New Perspectives on Neoliberal Finance


This article is excerpted from Rosa Remix, a collection of essays on the work of Rosa Luxemburg and its relevance to contemporary political debates, forthcoming from the Rosa Luxemburg Stiftung. Tomorrow night RLS is hosting a launch event for the book at their New York offices. 

In The Accumulation of Capital, Luxemburg identifies a general dynamic that lies at the heart of the process of capital accumulation, namely the chronic tendency to produce crises of overaccumulation. Capitalism needs to continually open up new territories for investment to solve this problem. What is the role played by international finance in this process? Though finance is somewhat incidental to the main argument of the book, or at least an add-on, Luxemburg’s analysis of the international loan system prior to World War I acknowledges international finance as a fundamental agent in the dynamics of global capitalism. 

Luxemburg’s argument is that loaned funds are eventually routed back to purchase productive capital from the country where capital originated, thereby realizing surplus value in that country and adding to capital accumulation. In recent years, we have seen capital in constant need of new international investment opportunities, an expansion of the financial sector relative to the size of the productive economy, and the socialization of financial risk in the aftermath of the 2007/2008 financial crisis. Though such developments are broadly consistent with Luxemburg’s view of finance, the changing nature of capital markets since she wrote The Accumulation of Capital begs for a reexamination of the original mechanisms she described.

The goal of this short essay is to attempt to do this by outlining Luxemburg’s original analysis of international loans and illustrating how the framework may still be relevant to understanding modern financial markets through the example of the sovereign debt crisis in Greece. Luxemburg can help us conceptualize the growth of finance both as an expression of the need to overcome capitalism as a purely closed system and as an expression of imperialism. 

Luxemburg’s Analysis of International Finance

What Luxemburg describes in Chapter 30 of The Accumulation of Capital is the following. Profits (surplus value) are extracted from the workforce in a rich country with capital-intensive industries and redeployed overseas through loans, rather than into the next round of production at home. The loans are made to poorer countries, which use the funds to import capital goods supplied by the country where capital originated, thereby realizing surplus value and adding to capital accumulation in that country. One example given is that of the rise in British commodity exports to Latin America in 1824–1825, financed through British loans. Loans eventually have to be repaid out of assets originating from pre-existing non-capitalist production. Hence international loans serve various functions: 1) transforming the wealth of non-capitalist groups into productive capital; 2) facilitating international transfer of capital from old capitalist countries to young ones (today we might say from developed to developing, or from rich to poor); and 3) enabling the realization of surplus value at home when the loans are paid off, with repayment flows typically generated from assets that lie outside of capitalistic relations. 

What are the specific mechanisms of wealth extraction designed to ensure that the loans are paid off in this way? To answer this question, Luxemburg discusses the cases of Egypt and Turkey. In Egypt, sugar cane production was financed through foreign loans (the venture eventually collapsed as Egypt faced a crisis of over-indebtedness). The source of repayment was “the Egyptian fellah-peasant economy,” namely land (some of which was pledged as collateral for public debt), labor power and forced labor, as well as a tax on peasant holdings. In Turkey concessions were obtained by a Turkish company funded by European capital to develop railroads. The loans were backed by tithes to be collected by tax-farmers or stored in kind (peasant grain) by the Turkish government. Through these examples, Luxemburg shows that there would appear to be at least two mechanisms by which national income from non-capitalist groups can be used to service the debt and realize the surplus value of the country where capital originated: the pledging of collateral in the case of loans to government and the socialization of debt through the tax system. 

Though capital investments in foreign countries and the demand of these countries for capital imports could be viewed as something positive since, at first glance, they provide the means to further development, in Luxemburg’s analysis the whole scheme conceals something more sinister, namely the extraction of value by the capitalist system, as well as an embedded imperialist power dynamic. The loans are “the surest ties by which the old capitalist states maintain their influence, exercise financial control and exert pressure on the customs, foreign and commercial policy of the young capitalist states.” Luxemburg teaches us that one can think of finance as a tool of control which can ultimately be used to force the states being financed to adopt capitalistic institutional arrangements that favor the interests of capital. 

The Case of Greece

I have chosen to use Luxemburg’s insights as a prism of analysis to highlight some interesting facts regarding the ongoing Greek sovereign debt crisis. One major development since Luxemburg wrote The Accumulation of Capital is the growing complexity of financial markets. There are now potentially many layers of intermediation between the domestic extraction of profit, on the one hand, and its redeployment in international financial markets. For this reason, it may not be so easy to trace the origin of international loans in the same way as Luxemburg did. However, it is interesting to note that though the ownership of Greek debt has changed a lot since the different bailouts, for the most part it has always been foreign-owned. Currently, almost two-thirds of Greece’s debt, about 200 billion euros, is owed to the eurozone bailout fund or other eurozone countries. A key difference between Greece and, for instance, Japan (throughout the crisis debt-to-GDP ratios remained lower than those of Japan) is that in Greece the debt is primarily held by foreign capital, while in Japan it is not. 

What is the Greek crisis really about? One aspect of Luxemburg’s analysis that interests me in this regard is the link between finance and international trade. An idea that has been put forward by a number of economists (notably Paul Krugman, in his New York Times blog) is that at the root of the Greek crisis lies its current account deficit (rather than excessive welfare state spending or budget deficits). Broadly consistent with Luxemburg’s analysis, other than oil-producing countries and China, the Greek current account deficit is with the same eurozone countries that hold Greek debt (Germany, France, and Italy). Might this balance of trade solve a realization problem for those eurozone countries? The answer to this question is not so straightforward, but in the case of Germany the idea that German trade surpluses are being financed by Greek deficits could be advanced.

Greece was not allowed to declare bankruptcy. The prime motivation of the bailout packages was to avoid a Greek default and protect the rest of the eurozone, as the funds were designed to repay existing debt rather than rebuild the Greek economy. The bailout funds never made their way into the economy. This is consistent with Luxemburg’s premise that capital accumulation would come to a halt with a crisis of over-indebtedness, so that default must be avoided at all cost. This is consistent with the idea that debt is also used as a form of imperialism and extraction, to acquire and privatize assets as a basis for capital accumulation. Bailouts came with conditions. Creditors imposed harsh austerity terms, requiring deep budget cuts, lower social spending, and steep tax increases.

Could we analyze these demands as some form of extraction, tapping into non-capitalist sectors? Can we view, as Luxemburg invites us, finance as a mechanism of extraction of pre-existing non-capitalist wealth? The existence of a clearly defined non-capitalist sector (such as the Egyptian fellah-peasant economy) is not as clear-cut as it was at the time of Luxemburg’s writings. More generally, following the worldwide expansion of the capitalistic mode of production, the non-capitalist sector has arguably shrunk. Yet we may still ask the same question that she did in the case of Egypt and Turkey: Who ultimately bears the financial burden of loan reimbursement? In Greece, one answer lies in the socialization of debt through the tax system. Under pressure to balance the budget in a context of massive tax evasion, prior Greek governments have added new taxes on the bulk of citizens who were tax-compliant, rather than on the actual corporations or wealthy individuals who were able to hide earnings. Further, as last resort, markets would have no hesitation to demand that Greece enter into a broad program of privatization and sell public property, even the Greek islands, as suggested in a mainstream German newspaper. We can see the same logic at work as that described by Luxemburg. 

Did the sophisticated financial instruments engineered to structure unsustainable debt levels ultimately benefit Greek society at large? In the case of Luxemburg’s Egyptian and Turkish examples, loans were used to finance infrastructure projects (interestingly, in Greece some loan proceeds were used to finance the major public infrastructure spending for the 2004 Olympic games). Did the lending facilities ultimately serve the interests of creditors (capital) or the interests of the Greek people? This is the broader question that Luxemburg invites us to reflect on, and it is still very much relevant 100 years after the publication of The Accumulation of Capital.

Come by the RLS office on September 8 for the release of ROSA REMIX, a collection of works about Rosa Luxemburg’s life and legacy. Free copies will be available for all in attendance!