I found the explanation of the logic of capitalism – capitalization, a process that attempts to derive the “present value” of future earnings with a “discount rate” – described by CasP (Chapter 11.) Indeed, it’s a mathematical ritual, which is, arguably being “arbitrary”, nevertheless consistent and binding, and it’s the logic and working principle of capitalism. I also found Blair Fix’s recent article on it very informative: https://economicsfromthetopdown.com/2021/06/02/the-ritual-of-capitalization/ I think it’s important to address the real functioning of our mode of capitalism, which is monetary: as much as the logic of capitalism mentioned above is real and intact, I think, the dynamics of money is as important as the logic. So I wonder what can be said about the capitalization process and the money creation in the economy. As post-Keynesian economics has elaborated, money is endogenous: contrary to the neoclassical notion of money which is just a medium of exchange used just for convenience, whose stock is physically limited (that can be controlled by either via a loanable funds market or via money multiplier), and thus is just a “veil”, monetary dynamics is real and money is credit whose creation and circulation is ultimately depending on the general expectation of future (as eloquently described by Keynes, mediated via liquidity preference.) Indeed, under our modern banking system, money is created endogenously: money creation is an endless process of double-entry bookkeeping, and when banks provide loans to customers, they create money out of nothing (ex nihilo) by marking the amount of money in both asset side and liability side of their balance sheets. (While still most mainstream economists, legal scholars, journalists, and policymakers adhere to the money multiplier myth, now some central banks, including Bank of England and Bundesbank, (albeit tacitly) admit endogenous money.) I think the (better) purpose of banking system is most well elaborated by Hyman Minsky, who is famous for his “Financial Instability Hypothesis” but who I think provided valuable insights into other issues too, including banking regulation. (For more detailed explanation, you can check articles on Minsky by Jan Kregel: https://www.econstor.eu/bitstream/10419/121994/1/722271182.pdf; and Minsky’s proposal for “post-Glass-Steagall” banking regulation https://digitalcommons.bard.edu/hm_archive/72/) For Minsky, banks are beneficial as long as they contribute to the “capital development of economy”, which means a broader advancement of economy, including maximizing the level of employment and an equitable distribution of income. To achieve this, in line with the post-Keynesian view of money, what Minsky identifies as the fundamental banking activity is “acceptance”: deposit creation following guaranteeing that the debtor is creditworthy. Indeed, banks basic activity is the creation of their own liabilities that are used to “guarantee” and acquire the liabilities of enterprises. These liabilities issued by banks then can be used for investment, but in this process their liquidity and their ability to be substituted for (or accepted as) legal tender remains crucial. Liquidity creation for financing capital development thus is fundamentally connected to the payment system, and here rises the problem of the “two masters”: potential losses from loan creation threatens the stability of payment system. So the core goal of banking regulation, Minsky identifies, is insulating the health of payment system from potential adverse effects of “credit enhancement.” Even when it comes to capital markets – stock markets, MMMFs, – purchases of assets are financed by banks’ acceptance of broker-dealers’ inventory as collateral, and therefore the “liquidity” provided by primary/secondary markets is ultimately dependent on the liquidity generated by deposit-issuing banks (as we all well witness the subprime crisis, and recently, the Gamestop saga). (Here, what Minsky identifies as the problematic tendency of financial capitalism, as elaborated via his FIH, is that entities, after a prior crash, overall increases risks, taking more fragility – feeling “euphoria – on their balance sheets, and ultimately due to the accumulated fragility the cost of borrowing increases, ending up with a crash. This applies to banks too, in that banks increasingly, instead of basing their “acceptance” on the profitability of enterprises, base it on the market price of assets (and the extent to which they can be sold at securities market), and increase off-balance sheet risk-taking activities. His solution to this destabilizing nature of monetary capitalism is establishing a “narrow-banking” system, based on that first proposed by Henry Simons. In his proposal, instead of requiring that banks always maintain 100% reserves as proposed by Simons (which anyway cannot control money creation), while continuously providing liquidity via central bank and deposit insurance, banks are required to *always* go through discount window, so whenever they creates a loan they have to submit it to the central bank in exchange for liquidity. By doing this, while still enabling capital development, central authorities can have a far better sense and oversight on the status of banking system. Of course, this indeed limits money creation and poses a threat of deflationary tendencies. To maintain full employment a functional finance-level government spending is required, and in this context Minsky called for an employer-of-the-last-resort scheme, which now is called a jobs guarantee.) I recently read a paper “Capitalized money, austerity and the math of capitalism” published recently by Tim DiMuzio and Richard Robbins, in which the authors try to connect CasP and endogenous money. https://journals.sagepub.com/doi/abs/10.1177/0011392119886876 As the authors put,
“…the act of capitalizing an income stream is the primary act made by capitalists or investors and one of the major features of this ritual is that income generating assets… the dominant owners of banks are capitalizing a very special power unique among the corporate universe: the power to create new official money as credit/debt bearing interest as well as issue fines and fees.” “A future research agenda in the capital as power tradition would examine how bankers specifically use their power to generate earnings… The question is who primarily benefits from the accumulation and the rising capitalization of commercial banks?”
I think much more about the Casp/capitalization and endogenous money can and should be investigated, and here are some question that I have. 1. Can it be said that the deposit/loan creation process or Minsky’s “acceptance” also involve the logic of capitalism – deriving the “present value” of future earnings with a “discount rate” – that capitalization of other assets has (in a sense that, for instance, bankers calculate the profitability of projects or debtors when that make loans?) 2. How would or does exactly endogenous money participate in the process of capitalization? We know, as I wrote above, liquidity of capital markets too depends on bank liquidity, but does it just have some indirect effects or does it have some direct involvement in capitalization of assets? 3. As CasP explains, earnings are a matter of exercising power – “creorder” – across society. How do banks do it exactly?
For a more complete treatment of endogenous money from a CasP perspective, see Di Muzio’s and Robbins’ books Debt as Power and An Anthropology of Money. While both books predate the article you cite, the books contain much more detail (obviously).
From my perspective, credit begets money which begets capital. That is, endogenous money is the original source of capitalist power, and it is the reason for capitalization, which is a secondary “ritual” for determining whether the compounding interest (aka “the yield”) associated with a particular capital asset is greater than the rate of inflation (which is ultimately caused by endogenous money). Accumulating money as “capital” in the financial system does you little good if its value is inflated away due to how endogenous money works, so capitalists figured out a way to create new capital without creating new money.
As Jonathan has explained to me elsewhere on this forum, Bichler and Nitzan do not believe there is an “ultimate” or “primary” source of capital’s power. While that may be true now, capitalism is something that developed over time. It did not leap fully formed from the mind of Adam Smith. The simple fact is that credit is neither capital nor money, i.e., when a commercial bank extends a “loan” it is not lending money, it is extending credit, and thus it does not put existing money (i.e., capital) at risk, notwithstanding the fiction supplied by accounting rules. Thus, the only value (personal commitment) in the loan transaction is the debtor’s promise to “repay” the loan plus interest, something he will not be able to do unless other people take loans, too. I call the “repayment” of loans “immaculate accumulation” because the fiction of accounting rules allows the “lender” to pretend the principal of the loan was its money/capital at the time of the loan, thus avoiding taxation of the principal altogether. All capital began as indentured servitude.
But once you’ve accumulated capital without putting any capital at risk, why would you put the capital you’ve accumulated at risk unless you can secure yields greater than the rate of inflation (or better), thus ensuring the continued process of accumulation (all capital accumulation is necessarily differential accumulation because of the inflation caused by endogenous money) ? That’s the conundrum the ritual of capitalization solved, i.e., the capitalization of future income streams of capital assets was a solution to the inherent instability caused by endogenous money, which demands exponential growth due to compounding interest.