Modern Socialism

Educational Series of Modern Socialism

Dr. Rusk Masih, MA Economics, PhD Engineering

THE STRUGGLE BETWEEN

THE INVESTMENT CAPITAL AND INDUSTRIAL CAPITAL

FOR

THE DOMINANCE OF THE CAPITALIST SYSTEM

Establishment of the Capitalist System

The capitalist mode of production became dominant in Europe between the 16^th and 17^th century, defined as privately owned production equipment and land coupled with free market for labor and commodities. In fact the labor force was treated like commodity, acquired and disposed off at will. The system, as defined by Adam Smith, was growing in size and capital was accumulated at a breath taking speed due to technological development and inventions, which increased the efficiency of production. Ultimately the unit labor produced more products with increased profit. The labor working and living conditions were quite miserable.

Emergence of Socialism Ideology

When Karl Marx studied the capitalist system, still in his infancy, during the middle of the nineteenth century, he saw the exploitation of labor by the new industrial capital. He dedicated his work for that study to explain the way such exploitation is done through the surplus value and how the capitalist market works. At that time the capitalist system was taking hold, shaping the government and its laws as well as its legislations to legalize the system and develop its code of behavior. In the meantime the workers as he called them (Proletariat) were suffering from bad working and living conditions, owning nothing but the knowledge and power to operate the machines which produced different products. The product was sold in the market to make profit and increase the accumulation of capital to further expand the capitalist system. He predicted that such intelligent class of labor, which has nothing to hold it back from revolutionary struggle to change the system to a socialist system, which will eliminate the exploitation of labor. Such class of proletariat, as defined by Marx does not exist in the present days’ society anymore because of the change in their living and working conditions. He contributed in the struggle of that class not only by his publications, mainly “The Capital, or Das Kapital as in its German origin”, which became the bible of the socialist movement, but also in organizing the struggle by writing the communist manifesto with his partner Frederick Engles for the German Communist League, in which him and Engles became member.

Under the struggle of the labor for their rights and through the social and technological development, which increased the profit of the capital, the industrial capital ceded some of the rights to its labor. They gained concessions, through their bloody struggle, in wages, living and work conditions improvement as well as the right to organize themselves in unions to defend their rights.

Expansion of the Capitalist System

At that time the industrial capital was the dominant in the society. However for the capital to expand its quest for more profit, found out that forming financial institutions such as banks would help to support the industrial expansion by collecting funds through the banks from public and other sources, deposited for safety in those banks, which were connected most of the time either to the industrial capital or to the commercial and trading capital. Nevertheless the industrial capital was the dominant and the industrialists were in managing positions in those banks and institutions.

In the early twentieth century, new phenomena began to appear in the capitalist system, the banks began to take more important role in the finance of the industrial capital in its expansion process. The producers began to form syndicates to control the prices. The struggle between the industry branches for monopolizing the market appeared as a main feature in the system. Lenin noticed all these phenomena and studied the system by writing his book “Imperialism is the Highest Stage of the Capitalist System”, which showed more clearly the ugly characters of the system. He did not envision that the capitalist system will have even higher stages in the future, as will be seen in this article. Lenin called for the establishment of proletariat dictatorship to eliminate the capitalist system, considering the proletariat dictatorship is only against the capitalist, but it is democracy for the working forces. After Lenin death Stalin used it to enhance his own personal dictatorship in the name of the proletariat dictatorship to eliminate his opponents and build his own version of socialism on the wrong foundation, which doomed it later on. Certainly in the present time no proletariat exists, as defined by both Marx and Lenin and no proletariat dictatorship can work in the present democratic society.

Long Cycles of the Capitalist System

A professor of economics in the Soviet Union by the name Kondratieff, helped to produce the first five years economic plan of the soviet union, studied the data from the capitalist system for the period from 1789 to 1926 and concluded that the system has long cycles, spanning about 50-60 years, in which the system expands vigorously at the early part of the long wave, then it slows down due to inflation before it peaks to begin the last part of the cycle in which recession begins to take hold and even the economy sometimes looks as if it is on the expansion course but a sudden thing takes place such as credit default where prices begin to collapse entering deflationary era in which a depression takes place or as it is called a deep recession to make it look better and not scary as calling it Great depression. Presently we are witnessing symptoms of depression: Oil price is declining, commodity prices are declining, stock market is crashing, housing market is collapsing, auto industry in shamble and its dealers are closing down, credit market frozen, bankruptcies and default on credits on the increase and unemployment keep going up. It has all the ingredients and diagnosis of a depression, regardless whether they call it deep and long recession or depression.

Unfortunately Stalin, who was not an intellectual as his predecessor Lenin, never understood the laws of economics, thought that socialism can be built by dictatorship rather than by sound economic and scientific methods. He did not like Kondratieff research and considered it against his collectivization policy, the policy which brought economic disaster and famine for the Soviet System. Kondratieff was dismissed in 1928 from his position as director of institute for business activities, arrested in 1930 and sent to the prison then executed in 1938. Unfortunately he did not have the chance to express his views about the great depression of 1930’s which confirmed his theory. The inapplicable part of Kondratieff theory is stating that the length of the long cycle is 50-60 years. Actually that was applicable for the period which he studied, but certain events as well as government intervention, as it is happening later on, be it monetary or fiscal policy could alter the length of the cycle, makes it longer or shorter, but never eliminate it, because when the capitalist system is in an unstable stage at the end of the long cycle, nothing can stopped it from entering depression and bring it back to the stable condition. It has to reach its limit where it finds a stable condition (This will be discussed in details in another article) We see this facts played well by the events taking place in our economy at this time, which are leading towards depression, about 70-80 years from the great depression.

We will elaborate, in another article of this series later on, about the stage of stability and the stage of instability of the capitalist system, which is displayed now, and why recessions during the stable stage do not lead to a depression but during the unstable stage do lead to a depression and possibly to a social upheaval and revolutions. This will be as further development of Kondratieff theory of the capitalist system long cycle.

Dominance of the Industrial Capital and its Golden Age

After the US emerged from the great depression assisted to a great extent by the demand for American products and weapons during WWII, the US economy was embarked on breath taking expansion, cheap material and low labor rate together with plentiful resources, from which the industrial capital was the main beneficiary. The industrial capital reached its peak of dominance of the capitalist system in the middle of the twentieth century, as it can be seen by the following statement of the president of General Motors Charles Erwin Wilson the designated secretary of defense during Eisenhower administration during the senate confirmation “Do you think that you can make decisions for the government opposite to the interest of GM.” He was asked by the senate. He answered “I thought what was good for our country was good for GM and vice versa.” That was the prevailing opinion at that golden age of the industrial capital, never being disputed. So what happened since then that the interest of GM was trashed in the year 2008 when the CEO of GM was told bluntly by the congress that he should come next time not in his private jet to beg the congress for help but by commercial airliner and with a viable plan for saving the auto industry so that GM will not go bankrupt. Strange contrast between the two cases in 1953 and 2008, because now the investment capital and not the industrial capital is at the helm of the capitalist system as we will see later on.

During that golden age of the industrial capital the executive officers of the industrial corporations became the high level directors in the US government, which prompted the democratic statesman Adlai Stevenson to quip that America took the government out of the hands of the New Dealers and put it in the hands of the Car Dealers (In a sarcastic reference to the followers of president Roosevelt New Deal and car dealers of GM).

It was also during that golden age of the industrial capital, when marshal plan was devised to revive the destroyed industry of Europe and Japan because of WWII. The industrial capital was the main beneficiary of that plan.

Interesting enough was the fierce competition between the capitalist system, led by the United States and the Socialist system led by the Soviet Union during the cold war, when the soviet system economy was no match to that of US economy in size, available resources and technology, when US has emerged from WWII strong, its industry unscarred by the war, emerging from depression and embarked on robust growth, while the Soviet Union industry was devastated by the war. The US with traditional democracy as a plus on its side and industrial leader as its leaders, while the Soviet Union was lead by a ruthless dictator called Stalin and later on by his doctrine followers as minus on its side. Clearly there was no match between both systems and the soviet system would be a loser in that competition. Under the struggle of labor for better working and living conditions higher wages and benefits were tied to higher prices of industrial product. In a well designed policy to fit that situation, the industrial capital decided to create a class of labor with high pay and good working and living condition to create a barrier between the labor and any radical ideas or any communist ideology, and to make the rest of the working class looking at the auto workers and its UAW, the steel workers and other unionized workers, telling themselves who needs socialism under dictatorship when we can achieve such a good living and working conditions under the democracy. If that was not enough to deter the workers from any radical ideas then senator Joe McCarthy did the rest of the job to prosecute anyone who was liberal or having any left wing ideas, let alone being communist.

What happened to those accomplishments of the unionized workers and their devastated unions in USA half a century later after the collapse of the socialist system of the Soviet Union? It was frontal assault on the labor in different manners to destroy their gains. Much of them gradually disappeared and the working class found itself back in square one. In fact not only the industrial workers and their unions were devastated but also the industrial capital too lost its crown to the much more ruthless investment capital, which emerged at the end of the twentieth century and the beginning of the twenty first century.

Investment Capital Now at the Helm of the Capitalist System

The difference between industrial capital and investment capital is the following:

In the case of industrial capital the capitalist invest his capital in one type of manufacturing or another, his investment is stationary, seldom moves his capital from that industry or alters his loyalty to that industry. Accordingly if he dominates big and influential industry then his influence on the government decision, directly or indirectly, could be as big as his capital and the importance of his industry, as the case was in 1953 when General Motors was in the helm.

In the case of the investment capital, the capitalist does not do direct investment in any type of industry, but in investment firms, such as hedge funds mutual funds, money market funds, banks and any other type of investment institution such as what was called investment firms of wall street. Those funds are mobile have no loyalty to any type of industry. They move the capital from one place of investment to another, looking for high return on their investment, or they invest in derivatives or securities issued by Wall Street investment firms or speculate on currency and other gambling. The managers are the kings, influencing the congress and government decisions.

The increase of competition from other industrial countries against the industrial manufacturers in the US, even invading US own territory, added to its own mistakes have made investing in industrial corporations an unfavorable investment for the capital which was seeking higher and higher profit. It realized that there is a host of problems surrounding the industrial manufacturing corporations. Aside from the fearsome competition, there are other problems such as environmental problems dogging them, labor contracts, particularly in the auto manufacturing industry, which is asked to produce small and efficient cars, when the gas prices were low, making the consumers preferred the big gas guzzler and now they are blamed for not producing efficient cars with high mileage per gallon of gas. All these problems and other factors helped to bring the demise of the industrial capital causing its fall from grace on the hands of the investment capital.

The deregulation and technological development at the end of the 20^th century and the beginning of the 21^st century made trading stocks so simple on the internet, easy, low cost and profitable, helping the capital to flee from investment in the big manufacturing corporations to the investment in hedge funds, money market funds and Wall Street investment firms. Added to all that the deregulations which took place during Clinton administration and particularly in Bush administration, which put senior investment officers of Wall Street firms in sensitive positions at the government. Robert Rubin, treasury secretary in Clinton administration, who was co-chairman at Wall Street Investment Firm Goldman Sacks, and Henry Paulson, treasury secretary in Bush administration, who was Chairman and CEO at Goldman Sacks. Those secretaries vowed, though they did not say it explicitly as GM president did – who became secretary of defense in 1953, to make the interest of Wall Street the interest of the nation! Interesting enough Bush administration fired the prior secretary of treasury O’Neil, who came from industrial capital firm Alcoa. Those administrators helped to deregulate and change the rules to fit Wall Street investment firms’ appetite for making more profit rather than safeguarding American people’s interest. Those firms gambled with our economy, using all kind of options, derivatives, selling securities backed by sub-prime mortgages as AAA securities, currency speculation and introducing new type of securities such as Credit Default Swap (CDS) and Collateralized Debt Obligations (CDO), which caused AIG to gamble and default on payment of such securities, costing the consumer $150 billions of financial aids and capital investment in AIG to prevent it from bankruptcy. Interesting enough to know that AIG held a party costing more than $400,000 after it received the capital infusion! While the nation is sliding gradually into depression, Henry Paulson rushed to the rescue of Wall Street rather than rescuing the home owners from foreclosures. He sat on the problem for the years of his tenure as secretary of treasury and suddenly walk up to alarm the congress, telling it if it does not approve his rescue package, called Troubled Asset Relief Plan (TARP), within one week, for buying the troubled securities the economy will collapse. Ironically after the plan was approved he did not use it for the purpose he asked for, but to give it to Wall Street Investment firms and big banks, not industrial companies, which made the congress who is supposed to guard the interest of the American people look like a bunch of fools approving something which sacrificed the interest of the American people and helping Wall Street. Nevertheless when the case came to rescue the manufacturing capital represented by the auto manufacturers for a fraction of what cost to rescue Wall Street Goldman Sacks, Morgan Stanley and Merrill Lynch every one in congress started getting smart demanding that the labor should give big concessions in wages and benefits. To add an insult to the injury, when Goldman Sacks and Morgan Stanly applied for becoming a holding bank so that they can borrow money from the Federal Reserve, their application was approved tight away without any question, but when GMAC the financial arm of GM applied to become a holding bank like Goldman Sacks and Morgan Stanly so that it can borrow money to help GM pay its bills it was delayed to make it difficult to GM to survive without getting big concession from the worker. When will the workers understand that the system is biased against GM because of the unionized worker and the intention to decimate their union and reduce their wages, which was conceded to them when the socialist system of the Soviet Union was alive, now they want to take all that back What did we get from those Wall Street Firms other than troubled economy on the verge of depression and all kind of fraud, most recently the $50 billions fraud committed by Bernard Madoff funds, at least the auto manufacturing companies produce goods and services for the American people and they are one of the pride of our country, employing millions of workers involved directly or indirectly in the production. What are the parasites of Wall Street giving us?

Is Imperialism the Highest Stage of Capitalism? Not really, what we see presently from the investment capital dwarfs what the industrial capital done at the early part of the 20^th century when it was at its golden age. Professor Robert Reich, who was the secretary of labor during Clinton administration, in his book “Supercapitalism” gave stunning facts about the dominance of hedge funds and other investment institutions, for example James Simons, manager of Renaissance Technology Hedge Funds took home in the year 2005 $1.5 billions; T. Boone Pickens Jr. of BP Capital $1.4 billions; George Soros of Soros Fund Management $840 millions; Steven Cohen of SAC Capital Advisors $550 millions. All this money was earned in one year! All those numbers are even dwarfed by what Bernard Madoff earned in his fraudulent investment fund of $50 billion in the year 2008. What is the society gaining from these Wall Street Parasites, other than sucking the blood of the working people? When it comes to tightening the belt in the tough times, it is the little guy has to sacrifice and bear the brunt of the bail out. The book has a wealth of information and facts, however in his analysis the author missed to classify this period as the period in which the investment capital is in control of the capitalist system and not the industrial capital anymore. He considered the consumer and the investors are the one who are deciding the destiny of the economy. How could you give the impression that the little guy who own 100 shares of any stock is the one who decides the destiny of the economy and forget that the investment funds are the ones who decide it. Is Paulson, who gave Wall Street firms generously the tax payer money, the same as you and me who own few shares here and there? Or he is deciding the course of the economy to benefit Wall Street firms.

The fact is the investment capital wants to kick the industrial capital out of the US land, telling it go to the third world country where the labor is cheap and produce more profit for us to invest in your companies so that we can bring the labor union down to its knees to make its members accept low payments or stand in the line of unemployment. This policy became very clear in the debate which took place in congress about rescuing the auto manufacturers by demanding impossible concessions, while no question was asked and no condition was demanded from the Wall Street Investment Firms before giving hundreds of billions of dollars in rescue funds. The workers of America thought that they are treated with the same scale of treating the rich people. They are bound to realize sooner or later that it is not the case.

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