Concentration and centralization of capital

Too Big to Fail haunts the current debate about financial reform in the United States. It’s the problem raised by, among others, Kansas City Federal Reserve President Thomas M. Hoenig and M.I.T.’s Simon Johnson. (Neoclassical economists, of course, see no such problem.)

In Marxian terms, it’s called the concentration and centralization of capital. Marx discussed it most famously in chapter 25 of volume 1 of Capital. His analysis focused on industrial capital but the same tendency holds with respect to financial capital.

With the increasing mass of wealth which functions as capital, accumulation increases the concentration of that wealth in the hands of individual capitalists, and thereby widens the basis of production on a large scale and of the specific methods of capitalist production. The growth of social capital is effected by the growth of many individual capitals. All other circumstances remaining the same, individual capitals, and with them the concentration of the means of production, increase in such proportion as they form aliquot parts of the total social capital. . .

This splitting-up of the total social capital into many individual capitals or the repulsion of its fractions one from another, is counteracted by their attraction. . .t is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. This process differs from the former in this, that it only pre-supposes a change in the distribution of capital already to hand, and functioning; its field of action is therefore not limited by the absolute growth of social wealth, by the absolute limits of accumulation. Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many. This is centralisation proper, as distinct from accumulation and concentration.

Just as the concentration and centralization of industrial capital were supported by the credit system, the concentration and centralization of financial capital were made possible by the creation of collateralized debt obligations, credit default swaps, and other  financial instruments.

According to my calculations, the share of all banking industry assets held by the top 3 banks—Bank of America, J. P. Morgan Chase, and Citigroup—was (at the end of 2009) 51.8 percent, and by the top 6 banks—including Wells Fargo, Morgan Stanley, and Goldman Sachs— 76 percent. Measured another way, the assets of the 3 largest banks totaled 42.3 percent of the nation’s gross domestic product, and of the 6 largest banks 62.1 percent of the nation’s product. Clearly, those leading banks have grown over time in absolute size, in proportion to the financial sector of the U.S. economy, and in relation to the economy as a whole.

The evidence is clear: the concentration and centralization of financial capital are a problem for capitalism. That’s the Too Big to Fail argument. They also represent the solution to the problem of capitalism, by socializing individual capitalist property and making it possible to move beyond capitalism, to create a noncapitalist social economy.