Life in the Age of Electronics

Speculative Capital

"Come on: in this there can be no dismay;
My ships come home a month before the day."

-- The Merchant of Venice

The rise of globalization over the past thirty years has coincided with a dramatic rise of money markets, derivatives, securitization, currency trading, and other forms of financial dealings. The various crises of the past five years -- the Asian currency crisis of 1997, the Russian default of 1998 and the subsequent collapse of Long-Term Capital Management ("the financial system itself seemed in peril"), the bursting of the stock market bubble in the spring of 2000, the collapse of the telecom sector and Enron in 2001 -- to name some of the more noted crises -- have pushed the rather arcane world of financial trading to the front page.

This trade in financial instruments with the goal of making money is called speculation. Speculation can also be described as the buying and selling of risk, which describes an important role of speculation in the economy.

Capital assumes many forms, depending on the stages of the various circuits of the capitalist economy in which it is used. Speculative capital describes the form of capital involved in speculation. Speculative capital is different from finance capital -- finance capital is indirectly connected with production through the loaning of capital for productive purposes. Speculation is twice-removed, as it involves the trading of loans, shares, contracts or other financial instruments. In many cases, the same companies deal in both speculation and finance, but the two activities are fundamentally different.

Speculation is popularly dismissed as a fiscal vice. It is piously called irresponsible by those who would seek to reform (and save) capitalism by purging it of its prodigal sons and daughters. The criticisms of speculation highlight the extreme dangers of an economy perched on speculation. However, much of the writing about speculation also hides the critical and necessary role that speculation plays in global capitalism. This obscures political and social dimensions of the speculative economy and makes it impossible to understand capitalism today, let alone consider the alternatives.

Speculative capital deserves a closer look. Below are nine assertions about speculative capital, as a starting point for discussion. These are the starting points for a paper-in-progress, so any comments are most welcome.

I. The emergence of "speculation", as a definite area of economic activity, coincides with the advent of capitalism. Speculation has always been an aspect of capitalism.

II. Speculation is not (necessarily), as is often suggested, wild-eyed or irresponsible behavior, but rather responsible and necessary care-taking by capitalists (or farmers or homeowners for that matter) to lay-off risk in an uncertain world.

III. Speculation and credit are related, and necessary to carry out economic activity that spans time. (Distance is simply a function of time and technology.) The more time that economic activity spans, or rather, the more events that can happen between the beginning and end of the economic event, the more uncertainty and risk that economic activity entails, and thus the more essential is speculation. Not coincidentally, the fields of probability, statistics and risk analysis emerge with the growth of capitalist world trade in the 16th and 17th centuries.

IV. Modern speculation is a necessary aspect of a global economy composed of national markets and currency systems. Money markets, major sites of speculation, were developed by the Chicago commodity exchanges (birthplace of agricultural futures trading, another form of speculation) within months of the abandonment of the gold standard in the early 1970s. The money markets enabled multinational corporations (MNCs) to manage (through hedging) the risk of currency fluctuations in their various countries of operation.

V. Modern speculation is only possible with electronics -- not just for facilitating circulation of money and market information, but also for calculating and pricing new speculative instruments like derivatives. Speculation is by its nature volatile, and modern speculation -- speculation in the age of electronics -- is especially volatile. Paradoxically, because information can be transmitted so quickly, the Internet age leads not to "more perfect markets", but to magnified herd behavior. As a result speculative markets can swing wildly.

VI. Globalization supersedes the stage of capitalism known as "imperialism." Just as finance capitalists dominated the era of imperialism, speculative capitalists dominate the era globalization. Speculative capitalists, like any section of the capitalist class, seeks to adjust the economic structures to its needs.

VII. We can identify different sectors of the speculative capitalists based on their relation to the speculative process. Treasury departments of MNCs attempt to manage risk through currency trading and hedging; they are interested in minimizing volatility; or at least using speculation to bring stability to their operations. The financial houses, on the other hand, make money by trading, and profit from volatility in the markets. It may be possible to map out political agendas with respect, e.g., to the IMF, financial policy, etc. based on these differing interests.

VIII. Speculation markets serve as a mechanism for the re-distribution of surplus value. For various reasons, the application of electronics to production results in a counter-tendency of increased application of labor to production (see So to whatever extent money is to be made via the trading of financial instruments, it is via the transfer of either _new_ surplus value (originating from labor-based production), or of existing stores of surplus value, via the process of the formation of a general rate of profit. Wealth is transferred via this mechanism from productive capital to speculative capital.

IX. The rise of speculation as a dominant aspect of economic activity is mirrored throughout society in the rise of gambling and other forms of activity that indicate a disconnection between work and money. Crushing burdens of debt, intensified work, and the total commodification of life can be traced back to, or relate in profound ways to, speculation. The rise of speculation represents the breakdown of one system centered around the exchange of work for money, and the emergence of an as-yet un-gelled new society. If may not be correct to even describe globalization now, at the beginning of the 21st century, as a "stage". Rather, we may be experiencing some transitional period, a period of destruction and transformation, a leap, between two systems. Speculative capitalism shows us one possible (albeit dismal) social form emerging on top of electronics. Certainly other forms are imaginable, and possible.

Jim Davis

See my home page.
For current items, see my blog Networks and dialectics