states developed and centralized political and economic power within urban centers, and moreover attained considerable wealth by means of commerce(11). Thus, Adam Smith noted, their wealth was largely predicated upon shipping and the transference of commodities produced elsewhere to foreign markets(12). In this sense, the wealth of these city-states was accumulated upon the logic of merchant capital. That is, money (m) is used to acquire commodities (c) and then sold on at a higher price (m’)(13). Marx expressed the logic of Merchant capital as m-c-m’. Profit is derived by exploiting differences in prices of production between varied “spheres of production”(14). Merchant capital, thus defined, is not directly related to the process of production. However, it had an important role in the transition from feudalism to capitalism, both as a “dissolvent” of feudalism (subject to its “internal structure”) and a fetter upon true capitalist production and social transformation (15).

Increased circulation of merchant capital had two major affects on the dissolution of feudal relation: firstly, the quantitative expansion of monetary circulation allowed for the concentration of monetary wealth, and secondly, the expansion of this circulation affected spheres of production geared towards the creation of use-value and encouraged production for exchange(16).The concentration of merchant capital and the expansion of trade within Western Europe were greatly advanced by the discovery of the Americas and the new path forged to India in the late 15th century(17).However, the expansion of merchant capital was a historically precursor to the capitalist mode of production and not the thing itself. The view that capitalism constitutes merely a commercial system or that intermediates between production and retail sale is the central criteria offer to wide a definition which can be applied from contemporary history back into classically antiquity. Merchant capital functioned to undermine the feudal system, but this was predicated upon the internal weakness of the mode of production as it existed in 15th century Europe.

By the late 14th century, serfdom had largely disappeared in England and the majority of the population comprised of free peasants(18).The historical process that resulted in the transformation of feudal relation of obligation into monetary relation is tided up with the development of towns and the manufacturing of luxuries that allowed the aristocracy to consume surpluses on their own household(19).Aristocratic consumption helped the development of artisan trades and the development of manufacturing curial to the growth of towns and the development of capitalism. Moreover, this increased conspicuous consumption had two other important effects; firstly, the great lord could no long afford to maintain unnecessary retainers and the increased demand for surplus led to the transformation of tenet relations and the improved cultivation of lands(20).The inability of the feudal lords to support the excess population of retainers and tenets led to the formation new class of proletariat unattached to the land(21). This emergence of a new class represented a watershed moment in the development of modern capitalism. Parallel to Marx’s position, Weber had noted that modern capitalism was defined by the organization of labour and the development of permanent enterprise(22).

The socio-economic transformations that led to the development of a new class of ‘free’ laborers within 14th century England is but one element in the development of capitalism. Take alone, this development does not equate to capitalism, in ancient Rome under the republican system there developed an extensive underclass of free labours(23). Needless to say, Rome’s economy was dominated by agriculture interests and the military apparatus that both equated to the prevalence of the slave-system – not capitalism. Historical capitalism is characterized by the relationship between capital and labour. Explanation of this development cannot be rendered in terms of mono-casual theories. The advent of Protestantism cannot explain the complex series of events that fostered the development of industry and capital accumulation. Nor can the exponential increase in merchant capital after the discovery of the new world, taken alone, explain the sudden transformation of Western Europe’s mode of production. Feudalism had already been weaken by internal contradictions that allowed for the development of towns and the emergence of new class of bourgeoisie who’s interests lay in the accumulation of capital along side the proletariat who had nothing to sell but their labour .
Written by Mathew Toll.

1)Maurice Dobb, (1951), Studies In The Development of Capitalism, London; Rutledge & Kegan Paul, p, 35.

2)Ibid, p. 332.

3)Max Weber, (1976), The Protestant Ethic and the spirit of Capitalism, trans Talcott Parsons, London; George Allen & Unwin, p. 35.

4)Maurice Dobb, (1951), Studies In The Development of Capitalism, p. 7.

5)Immanuel Wallenstein, (1983), Historical Capitalism, London ;Verso, p. 13.

6)Andre Gunter Frank, (1975), “Development and Underdevelopment in the New World: Smith and Marx vs. the Weberians”, Theory and Society, pp. 431-466, p. 431.

7)Max Weber, (1976), The Protestant Ethic and the spirit of Capitalism, p. 56.

8)Ibid, pp. 76-77.

9)Ibid, p. 35.

10)Andre Gunter Frank, (1975), “Development and Underdevelopment in the New World: Smith and Marx vs. the Weberians”, p. 434; Eric J. Hobsbawm, (1969), Industry and Empire, Harmondsworth; Penguin, p. 37.

11)Adam Smith, (1999), The Wealth of Nations: Book I-III, London; Penguin Group, p. 503

12)Ibid, p. 503.

13)Karl Marx, (1971), Capital: A Critique of Political Economy, Vol 3, Edited F. Engels, Moscow; Progress Publishers, p. 326.

14)Ibid, p. 330.

15)Ibid, pp. 331-332.

16)Ibid, p. 327.

17)Ibid, p. 332.

18)Karl Marx, (1988), Capital: A Critique of Political Economy, Vol I, Trans Ben Fowkes, London; Penguin Books, p. 877.

19)Adam Smith, The Wealth of Nations: Book I-III, p. 512.

20)Ibid, pp. 13-14.

21)Karl Marx, (1988), Capital: A Critique of Political Economy, Vol I, pp. 877-878.

22)Max Weber, (1976), The Protestant Ethic and the spirit of Capitalism, p. 56.

23)Karl Marx, (1953), “Marx to Otechestvenniye Zapiski, November 1877”, Selected Correspondence, Moscow: Foreign Languages Publishing House, pp.376-379, p 379.