The financial crisis and intangible value.

Author:Palan, Ronen


Analyses of the current and ongoing crisis in the world can be divided broadly into two groups. The first group considers the crisis to be essentially a financial crisis. The causes, and hence the solutions, of the crisis are traceable largely to lack of financial oversight, wrong incentives, problems of governance and fraud, and so on. The second group seeks to understand the crisis in structural terms as either the crisis of neoliberal capitalism or the crisis of global capitalism, or possibly a geopolitical crisis that manifests itself, like the one experienced during the 1930s, first as a financial crisis, then as an a structural economic crisis, but also as a hegemonic crisis (Nesvetailova 2010, Shiller 2008).

Proponents of the second set of theories present structural interpretations of the crisis. They have tended to emphasis growing inequality in the world, both between and within countries, as a major cause of the crisis (Crotty 2008; Wade 2008). The argument is that the slowing growth rate of real wages in the USA and Europe is the core structural cause for the crisis. As wage growth stalled from about the 1980s in the USA and from the 1990s in the European area, effective demands stalled as well. For reasons that are better understood today, the financial system was able to bridge the growing gap between supply and effective demand by generating ever more sophisticated and obscure credit instruments. But as these credit instruments were largely built upon each other, the system had to collapse eventually like a house of cards. The sub-prime market in the USA triggered the collapse for two related reasons. First, by the year 2007 the first tranche of 'teaser' sub-prime mortgages were transformed into their long-term full rates of interests. Many borrowers were unable, as was known from the start, to pay back the full rate of interest, let alone the capital, on those subprime mortgages. Second, the situation was exacerbated as the USA began to raise federal interest rates in 2007. What unfolded, then, was not a simple contagion effect, but rather the collapse of a gigantic Ponzi that was erected through ever more obscure derivative instruments erected on an original Ponzi in the subprime market. Once one card was pulled from underneath, the entire building collapsed. As Bryan and Rafferty (2006) argue, derivatives are perfect instruments of 'market hoping', and they can bring down two apparently entirely separate markets with one financial instrument. Hence, they proved perfect instruments of contagion.

I agree with the above thesis. I would like to link the causes of the crisis, however, to another deep structural development that emerged even earlier in the 20th century: the rise of intangible assets, and particularly what is known in legal and accounting jargon as 'goodwill'. My argument at this point is conceptual, and suggestive. My thesis is that there are inherent pro-cyclical qualities to a capitalist economy that is founded on what John R. Commons called futurity, which renders modern capitalism inherently speculative. Furthermore, the pro-cyclical qualities were exacerbated under the conditions of globalisation. Third, and related to this, the policy debate is founded on implicit and sometime explicit assumptions that policy-making processes are based on scenario planning: once a future scenario is agreed upon, it is up to the policy-making apparatus to be courageous enough to opt for the right policy. I would tend to assume that future scenarios are produced largely as linear projections of past. Certain groups that have managed to wrest some power, such as economists in this case, will tend to dominate ideas about the future based on projections of theoretical frameworks. But most crucially, the state will tend to pursue certain policies not because they are considered to be the right policies, but because they are relatively easier to pursue than others. I tend to view what we call neoliberal policies, which dominated the agenda from the early 1980s to the turn of the century, as one type of such policy choices. They were chosen less because of the tremendous power of some unified global elites or a transnational ruling classes, joined together by a powerful but erroneous ideology, than because in conditions of sovereignty and sovereign equality, they were relatively easier to pursue than the more difficult, collective-action nightmare that would be required in order to achieve global synchronous policies between demand and supply.

This is a good opportunity to make a link with the theorising of modern capitalism that regulation approaches have developed. Finance plays a key role in the regulationists' interpretation of the Fordist and post-Fordist eras. As Aglietta indicated, the financial system and government monetary policies were 'a second line of defence to guarantee the durability of growth' during the 'golden era' of Fordism (quoted in Dunford 2013: 147). The neoliberal era is associated, in contrast, with the erosion of the capacity of the nation-states to ensure social cohesion and the failure to put in place new mediation mechanisms. The rising power of financiers and rentiers, and their ability to take precedence over manufacturing capital, is key to this understanding. The neoliberal era is inherently crisis prone. The regulationist critique centres on the breakdown of the virtuous forms of national regulation and the rise of 'Strict financial criteria compelled them to maximise short-term equity values and to bear down on terms and conditions of employment and wages' (Dunford 2013: 148).

I have no problem with this assessment. But I have serious doubts about the idea of some 'golden era' in which finance was harnessed to social needs, in contrast with the bad era of neoliberalism which was really, the liberalisation of finance from the production needs of society. It is a good normative argument, based on the Marxist distinction between different spheres of capital--productive, commercial and finance. The evolutionary institutionalism of Veblen, Commons and Minsky never subscribed to such a distinction. They thought, in Gary Dimsky's words, that 'the capitalist economy has a financial aspect at its root' (Dymski 1991 : 2). In other words, productive or commercial capital is not less interested in the pecuniary value of capital than is 'financial capital'; indeed, they all treat their assets as financial. That meant that in practice, 'ownership rights in productive assets are embodied in long-lived, alienable nominal contracts or claims. So any individual's wealth is more properly measured by the market value of her net assets than by the value of the "real assets" to which those paper assets correspond' (Dymski 1991: 2). It also means that accumulation, if this is the right word, 'takes the form of maximizing the value of nominal assets' ownership entities' (1991: 2). A key aspect of modern capitalism is the various techniques and the manipulation that are aimed at maximising the value of nominal assets' ownership entities. The evolutionary story is how the nominal values of intangible assets increasingly shaped the dynamics of modern capitalism.

The article begins by presenting a brief history of goodwill accounting. I follow with a section that describes the link between Jan Toporowski's theory of capital asset inflation and pro-cyclicality. I conclude with an argument that pro-cyclicality has been exacerbated during the era we call 'globalisation'.

Incorporeal and intangible assets

The concept of 'finance' or the 'financial system' can be confusing. The common assumption is that the financial system consists of related markets trading in a variety of financial instruments that are ultimately of similar nature. In the late-19th century, however, financial assets have bifurcated into broadly two classes of property titles: incorporeal assets, such as credit and debt instruments that were traded in markets and were recognised as a distinct class of property titles by economists from about the mid19th century, and intangible assets that reflected very broadly any other possible income that could not be accounted for either by tangible assets (e.g. machinery, etc.) or incorporeal assets. Now, some economists still think of both categories as being...

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