((A repost of something I wrote on an earlier incarnation of this site.) And now reposted again. Hey: reuse is hot, right?)
This rant first had the title “Private equity” and began as a diatribe about the evil that is private equity. Naturally enough: my previous company was “taken private”, cost was “contained”, and it is now being prepped for “going public.” I mean, WTF: somebody “buys” a company that is quite healthy and that does make money, fires some 20% of the workforce, and wants to sell it again at a higher price? Because they have now reduced cost? Are they really thinking investors are that dumb? For one thing: this is a software company. Sure: it is probably possible to cut some head counts and make the bottom line look rosy for a while. Unfortunately, as this also means that new development is delayed or cancelled, what will happen in a couple of years when the prospective customers realize that the product is dead or dying?
But, sure, for now there is perhaps a window of opportunity where they may be able to find a buyer that does not do the required homework and instead jumps in and buys.
And just for completeness’ sake: I put the original “buy” in quotes just like so. You see: the current owners did not show up with a bag full of cash with which to buy us. They dumped the debt on the company, so going from being healthy and not having much debt, the company now has to make even more money to pay off a large debt. Does any of this make sense?
Thought not. And that was why I was inclined to write a diatribe against private equity.
But private equity is but a symptom of something else, something we could call “finance capitalism” or, even, neo-liberalism. But what is this, then?
Susan George writes in her essay A Short History of Neo-liberalism:
In 1945 or 1950, if you had seriously proposed any of the ideas and policies in today’s standard neo-liberal toolkit, you would have been laughed off the stage at or sent off to the insane asylum. At least in the Western countries, at that time, everyone was a Keynesian, a social democrat or a social-Christian democrat or some shade of Marxist. The idea that the market should be allowed to make major social and political decisions; the idea that the State should voluntarily reduce its role in the economy, or that corporations should be given total freedom, that trade unions should be curbed and citizens given much less rather than more social protection — such ideas were utterly foreign to the spirit of the time. Even if someone actually agreed with these ideas, he or she would have hesitated to take such a position in public and would have had a hard time finding an audience.
So the essence of neo-liberalism is that the “market” makes major social and political decisions. And about finance capitalism, this (from Contradictions of Finance Capitalism):
Over the last thirty years, capital has abstracted upwards, from production to finance; its sphere of operations has expanded outwards, to every nook and cranny of the globe; the speed of its movement has increased, to milliseconds; and its control has extended to include “everything.” We now live in the era of global finance capitalism. Productive corporations compete by generating rapid increases in the price of the corporation’s stock, immediately through gimmicks and trickery, but more basically through firing workers, moving production, and raiding pension funds. Corporations heavily involved in production—automobile or steel makers, for example—have become increasingly financial in orientation, diversifying into credit, insurance, real estate, etc.
And this article continues by closing the loop:
Since the Second World War, the capitalist world has seen two main political-economic policy regimes: Keynesian democracy, predominating between 1945 and 1973 and forming the last stage of corporate industrial capitalism; and neoliberal democracy, predominating between 1980 and the present, and constituting the formative stage of financial capitalism; the years 1973–80 represent a transitional period between regimes.
And this is my point, and my argument:
“Private equity” is only one aspect of “finance capitalism”, but it does show us something right from the start: “finance capitalism” is not necessarily rational, at least not from the point of view of the individual employee, nor from the point of view of “capitalist society” in any traditional sense. It dooes no longer strive to maximize output of goods, not does it strive to expand markets. Not necessarily, at least.
As such, finance capitalism becomes a parodoxical thing, and at odds even with parts of the traditional capitalist class. It uses the neo-liberal ideology as the smokescreen that it needs to hide behind.
Part Two
Continuing with the theme of finance capitalism and neo-liberalism, I shall start with this lengthy quote that says what I meant to say, but only better.
From Marx to Goldman Sachs: The Fictions of Fictitious Capital:
Despite Marx’s explanation of how parasitic finance capital was in its manifestation as “usury capital,” he believed that its role as economic organizer would pave the way for a socialist organization of the economic surplus. Industrial capital would subordinate finance capital to serve its needs. No observer of his day was so pessimistic as to expect finance capitalism to overpower and dismantle industrial capitalism, engulfing economies in parasitic credit such as the world is seeing today. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, Marx expected banking and high finance to become subordinate to these dynamics, with governments accommodating forward planning and long-term investment, not asset-stripping.
Marx defined “primitive accumulation” as the seizure of land and other communally held assets by raiders and the subsequent extraction of tribute or rent. Today’s financial analogue occurs when banks create credit freely and supply it to corporate raiders for leveraged buyouts or to buy the public domain being privatized. Just as the motto of real estate investors is “rent is for paying interest,” that of corporate raiders is “profit is for paying interest.” Takeover specialists and their investment bankers pore over balance sheets to find undervalued real estate and other assets, and to see how much cash flow is being invested in long-term research and development, depreciation and modernization that can be diverted to pay out as tax-deductible interest.
Whatever is paid out as income taxes and dividends likewise can be turned into tax-deductible interest payments. The plan is to capitalize the target’s cash flow (ebitda) into payments to the bankers and bondholders who advance the credit to buy out existing shareholders (or government agencies). For industrial firms such leveraged buyouts (LBOs) are called “taking a company private,” because its stock ownership is no longer publicly available.“Many Social Democratic and Labour parties have jumped on the bandwagon of finance capital, not recognizing the need to rescue industrial capitalism from dependence on neofeudal finance capital before the older conflict between labor and industrial capital over wage levels and working conditions can be resumed.
The article I already quoted in the first part of this rant sums this it up like this:
”Resolving finance capitalism’s dilemmas would require state redirection of income distribution, investment, and economic development. This would mean at least a new and stronger version of democratic socialism. Otherwise known by the S word.”
Or even Wikipedia:
Finance capitalism is a term defined as the subordination of processes of production to the accumulation of money profits in afinancial system. It is characterized by the pursuit of profit from the purchase and sale of, or investment in, currencies and financial products such as bonds, stocks, futures and other derivatives. It also includes the lending of money at interest. Finance capitalism is seen by Marxists as being exploitative by supplying income to non-laborers.
Susan George, furthermore:
They have built this highly efficient ideological cadre because they understand what the Italian Marxist thinker Antonio Gramsci was talking about when he developed the concept of cultural hegemony. If you can occupy peoples’ heads, their hearts and their hands will follow. I do not have time to give you details here, but believe me, the ideological and promotional work of the right has been absolutely brilliant. They have spent hundreds of millions of dollars, but the result has been worth every penny to them because they have made neo-liberalism seem as if it were the natural and normal condition of humankind. No matter how many disasters of all kinds the neo-liberal system has visibly created, no matter what financial crises it may engender, no matter how many losers and outcasts it may create, it is still made to seem inevitable, like an act of God, the only possible economic and social order available to us.
Let me stress how important it is to understand that this vast neo-liberal experiment we are all being forced to live under has been created by people with a purpose. Once you grasp this, once you understand that neo-liberalism is not a force like gravity but a totally artificial construct, you can also understand that what some people have created, other people can change. But they cannot change it without recognising the importance of ideas. I’m all for grassroots projects, but I also warn that these will collapse if the overall ideological climate is hostile to their goals.
Indeed. How many times have you heard that phrase from you friendly, social-democrat prime minister: “We have no choice”. Perfectly channeling Mrs. Thatcher.
Point is: we do have a choice. It may not the easy to see, but it is there. Why would the Potemkin-like edifice of neo-liberalism be needed if we did not?