Notes on "Political Economy of Money and Finance"

Posted in martin's blog on Thu, 01/01/2009 - 16:30,

Makoto Itoh and Costas Lapavitsas, Political Economy of Money and Finance, Macmillan 1999

This book is a review of doctrine rather than a study of the latest developments. A great deal of it is concerned with the polemics between the "bullionists" and "anti-bullionists", and later between the "banking" and "currency" schools, in 19th century England. It also discusses rational-expectations doctrines and "post-Keynesian" doctrines (centred round the idea that the money supply is endogenous).


Itoh and Lapavitsas stress that capitalist production inevitably generates hoards - perhaps the term is misleading, in any case they mean at-least-temporarily static stashes of cash - in the common course of capital. The credit system is about mobilising those temporarily static stashes of cash (and, we could add, crises are about the mobilisation failing, the stashes congealing).

Despite what Marx says - maybe as a "for-the-sake-of-argument" schematisation? - moneyed capitalists and entrepreneurial industrial capitalists are not two clearly distinct sectors of the capitalist class [84]. All capitalists put into and take out of a pool of loan capital held by the banks.

The relation of the rate of interest to the rate of profit is thus not so simple as a balance of forces between moneyed capitalists and entrepreneurial capitalists. Itoh and Lapavitsas declare that "interest... simply reflects the general possibility of augmenting a sum of money through lending" (which seems to be a tautology rather than an explanation); and the fact that the rate of interest is generally lower than the rate of profit from the fact that interest-bearing capital is "formed outside the circuit [of capital] and enters and exits the latter".

The substantive point here, maybe, is that the basis of interest may be wider than Marx seems to indicate. Up to a point, it must be wider, since we know that interest (usury) exists long before industrial profit is a large part of economic life.

As well as the other asymmetries between money and commodities, there is a time-asymmetry. Money now can buy commodities today or next year. Money next year can buy commodities next year, but not commodities today. Capitalists may be desperate for ready cash now as a means of payment, or to make an investment to catch a competitive opportunity; households, or, say, governments making war, may be desperate for ready cash now for consumption purposes. Hence they may be willing to pay a premium - out of future surplus value, or even as an act of extracting new surplus value from their own labour - for money now as against money next year.

These rates of interest may be variable, from the 149% APR charged at a paycheque-cashing shop to, say, the "standard" long-term interest rate of currently around 5% on high-credit US corporate bonds. Marx's explanation kicks in for the relation between "standard" long-term rates (generally higher than the short-term rates banks charge each other) and the rate of profit.


The authors contend that "the forms of value arise out of the common property of commodities to request exchange, and can be understood independently of the substance of value" [38]. Thus, forms of value - including money - arise long before the development of capitalism. Itoh and Lapavitsas implicitly consider the old USSR to have been a form (albeit a very unsatisfactory) form of socialism; despite asserting that "money and commodities, in the original sense [?]... did not exist in any socially significant scale in the Soviet economy", they believe that a sort of money, "s-money", can (and implicitly should) exist in a socialist society. "Socialism must socialise money".

The argument seems to be that a systematic relation of prices to embodied labour can only arise in fairly-developed capitalism, with fluid movement of labour power between lines of production and so on. That may be true: the forms of value may move some distance from their underpinnings. But it is difficult to see how the forms of value can develop entirely "independently" of... what value is.


Itoh and Lapavitsas construct a picture of the capitalist credit system as like a pyramid. At the bottom is inter-firm commercial credit (in the book, they give a lot more space to analysing bills of exchange than to analysing the modern forms of this credit). Next up, individual banking credit. Next up again, the money market (banks lending to banks). At the top, the central bank.

I found all this, however, more stylised-descriptive than explanatory. The book does point to the fact of recent development which Lapavitsas has stressed elsewhere, the drawing-in of working-class households to finance capital (so that interest and bank fees are now a large part of working-class household expenditure), but does not integrate it into their picture of the pyramid.


The authors find "finance capital" and "monopoly capital" to be inadequate terms for describing 20th century capitalism. Hilferding's model of the fusion of banks and industry generalised too much from specifics of Germany and Japan. The term "monopoly" omits the financial aspect of modern capitalism, and the fact that giant corporations are not necessarily monopolies in any literal sense. (In fact, as other authors have pointed out, a market dominated by a few giant corporations is often likely to be more sharply competitive than one with a vast variety of small operators).

They prefer "giant joint-stock capital". Indeed, they argue that "joint-stock capital is the highest and most complete form of capital". (They quote Marx on this - from the Grundrisse, p.264 and p.275-7 - but in the first place, it is wrong to build so much on odd passages from Marx's rough drafts, and in the second place, in those passages Marx actually lists "capital as money-market" as a more developed form than joint-stock capital).


The authors derive from this idea of "giant joint-stock capital" defining developed capitalism some consequences for the theory of crises.

They make wage-squeeze (labour shortage) pivotal to their theoretical model of the business cycle [126ff]. In this scheme, crises open because speculators in commodity markets go bust under the pressure of a squeeze between lower profit rates (arising from wage-squeeze) and higher interest rates. That then precipitates a further fall in profit rates.

(But empirically, most crises are not preceded by a fall in profit rates, certainly not by a large one. In some - like the current crisis, for example - it is very difficult to see wage-squeeze as a factor.)

The complication from "giant joint-stock capital" is that it gives rise to "speculative booms in the construction of large plant" which can then precipitate crises even before the wage-squeeze point. Once the large plant is set a-building, it is not easily scrapped. Hence long periods of depression where, all through cyclical ups and downs, there is "intractably excessive fixed capital investment" [143-4].

They see the period since 1973 as one of "depression" in this framework analogous to 1873-96 and the 1930s. In focusing on "intractably excessive fixed capital" they have common ground with Robert Brenner.

As I've indicated in other notes, I find this whole scheme unconvincing.


There is a symposium on some of the ideas, introduced by Jim Kincaid, in Historical Materialism 14:1. I need to study that further.


Itoh is the major currently-active writer (in English, anyway) from the "Uno school" of Japanese Marxist economics. Lapavitsas is a former student of Ben Fine, an economist with some roots in the political current represented by the Morning Star and the CPB; he has learned Japanese and spent time working in Japan.

Uno apparently argued that a Marxist analysis of capitalism must proceed at three levels: the pure theory of capitalism; consideration of stages of capitalism, with 19th-century liberal capitalism in Britain taken as a normative stage; and "empirical analysis".

According to Tom Bottomore (A Dictionary of Marxist Thought), "Uno saw the whole era since the first world war as... a period transitional between capitalism and socialism, and therefore, because political confrontations between socialist forces within and outside capitalist economies informed policy, this was no longer a pure stage of capitalist development...

"One of the most controversial aspects of Uno's Marxism is its insistence that economics can be independent of political and ideological movements. This has been exemplified by the development of the school in Japan which, although it has some adherents among the left wing of the Socialist Party, remains mainly an academic school..."


Marxist Theory and History

Add new comment

This website uses cookies, you can find out more and set your preferences here.
By continuing to use this website, you agree to our Privacy Policy and Terms & Conditions.