NatWest, one of Britain's "Big Four" banks and one of the most profitable, has been the target of several takeover bids over the past few months. Its management and main shareholders have been resisting these bids by trying to boost the price of NatWest shares so as to make a takeover too expensive for potential bidders. In order to achieve this they did two things. On the one hand they announced a savage cost-cutting exercise involving nearly 12,000 redundancies and on the other they told shareholders that £2bn would be returned to them in the form of a special dividend. Thus, just for the sake of propping up these share prices, 12,000 more jobs will have disappeared in Britain this year.
Events of this kind do not only affect financial companies. In June this year, Invensys, a new engineering giant formed by the merger of BTR and Siebe, announced 5,000 job cuts and the closure of ten factories. This was on top of a total of 20 factory closures and 6,000 job cuts carried out over the seven months preceding the merger in February this year. At the same time, Invensys announced it was going to return £1bn to its shareholders and would still have £3bn in hand for future acquisitions. Predictably, after this announcement, Invensys shares went up dramatically on the stock market - on the back of workers' jobs.
These are not exceptional cases, but two examples in a long series of similar scandals, particularly over the past two years. The list of large profitable companies announcing job losses affecting thousands or even tens of thousands of workers, while their profits a reaching obscene levels, grows longer daily across the industrialised world - British groups such as Glaxo- Wellcome and British Steel, Dutch groups like Unilever and ABN-Amro, French groups like Michelin and Renault, Germans like Siemens or American like Procter and Gamble.
In all these cases, job cuts were blamed on stock market pressures to increase profits and more specifically on the pressures exercised by the notorious US American pension funds. That these pressures exist is unquestionable. But, of course, this does not mean that US pensioners will be any better off than their British counterparts as result of these job cuts. On the other hand, all the shareholders of the companies involved will gain, not just the US pension funds.
That being said, however hypocritical the justifications offered by company executives for their cost cutting exercises may be, they are nevertheless a clear admission of their increasing dependency on the stock market's whims - that is on finance capital.
But at the same time, the fact that finance capital is able to impose its diktats on productive capital - that is on companies such as Invensys, Michelin, etc - is also due to these companies' ability to make the workforce foot the bill in the last resort, by means of job cuts and aggravated working conditions. The increasing dependency of productive capital on finance capital, therefore, feeds above all on the ability of the capitalist class to increase the level of exploitation of the working class. This ability is itself the result of the low level of the class struggle today, after many years in which unemployment has undermined working class militancy.
So, contrary to what most commentators argue today, on the left as well as on the right, the present situation and particularly the present attacks against the working class, are not the reflection of a "financial phenomenon" - they are the product of the social balance of forces in society.
The shareholder as King
Over the last few years, the vocabulary used by economic commentators has been blighted with new terminology. They talk about a "new managerial culture", "market commitment", "market awareness", or more understandably, "shareholder value".
Behind this jargon hides a simple reality that is not as new as people claim - that companies should not only maximise profits (which they have always done and still do, of course) but also maximise the value of their shares on the stock market, for the benefit of shareholders.
Who are these shareholders for whom the companies must create "shareholder value"? For the most part (60 to 80% depending on which stock market), they are investment funds which manage capital on behalf of third parties - including banks, non-financial companies, as well as pension funds. These investment funds have to pay their customers a minimum dividend, agreed in advance, on the capital that they have in their custody. Their managers get their income partly from commission, but mainly from speculative profits over and above the amount they return to their customers. Their aim is not to build up a portfolio of shares in different sectors of the economy in order to reap long-term benefits, but to use the funds they manage to make as much speculative profit in the shortest time possible. This means that when they buy shares, they are less interested in the dividends that these shares can bring, than they are in seeing the price of these shares rise quickly, so that they can sell them on at a large profit.
These investment funds can be enormous in size and therefore power. For example, the world's biggest investment fund, the Swiss UBS bank, deals with capital amounting to more than half the combined value of all shares quoted in the City. In theory, this means that a fund like UBS can take over control of any large company, including the large multinationals. Without needing to go that far, UBS could easily acquire sufficient interests in a company to be able to dictate its directors' policies. It would be more likely to do this if the price of this company's shares has gone down enough to open the prospect of a large increase. Once it has a foot in the boardroom, the predator pushes for measures likely to indicate a short- term growth in profits for the company, so as to make its shares look more attractive to market operators, thereby generating the share price increase they aim at. Then they can move on to another target. For such predators, the long term consequences of this game for the company is irrelevant, not to mention the consequences for workers' jobs and conditions.
Of course, in this game, company directors are willing "victims". The huge bonuses they get on top of their salaries are, in most cases, stock options, which allow them to make large profits when the price of the company's shares goes up. So the more "shareholder value" they "create", the larger the bonuses. But at the same time, they do not have much of a choice anyway, if only because they need the predators more than the predators need them.
Behind the speculative bubble
In the capitalist system, the stock market - like the banking system - plays a decisive role as an intermediary between companies and the owners of capital. The network of stock markets allows the large mass of existing capital to be made available on a worldwide scale (at least in the industrialised countries) to the productive sphere where and when it is needed. Without this mechanism, the capitalist economy would soon be paralysed since it lacks any other way - like a centralised planning system - to redistribute existing resources.
However, there are periods in which stock markets become the vehicle for parasitic phenomena, like financial speculation, which, instead of putting oil in the cogs of the system as stock markets should do, generate friction and breakdown.
The financial bubble which has been growing almost continuously on the stock markets of the rich countries for seven years now, shows that we are in such a period today. And the increasing dependency of large companies on the stock market is both a consequence of this bubble and one of its causes.
On 5th December 1996, Alan Greenspan, the president of the US Federal Reserve Bank first warned about the dangers of the speculative "bubble": "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged corrections?". At the time, the Dow Jones index, which measures the changes in share prices of the biggest industrial companies quoted on the New York stock exchange, stood at an all-time high. Seven months later, the outbreak of the financial crisis in South East Asia shook the financial markets. But this was short-lived, and 1997 ended with the Dow Jones gaining 22% over the year. And even though the following year saw the collapse of the Russian ruble and a deepening crisis in South East Asia, 1998 finished in another, admittedly smaller increase of 16%. At the time of writing, the Dow Jones has jumped again by 13% in comparison to the end of 1998.
In other words, since Greenspan's warning, the New York stock exchange has increased by 60% in three years, while GDP has only increased by 12% and company profits by 32%. This has happened in spite of the devastating crisis that hit South East Asia and Russia, and, to a lesser extent, Latin America. Not to mention the very real threats of bankruptcy that shook some Wall street bankers.
But this is only one aspect of the gap between the stock market bubble and the economic reality, and not even the most absurd.
For instance, the Bank of International Settlements (a body which regulates the world banking system) expressed concern in its latest annual report over the fact that, in 1998, the ratio of share prices to dividends paid was three times the average recorded in the previous 25 years.
What is more, in the case of what trendy commentators call "e- shares" (i.e. shares in companies linked to the development of the Internet or, by extension, to things like mobile phones), this ratio has reached astronomic levels on the US stock market. For example, the stock market value of Yahoo!, the largest Internet business, outstripped the oil giant Texaco, with 37 billion dollars, whereas Yahoo!'s 1998 profits were under 100 million dollars! At these levels, the directors of Yahoo! would have to work for at least 370 years just to earn the capital that their company is meant to represent. And this is not even the worst case since, on average, the stock market value of an Internet company is around 600 to 1000 times its annual profits - for those that actually make a profit, which is not the case for many of these companies, not even among the largest.
These "e-shares" give a very graphic illustration of what is behind Wall Street's speculative bubble. Market traders have come to the point where they fight amongst themselves to pay exorbitant prices for shares of companies that produce hardly any profit. This can only mean that they are gambling on the possibility that the Internet will produce enormous profits... one day, eventually (they hope) justifying eventually the over-inflated prices of their shares today.
However unreal it may seem, this gambling is nevertheless based on a tangible reality - today's profits in the economy as a whole and their general tendency to increase regularly over the past years. This is a reality based on hard fact, which only reflects another reality, the increased exploitation of the working class, which is also based on hard fact, specially for workers.
It is therefore logical - that is from their point of view - that those market operators who have benefited so far from rising profits in other parts of the economy should seek to do at least as well and if possible better. And they do this by gambling on new activities which are still expanding, and where potential profits are therefore not yet constrained by exacerbated competition - rather than relying on old sectors, which may be seem more reliable but where profits are not likely to increase fast.
It is this gambling on profits which are yet to come, pushed to extremes in the case of e-shares, that feeds the stock market bubble. Traders do not buy shares in a company just on the basis of what it produces, but on their assessment of the opinions of other traders (the "market" as financial commentators call it, as if it were an independent, thinking entity) as to the future profitability of this company. And because this gambling wave is fed by an enormous volume of capital, it becomes completely absurd, as illustrated by the explosion of e- share prices.
As a result, the very reason for stock markets to exist - to provide capital to the companies that need it - becomes secondary. Instead their main role becomes to allow the enormous masses of capital that the bourgeoisies of the rich countries are no longer prepared to risk in productive investment, to generate profits at a low risk, as parasite of the productive sphere, feeding from it and on its back.
The "new economy" and the ghost of 1929
When it comes to defending the class interests of the capitalists, even if this means justifying capitalism's worst perversions, there has never been a shortage of volunteers amongst "economists". And there are many today who claim to have a "rational" explanation designed to lend legitimacy to the perverse behaviour of finance capital.
It is fashionable these days for "experts" to say that the American economy has finally resolved the old problem of recurring economic crises. They argue that thanks to the combined effect of new technologies (including the Internet, of course), and market deregulation, a "new economy" has emerged. This "new economy", they claim, is free from crises and capable of unlimited growth - which at the same time justifies the crazy expectations of future ever-increasing profits reflected by the financial market.
So what is this "new economy"? The British weekly business magazine The Economist, which is normally full of praise for the "American model", published a series of devastating articles last July on what it considered to be a "dangerous myth".
The Economist noted, for instance, that the average growth of 4% in the American economy over the last few years masks features that are not those of a prosperous or nearly-prosperous economy. During the 1990s, company investments increased, but not in the same way in all areas. This growth was mainly due to the heavy purchasing of IT equipment (computers, software and the like). These purchases represented 14% of total investment, whereas other productive investments have, at best, stagnated. Similarly, economic growth has been very unequal. Between 1995 and 1998, the IT sector (hardware, software, and services) represented 35% of economic growth, whereas this sector only provided 8% of GDP, which means stagnation or shrinkage in many other sectors. The same assessment can be made about the increase in productivity in the manufacturing sector. Between 1995 and 1998, only the computer manufacturing sector saw a growth in productivity that was faster than in previous years. And this sector only represents 1% of US national production. In fact, if computers are left out, the annual growth rate in productivity in the production of durable equipment actually dropped in 1995-98 compared with 1972-94.
Despite all that is said about American prosperity, and the record levels of employment which are meant to exist (although everyone knows that it is mainly casualisation that has reached record levels), all these factors indicate an economy that is in stagnation. It seems true to say that the body of the US economy is being pulled by the sleeve, so to speak (its IT and new technologies sleeve) due to the enormous volume of capital flowing in the financial sphere in search of a quick profit. But all the indications are that the body itself has not been shaken into movement so far.
On the other hand, a number of commentators who are rightly concerned about the erratic behaviour of the stock market, and the consequences of this on manufacturing, have made comparisons between the present situation and the period before the 1929 crash. In 1928 too, people talked endlessly about whether shares were overvalued on Wall Street. At that time too, those who defended the system claimed that the era of crisis was over, and that the "new technologies" (those of the 1920s: radio, telephone, aviation, electricity, and cars) meant the beginning of a new golden age of unlimited expansion of the capitalist market. But all this talk did not prevent the crash of 1929.
That this parallel is legitimate is beyond doubt. But one should add also that in 1929, these "new technologies" did at least require the building up of entire industries, from heavy engineering to the construction of motorways and airports. By contrast, while their present pale imitations may offer the prospect of greatly improved communications across the planet, they do not imply the emergence of any large manufacturing industry capable of replacing those destroyed over the last three decades of capitalist crisis. Not to mention the fact that there is no guarantee that the present level of investment in computers, which is the engine of expansion for this sector in the US, will continue at the same rate after 2000, once the IT equipment of tens of thousands of companies across the world has been renewed for fear of the millennium bug.
All this can only reinforce the argument that the gigantic stock market bubble in the US, which affects the whole financial sphere and all stock markets in the world, cannot continue to inflate indefinitely on the basis of the holy grail of "new technologies" and other similar fairy tales.
The intolerable parasitism of finance capital
Of course, nobody can say whether this speculative bubble will eventually burst, or whether if will deflate like a windbag, nor when this will happen. Neither can one say what damage this will cause to the economy, nor on what scale.
But even before this happens, one cannot fail to see how this financial bubble is weighing increasingly heavily on the productive sphere.
Going back to today's language fashions, even a die-hard supporter of "shareholder value" like The Economist, expressed concerns about its consequences in a survey of the world economy published last September. For instance this magazine demonstrates one hidden implication of the need for manufacturing companies to keep share prices up at any cost. Instead of selling new shares on the stock market - which would result, at least in the short term, in pushing share prices down - they borrow from banks.
As a result, says The Economist, taking the US economy as an illustration, "companies' debts have also recently hit a record level as a percentage of corporate-sector GDP. In 1998, non-financial businesses increased their debt by more than $400bn. If all of this had been invested in plant and machinery there would be less cause for concern, but over half of it was used to finance share buy-backs(..) The quality of corporate credit has also deteriorated (..) Non-performing bank loans have risen, and the default rate on corporate bonds is running at its highest level since the early 1990s." In fact, official figures show that companies' debts in the US are 3 times larger than their net assets. In this context, even a benign reduction in the availability of credit, or an increase in interest rates, could result in a large wave of bankruptcies in the productive sector.
The share buy-backs mentioned above in The Economist's quote, have become a major feature of today's corporate business. It has affected the British economy as well as the US. In 1998, it was estimated that £1bn was forked out every month by companies in order to buy back their own shares. Over the three years 1996-98, Barclays spent £2bn on such schemes and the privatised utilities no less than £6bn altogether.
A graphic example of this is provided by Unilever, the giant Anglo-Dutch agro and chemical multinational. We are not talking here about small fry. Unilever is the 7th largest company in the world in terms of profits. Last February, Unilever announced a £2bn net profit for 1998, up 26% compared with the previous year. At the same time, in a press statement, the company announced that it intended to buy back £5bn worth of its shares because, it said, "we cannot see any better use for our cash at the present time". £5bn - this would have been enough to build a dozen factories and create thousands of useful jobs for society. But Unilever's executives could not "see any better use" for it! On the other hand, over the past seven years, Unilever closed down 57 factories or 25% of its production facilities in Europe, cutting 20,000 jobs in the process.
Unilever's directors are not just blatantly cynical, they are hypocrites. The aim of this buy-back operation was merely to reduce the number of Unilever shares on the market, resulting automatically in a big boost for the price of the remaining shares (in fact on the very day of the announcement of the buy- back, Unilever's shares went up 7%). That is what they call "creating shareholder value". But, by the same token, the stock options owned by Unilever's executives will go sky high too... - thereby creating what they might call in their selective circles "executive value", who knows?
There are many other ways in which finance capital spreads chaos in the operation of the productive sphere. The fact that large multinationals like Unilever have closed down so many factories over the past decade was not due to economic constraints, nor to the fact that their products were no longer needed. As the "experts" say, Unilever chose to concentrate on its "core businesses", meaning by that those that were most profitable. Whole industries have been destroyed by choices like these and their production has not necessarily been replaced by imports from some cheap-labour countries as it is often claimed. And this is a factor that disrupts the already chaotic operation of the capitalist economy. Supplies disappear in some sectors, thereby weakening others. But what do shareholders and stock market traders care? Most of them do not even know, let alone bother to find out, what the companies represented by their shares produce!
Of course, the worst consequence of "shareholder value" is the on-going job-cutting process. All industrialised countries have shown the same pattern over the past decade: profits have been rising much faster than production while productive investment have been going down. In Britain, even a pro- business paper like The Economist had to admit that, in manufacturing, most of the increase in productivity over the past decade has been the result of a more intensive use of labour. In other words, those whose jobs have not been cut, have had to work harder and longer for the same wages. As to the larger profits, which have not been reinvested in the productive sphere, they went into the financial merry- go-round to please shareholders and stock market traders.
This process is highlighted in the crudest way by the frantic wave of company mergers and acquisitions. In 1998, the stock market value of all companies involved in such deals increased by 50% over 1997, to reach the fabulous total of £1,450 bn - that is significantly more than the total value of shares quoted in the City. Yet, says a report commissioned this year by the French government to assess the state of world finance, "there is no empirical consensus about the ability of mergers and acquisitions to improve productivity and generate additional profits." But if the short-term advantage of such schemes is neither a boost in productivity nor a boost in profits, what is it? The answer can be seen in almost every one of these operations. Share prices are suddenly propped up, at least for a certain length of time, by the bidding generated by the deal. And the impact of this usually lasts for long enough to allow massive job cuts to be carried out. Once this is done, the prospect of rising profits will be there again and, hopefully, share prices will carry on increasing - in any case, this is the rationale behind such operations. As to the resulting casualties in terms of jobs, once again who cares about that in the world of finance?
This is how, day after day, tens of thousands of jobs are cut to create industrial giants, not with the aim of rationalising and increasing overall production, but to allow the new partners to strengthen their position on the stock market, to protect themselves against potential predators and to push share prices up if possible.
The parasitism of finance capital is weighing all more heavily on the economy as it is facilitated by governments who are wary of upsetting in any way the same financial sphere on which they are dependent for the financing of their public debt. The absurdity and chaos caused by this parasitism is not only dangerous for the future of society as a whole, but also has drastic consequences for the working population and the jobless, by sustaining or even worsening the social catastrophe which has plagued the industrialised countries (but even more so the poor countries) over the past decade.
However this is not just an economic problem, despite what so many well- meaning critics of finance capital seem to think. In particular, although the parallel which many of them make with the situation before the Great Depression of the 1920s is valid from an economic point of view, it is not valid from a social and political point of view.
The fact that the parasitism of finance capital is able to operate today on such a scale reflects a social balance of forces which makes it possible for the bourgeoisie to dramatically increase the exploitation of the working class. This is why the idea that the present catastrophic course for the working class, and in fact the vast majority of society, could be somehow reversed by means of economic reforms, regulations or whatever other braking system designed to "tame" this capitalist madness, is a fantasy given the extent of the damage already done and the worldwide scale on which the problem is posed.
If the course of events is to be reversed, and we do hope this will happen of course, it is much more likely to come as a result of the reactions of the working class against this madness, than by virtue of some reformist gimmick aimed at regulating a system which, by definition, cannot be regulated.
31 October 1999