Capitalism's New Economy: The Booming Financial Sector

Part three of this series was published in 2005, two years or so before the great financial crash when the economic pundits were lauding the move away from manufacture to 'business and financial services'.

Submitted by Internationali… on July 31, 2019

In 2008 the banking and wider financial bodies were saved and the appearance of capitalist 'normality' maintained only by the concerted injection of gargantuan amounts of fictitious capital by central banks (Quantitative Easing) which is still being used today to maintain the appearance of economic normality. But there is nothing normal about this global capitalism, struggling to generate new value in the throes of its deepest ever economic crisis. Yet capital is still turning to services, especially financial services where financial capital appears to be able to generate more money, ad infinitum, without the need for any new value to be created. Only this month (19.7.19) the Financial Times noted that "The services sector is the real powerhouse of the UK economy, accounting for almost 80 per cent of GDP. It is one of the few parts of the economy to have surpassed its pre-recession peak." For the UK today, 'the City' now claims to represent 10% of UK's economic output and employ 2.3m people – more than double the figures claimed by Gordon Brown in this article here.

Part Three: The Booming Financial Sector

"The strongest performing sector in the UK economy is business and financial services. Business and financial services continue to form the largest single sector of the UK economy, and in 2003 accounted for 31.7 per cent of the total, which was more than double the size of the manufacturing sector. Insurance companies, banks and other financial institutions achieved net exports of £19bn in 2004, almost three times higher than their contribution to the balance of payments a decade ago."1


The previous part of this article focussed on the predominant role of 'services' in the UK economy. We examined the bourgeoisie's claim that services added value to the economy by looking at the various official categories of service work in terms of Marx's definition of what constitutes productive and unproductive labour. Whilst we did find that a substantial part of the workforce who are officially classified as service workers do indeed produce surplus value it nevertheless appears that up to three-fifths of employed workers in the UK are not productive in value terms. By far the two largest unproductive sectors of the economy are the public sector – where a workforce of roughly 7.4 million (as classified by the Office of National Statistics under 'education, health and public administration') is paid out of taxation and whose work therefore does not involve the creation of new value – and the 6 million or so who are employed in the amorphous category of 'finance and business services' whose work equally produces no new value.

For the capitalists who are not interested in the labor theory of value and do not recognise human labour power as the source of wealth, this flies in the face of their perception of reality, a perception which essentially equates economic growth with financial profit. So, while on the one hand Gordon Brown has no trouble recognising the public sector as a drain on wealth (and is constantly imposing spending cuts and trying to curb the growth of the workforce), when it comes to the financial sector he is amongst the first to boast of its most celebrated component, the City of London, which he claimed in 2002 "generates fifty billions of wealth each year, provides work for over one million people and accounts for over five percent of UK GDP".2 Quite simply, the City and the whole panoply of banking, money-dealing, speculating, hedging, insuring, lending and so so on that come under the heading of 'financial services' generate massive sums of revenue or financial profits which capital describes as 'added value' and which in fact do help the UK maintain its position as the world's fourth largest economy. So how is it that the financial sector which, according to the labour theory of value, produces no new value, should head the capitalists' wealth creation list?

Marx on Money-Dealing Capital

Marx points out that at its most elementary level the banker, or money-dealing capitalist performs a useful function for capital in that it provides the technical means for the circulation of capital and thereby the realisation of surplus value and the continued accumulation of capital. The banks act as middlemen in the dealings between the industrial (value-producing) capitalists and the merchants (wholesalers, retailers, etc.) which are a necessary part of the circulation process. Basically the banks pay out and receive money on behalf of the industrial and commercial capitalists (using money capital deposited by them) and thereby shorten the process of circulation. Though this is a useful and necessary function the labour involved is “a cost of circulation, i.e. not labour creating value.”3 The money-dealers pay themselves a profit out of the money capital of the industrialists and commercial capitalists in return for carrying out an increasing number of specialised functions extending way beyond the collecting, paying and book-keeping derived from the simple function of “disbursing and receiving money”. “It is evident”, therefore,

"that the mass of money-capital with which the money-dealers operate is the money-capital of merchants and industrial capitalists in the process of circulation, and that the money-dealers’ operations are actually operations of merchants and industrial capitalists, in which they act as middlemen. It is equally evident that the money-dealers’ profit is nothing but a deduction from the surplus-value, since they operate with already realised values (even when realised in the form of creditors’ claims)."4

As with merchant’s capital, which does not produce new value and whose profits and wages come from the surplus value created by the productive capitals, so too the money dealers’ role in the process of realising surplus value subtracts from the overall pool of surplus value. And, just as merchant’s capital “participates in levelling surplus value to average profit, although it does not take part in its production. Thus, the general rate of profit contains a deduction from surplus value due to merchant’s capital, hence a deduction from the profit of industrial capital”5 , so we might suppose that the vast profits generated by today’s burgeoning financial sector equally represent a lowering of the general rate of profit.

To the extent that today’s financial transactions remain a necessary part in the circulation of commodities and for the realisation of their value then the costs incurred still represent a deduction from the surplus value and a lowering of the general rate of profit. (Which, by the way, in today’s world has to be seen as a global averaging of profit rates.) However, the most significant aspect of the financial sector nowadays is precisely its increasing divorce from the function of realisation of commodity values. As our comrades in the International Bureau have been arguing for some time,

"The classical form of valorisation of capital, M-C-M1 is tending to be superseded by M-M1, or rather, … by the production of finance capital by means of finance capital without the mediation of the production process or the trading of goods."6

Marx recognised that the development and extension of the credit system encouraged the growth of fictitious capital, i.e. nominal paper capital unconnected to the realisation of commodity values and separate from the accumulation process.

"With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on debt, appears in different forms in different hands. The greater portion of this ‘money-capital’ is purely fictitious. All the deposits, with the exception of the reserve fund, are merely claims on the banker, which, however, never exist as deposits."7

Moreover, once money takes the shape of a loan it no longer serves as a medium of circulation but represents a certain amount of capital value held by the lender.

"And in this form he transfers it when lending it to another. If A had lent the money to B, and B to C, without the mediation of purchases, the same money would not represent three capitals, but only one — a single capital-value."8

Again, Marx saw that the separation between loan capital and real capital means that “the mass of loanable money-capital thus grows quite independently of the actual accumulation” but he tempered this with the aside that “we are not speaking here at all about loans for a number of years but only of short-term ones on bills of exchange and deposits.” Over a century and a half later and towards the end of capitalism’s third global cycle of accumulation capital has dreamed up more ways of extending credit and creating ‘financial instruments’ than Marx could have imagined. The voluminous amount of fictitious capital divorced from real capital values continues to grow and since this has so far not led to a mighty collapse the capitalists themselves like to believe that the more an economy rests on profits from purely financial transactions the healthier it is.

The UK: A Lead Financial Player

Thanks to the historical legacy of the Square Mile's financial institutions, UK capital had a head start over its European rivals when international financial markets opened up to global competition in the 1980's. It is an advantage UK financial capital has used to shore a substantial part of the revenue generated from global financial transactions. Now, for example, the City claims

• $753bn foreign exchange turnover each day in London (31% global share)
• 58% of the global foreign equity market, with 450 foreign companies listed on the London Stock Exchange
• 70% of all Eurobonds are traded in, and issued through London
• $2000bn per annum traded on metals in London
• The world's leading market for international insurance. UK worldwide premium income reached £153bn in 2003
• 790m contracts a year traded on the London international futures exchange: Euronext.liffe
• £2713bn total assets under management in the UK in 2003
• £1046m in overseas earnings generated by the maritime industry in London
• 20% of international bank lending arranged in the UK (the largest single market)
• £1406bn pension fund assets under management (third largest in the world)
• $643bn daily turnover in 'over the counter' derivatives (42/6% of global share)
• 287 foreign banks in London9

Whilst some of this trading bears some resemblance to the commodity—money—commodity turnover where money functions as a medium of circulation, the vast bulk of the City's transactions are firmly in the realm of fictitious capital — transfers of paper, often some form of debt obligation, each one of which accrues a financial rake-off for the financial 'service provider'. Little of the trade involves the domestic economy — where it does it is likely to involve the sell-off or take-over of a company (merger or acquisition) by capital from abroad — and the largest financial firms tend to be US or European-based.

As far as the domestic economy is concerned, economic growth over recent years has been fuelled by the massive build-up of private debt, first on the basis of credit cards and then on the back of mortgage-backed lending which fuelled house price inflation so that now the UK's private mortgage debt is equivalent to 72% of GDP.10

Whether the borrower is a private individual or corporate enterprise, the bank, building society, security house, or whoever is doing the lending, will almost immediately pass the debt on to somewhere else.

"One example of recent secondary trading was Jarvis, the heavily indebted support services company, in April where almost all the UK banks that owned about £250m of debt sold their holdings in the secondary market. US Strategic Value Partners picked up 20 per cent of Jarvis debt—a large part of which for 70p in the pound."11

Financial instruments have come a long way since Marx noted that the rural depositor with his country banker "has not the slightest suspicion that this banker places his deposit at the disposal of some London bill-broker, over whose operations neither of them have the slightest control."12

For all the larger numbers, the greater sophistication and the internationalisation of the players this game of financial pass the parcel remains essentially the same. Even capitalism's own financial pundits do not believe that extending it ad infinitum will be without serious economic consequences. And even if this game of extending fictitious capital is being played more or less independently of the accumulation process there is ultimately a link since the financial profit of the money capitalists is, at the end of the day, based on the pool of surplus value expropriated from workers in the productive sphere. Meanwhile, the fact that more and more capital sees a higher rate of return in the financial sphere indicates the dearth of 'opportunities' for capital in value-producing 'investment'. In other words, the classical symptoms of the end of an accumulation cycle.

This, of course, takes us beyond the boundaries of the UK economy and to the question of the capitalist crisis which we deal with elsewhere.13


  • 1Economic and Social Research Council ( Fact sheet on the UK economy, February 2005; Growth in Gross Value Added (GVA), Office of National Statistics, August 2005 (; Financial Times report, 'City of London drives surge in financial exports, 19th July 2005.
  • 2Brown appears to have exaggerated in this Mansion House speech, 26 June 2002. the square mile itself claims its 'financial services' amount to 3% of GDP ( – but we are not in a position to check!
  • 3Capital Vol. 3 p.316 (Lawrence and Wishart edition).
  • 4op.cit. p.322
  • 5op.cit. p.286
  • 6‘Capitals Against Capitalism’, p.18, Internationalist Communist 14, available from the CWO address.
  • 7Capital Vol. 3 p.470
  • 8op.cit. p.472
  • 9From the City of London website quoted above, and the DTI's on Financial Services.
  • 10See 'A built-in failure: capitalism and the housing question', Revolutionary Perspectives 33.
  • 11Financial Times 18.7.2005
  • 12Capital Vol. 3 p.498
  • 13See, for example, 'Capitals Against Capitalism'; 'Globalisation and Imperialism'; 'Control Over the Oil Marker in an Epoch Where Finance Dominates'; 'US Boom: Triumph of the Paper Economy' in Internationalist Communist 14,16, 18 and 19 respectively.