Ruslan Dzarasov is a senior research fellow at the Central Institute of Economics and Mathematics of the Russian Academy of Sciences. He has written for the academic journals Debatte: Journal of Contemporary Central and Eastern Europe and the Cambridge Journal of Economics.

The Conundrum of Russian Capitalism

The Post-Soviet Economy in the World System

Pluto Press

Contents

Global Accumulation and the Capitalist World-system

1 Introduction

This first chapter provides a general framework for analysis of the Russian economy as part of the current capitalist world-system. A brief review of the main features of this world-system is necessary for discussing both the major formative factors of modern Russian society and its position in the world. The chapter begins from the Marxian perspective of capitalism as a society in which appropriation of value dominates over production of use-value. This approach is found to be in accordance with a Veblenian emphasis on a deep contradiction between the industrial and financial logic of the capitalist business enterprise. This contradiction finds its salient expression in the opposition that exists between the enterprise as a going concern and its share value. In the so-called 'Golden Age of Capitalism', from the late 1940s to the early 1970s, the typical US corporation was characterised by separation of ownership and control, the latter function residing with the managers. These were times when it was more or less possible to reconcile the contradictory interests of different stakeholders by paying relatively high wages and sound dividends, while at the same time making necessary investments in expanding and renovating productive capacity.

The 'Shareholder Revolution' of the 1980s transformed the US model of corporate governance: big business was compelled to sacrifice long-term growth for the sake of short-term benefits for the owners. This drastic shift initiated deep changes in the capitalist world-system. Material production was largely shifted from the US and other core capitalist countries to their periphery, with the aim of exploiting cheap labour. Global production networks were established, in which high value-added processes resided with western multinational corporations and low value-added processes were moved abroad. Financial and speculative capital increasingly supplanted productive capital in the core countries, while state, corporate and consumer debt soared both in the core and on the periphery. From the emerging system of intensive global exploitation of labour, a growing gap appeared between global aggregate demand and global aggregate supply, thus engendering the current global economic crisis.

The second section of this chapter provides a brief review of the Marxian 'duality of labour' approach to analysing capitalism, and of Veblen's concept of the dual nature of the capitalist enterprise. The third section takes up the issue of the Eichnerian 'megacorp', which is characterised by a separation of ownership and management and having long-term growth as its prime objective. The fourth section focuses on the so-called 'Shareholder Revolution' through which the separation of ownership and control was overcome, and maximising shareholder value replaced long-term growth as the corporation's main goal. Various facets of the financialisation of the US non-financial corporate sector are examined. Using a global value-chains approach, the fifth section then examines the shifting of production to low-wage countries. This phenomenon is interpreted as both a result of financialisation, and an important factor in allowing it to proceed. The sixth section examines the shift of investment strategies of US non-financial corporations from productive to financial goals, with the corresponding changes in the structure of capital. The seventh section reveals how financialisation and growing exploitation of the periphery led to the current world economic crisis, while the final section provides some concluding remarks.

2 Marx and Veblen on the Duality of Capital and Enterprise

Marx's vision of the income of capitalists is based on his concept of the duality of labour (Afanas'ev et al. 1986) and on the 'ascent from the abstract to the concrete' (Dzarasov 2010a). The commodity – the point of departure of the Marxian system – embodies the dichotomy in which use-value is the product of concrete labour, and value is the product of abstract labour. These are opposing characteristics – as use-values, all commodities are different, while as values they are all identical. At the same time, they do not exist without each other, since the only labour that creates value is that which creates use-value. This dichotomy of labour conditions duality as the main structural characteristic of capitalist economic relations at all steps of the ascent from the abstract to the concrete. Using this perspective, many obscure aspects of the question confronted here can be unravelled.

Capital thus has its material form, represented by an array of commodities (productive equipment, labour power, raw materials, output, inventories, and the like). But it cannot, as the neoclassical school assumes, be reduced to the property of yielding a return, the reason being that capital is represented by a definite quantity of value embodied in the capital goods. Ostensibly, capitalist production is about supplying commodities or services. However, its main aim is the production of value, use-value being only a means to that end. Marx saw the nature of capitalist profit as being manifested in the phenomenon of surplus value, that is, in the product of unpaid labour appropriated by capitalists. From this source stem the other types of income that dominate in a mature capitalist economy:

Up to the present, political economy ... has never separated surplus-value from profit, and never even considered profit in its pure form as distinct from its different, independent components, such as industrial profit, commercial profit, interest, and ground-rent. (Marx 1959 [1894]: 146)

Elsewhere, Marx adds taxes to the components into which profit is divided (see, for instance, ibid.: 32). Thus, the whole variety of the incomes accruing to capitalists is seen as resulting from a transformation of surplus value that takes place in the sphere of distribution and exchange, hence resulting from the exploitation of hired labour. The domination of value over use-value as the aim of capitalist production has important repercussions.

One of the most important is that appropriation of surplus value is not the only means of exploitation under capitalism. Marx also considered 'profit upon alienation or expropriation', 'resulting from zero-sum transactions that relate to money revenue or existing stocks of money, accruing through transactions in financial or real assets' (Lapavistas and Levina 2011: 8). In contrast to surplus value, this kind of profit is not predicated on the creation of new value, but supposes a redistribution of value that already exists. Marx demonstrated this through his theory of the 'primitive' or 'original' accumulation of capital, using such examples as the 'enclosures' through which commoners were deprived of their rights over the land and peasants were coerced into become hired labourers: the destruction of pre-capitalist modes of production, the plunder of colonies, slavery, and usury. In none of these activities was new wealth created, but redistribution of already existing values took place. 'All the features of primitive accumulation that Marx mentions have remained powerfully present within capitalism's historical geography up until now,' argues David Harvey in his persuasive account of the 'new imperialism'. This can be seen in the neocolonial exploitation of the periphery of the capitalist world-system, involving the displacement of peasants and their conversion into landless proletarians, the privatisation of public services and many other destructive activities (Harvey 2003: 145). Above all, this type of income appropriation is peculiar to modern finances. Since 'profit by alienation or expropriation' has marked not only the dawn of the capitalist era but its entire history, Harvey calls it 'accumulation by dispossession' rather than 'original accumulation'. These ideas are commensurate with Veblen's account of capitalism.

The founder of institutionalism distinguished between the logic of industrial and pecuniary business (Veblen 1936). The logic of industrial business requires understanding an enterprise as a going concern, and favours the 'uninterrupted interplay of the various processes which make up the industrial system' (ibid.: 27). Modern industry, Veblen argues, has become so intertwined on a world scale that disturbances to established supplies and deliveries cause increasing damage to the community at large. However, the aim of the so-called 'captains of industry' is pecuniary gain, not the common good. There is thus a deep contradiction between the industrial and pecuniary logic of capitalism, and the former is often sacrificed to benefit the latter.

Within Veblen's approach, it is not difficult to discern a modification of Marx's notion of the duality of labour. Indeed, Veblenian industrial logic corresponds to the processes of concrete and pecuniary logic – to the processes of abstract labour. The domination of value over use-value under capitalism engenders not only increases in production, but also from time to time 'a set-back to industrial plants'. This can be treated as accumulation by dispossession. Veblen related this type of enrichment to the vestiges of predatory behaviour in pre-industrial societies. Under capitalism, such behaviour resurfaces with the ascendancy of finances. The strategising of each capitalist 'is commonly directed against other business interests and his ends are commonly accomplished by the help of some form of pecuniary coercion' (ibid.: 31–2). Here the vital link between finances and coercion is established (Henry 2012).

Meanwhile, financial capital and its dynamics make up another important area in which the principle of the duality of labour applies at the new level of the ascent from the abstract to the concrete. The value of labour in its purest form is represented by money. Since capital in the form of money is central to the capitalist mode of production, finances take on an apparently independent existence in the form of interest-bearing and loanable capital (Lapavistas and Levina 2011). Taking economic relations at a superficial level, it may seem that money when employed in financial markets produces money. But nothing can sever financial from productive capital, because it is only in the sphere of production that new value is created, while financial markets merely redistribute it. The deceptive appearance of money creates 'a world of illusion' disguising fraud and alienation (Henry 2012).

In summary, the '"organic relation" between expanded reproduction on the one hand and often violent processes of dispossession on the other' may be said to have 'shaped the historical geography of capitalism' (Harvey 2003: 141–2).

3 The Megacorporation and Shareholder Power

Among the tacit assumptions underlying the Marshallian 'representative firm', one is particularly prominent: that it is owned and managed by the same individual. This expresses one of the most important neoclassical tenets: that the shareholder should be seen as an owner-entrepreneur: 'The neoclassical theory of the modern corporation, then, combined the notions of private property, ownership, self-interest, and profit maximization in the body of shareholder' (Ho 2009: 175). This presupposes a fusion of ownership and control that was characteristic only of the period prior to large-scale modern industry, when enterprises were small and owners oversaw their operations. Things changed dramatically with the concentration of production and centralisation of capital in the late nineteenth and early twentieth centuries. Business in the United States at that time was already remote from the neoclassical parable of the 'rational economic man'.

Since the publication of the classic text The Modern Corporation and Private Property by Adolf Berle and Gardiner Means (1932), it has been recognised that the emergence of big corporations in advanced market economies and the dispersion of shares among shareholders has led to the separation of ownership from control, with the latter in the hands of the managers. It is important that 'historically the rise of the corporation had been accompanied by a shift in power from the shareholders to the controllers of the corporation' (Lee 1998: 22), contradicting the neoclassical owner-entrepreneur model. Until the 1980s, and in stark contrast to the neoclassical position, it was widely believed that separation of ownership and control made the 'managerial firm' a long-term growth maximiser. The megacorp model of the American post-Keynesian Alfred Eichner (1938–88) provides a well-known example of such a vision (Eichner 1991, 1976, 1973).

The Eichnerian megacorp was the typical, representative corporation of the US manufacturing sector in the so-called 'Golden Age of Capitalism' from the late 1940s through the early 1970s. The defining features of the megacorp were: (a) separation of ownership and control, the latter function residing with the managers, (b) fixed production coefficients-constant average direct costs, and (c) an oligopolistic industry structure. Eichner believed that separation of ownership from management extended the megacorp's time horizon in the long run, making its prime objective the maximisation of long-term growth rather than short-term profit. This was held to be the case because the welfare of managers, when salaries and non-pecuniary privileges were determined, depended not on the size of dividends but on the firm's long-term market position. As a result, investment strategy became the prime factor underlying the megacorp's pricing decisions. Meanwhile corporate performance, even if apparently successful, could embody some important contradictions.

Berle and Means saw the reason for separation of ownership and control in 'the difference between the time for which the capital is needed by the enterprise and the period for which the investor desires to tie up his wealth' (1968: 248). An enterprise needs long-term investment to keep going, while an investor wants quick returns. This means that unlike the logic of industrial business, the logic of financial business is short-term and myopic. The needs of financial business are met using the liquid assets of financial markets.

Non-financial corporations, representing physical property, are essentially immobile, since they demand constant 'service of human beings, managers, and operators'. For the sake of financiers, they are therefore complemented by shares, which are nothing else but 'a set of tokens, passing from hand to hand, liquid to a degree, requiring little or no human attention' (ibid.: 251). Thus, to meet the different time horizons of the owners and other stakeholders, corporate property is split into liquid and non-liquid forms. Contrary to the neoclassical narrative of the shareholder-manager, liquid property can be priced by the stock exchange because it is separate from corporations. Consequently, the logic of financial business receives its own material expression and becomes partially independent of its industrial foundations. This assumes that opposed, contradictory social interests lie hidden behind the façade of the 'firm as a united family'.

This duality of the modern corporation is expressed in two sets of values associated with it: the price of productive capacity (fixed property) and the price of shares (liquid property), appearing 'one above the other, related but not the same' (ibid.: 250).

Veblen related the excess of share prices over the value of productive capacity to goodwill, seen as constituting the intangible assets of corporations as opposed to their tangible, productive property. Further, Veblen makes a very important point when he relates these assets to a monopoly position that a business enterprise may hold (Veblen 1936: 142–3).

Since the main aim of capitalism is to appropriate surplus value, financial interests represented by shareholders neglect the interests of managers and of society at large. It is goodwill, which reflects corporations' monopoly power, that inflates their stock over the value of immobile, productive property. Here we find the source of the tendency for the processes of abstract labour to free themselves from those of concrete labour.

4 Financialisation and the 'Shareholder Revolution'

As noted above, the Eichnerian model reflected the realities of the post-Second World War 'Golden Age of Capitalism'. In the decades from the 1980s through the 2000s, financialisation led to significant changes in the fundamental processes which determine the development of capitalism. Arrighi (2010) defined financialisation as a particular type of accumulation of capital in which profit increasingly is appropriated through investing money in financial markets, rather than in productive capacities. I will treat this phenomenon as an increasing substitution of fictitious capital (see below) for productive capital.