From Luxemburg to Sweezy: Notes on the Intellectual Influence of Hilferding’s Finance Capital

Abstract

This chapter is about the key political economy contributions which originated from Hilferding’s “Finance Capital”. It covers the period from its publication in 1910 to 1966 the year Monopoly Capital by Paul Sweezy and Paul Baran came out. I will show that the ideas associated with Finance Capital dominated economic thinking in the left during the second and third decades of the twentieth century. In the 1930s the Great Depression marked a setback for the book’s prestige. However, important economists, like Natali Moszkowska and Paul Sweezy, who elaborated on the realization/underconsumption version of monopoly theory during that period, initiated fresh interest in this line of thought. It was the conclusion of an intellectual effort that stemmed from the insights of Rosa Luxemburg. Their input established a scientific paradigm that gained recognition in the economic profession. Moreover, it offers an analytical explanation for the booming growth of finance following 1980 and the economic crisis which began in 2007/2008. The most serious criticism toward Hilferding, Moszkowska, and Sweezy is that their conclusions rely on the neoclassical theory of perfect competition and its “dark side”, that is monopoly “price setting”. Neoclassical monopoly pricing means the rejection of the labor theory of value and constitutes a different argument from the one in Marx.

Appendices

Appendix 1: Commodity Prices in Hilferding

When referring to competitive capitalism Hilferding says:

the tendencies which give rise to a protracted decline in the rate of profit and in its average level, … can only be overcome by eliminating their cause—competition [emphasis added-NS]. (Hilferding [1910] 1981, p. 193)

This is not the case in Marx. In Capital Vol.I (Marx [1964], Ch. 12, pp. 220–226) Marx argues that automation becomes the dominant form of increasing the social productivity of labor, and this is done not to get additional profit from other capitalists but to increase the extraction of relative surplus value from workers, the source of profit in capitalism. Mechanization thus results from the labor process itself. This inherent tendency, as we know, leads to an increasing organic composition of capital and a declining rate of profit as presented in The Capital V. III (Marx 1959, Part III, pp. 153–171). Competition does not produce this law of capitalist accumulation (i.e., the declining rate of profit) it makes it evident.

This process has an impact on the competition itself. Because capitalist competition emerges out of the fundamental conflicting production relations in capitalism, it is not a game, it is a war fought by the “cheapening of commodities” (Marx [1964], p. 441), it decides who lives or dies. This means that in the Classical/Marxian notion, capitalist competition cannot be abolished for long because it emerges from the production process as a labor process. In the neoclassical world of “perfect competition”, competition can be easily eliminated. For this reason, neoclassical economists propose and accept laws and regulations “protecting” competition. In other words, the mainstream theory assumes that the market cannot protect itself from monopolies and cartels.

This explains why Hilferding applies “perfect competition” to justify the tendency toward cartelization. The latter implies also the abolition of the labor theory of value, as admitted by Hilferding himself (Hilferding [1910] 1981, p. 228), and the determination of prices in a similar fashion to that of monopoly prices in neoclassical micro textbooks. The following extract is indicative:

The latter [Monopoly prices-NS] would themselves be determined, however, by the reciprocal relationship between costs of production and volume of output on the one hand, and prices and the volume of sales on the other. The monopoly price would be that price that makes possible a volume of sales such that the scale of production does not increase the costs of production so greatly as to reduce the profit per unit significantly. A higher price would reduce sales, and hence the scale of production, thus raising costs and reducing the profit per unit of output; a lower price would reduce profit so greatly that even the greater volume of sales would not compensate for it. (Hilferding [1910] 1981, p. 227)

The solution to Hilferding’s exercise is no other than the familiar figure we have all seen in our neoclassical micro textbooks. Here it is copied from Henderson and Quant “Microeconomic Theory—A Mathematical Approach” McGraw-Hill Book Company, Inc. New York 1958, p. 169. Where D is the demand curve, MC is the marginal cost, and MR the marginal revenue.

Similarly to Hilferding, the neoclassical economist states: “The monopolist can increase her profit by increasing (or contracting) her output as long as the addition to her marginal revenue exceeds (or is less than) the addition to her cost (MC)” (Henderson & Quant 1958, p. 169).

Appendix 2: Stock Market Prices

This chart is indicative in many respects. The blue line pictures the real price of the S&P 500 from 1947 to 2019. It is the benchmark for the warranted price data simulation using the Incremental Rate of Profit as the rate of return (brown line) (Stravelakis 2019). The gray line shows the Efficient Market Hypothesis prices calculated by Robert Shiller with a constant discount factor of 7.6%. A constant or slowly varying discount factor appears also in Hilferding for the pricing of common and preferred stock (see “Finance Capital and the Dynamics of Capitalism” section). However, we can see that constant discount factor prices like the efficient market prices are not relevant. This led Shiller to consider the volatility and the diversion in actual prices compared to the “gray” line as an indication of “irrationality” from the side of “economic agents”.

The application of the Incremental Rate of Profit as the required rate of return implies that “warranted prices” are the gravity center of actual prices (Shaikh 1997). This leaves room for bubbles or under-pricing. Nevertheless, fundamentals rule in the end. The preceding simulation confirms this insight. In the boom of the 50s and the 60s, actual stock prices exceeded fundamental prices. The opposite happened during the times of the great stagflation (1970–1981) when actual prices underscored warranted prices. This continued in the first years of the neoliberal era. However, following 1985 actual prices overshoot the underlying fundamentals reaching a climax in the dot com bubble (around the year 2000). The correction that follows was steep but short. Thereafter, actual prices gravitated around fundamental prices. In 2007/2008 stock prices fell shortly after the collapse in the underlying fundamentals. The latter supports the analytical conclusion that the financial crisis was the trigger and not the cause of the depression that followed. This indicates also why the application of the Baran-Sweezy theory (see “Conclusion: Crisis and Finance” section) in understanding the current crisis, although analytically sound, is unsupported. No bubble appears at least in stock market prices following 2000 to justify this reasoning.