Sunday, October 10, 2010

Capital Parts I & II: My Part in Perpetuating Finance and Industrial Capital

For a while, I didn't get finance capital's place in the broader system of capital. I understood that it was a means of accumulating wealth and enabling business ventures and transactions, but it always seemed abstract and disconnected from the exploitation of laborers that operates on a daily basis. When an investment gets wrapped up in some kind of security and then resold on a secondary market with lots of other securities (as in the credit default swap pyramid scheme that helped bring down the global financial system in 2008), it gets difficult to follow the connection to labor. But this is exactly what Marx meant when he discussed the concept of fetishism. Real relations between people are obscured by seemingly abstract numbers and market fluctuations. It all seems fake, but we treat it as real. The finance capitalist says that it's all just numbers on a page, but continues to treat those numbers as if they were the most important thing in the world.

This made it easier for me to play my role in the financial system. After all, I wasn't out their crushing unions or helping to deny health care claims. I was just shuffling paperwork between different capitalists, helping some protect their assets from others with cutting edge trust instruments. But my paper pushing amounted to another form of fetishism. I knew very well that these instruments were imaginary abstractions, but I treated them like they were real and their legal status caused them to have a real effect on people.

Estate planning is fairly boring, but it plays an important role in modern capitalism. Over the years, liberal governments have created various tools to minimize the accumulation of multi-generational wealth. Even free market advocates saw this as beneficial to stop the concentration of wealth in a few hands―along with all of the social tension that that might cause―and retain some notion of desert to justify the system as a whole. It gets difficult to believe Horatio Alger parables about capitalism benefiting those who work hard when social mobility is low and your ability to become one of the haves or have-nots depends so much on your family's socioeconomic background.

The rich found ways to get around this, often transferring wealth to remote generations, avoiding imposition of the estate tax for quite some time. This was addressed with the Generation Skipping Transfer (GST) tax, that imposed a tax on transfers to so-called "skip" persons in remote generations. Now, however, there is a way of getting around both estate and gift taxes: the trust.

Modern trusts have their roots in English history. While they have existed in various forms for a very long time, they became important during the reign of Henry VIII. The basic idea of a trust is that the owner of property (the settlor) transfers property to a recipient (the trustee) for the benefit of another person (the beneficiary). The trustee holds legal title and the beneficiary has beneficial title. This can provide a number of benefits, allowing for privacy (unlike the probate process), efficiency, the avoidance of transfer taxes, control over assets, and protection from creditors (this is a lot of the work I had been doing).

The biggest obstacle to using trusts to maintain family wealth was the Rule Against Perpetuities (RAP). Anyone who has gone through law school probably shudders at the thought of RAP because of how difficult it is to learn and apply on law school exams.1 The basic rule goes something like this: Any property interest is invalid unless it must vest within 21 years of some life in being at the time of its creation.2 I'll leave aside the strange scenarios that you have to use to determine whether a trust is valid under this rule (imagine situations in which a property interest is created and then everyone who was alive on the planet dies). I'm probably not explaining it very well, which is why I got a terrible grade in Property 2; but the basic idea is that, at some point, a property interest has to vest in someone and the trust has to terminate. This prevented people from creating perpetual trusts that would avoid estate taxes forever.

However, states have been gradually doing away with RAP. Some have extended it to 1,000 years and others have abolished it outright. While this is nice for attorneys who can't grasp the rule's strange application, it's even better for someone who wants to concentrate family wealth. It gets even better when you realize that certain "grandfathered" trusts don't have to deal with the GST because they existed before Congress created the tax. The tricky thing is that a lot of those trusts were created while RAP existed, so they are set to terminate some time this century. That has led estate planners to craft some tricks to transfer the old trust assets into new perpetual trusts while maintaining their GST-exempt status. There is a small time frame in which to do this because GST and estate taxes have been abolished during 2010 because of the expiration of the Bush tax cuts. Right now, lots of estate planners and rich individuals are planning ways to create something called a "dynasty trust" before the year is out, shielding their wealth from public scrutiny and transfer taxes for a very, very long time. If you're in South Dakota, that's forever and if you're in Utah, it's a thousand years.

Wealth disparity is a real problem in this country. Slate had an interesting piece about it recently that looked at a number of reasons for it and why it's a bad thing from a liberal perspective called the Great Divergence. Noah chalks the gap up to a number of factors:

  • Race and gender are responsible for none of it, and single parenthood is responsible for virtually none of it.
  • Immigration is responsible for 5 percent.
  • The imagined uniqueness of computers as a transformative technology is responsible for none of it.
  • Tax policy is responsible for 5 percent.
  • The decline of labor is responsible for 20 percent.
  • Trade is responsible for 10 percent.
  • Wall Street and corporate boards' pampering of the Stinking Rich is responsible for 30 percent.
  • Various failures in our education system are responsible for 30 percent.3

While tax policy is not given a large share of the blame, it gets some. The role played by Wall Street also implicates trust law, since trusts have an investment function. A large part of the motivation for dynastic trusts isn't simply that they shield wealth, but that they also allow it to grow. This is largely done by investing trust assets.

But how is any of this possible? Where does dynastic trust wealth come from? It surely does not emerge ex nihilo from the aether. It turns out that my middle of the road estate planning was more directly tied to exploitation through the concept of finance capital than I had understood.

In Chapter Four of Capital, after several chapters explaining the development of the commodity form and the money commodity in often-excruciating detail, Marx explains a key historical shift that makes capital possible. Traditionally, someone produced a commodity, traded it for money, and then exchanged that money for a commodity that he or she wanted. I make a plate of muffins. They have both a use value and an exchange value. I don't like peach muffins, so they have little use value to me. However, they do have an exchange value in that others will exchange a certain quantity of other commodities for my muffins. So I sell them to someone who wants them for $5. I then exchange that $5 for a bag of potato chips. In the end, I am left with the same exchange value, except it is measured in a different commodity: $5 of chips instead of $5 of muffins. But the exchange makes sense because the chips have a use value to me that the muffins didn't. This is called C–M–C exchange (commodity -> money -> commodity). This exchange is intuitive and no one would question it.

But then we get an important historical shift. The capitalist exchanges money, for a commodity, for money (M–C–M exchange). But when this happens, the law of equivalence doesn't make sense anymore. Why would I give someone $5 for muffins and then exchange those muffins for $5? Getting back the same exchange value in money makes no sense. You might as well have just kept the $5 and not wasted your time. There has to be a reason to enter into the transaction: the prospect of generating a profit. This can accomplished either by charging interest (finance capital, which takes on the even stranger sequence of M–M where money is directly exchanged for more money) or by finding a way of extracting surplus value from the process (industrial capital). For this to happen, the capitalist needs to find a commodity that produces more value when it is consumed. That commodity is labor power. Capitalists and laborers meet in an open market where the laborer is free to sell the commodity of his or her labor power (usually as measured by time) to the capitalist. In the M–C–M sequence, money is advanced to the laborer for a certain amount of time worked, rather than spent outright, and received back (hopefully plus profit). David Harvey makes the point in his lecture on Capital that not all money is capital; rather, capital is a process whereby money is put into motion for this purpose.

In his discussion of fetishism, Marx makes a nicely worded point:

The independent form, i.e., the money-form, which the value of commodities assumes in the case of simple circulation, serves only one purpose, namely, their exchange, and vanishes in the final result of the movement. On the other hand, in the circulation M-C-M, both the money and the commodity represent only different modes of existence of value itself, the money its general mode, and the commodity its particular, or, so to say, disguised mode. It is constantly changing from one form to the other without thereby becoming lost, and thus assumes an automatically active character. If now we take in turn each of the two different forms which self-expanding value successively assumes in the course of its life, we then arrive at these two propositions: Capital is money: Capital is commodities. In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus-value, is its own movement, its expansion, therefore, is automatic expansion. Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs.4

I was caught up in this mysticism. I believed that capital simply created value and that trusts could be protected from taxation and other creditors and continue to grow, abstracted from the brutal process of day-to-day exploitation. The increase in value of a dynastic trust doesn't come from nowhere, but from the M–C–M (or M–M) cycle. The notion of the dynastic trust spontaneously creating wealth is the kind of occult golden egg laying hen that Marx mocks. Part of the goal of Capital is to demystify this process. As wealthy families grow in size and inflation and income taxes eat away at the real value of dynastic trusts, new means of maximizing profit will have to be achieved.5 This will force ever downward pressure on wages as wealthy people attempt to receive the trust bounty to which they feel they are entitled.

I am an enabler of a violent system.

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fn1 Lucas v. Hamm, 364 P.2d 685 (Cal. 1961).

fn2 John Chipman Gray, The Rule Against Perpetuities 191 (4th ed. 1942)

fn3 Timothy Noah, The United States of Inequality, SLATE.COM, Sept. 15, 2010, http://www.slate.com/id/2266025/entry/2267384/.

fn4 1 KARL MARX, CAPITAL (S. Moore & E. Aveling trans., Frederick Engels ed., 1st Eng. ed. 1887) (1867), available at http://www.marxists.org/archive/marx/works/1867-c1/ch04.htm.

fn5 William J. Turnier & Jeffrey L. Harrison, A Malthusian Analysis of the So-Called Dynasty Trust, 28 VA. TAX REV. 779, 787–88 (2009).