Rents versus Profits in the Financial Reform Battle and Post-Industrial Economy

We’ve been trying to develop a theory about the financial sector versus the real economy and how it relates to the financial reform battle.

First off, boo to the Federal Reserve for raising the interchange debit swipe fee cap behind the scenes, almost certainly violating the Dodd-Frank law.  A win for finance over the real economy.  More from Zach Carter and Adam Levitin on the issue.

Second, Kevin Drum directs us to a battle over whether or not the financial sector will be able to challenge and exempt themselves from abusive patents easier, yet another place where they are in conflict with the rest of the real economy.  Here Drum collects some quotes:

Andrew Ross Sorkin is outraged. This provision “is perhaps the most blatant demonstration of the lobbying power of Wall Street and, just as important, the willingness of Congress to support the interests of the banks, even in the face of clear evidence that the law has no purpose other than to benefit the financial services industry.”

Felix Salmon is a lot less outraged. “Sorkin’s attempts to defend the idea of financial business-method patents ring pretty hollow….The law will benefit the financial services industry. No one is arguing that point. And it will hurt rentiers with patents. The important question is whether it’s a good idea from a public-policy perspective. Sorkin ducks that question entirely. But the fact is that if we want a level playing field in financial services, getting rid of business-method patents is an extremely good idea.”

So when it comes to profits, the real economy won’t challenge the financial sector.  Either because the CEOs are hired by Wall Street, the financialization of the economy has made business lines so similar it is tougher to distinguish a company like GE from Lehman, or because of a solidarity among the rich and the elites against regulation, or something else.

But they fight quite viciously when it comes to rents.  I consider interchange a rent – the government has a responsibility to the payment system working correctly, and people who control the crucial nexus of how we exchange goods and services can extract a lot of value from people trying to lead their lives.  Patents, by definition, are rents, rents designed to create innovation.

I think it is helpful for us to step back and get a generalizable theoretical framework for conflicts between profits and rents in the post-industrial world.  I’m going to quote at length from Michael Hardt’s recent The Common in Communism (pdf) to get such a framework going (my bold):

…passages from Marx’s 1844 Economic and Philosophical Manuscripts…In the first passage, titled “The Relation of Private Property,” Marx proposes a periodization that highlights the dominant form of property in each era. By the mid-19th century, he claims, European societies are no longer primarily dominated by immobile property, such as land, but instead by mobile forms of property, generally the results of industrial production. The period of transition is characterized by a bitter battle between the two forms of property….Marx considers it inevitable that mobile property would achieve economic dominance from immobile property…

the triumph of movable over immobile property corresponds to the victory of profit over rent as the dominant mode of expropriation. In the collection of rent, the capitalist is deemed to be relatively external to the process of the production of value, merely extracting value produced by other means. The generation of profit, in contrast, requires the engagement of the capitalist in the production process, imposing forms of cooperation, disciplinary regimes, etc. By the time of John Maynard Keynes profit has such dignity with respect to rent that Keynes can predict (or prescribe) the “euthanasia of the rentier” and thus the disappearance of the “functionless investor” in favor of the capitalist investor who organizes and manages production…

Today, however, it is clear that industry no longer holds the hegemonic position within the economy…Industry has to informationalize; knowledge, code, and images are becoming ever more important throughout the traditional sectors of production; and the production of affects and care is becoming increasingly essential in the valorization process…

If we focus on the new struggle between two forms of property implied by this transition we can return to Marx’s formulations. Whereas in Marx’s time the struggle was between immobile property (such as land) and moveable property (such as material commodities), today the struggle is between material property and immaterial property – or, to put it another way, whereas Marx focused on the mobility of property today at issue is centrally scarcity and reproducibility, such that the struggle can be posed as being between exclusive versus shared property. The contemporary focus on immaterial and reproducible property in the capitalist economy can be recognized easily from even a cursory glance at the field of property law. patents, copyrights, indigenous knowledges, genetic codes, the information in the germplasm of seeds, and similar issues are the most actively topics debated in the field…

The neoliberal strategies for the privatization of the “artificial” common are much more complex and contradictory. Here the conflict between property and the common is fully in play…In general, though, capital accomplishes the expropriation of the common not through privatization per se but in the form of rent…The core insight of this analysis of the emerging dominance of rent over profit, which I find very significant, is that capital remains generally external to the processes of the production of the

Much of the modernization that Marx triumphed was a victory of profit-makers over rent-holders. What Hardt argues is that, as the economy becomes more and more about information, the crucial ends of capital holders is to take things that could belong to the commons and instead appropriate them as property rights and sell them off. The implies a prioritization of rent-holders over profit-makers in terms of power over the economy (also implying a regression back from the future that Marx thought would come after profit-makers – take that Hegelian Marxism!).

If we look at some of the major economic battles taking place, they are over patents, how the risks and rewards of large, systemically important public-utility style financial institutions are distributed and who gets to control the residual over the delegated ends of the government with the mad rush for the privatization of government resources and responsibilities. These are all, in some way, about rents. And the battle over these will determine a lot about who gains in the future of the economy.

As such, they are the only place where the financial sector and the real economy fight it out.

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6 Responses to Rents versus Profits in the Financial Reform Battle and Post-Industrial Economy

  1. b lavag says:

    What we are really talking about is rent as the manifestation of power. Market power certainly but as a system of property rights inescapably political power. Are we then making a mistake by separating the “real economy” from rents via control of immaterial assets? To what extent do actual capitalists make that distinction? See particularly the argument in Nitzan and Bichler, Capital as Power.

    “Faced with these facts of life, particularly the last one, the theorists must
    make a choice: stick with the so-called ‘real economy’ and treat capitalization
    as a distorted mirror if not a mere fiction; or stay focused on what drives the
    capitalists and try to develop a social theory of capitalization that transcends
    the fetish of material production and capital goods. Most political economists
    have taken the first route. We choose the second.
    Chapter 11 unzips the capitalization process. We identify the different
    ‘elementary particles’ that make up the capitalization formula, examine their
    actual and ideological histories, dissect their properties and study their inter-
    relations. This analysis provides a broad framework on which we can build
    an alternative theory of capital as power.” (14)

  2. Matt says:

    “(also implying a regression back from the future that Marx thought would come after profit-makers – take that Hegelian Marxism!).”

    Well from the very beginning of the Manifesto:
    “Freeman and slave, patrician and plebeian, lord and serf, guild-master and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted, now hidden, now open fight, a fight that each time ended, either in a revolutionary reconstitution of society at large, *or in the common ruin of the contending classes.*” [*my emphasis]

    So Marx/Engels certainly saw the possibility of a regression – which nevertheless gave birth to a more productive, superseding form of economy. Of course in the present case ” the common ruin of the contending classes” will result in the destruction of the human race; hence the use of the past tense in the above quote. So yes, there will be no “Hegelian supersession” of capitalism, only confirming the view of the same by Marx/Engels: capitalism truly is the highest and final form of society based upon the exploitation of labor.

    But the question of rent is a very important one, but frequently overlooked. In fact it has a long history in economic thought going back to Adam Smith’s time, and was a touchstone of Ricardian political economy, whose key achievement was the expulsion of rent as a factor of (input to) production, reduced to a passive income gratis due to factors extraneous to capitalist production. The classical economists assumed that over the long run 1) profits fell with accumulation; 2) rents grew with accumulation; 3) and therefore profits and rents would vary inversely over time, although this is not a directly determinate relation between the two. The question of these macro-economic long term relations has tended to fall from sight, and it would be extremely worthwhile to revive them.

    This has much to with the shift in the focus of what constitutes “rent” between the mid-19th to mid-20th centuries. The use of land under conditions of private ownership is the classical form in which the question of rent was treated: Land Rent. The “neo-classicals” however, saw the Ricardian differential rent schemes as just another phenomenon of marginal utility, to be subsumed under the genus “economic rent” or alternatively “monopoly rent” in general as a form of unproductive income, albeit a legitimate price “at value” at the margin for a utility, except in the true monopoly case. What such generalizations obscure is that (typically naturally occurring) utilities that enter as factors of production do not do so in the form of value (as a commodity) as they are not the productions of human labor. Therefore their mode of insertion into the capitalist production process – and therefore the resulting rents – depend upon the concrete characteristics of their utility, and it is therefore not possible to a priori generalize a theory of “economic rent”; rents must be analyzed on the basis of the concrete differentia that characterize them. Hence the analysis of land rents vs. patents vs. license rents etc. must each be pursued independently of one another, and these broad categories further break down into their constituent subcategories, hence land rent: mineral, agricultural and urban land rents; further, urban: commercial (transportation), industrial, and productive and unproductive consumption (housing) land uses.

    I’d start with land rent, not simply because it is the oldest, most traditional form of rent, but also because, if the economist Michael Hudson, who writes almost exclusively on the subject of the “FIRE economy”, is right, capitalised land rent (“land prices”) constitutes some 60% of the total asset values of property in the United States. Not insignificant.

  3. Nice. We don’t get enough Marx, and certainly not enough Hegel-bashing, in finance blogs. As always, an informative post.

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