Dick Bryan and Michael Rafferty, Capitalism with Derivatives, Palgrave Macmillan 2006
Since the 1980s, the trade in financial derivatives has become vastly greater than any other sort of trade.
There was $684 trillion - over $100,000 for every child, woman, and man in the world - outstanding in OTC derivative contracts at the end of June 2008 - www.bis.org/statistics/derstats.htm. Exchange-traded derivative contracts were another $84 trillion - www.bis.org/publ/otc_hy0811.pdf.
"Gross market values" of those contracts - measured as the cost of replacing them at current rates - were $20.4 trillion at the end of June 2008 - www.bis.org/publ/otc_hy0811.htm.
Average daily turnover in OTC derivative contracts was $4.2 trillion in April 2007, and of exchange-rated derivative contracts $3.2 trillion, a total of $7.4 trillion - www.bis.org/press/p071219.htm and www.bis.org/press/p070925.htm.
Total world merchandise exports in 2007 were $13.6 trillion - www.wto.org - or about $0.05 trillion per day if you divide by 250. Gross world product - which is about the same as gross world expenditure, or gross world market turnover - was about $66 trillion in 2007, or about $0.26 trillion a day on the same basis - www.cia.gov.
The best of Bryan's and Rafferty's various definitions of "derivative" is, to my mind, this: "an instrument through which financial obligations can be traded" [65].
Or again: "Derivatives markets trade in rights to price relativities" [65].
The word "derivative" comes from the idea that derivatives are financial bits of paper whose meaning "derives" from that of some other asset. Some forms of derivatives are quite old. For example, "wheat futures" - contracts to buy or sell wheat at a given price at a given future time - are quite old. Financial derivatives, relating to financial assets rather than to wheat, or oil, or metals, date (on any large scale) only from the 1970s, and are the authors' focus.
For example, an "interest rate swap" is a bit of paper by which you buy the exchange of a series of payments you are due to make (say, interest payments in dollars, at a fixed rate) for another series of payments (say, interest payments in yen, at a variable rate of interest).
A "credit default swap" is a bit of paper by which you buy the exchange of a series of payments with a lump-sum payment if a bond-issuer defaults on their payments.
A "currency swap" is a bit of paper by which you swap a certain amount of one currency for a certain amount of another, with an agreement to pay back the respective amounts at a fixed future date.
A put or call "option" is a bit of paper by which you purchase the right to sell ("put") or buy ("call") a certain amount of a currency, a financial asset, or a commodity at a future date at a given price.
According to Bryan and Rafferty, and they have a point, most accounts of recent capitalist development dismiss the explosive growth of derivatives trading as just unseemly noises off, wasteful and destabilising "speculation".
They say we should "look inside the box" to see what derivatives really are and do. If we do, we see that they are more than froth. Derivatives - and, in fact, big (liquid and deep) derivatives markets - are essential tools for global capitalist corporations to deal with the complexities of doing business across the world, which involves borrowing, lending, and stashing funds, buying and selling, in several different currencies whose values and interest rates are likely to move significantly relatively to each other.
In the first place, in fact, derivatives are a sort of insurance contract for those capitalist corporations. (This is "hedging" - not at all, despite the name, what "hedge funds" do). By using derivatives, corporations pay to "insure" themselves against the risk of exchange or interest rates moving against them.
It is possible that both parties to a derivatives transaction, or both end-parties to a chain of derivatives transactions, are reducing their risk. If corporation A has borrowed in yen but receives its income mainly in dollars, and corporation B has borrowed in dollars but receives its income mainly in yen, then an interest swap will reduce risk for both of them.
Some people in the derivatives markets will take on risky transactions in the hope that they've guessed the future better than others, and so can reap profits from the payments that the more cautious make. What is special about derivatives markets in this respect is the potential they give for "leverage". If you think the exchange rate of the US dollar is going to go up, you may be able to buy "options" to buy dollars at a low rate with a relatively small cash investment. Your gain if the dollar actually does go up is much bigger, in proportion to your initial investment, than if you had bought dollars straight off and waited to see if they would go up.
But derivatives are not only "speculation", nor uniquely "speculation".
The derivatives markets create a way of comparing - "commensurating" - the capitalist returns from very different financial assets. Thus, according to the authors, they have two key effects:
1. They sharpen global capitalist competition, and give a finer focus (rather than competition being able to operate only on a gross level, between the overall outcomes of giant corporations). They create "a huge market process in which all different forms (and temporalities) of capital are priced against (commensurated with) each other... there follows a requirement of each asset, across space and across time, to deliver a competitive return" [35]. "Corporations can now benchmark the returns of their operations in different countries" [53]. Thus competition sharpens at the same time as corporations become more monstrous: "while many people "think of large corporations as the antithesis of competitiveness, and small firms the ideal image... [the fact is] exactly the opposite" [168].
2. They escape state-centred financial regulation, and create, not so much "de-regulation", as a new global market-based regulation of capital flows. They "enforce the logic of capital" in a more abstract and impersonal way than the old joint-stock company, which in turn was more abstract and impersonal than the previous owner-capitalist regime. Capitalism-with-derivatives is a new, third, great era in the evolution of capital.
There is the odd passage where the authors seem to take too rosy a view of derivatives markets, but on the whole they are clear that the sharper competition generated by those markets exerts particular pressure on labour to be "competitive", i.e. to ratchet up productivity and ratchet down wages and social provision.
They reject the orthodox "neo-classical" view that derivatives markets are merely a form of arbitrage benignly assuring price accuracy and stability. "Although derivatives are creatures of price instability, they do not seem to have made prices more stable" [182].
"Derivatives make capitalism more dynamic and more fragile; more complex and more integrated" [213]. "Derivatives have made it more likely that any financial crisis will have a more pervasive and speedy than was previously the case" [209].
They open the book by telling the story of the LTCM firm, set up to trade in derivatives by one of the economists who had won the Nobel Prize by working out the mathematical formula for pricing options. (The derivatives markets could not function as they do without the contribution of microelectronics to making information instantly available world-wide, and to split-second calculation of complicated mathematical formulas). In 1998 LTCM went broke, and had to be bailed out by the Federal Reserve.
Our attitude to capitalism-with-derivatives, the authors say, should be something like that of Marx to capitalism-with-global-free-trade, or capitalism-with-joint-stock-companies - to recognise it as capitalistically "progressive" (the authors do not use the word), here simultaneously meaning destructive and subversive.
Specifically, the authors reject the Tobin Tax. It wouldn't work - derivatives would escape it. To the extent that it would work, it would hit cautious, "responsible-capitalist" hedging just as much as speculation, and might even increase financial stability.
They also argue against the reimposition of controls on the movement of (financial) capital as a presumed first step in any left-wing reformist programme. Again, derivatives would slip round any such controls. And they could not address the problem of directing material investment as desired.
But what are derivatives? Marx opened Capital volume 1 with the statement: "The wealth of societies in which the capitalist mode of production prevails appears as an immense collection of commodities". It seems that today we should have to rewrite that - "as an immense collection of commodities and derivatives".
Over-enthusiastically, I think, the authors contend that derivatives are simultaneously money - in fact, "distinctively capitalist money" [155] - commodities, and capital.
They are money because they "commensurate". "Prices are anchored through the network of financial derivatives" [131] Derivatives embody the extension of the "trust" central to the function of a money system (whether gold-money or state fiat-money) being "stretched to an extra-territorial level [141]. They institute "a system of universal equivalence" [153].
Moreover, derivatives "exist at the intersection of money and commodities: derivatives themselves are money and commodities at the same time" [131], "effectively breaking down the differences... between commodities and money" [132]. "Derivatives have replaced gold as the anchor of the financial system" [124].
They are capital because they give "ownership of the 'performance' of a corporation, but without any ownership of the corporation itself" [69]. They "are always 'capital', because they never 'leave' a circuit of capital so as to be consumed" [153].
If the borders between commodities, money, and capital had indeed been broken down, then capital would have superseded its tendencies to crisis. In fact, as we see, far from it. In fact, as the authors themselves note, derivative markets "do not [even] seem to have made prices more stable".
The authors add cryptic reservations. When calling derivatives capital, they frequently add scare-quotes: "capital". Commodities? "If derivatives are commodities, they are a different sort of commodity from those we conventionally talk about" [153]; sometimes they call them instead "meta-commodities".
Money? "Albeit not as means of exchange" [155]. Not, we might add, as unit of account (how can the variety of "derivatives", plural, be the unit of account? The authors' own figures for derivatives trading are given in the unit of account of... US dollars). Nor as means of payment (we've seen that in the recent months of financial crisis, when "cash" became "king"). Nor as store of value (corporations still reckon their profits in dollars or suchlike, not in miscellaneous derivatives).
At one point the authors talk about derivatives "as products of the labour of financial institutions" [153], as if they want to categorise them as another form of congealed labour. Marx's comments on the idea of religious conversions, or judges' rulings, as examples of congealed labour, are relevant:
"The quantity of labour required to achieve a particular result is as conjectural as the result itself. Twenty priests together perhaps bring about the conversion that one fails to make... In a bench of judges perhaps more justice is produced than by a single judge who has no control but himself. The number of soldiers required to protect a country, of police to establish order in it, of officials “to govern it” well, etc. —all these things are problematical... although how much spinning labour is needed to spin 1,000 lbs. of twist is known very exactly in England" - Theories of Surplus Value.
In truth, it seems to me, derivatives are tickets to shares in future congealed surplus labour. They are of the same sort as tickets for an airline or train journey some time in the future - distinct from the "congealed labour" embodied in the actual journey, but related to it.
The derivatives "ticket" market is different from other "ticket" markets in:
- Ticket "touting" is not only legal; it is encouraged and promoted on a vast scale. (I think the reason why ticket "touting" is discouraged or banned in other connections is because the tickets are for a fairly small supply limited in advance, and it would be too easy for touts to "corner" markets. But some orthodox economists think it is just superstition - see for example Samuel Brittan.)
- The tickets are specifically to future congealed surplus labour.
- They are to specific streams of future congealed surplus labour, from specific activities, at specific (often remote) times.
Fiat money has the character of a ticket to future congealed labour - but a ticket valid for any congealed labour, within the state's ambit, and immediately.
We can thus see how derivatives are close to money, close to commodities, and close to capital, without being exactly of the character of any of them.
The implications of these vast ticket markets for the functioning of capitalism certainly need to be explored. Bryan and Rafferty have opened up the investigation.
One missing element in their book is securitisation - also critical to the sharpening and finer targeting of capitalist competition.
