No, We Are Not Going to Beat Capitalism on the Stock Market

By Nathaniel Flakin

Republished from Left Voice.

Given the news over the past week, you would be forgiven for thinking that Occupy Wall Street had come back with a vengeance. Back in 2011, activists occupied a small park in front of a Lower Manhattan bank — now they seem to be “occupying the stock market” itself. Ten years ago, the bankers and brokers could just get their cops to arrest the pesky occupiers — but now, with the loss of billions of dollars at stake, armed thugs in blue are not going to do the trick.

The stock surge for GameStop has rattled financial markets. A motley horde of Internet users have been giving hedge fund managers a run for their money. Those who bet that shares of the retail chain GameStop would lose value (short sellers) have been thrashed as the stock price surged higher and higher, thanks to the targeted actions of thousands of small investors.

The bankers, who for more than a generation have been praising deregulation and the “invisible hand of the market,” are now calling on the government to protect them from losses. So have “little guys” taken over the stock market? Will the revolution be organized on Reddit?

Of course not. This was never going to take down the hedge fund system. At best, its greatest “hope” was to do some short-term mischief and maybe kill one small fund. Melvin Capital Investment is losing billions and might collapse — but Reuters has reported that Blackrock, the biggest asset management in the world, stands to earn $2.4 billion from the rising stock price. As Derek Thompson has explained in The Atlantic, Melvin Capital Investment was betting on GameStop’s stock to fall — and that was always a risky bet:

[GameStop’s] stock had already fallen from $56 a share in 2013 to about $5 in 2019. GameStop’s short sellers were essentially betting that a company publicly valued as “horrendous” should really be valued at a level commensurate with the notion of “truly horrendous.” They risked billions of dollars on the financial equivalent of a qualifying adverb. It’s really risky to aggressively short a company whose stock, having fallen 95 percent, is floating around $5; there just aren’t a lot of numbers under five.

A Rigged System

The discussion around GameStop has shown that the system is hopelessly rigged: even when small investors manage to exploit the rules to their advantage, those rules are simply changed to prop up the big capitalists.

But that’s only the beginning of how it is rigged. Virtually all stocks are controlled by a tiny minority of capitalists. How are all the working people in the world, even if they invested all their savings into the stock market, supposed to compete with the gargantuan sums owned by the likes of Elon Musk, Jeff Bezos, and their wealthy corporate cronies?

The rumblings have led Democratic Party “progressives” such as Elizabeth Warren to call for new regulations. She wants action to “ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders.” Those “highly leveraged” traders,” by the way, are the hedge funds. Warren is worried about someone inflicting damage on them. 

How Capitalism Works

The entire episode is making lots of people wonder: Is this any way to organize an economic system? After all, as the back-and-forth trading has unfolded through these rather absurd machinations, who has been thinking about the effect on the livelihoods of tens of thousands of GameStop employees?

But this casino is how all decisions are made in the capitalist system. Where is housing built, and who gets to live in it? Which medical breakthroughs get funding? Which wars are waged? The same rules deciding the future of GameStop decide all these questions as well.

The stock market and its fictitious capital which condenses all the absurdities of the capitalist system into one small space. So much of the market is about “fictitious capital” — money lacking any material basis in actual commodities or productive activity. As the Marxist economist Rudolf Hilferding explained:

On the stock exchange, capitalist property appears in its pure form, as a title to the yield, and the relation of exploitation, the appropriation of surplus labour, upon which it rests, becomes conceptually lost. Property ceases to express any specific relation of production and becomes a claim to the yield, apparently unconnected with any particular activity. Property is divorced from any connection with production, with use value. The value of any property seems to be determined by its yield, a purely quantitative relationship. Number is everything; the thing itself is nothing! The number alone is real, and since what is real is not a number, the relationship is more mystical than the doctrine of the Pythagoreans.

A Way Forward

Within this absurd system, thousands of working-class people, investing their stimulus checks, might be able to steal a little something back from Wall Street — with the help of an app cynically named Robinhood. 

Yes, the ruling class is pissed that normal people are disrupting their casino. But the market remains their casino. The experience of this kind of “activism” will lead people to draw the wrong conclusions. We’re already seeing calls for more “democratic” and “fair” rules for the stock market, rather than for toppling the stock market itself.

And what happens if small investors are successful? Then some of them might become big investors. So, this kind of activism may create some new capitalists — but it’s no way to beat the capitalist class. In a fight over stocks, the rulers will always have an advantage.

But you’re in luck: Marxism is a 150-year-old science of how to eliminate the bourgeoisie and its exploitation and oppression. If we pool our money, we shouldn’t invest it in stocks; — we should use it to build up organizations that will fight for our interests —, not by trading stocks, but by organizing our strength in terms of material force.

A Problematic Ally

If you’re not convinced, consider one troubling figure who has been cheering on the small investors against the short sellers: pandemic profiteer and Internet troll Elon Musk. He understands the giant casino that passes for a global economy. After all, he has leveraged a small, almost completely unprofitable car company into a personal fortune of $180 billion. Musk is obviously not trying to bring down the system that is rewarding him with such vast wealth, nor does he have some personal vendetta against short sellers. Instead, Musk understands that this is capitalism at work.

Musk might have several hundreds of billions of dollars, but he’s a small part of the global capitalist system. We don’t need to buy him out, or beat his ilk at the stock market game. We can use our strength to take power and expropriate them. A workers’ government can put all those riches at the service of all humanity. Now that’s a project worth “investing” in.

What's Good for Tech Stocks is Bad for the Economy

By Contention News

Tech stocks deepened their recent skid this week, and the fear among market watchers right now is the bubble may have already burst. Investments that could do no wrong just last month now look somewhat suspicious.

What these observers don’t know is that things are actually much worse than they think. There is a deep and important connection between these high-flying tech investments and the crappy economy their shareholders hope to escape.

Drawing this out requires a big picture outlook, and connecting some dots in ways that Wall Street can’t.  

How society works

Let’s start as big as we can: all human societies have to constantly reproduce themselves to survive. Our society reproduces itself through a system of market exchanges. Each completed purchase validates the good or service exchanged as necessary for the reproduction of our society.

Investors use their capital to command some portion of society’s existing resources to produce something new they think society also demands. If they’re right, then the product will sell and they’ll get a return on their investment. If the new product isn’t socially necessary — i.e. valuable — it won’t sell, and they lose their investment.

Where investors gain value, and where they don’t

These investors don’t gain any additional value from the inputs they buy for their products. Buying these inputs just validates their necessity. To create new value the investors need to combine the inputs together to create new, value-added products, and this requires human input — labor.

Labor power is an exceptional input because the workers selling it can’t realize its value without the machinery, facilities, and other inputs owned by private businesses. This means those businesses get to buy labor power at a discount, and investors pocket the difference. 

This has an important implication: each enterprise is some combination of produced inputs and labor power. If the enterprise sinks a larger share of its investment dollars into inputs rather than labor, then over time they should return less investment. This is why labor-intensive “emerging markets” can have such extraordinary rates of growth as compared to capital-intensive advanced economies.

Why investors love “operating leverage”

This is the level where this impact emerges — in the aggregate, over time. At the level where equity markets operate — individual firms and sectors over short terms — a different perspective emerges.

There, “valuation” has everything to do with expected future cash flows. Operating income — the money left over after paying out all the costs of production and overhead costs of the business — is the name of the game. The more operating income a company expects, the more valuable its stock should be.

Every company delivers this cash flow differently. Companies with low variable costs (the labor and input costs of each unit produced) and high fixed costs (the administrative expenses necessary to keep the lights on) are said to have a high degree of “operating leverage.” These businesses are efficient at turning their revenue into operating income.

Why tech stocks look so hot

Tech companies tend to have high operating leverage. Each additional unit sold adds very little to their variable costs — Facebook can sell thousands of ads before they have to add any hardware or staff, for example — which means that for every percentage point of revenue growth, they get more than a point of cash flow growth.

So when the economy is growing — the norm for capitalist economies — rising sales mean growing revenue, which means even faster cash flow growth and equity value. Investment gets disproportionately drawn into high fixed-cost, low variable-cost firms.

But produced inputs don’t add value, remember, and yet these high fixed costs — attractive to investors — include only those inputs. Labor power does add value, but that’s covered in the variable costs they seek to minimize.

Bottom line: investments at the firm level favor a capital allocation that produces less value throughout the economy overall.

Where the zombies come from

And it gets worse: when sales drop, these companies’ high overhead costs put them at increased risk of default. Since they are also the ones with disproportionate levels of investment, leaders seek to bail them out, mainly in the form of interest rate suppression by central banks. The companies can borrow and issue bonds more easily, but this debt only adds to their fixed costs.

Soon you have an economy full of companies that make just enough to cover their debt service — so-called “zombie” firms.

So now we can connect the dots: high levels of operating leverage made tech stocks sexy investments for years, but this contributed to a capital-intensive economy with lower aggregate returns on investment. When downturns came, central bank rescues only created more long-term deadweight, hence the slow, sleepy growth of the last “recovery.”

Now that the recent speculative boom has paused, we’re left with a terrifying question: what do we do with an economy founded on a basis that can’t perform for the future, especially in light of all the debt — i.e. future earnings — that we’ve accumulated to build it?

One thing is certain: the leaders that can’t deliver a relief package everybody wants definitely can’t figure this one out either. Watch out for your own bottom line while they try nonetheless. 

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