Bureau of Economic Analysis through Global Insight (series codes: FAPNREZ for current cost of
corporate
fixed assets).
Nitzan Bichler - 2012 - Capital as Power
The earning yield on US equities fell below the yield on long-term bonds for the first time since the 1940s, and that drop gave corporate 'raiders' the academic justification (if they needed one) for launching the latest and longest merger wave.
The logic of the argument, however, was and remains problematic.
Mergers may indeed be driven by profit, but that in itself has little to do with productivity gains.
Neither is there much evidence that mergers are prompted by inefficiency, or that they make the combined firms more efficient.
8 Indeed, as we suggested in Chapter 12 and argue further below, the latent function of mergers in this regard is not to boost efficiency but to tame it - a task that they achieve by keeping a lid on overall capacity growth.
Moreover, there is no clear indica- tion that mergers make the amalgamated firms more profitable than they
8 See for example, Ravenscraft and Scherer (1987), Caves (1989), Bhagat, Shleifer and Vishny (1990) and Kaplan (2000).
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were separately - although here the issue is somewhat more complicated and requires some explication.
Two points are worth noting. First, there is a serious methodological diffi- culty. Most attempts to test the effects of mergers on profitability are based on comparing the performance of merged and non-merged companies. 9 While this method may offer some insight in the case of individual firms, it is misleading when applied to dominant capital as a whole. Looking at the amalgamation process in its entirety, the issue is not how it compares with 'doing nothing' (that is, with not amalgamating), but rather how it contrasts with the alternative strategy of green-field investment. Unfortunately, such a comparison is impossible since the very purpose of mergers and acquisitions is to avoid creating new capacity. In other words, amalgamation removes the main evidence against which one can assess its business success.
Perhaps a better, albeit 'unscientific', way to tackle the issue is to answer the following hypothetical question: What would have happened to the prof- itability of dominant capital in the United States if, instead of splitting its investment one third for green-field and two thirds for mergers and acquisi- tions, it were to plough it all back into new capacity? As Veblen (1923) correctly predicted, such a 'free run of production' is not going to happen, so we cannot know for sure. But then the very fact it hasn't happened, together with the century-long tendency to move in the opposite direction, from green- field to amalgamation, already suggests what the answer may be. 10
The second important point concerns the meaning of 'profitability' in this context. Conventional measures, such as earnings-to-price ratio, return on equity, or profit margin on sales, relevant as they may be for investors, are too narrow as indicators of capitalist power - particularly when such power is vested in and exercised by corporations rather than individuals. A more appropriate measure for this power is the distribution and differential growth of profit (and of capitalization more broadly), and from this perspective mergers and acquisitions make a very big difference. By fusing previously distinct earning streams, amalgamation contributes to the organized power of dominant capital, regardless of whether or not it augments the more conven- tional rates of return. In our view, this 'earning fusion', common to all mergers, is also their ultimate reason.
And indeed, by gradually shifting the emphasis from building to buying, from colliding to colluding and from a certain measure of public oversight to increasingly capitalized government, corporate capitalism in the United States and elsewhere has been able not only to lessen the destabilizing impact of green-field cycles pointed out by Marx, but also to reproduce and consoli- date on an ever-growing scale. Instead of collapsing under its own weight,
9 For instances of this approach, see Ravenscraft (1987), Ravenscraft and Scherer (1989), Scherer and Ross (1990: Ch. 5) and Healy, Palepu and Ruback (1992).
10 See also footnote 12 in Chapter 12, for the accumulation consequences of Japan's anti- merger/all-for-growth attitude.
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capitalism seems to have grown stronger. The broader consequence of this shift has been creeping stagnation (Proposition 3 in Chapter 14); and yet, as Veblen already suggested a century ago, the large accumulators have learned to 'manage' this stagnation for their own ends.
Patterns of amalgamation
Merger waves
Now, this general rationale for merger does not in itself explain the concrete historical trajectory of corporate amalgamation. Mergers and acquisitions grow, but not smoothly, and indeed the second feature evident in Figure 15. 2 is the cyclical pattern of the series (Proposition 4 in Chapter 14).
Looking at the past century, we can identify four amalgamation 'waves'. The first wave, occurring during the transition from the nineteenth to the twentieth century, is commonly referred to as the 'monopoly' wave. The second, lasting through much of the 1920s, is known as the 'oligopoly' wave. The third, building up during the late 1950s and 1960s, is nicknamed the 'conglomerate' wave. And the fourth wave, beginning in the early 1980s, does not yet have a popular title, but based on its all-encompassing nature we can safely label it the 'global' wave.
This wave-like pattern remains something of a mystery. Why do mergers and acquisitions have a pattern at all? Why are they not erratic? Or, alterna- tively, why do they not grow continuously or in line with green-field invest- ment? So far, most attempts to answer these questions have approached the issue from the micro perspective of the firm, which is precisely why they run into a dead end.
Tobin's Q
One of the more famous explanations is based on the work of Tobin and Brainard (1968; 1977), whom we have already met in Chapter 10. The under- pinnings of the argument cannot be simpler: capitalists are rational, and rational actors buy what is cheap. Their yardstick is Tobin's Q: the ratio between the capitalized value of an asset on the market and the price of building it from scratch. When Tobin's Q is smaller than 1, existing capacity is cheaper, so the firm will buy it from others. And when Tobin's Q is greater than 1, new capacity is cheaper, so the firm will construct it anew.
For the corporate universe as a whole, Tobin's Q is the ratio of overall market capitalization to the replacement cost of all outstanding assets; and if individual rationality extends to aggregate rationality, we should observe the buy-to-build indicator moving inversely with Tobin's Q: the less expensive existing assets are relative to newly produced ones, the greater the proportion of 'financial' to 'real' investment should be, and vice versa.
The explanation seems sensible enough, only that reality refuses to abide. Figure 15. 3 shows the relationship between the two magnitudes: our own
344 Accumulation of power
1,000. 0 3. 5
? ? ? ? ? ? ? ? ? log scale
? ? ? ? ? ? ? Buy-to-Build Indicator
? ? ? ? (mergers & acquisitions as a per cent of gross fixed capital formation, left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Tobin's Q
(ratio of market value of stocks and bonds to the current cost of fixed assets, right)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 100. 0
10. 0
1. 0
3. 0 2. 5 2. 0 1. 5 1. 0 0. 5 0. 0 -0. 5
0. 1 -1. 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 15. 3 Tobin's Q?
Note: The market value of stocks and bonds is net of foreign holdings by US residents. Series are
smoothed as 5-year moving averages.
Source: For data sources and computations of the Buy-to-Build Indicator, see Data Appendix to the chapter. Data for Tobin's Q: U. S.
Bureau of Economic Analysis through Global Insight (series codes: FAPNREZ for current cost of corporate fixed assets). The market value of stocks and bonds splices data from the following two sources. 1932-1951: Global Financial Data (market value of corporate stocks and market value of bonds on the NYSE). 1952-2007: Federal Reserve Board through Global Insight (series codes: FL893064105 for market value of corporate equities; FL263164003 for market value of foreign equities held by US residents; FL893163005 for market value of corporate and foreign bonds; FL263163003 for market value of foreign bonds held by US residents).
buy-to-build indicator, expressing mergers and acquisitions as a per cent of gross fixed investment; and Tobin's Q, computed by dividing the overall market value of stocks and bonds by the total current cost of corporate fixed assets (both series are smoothed for easier comparison).
According to the chart, US capitalists have gone out of their minds: instead of investing in what is cheap, they have been systematically over- spending on the expensive! Note that the two series move not inversely, but together. When Tobin's Q rises, so does the buy-to-build ratio - which means that capitalists prefer costlier mergers and acquisition over cheaper green- field. And when Tobin's Q falls, so does our buy-to-build indicator - which suggests that they prefer pricier new factories over the inexpensive second- hand assets available on the market.
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Of course, the problem here is not the capitalists; it's the theory. If the posi- tive correlation of the two series seems anomalous, it is only because we use a neoclassical logic that denies power in order to explain a process that is all about power.
The specific blind spot is prices. Locked into the atomistic individualism of the nineteenth century, liberal analysts tend to assume that prices are given by the market, and that the only thing capitalists need to do is minimize cost. Yet, as we have seen in Chapter 12 - and as the large owners know full well - this pricing ethics is a relic of history. In the new state of capital, the power struggle is fought over prices as well as costs. The issue is not only to reduce the latter, but also to actively maintain and increase the former. And this simultaneity changes the whole 'buy or build' calculus.
New capacity indeed may be cheap if only a few capitalists add it. But if many capitalists do the same, the calculus becomes very different. The latter circumstances spell 'glut'; glut means the disintegration of full-cost pricing; and if prices end up dropping faster than costs, the consequence is falling profit. In this context, building green-field factories - although seemingly 'cheaper' than existing assets - is a recipe for business disaster. As we explain below, dominant capital understands this power logic all too well and acts accordingly. And as the emphasis flips from passively accepting prices to actively managing them, Tobin's Q turns from a cause to a consequence: it goes up when investors happen to buy and down when they decide to build.
From classical Marxism to monopoly capitalism
In short, mergers and acquisitions, although pursued by individual firms, occur within a broader and ever-changing political-economic context. It is only when we make this restructuring process the centre of our analysis that the general pattern of amalgamation begins to make sense.
A highly interesting attempt in this direction was offered by Michael Lebowitz (1985), who tried to derive the tendency toward monopoly capi- talism from the very logic of classical Marxism. According to Marx, argues Lebowitz, the essence of accumulation is the expropriation of means of production - initially from workers, but ultimately also from most capitalists - until capital becomes One, a unitary amalgamate held by a single capitalist or a single corporation. The road toward such amalgamation, Lebowitz continues, proceeds through horizontal, vertical and conglomerate integra- tion (although not necessarily following the stylized pattern in Figure 15. 2), and the key challenge is to show that all three phenomena are inherent in the inner logic of accumulation.
To establish this link, Lebowitz begins by assuming, along with Marx, an intrinsic connection leading from productivity growth to accumulation. Next, he suggests that all three forms of integration increase efficiency and hence contribute to accumulation: horizontal integration creates economies of scale; vertical integration leads to more roundabout, or mechanized production
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runs; and conglomerate integration improves allocative efficiency through inter-sectoral capital mobility. To constrain any of these processes therefore is to hinder accumulation; and since according to Marx capital works to dismantle its own barriers, it follows that all three types of integration are inevitable, and that capitalism is destined to become monopolistic.
Based on its own premises, this logic is undoubtedly elegant. But the prem- ises are partly incorrect as well as incomplete. The first problem concerns production. As noted earlier, beyond a certain point there is no necessary connection between industrial size and measured efficiency/profitability, so complete business integration cannot be attributed to the 'productive' logic of accumulation. 11
The second problem is the absence of power. Even if greater industrial integration were always more efficient and more profitable, that would still leave unexplained a growing proportion of mergers that merely fuse owner- ship while leaving production lines separate. The difficulty is most clearly illustrated in the case of conglomerate integration. Inter-sectoral capital movement can improve allocative efficiency only through green-field invest- ment; but, if so, why does conglomerate consolidation almost invariably take the route of merger?
The answer, by now a bit tedious, is that business consolidation is not about efficiency but about the control of efficiency. While capital is forever trying to remove the barriers to its own accumulation, this very accumulation is inherently impossible without imposing barriers on others, including on most other capitalists. The act of merger fulfils both of these requirements, allowing investors to exercise their freedom to hinder.
Differential advantage
Seen from a differential-accumulation perspective, amalgamation is a power process whose goal is to beat the average and redistribute control. Its main appeal to capitalists is that it contributes directly to differential breadth, yet without undermining and sometimes boosting the potential for differential depth. 12 In addition, by making the fused entities ever larger, increasingly
11 Economies of scale, impressive as they were in Marx's time, are not a timeless iron law, but rather historically and technologically contingent. Diseconomies of scale can be as impor- tant, and there is no reason to believe that completely centralized planning, capitalist or otherwise, is most efficient (recall our discussion in Chapter 12 of industrial 'resonance' and the open-ended democratic notion of 'efficiency'). Similarly with roundabout processes: longer production runs may be more efficient, but only up to a point, beyond which they almost always run into organizational barriers.
12 Note that the act of merger itself has no direct effect on depth. The impact on depth works only indirectly, through increasing corporate centralization - and even that is merely a facilitating factor. Consolidation makes it easier for firms to collude as well as to fuse with government organs. But that facilitation doesn't imply that collusion and fusion will actu- ally take place, or that they will be effective.
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intertwined with other larger firms and government bodies, and more involved in setting polices and regulations, mergers stabilize earnings growth and therefore reduce differential risk. 13 Finally, mergers often generate differ- ential hype that owners can leverage to their own advantage.
Thus, everything else remaining the same, it makes more sense to buy than to build. But then everything else does not and indeed cannot remain the same. The reason is simple: amalgamation creorders the very conditions on which it is based. 14
Three transformations
Three particular transformations need noting here. First, amalgamation is akin to eating the goose that lays the golden eggs. By gobbling up takeover targets within a given corporate universe, acquiring firms are depleting the pool of future targets. Unless this pool is somehow replenished, mergers and acquisitions are bound to create a highly centralized structure in which domi- nant capital owns everything worth owning. From a certain point onward, therefore, the pace of amalgamation has to decelerate. Although further amalgamation within the circle of dominant capital itself may be possible (large firms buying each other), the impact on the group's differential accu- mulation relative to the average is negligible: by this stage, dominant capital has grown so big it is the average.
Green-field growth, by adding new employment and firms, works to replenish the takeover pool to some extent. But then, and this is the second point worth noting, since green-field growth tends to trail the pace of amalga- mation in both employment volume and dollar value, its effect is mostly to
13 This power perspective is usually lost on financial analyses of merger. As we saw in Chapter 11, the standard view on risk reduction focuses on diversification. Merger does the job when it fuses firms with divergent volatility patterns. But according to the analysts, owners can achieve the same reduction with far less hassle simply by including shares of the pre- merged firms in a diversified financial portfolio.
The glitch in this argument is that the owned entities in the two cases are very different. To see why, imagine a capitalist owning 1 per cent of the shares of every independent oil refiner that populated the business landscape before the arrival of John D. Rockefeller. Now compare this scenario to one in which the capitalist owns a 1 per cent stake in Rockefeller's Standard Oil of New Jersey after the company absorbed all these indepen- dent refiners. The diversification of the two ownership stakes is technically identical, but their earnings pattern most certainly is not. Historically, the 'before' case was associated with cutthroat competition and the absence of organized power, which together meant massive volatility; in the 'after' case, the political-economic regime imposed by Standard Oil brought a more stable flow of earnings and greatly reduced risk.
14 This creordering is also why most macro studies of mergers and acquisitions, such as Mitchell and Mulherin (1996), Weston, Chung and Siu (1998) or Winston (1998), are usually insufficient. Although these studies acknowledge the role of structural changes, such as increased competition, technical change and policy deregulation, they tend to treat these changes as external societal 'shocks' to which business 'responds' with amalgamation.
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slow down the depletion process, not to stop it. Indeed, the very process of amalgamation, by directing resources away from green-field investment, has the countervailing impact of reducing growth, and that reduction hastens the depleting process. Thus, sooner or later, dominant capital is bound to reach its 'envelope', namely the boundaries of its own corporate universe with few or no takeover targets to speak of. 15
Finally, corporate amalgamation is often socially traumatic. It commonly involves massive dislocation as well as significant power realignments; it is restricted by the ability of broader state institutions to quickly accommodate the new corporate formations; and it is capped by the speed at which the underlying corporate bureaucracy can adapt (a point emphasized by Penrose 1959). The consequence is that as amalgamation builds up momentum, it also generates higher and higher roadblocks, contradictions and counter-forces. 16
Taken together, the depletion of takeover targets, the negative effect on growth associated with lower levels of green-field investment and the emer- gence of counter-forces suggest that corporate amalgamation cannot possibly run smoothly and continuously (Proposition 4 in Chapter 14).
Breaking the envelope
But then, why should amalgamation move in cycles? In other words, why does the uptrend resume after it stumbles? And what does this resumption mean?
15 A typical illustration of this process is provided by the food business (based on data from the authors' archives). During the 1980s, the sector went through rapid amalgamation. In 1981, a $1. 9 billion merger between Nabisco and Standard Brands created Nabisco Brands, which then merged in a $4. 9 billion deal with R. J. Reynolds to create RJR Nabisco. A few years later, KKR, which had earlier acquired Beatrice for $6. 2 billion, paid $30. 6 billion to take over RJR Nabisco in what was then the largest takeover on record. Elsewhere in the sector, Nestle? took over Carnation ($2. 9 billion) and Rowntree ($4. 5 billion); Grand Metropolitan acquired Pilsbury ($5. 7 billion) and Guinness ($16 billion); Phillip Morris bought General Foods ($5. 7 billion) and Kraft ($13. 4 billion); BCI Holdings took over some Beatrice divisions ($6. 1billion); and Rho^ne-Poulenc bought Hoechst ($21. 9 billion). By the end of the 1980s, the merger flurry died down. According to the Financial Times, food companies at the time were very cheap, yet 'shareholders have deserted food stocks . . . partly because of the absence of genuinely attractive acquisition targets' in an industry whose 'biggest problem has been minimal sales growth' (Edgecliffe-Johnson 2000). During the 1990s, there were a few more big transactions, such as the $14. 9 billion acqui- sition of Nabisco by Philip Morris, but these were mostly reshuffles of assets among the large players. The experience of reaching the 'envelope' was summarized metaphorically by a Bestfood executive whose company had been taken over by Unilever: 'I have been to Bentonville, Arkansas [home of Wal-Mart's headquarters], and I would like to say that it is not the end of the world, but you can see it' (ibid. ).
16 The 1933 Glass-Steagall Act, for instance, barred US banks from making industrial invest- ments, a prohibition that only recently has been relaxed. Similar transformational effects were brought on by the post-war dismantling of the Japanese Zaibatsu, by the 1990s unbundling of South African holding groups and the divestment of Israeli banks of their 'non-financial' holdings, and by the transnationalization of the Korean Chaebol during the 2000s.
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From the perspective of dominant capital, amalgamation is simply too important to give up. And while there may not be many candidates worth absorbing in their own corporate universe, outside of this universe targets are still plentiful. Of course, to take advantage of this broader pool, dominant capital has to break through its original 'envelope' - which is precisely what happened as the United States moved from one wave to another (Proposition 5 in Chapter 14).
The first, 'monopoly' wave marked the emergence of modern big business, with giant corporations forming within their own original industries. Once this source of amalgamation was more or less exhausted, further expansion meant that firms had to move outside their industry boundaries. And indeed, the next 'oligopoly' wave saw the formation of vertically integrated combines whose control increasingly spanned entire sectors, such as in petroleum, machinery and food products, among others. The next phase opened up the whole US corporate universe, with firms crossing their original boundaries of specialization to form large conglomerates with multiple business lines ranging from raw materials, through manufacturing, to services and finance. Finally, with the national scene having been more or less integrated, the main avenue for further expansion now is across international borders, hence the latest global merger wave. 17
Until recently, the global wave was characterized by considerable de- conglomeration, with many firms refocusing on so-called core activities where they enjoyed a leading profit position. The main reason is that global- ization enables additional intra-industry expansion across borders while legitimizing further domestic centralization in the name of 'global competi- tiveness'. Eventually, though, such refocusing is bound to become exhausted, pushing dominant capital back toward conglomeration - and this time on a global scale. In fact, such re-conglomeration is already happening in areas such as computing, communication, transportation and entertainment, where technological change is rapidly blurring the lines between standard industrial classifications. 18
17 The process of course is hardly unique to the United States. For example, 'Before [South Africa] started the progressive unwinding of exchange controls in 1994', writes the Financial Times, 'large companies were prevented from expanding overseas. With capital trapped at home, they gobbled up all available companies in their industries before acquiring compa- nies in other sectors and becoming conglomerates' (Plender and Mallet 2000). For analyses of differential accumulation, business consolidation and globalization in South Africa and Israel, see Nitzan and Bichler (1996) and Nitzan and Bichler (2001).
18 For instance, information, telecommunication and entertainment companies such as Cisco, Alcatel-Lucent, Microsoft, Time Warner, NewsCorp, Hutchison Whampoa and Vivendi increasingly integrate computing (hardware and software), services (consulting), infra- structure (cables and satellite), content (television, movies, music and print publishing) and communication (internet and telephony), while leisure firms like Carnival Cruise own ship- ping lines, resort hotels, air lines and sport teams. Other companies, like General Electric or Philip Morris, have never abandoned conglomeration in the first place and continue spreading in numerous directions.
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And, indeed, the pivotal impact of mergers is to creorder not capitalist production but capitalist power at large. The reason is rooted in the dialec- tical nature of amalgamation. By constantly pushing toward, and eventually breaking through their successive social 'envelopes' - from the industry, to the sector, to the nation-state, to the world as a whole - mergers create a strong drive toward 'jurisdictional integration', to use Olson's terminology (1982). Yet this very integration pits dominant capital against new rivals under new circumstances, and so creates the need to constantly creoder the wider power institutions of society, including the state of capital, interna- tional relations, ideology and violence.
Although this merger-driven creordering of power is yet to be theorized and empirically investigated, some of its important patterns can be outlined tentatively. In the remainder of the chapter we examine several key develop- ments that unfold as mergers enter their ultimate, global envelope.
Globalization
From the viewpoint of capital as power, globalization is the capitalization of power on a global scale, and its key vehicle is the movement of capital. 19 The notion of 'movement' here can have different meanings, so some clarification is in order before we begin.
In common parlance, reference to international capital mobility connotes a macro-statist frame of reference: capital is seen as an 'economic-productive' entity that somehow 'flows' from one state to another. But that isn't what happens in practice. By definition, capital mobility is a purely pecuniary process. Usually, the only thing that happens is a reshuffle of ownership claims, in which foreign capitalists acquire an asset from (or sell one to) their domestic counterparts. Occasionally, the acquisition alters the value of the transacted asset, but that change, too, is entirely pecuniary. The accountants simply adjust the value of equity or debt on the right-hand side of the balance sheet and of goodwill on the left-hand side, and that's it.
There is no cross-border flow of machines, structures, vehicles, technical know-how, or employees. These items may or may not move later on, but such movements are merely rearrangements of the left-hand side of the balance sheet; they have no bearing on the act of foreign investment per se.
The real impact of capital flows is on the underlying nature of power. When ownership crosses a border, it alters the organization and institutions of power on both sides of that border and, eventually, the significance of the border itself. In this sense, capital mobility creorders the very state of capital -
19 Globalization of course has numerous other dimensions, but these are secondary for our purpose here. For more on the globalization debate, see Gordon (1988), Du Boff et al. (1997), Sivanandan and Wood (1997), Burbach and Robinson (1999), Hirst and Thompson (1999), Radice (1999), Sutcliffe and Glyn (1999) and Mann et al. (2001-2).
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that we need to decipher.
Capital movements and the unholy trinity
Most analyses of capital movement concentrate on its alleged cyclicality. The common view is that, although capital flow has accelerated since the 1980s, the acceleration is part of a broader recurring pattern, and that the peaks of this process in fact were recorded during the late nineteenth and early twen- tieth centuries (Taylor 1996).
The standard approach to these ups and downs in capital mobility is the so-called 'Unholy Trinity' of international political economy. According to this framework, there is an inherent trade-off between (1) state sovereignty, (2) capital mobility and (3) international monetary stability - three conditions of which only two can coexist at any one time (Fleming 1962; Mundell 1963; Cohen 1993). 20
Thus, during the 'liberal' Gold Standard that lasted until the First World War, limited state sovereignty allowed for both free capital mobility and international monetary stability. During the subsequent inter-war period, the emergence of state autonomy along with unfettered capital flow served to upset this monetary stability. After the Second World War, the quasi-statist system of Bretton Woods put a check on capital mobility so as to allow domestic policy autonomy without compromising monetary stability. Finally, since the 1970s, the rise of neoliberalism has, again, unleashed capital mobility, although it is still unclear which of the other two nodes of the Trinity - state sovereignty or monetary stability - will have to give.
Why has the world moved from liberalism, to instability, to statism and back to (neo)liberalism? Is this some sort of inevitable cycle, or is there an underlying historical process here that makes each 'phase' fundamentally different? The answers vary widely. 21
Liberal interpretations emphasize the secular impact of technology that constantly pushes toward freer trade and greater capital mobility, with unfor- tunate setbacks created by government intervention and distortions. From this perspective, post-war statism, or 'embedded liberalism' as Ruggie (1982) later called it, was largely a historical aberration. After the war, governments took advantage of the temporary weakness of capitalism to impose all sorts
20 The rationale is based on the external account identity between the current and capital balances. If the international monetary system were to remain stable (in terms of exchange rates), governments can retain domestic sovereignty over exports and imports only if capital movements are controlled to 'accommodate' the resulting current account imbalances. In the absence of such capital controls, governments would have to give up their policy autonomy; if they don't, the mismatch between the current and capital balances would lead to currency realignment and international monetary instability.
21 For views and reviews, see Cerny (1993), Helleiner (1994), Sobel (1994) and Cohen (1996).
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of restrictions and barriers. Eventually, though, the unstoppable advance of information and communication forced them to succumb, as a result of which the rate of return rather than political whim once again governs the move- ment of capital.
Critics of this natural-course-of-things theory tend to reverse its emphasis. Thus, according to Helleiner (1994), the key issue is neither the expansionary tendencies of technology and markets, nor their impact on the propensity of capital to move, but rather the willingness of states (i. e. governments) to let such movements occur in the first place. From this viewpoint, state regulation is not an aberration, but rather the determining factor - and one that govern- ments remain free to switch on and off.
One important reason for such cyclical change of heart, suggests Frieden (1988), is the shifting political economy of foreign debt. According to this view, during the Gold Standard, Britain became a 'mature creditor', and therefore was interested in liberalization so that its debtors could have enough export earnings to service their foreign liabilities. The United States reached a similar position during the 1970s, and since then it has used its hegemonic power to re-impose liberalization for much the same reason. According to Goodman and Pauly (1995), this second coming of liberalism was further facilitated by the desire of governments to retain the benefits of transnational production. The latter desire required that they also open the door to trans- national financial intermediation, hence the dual rise of portfolio and foreign direct investment.
Global production or global ownership?
Plus c? a change, plus c'est pareil? According to the globalization sceptics, the answer is pretty much yes. Despite the recent increase in capital mobility, they point out, most companies remain far more national than global (see for instance, Doremus et al. 1998; Weiss 1998; Hirst and Thompson 1999). The extent of transnational production is fairly limited: its share in global GDP rose from 5. 6 per cent in 1982, to 6. 8 in 1990, to 10.
8 See for example, Ravenscraft and Scherer (1987), Caves (1989), Bhagat, Shleifer and Vishny (1990) and Kaplan (2000).
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were separately - although here the issue is somewhat more complicated and requires some explication.
Two points are worth noting. First, there is a serious methodological diffi- culty. Most attempts to test the effects of mergers on profitability are based on comparing the performance of merged and non-merged companies. 9 While this method may offer some insight in the case of individual firms, it is misleading when applied to dominant capital as a whole. Looking at the amalgamation process in its entirety, the issue is not how it compares with 'doing nothing' (that is, with not amalgamating), but rather how it contrasts with the alternative strategy of green-field investment. Unfortunately, such a comparison is impossible since the very purpose of mergers and acquisitions is to avoid creating new capacity. In other words, amalgamation removes the main evidence against which one can assess its business success.
Perhaps a better, albeit 'unscientific', way to tackle the issue is to answer the following hypothetical question: What would have happened to the prof- itability of dominant capital in the United States if, instead of splitting its investment one third for green-field and two thirds for mergers and acquisi- tions, it were to plough it all back into new capacity? As Veblen (1923) correctly predicted, such a 'free run of production' is not going to happen, so we cannot know for sure. But then the very fact it hasn't happened, together with the century-long tendency to move in the opposite direction, from green- field to amalgamation, already suggests what the answer may be. 10
The second important point concerns the meaning of 'profitability' in this context. Conventional measures, such as earnings-to-price ratio, return on equity, or profit margin on sales, relevant as they may be for investors, are too narrow as indicators of capitalist power - particularly when such power is vested in and exercised by corporations rather than individuals. A more appropriate measure for this power is the distribution and differential growth of profit (and of capitalization more broadly), and from this perspective mergers and acquisitions make a very big difference. By fusing previously distinct earning streams, amalgamation contributes to the organized power of dominant capital, regardless of whether or not it augments the more conven- tional rates of return. In our view, this 'earning fusion', common to all mergers, is also their ultimate reason.
And indeed, by gradually shifting the emphasis from building to buying, from colliding to colluding and from a certain measure of public oversight to increasingly capitalized government, corporate capitalism in the United States and elsewhere has been able not only to lessen the destabilizing impact of green-field cycles pointed out by Marx, but also to reproduce and consoli- date on an ever-growing scale. Instead of collapsing under its own weight,
9 For instances of this approach, see Ravenscraft (1987), Ravenscraft and Scherer (1989), Scherer and Ross (1990: Ch. 5) and Healy, Palepu and Ruback (1992).
10 See also footnote 12 in Chapter 12, for the accumulation consequences of Japan's anti- merger/all-for-growth attitude.
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capitalism seems to have grown stronger. The broader consequence of this shift has been creeping stagnation (Proposition 3 in Chapter 14); and yet, as Veblen already suggested a century ago, the large accumulators have learned to 'manage' this stagnation for their own ends.
Patterns of amalgamation
Merger waves
Now, this general rationale for merger does not in itself explain the concrete historical trajectory of corporate amalgamation. Mergers and acquisitions grow, but not smoothly, and indeed the second feature evident in Figure 15. 2 is the cyclical pattern of the series (Proposition 4 in Chapter 14).
Looking at the past century, we can identify four amalgamation 'waves'. The first wave, occurring during the transition from the nineteenth to the twentieth century, is commonly referred to as the 'monopoly' wave. The second, lasting through much of the 1920s, is known as the 'oligopoly' wave. The third, building up during the late 1950s and 1960s, is nicknamed the 'conglomerate' wave. And the fourth wave, beginning in the early 1980s, does not yet have a popular title, but based on its all-encompassing nature we can safely label it the 'global' wave.
This wave-like pattern remains something of a mystery. Why do mergers and acquisitions have a pattern at all? Why are they not erratic? Or, alterna- tively, why do they not grow continuously or in line with green-field invest- ment? So far, most attempts to answer these questions have approached the issue from the micro perspective of the firm, which is precisely why they run into a dead end.
Tobin's Q
One of the more famous explanations is based on the work of Tobin and Brainard (1968; 1977), whom we have already met in Chapter 10. The under- pinnings of the argument cannot be simpler: capitalists are rational, and rational actors buy what is cheap. Their yardstick is Tobin's Q: the ratio between the capitalized value of an asset on the market and the price of building it from scratch. When Tobin's Q is smaller than 1, existing capacity is cheaper, so the firm will buy it from others. And when Tobin's Q is greater than 1, new capacity is cheaper, so the firm will construct it anew.
For the corporate universe as a whole, Tobin's Q is the ratio of overall market capitalization to the replacement cost of all outstanding assets; and if individual rationality extends to aggregate rationality, we should observe the buy-to-build indicator moving inversely with Tobin's Q: the less expensive existing assets are relative to newly produced ones, the greater the proportion of 'financial' to 'real' investment should be, and vice versa.
The explanation seems sensible enough, only that reality refuses to abide. Figure 15. 3 shows the relationship between the two magnitudes: our own
344 Accumulation of power
1,000. 0 3. 5
? ? ? ? ? ? ? ? ? log scale
? ? ? ? ? ? ? Buy-to-Build Indicator
? ? ? ? (mergers & acquisitions as a per cent of gross fixed capital formation, left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Tobin's Q
(ratio of market value of stocks and bonds to the current cost of fixed assets, right)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 100. 0
10. 0
1. 0
3. 0 2. 5 2. 0 1. 5 1. 0 0. 5 0. 0 -0. 5
0. 1 -1. 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 15. 3 Tobin's Q?
Note: The market value of stocks and bonds is net of foreign holdings by US residents. Series are
smoothed as 5-year moving averages.
Source: For data sources and computations of the Buy-to-Build Indicator, see Data Appendix to the chapter. Data for Tobin's Q: U. S.
Bureau of Economic Analysis through Global Insight (series codes: FAPNREZ for current cost of corporate fixed assets). The market value of stocks and bonds splices data from the following two sources. 1932-1951: Global Financial Data (market value of corporate stocks and market value of bonds on the NYSE). 1952-2007: Federal Reserve Board through Global Insight (series codes: FL893064105 for market value of corporate equities; FL263164003 for market value of foreign equities held by US residents; FL893163005 for market value of corporate and foreign bonds; FL263163003 for market value of foreign bonds held by US residents).
buy-to-build indicator, expressing mergers and acquisitions as a per cent of gross fixed investment; and Tobin's Q, computed by dividing the overall market value of stocks and bonds by the total current cost of corporate fixed assets (both series are smoothed for easier comparison).
According to the chart, US capitalists have gone out of their minds: instead of investing in what is cheap, they have been systematically over- spending on the expensive! Note that the two series move not inversely, but together. When Tobin's Q rises, so does the buy-to-build ratio - which means that capitalists prefer costlier mergers and acquisition over cheaper green- field. And when Tobin's Q falls, so does our buy-to-build indicator - which suggests that they prefer pricier new factories over the inexpensive second- hand assets available on the market.
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Of course, the problem here is not the capitalists; it's the theory. If the posi- tive correlation of the two series seems anomalous, it is only because we use a neoclassical logic that denies power in order to explain a process that is all about power.
The specific blind spot is prices. Locked into the atomistic individualism of the nineteenth century, liberal analysts tend to assume that prices are given by the market, and that the only thing capitalists need to do is minimize cost. Yet, as we have seen in Chapter 12 - and as the large owners know full well - this pricing ethics is a relic of history. In the new state of capital, the power struggle is fought over prices as well as costs. The issue is not only to reduce the latter, but also to actively maintain and increase the former. And this simultaneity changes the whole 'buy or build' calculus.
New capacity indeed may be cheap if only a few capitalists add it. But if many capitalists do the same, the calculus becomes very different. The latter circumstances spell 'glut'; glut means the disintegration of full-cost pricing; and if prices end up dropping faster than costs, the consequence is falling profit. In this context, building green-field factories - although seemingly 'cheaper' than existing assets - is a recipe for business disaster. As we explain below, dominant capital understands this power logic all too well and acts accordingly. And as the emphasis flips from passively accepting prices to actively managing them, Tobin's Q turns from a cause to a consequence: it goes up when investors happen to buy and down when they decide to build.
From classical Marxism to monopoly capitalism
In short, mergers and acquisitions, although pursued by individual firms, occur within a broader and ever-changing political-economic context. It is only when we make this restructuring process the centre of our analysis that the general pattern of amalgamation begins to make sense.
A highly interesting attempt in this direction was offered by Michael Lebowitz (1985), who tried to derive the tendency toward monopoly capi- talism from the very logic of classical Marxism. According to Marx, argues Lebowitz, the essence of accumulation is the expropriation of means of production - initially from workers, but ultimately also from most capitalists - until capital becomes One, a unitary amalgamate held by a single capitalist or a single corporation. The road toward such amalgamation, Lebowitz continues, proceeds through horizontal, vertical and conglomerate integra- tion (although not necessarily following the stylized pattern in Figure 15. 2), and the key challenge is to show that all three phenomena are inherent in the inner logic of accumulation.
To establish this link, Lebowitz begins by assuming, along with Marx, an intrinsic connection leading from productivity growth to accumulation. Next, he suggests that all three forms of integration increase efficiency and hence contribute to accumulation: horizontal integration creates economies of scale; vertical integration leads to more roundabout, or mechanized production
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runs; and conglomerate integration improves allocative efficiency through inter-sectoral capital mobility. To constrain any of these processes therefore is to hinder accumulation; and since according to Marx capital works to dismantle its own barriers, it follows that all three types of integration are inevitable, and that capitalism is destined to become monopolistic.
Based on its own premises, this logic is undoubtedly elegant. But the prem- ises are partly incorrect as well as incomplete. The first problem concerns production. As noted earlier, beyond a certain point there is no necessary connection between industrial size and measured efficiency/profitability, so complete business integration cannot be attributed to the 'productive' logic of accumulation. 11
The second problem is the absence of power. Even if greater industrial integration were always more efficient and more profitable, that would still leave unexplained a growing proportion of mergers that merely fuse owner- ship while leaving production lines separate. The difficulty is most clearly illustrated in the case of conglomerate integration. Inter-sectoral capital movement can improve allocative efficiency only through green-field invest- ment; but, if so, why does conglomerate consolidation almost invariably take the route of merger?
The answer, by now a bit tedious, is that business consolidation is not about efficiency but about the control of efficiency. While capital is forever trying to remove the barriers to its own accumulation, this very accumulation is inherently impossible without imposing barriers on others, including on most other capitalists. The act of merger fulfils both of these requirements, allowing investors to exercise their freedom to hinder.
Differential advantage
Seen from a differential-accumulation perspective, amalgamation is a power process whose goal is to beat the average and redistribute control. Its main appeal to capitalists is that it contributes directly to differential breadth, yet without undermining and sometimes boosting the potential for differential depth. 12 In addition, by making the fused entities ever larger, increasingly
11 Economies of scale, impressive as they were in Marx's time, are not a timeless iron law, but rather historically and technologically contingent. Diseconomies of scale can be as impor- tant, and there is no reason to believe that completely centralized planning, capitalist or otherwise, is most efficient (recall our discussion in Chapter 12 of industrial 'resonance' and the open-ended democratic notion of 'efficiency'). Similarly with roundabout processes: longer production runs may be more efficient, but only up to a point, beyond which they almost always run into organizational barriers.
12 Note that the act of merger itself has no direct effect on depth. The impact on depth works only indirectly, through increasing corporate centralization - and even that is merely a facilitating factor. Consolidation makes it easier for firms to collude as well as to fuse with government organs. But that facilitation doesn't imply that collusion and fusion will actu- ally take place, or that they will be effective.
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intertwined with other larger firms and government bodies, and more involved in setting polices and regulations, mergers stabilize earnings growth and therefore reduce differential risk. 13 Finally, mergers often generate differ- ential hype that owners can leverage to their own advantage.
Thus, everything else remaining the same, it makes more sense to buy than to build. But then everything else does not and indeed cannot remain the same. The reason is simple: amalgamation creorders the very conditions on which it is based. 14
Three transformations
Three particular transformations need noting here. First, amalgamation is akin to eating the goose that lays the golden eggs. By gobbling up takeover targets within a given corporate universe, acquiring firms are depleting the pool of future targets. Unless this pool is somehow replenished, mergers and acquisitions are bound to create a highly centralized structure in which domi- nant capital owns everything worth owning. From a certain point onward, therefore, the pace of amalgamation has to decelerate. Although further amalgamation within the circle of dominant capital itself may be possible (large firms buying each other), the impact on the group's differential accu- mulation relative to the average is negligible: by this stage, dominant capital has grown so big it is the average.
Green-field growth, by adding new employment and firms, works to replenish the takeover pool to some extent. But then, and this is the second point worth noting, since green-field growth tends to trail the pace of amalga- mation in both employment volume and dollar value, its effect is mostly to
13 This power perspective is usually lost on financial analyses of merger. As we saw in Chapter 11, the standard view on risk reduction focuses on diversification. Merger does the job when it fuses firms with divergent volatility patterns. But according to the analysts, owners can achieve the same reduction with far less hassle simply by including shares of the pre- merged firms in a diversified financial portfolio.
The glitch in this argument is that the owned entities in the two cases are very different. To see why, imagine a capitalist owning 1 per cent of the shares of every independent oil refiner that populated the business landscape before the arrival of John D. Rockefeller. Now compare this scenario to one in which the capitalist owns a 1 per cent stake in Rockefeller's Standard Oil of New Jersey after the company absorbed all these indepen- dent refiners. The diversification of the two ownership stakes is technically identical, but their earnings pattern most certainly is not. Historically, the 'before' case was associated with cutthroat competition and the absence of organized power, which together meant massive volatility; in the 'after' case, the political-economic regime imposed by Standard Oil brought a more stable flow of earnings and greatly reduced risk.
14 This creordering is also why most macro studies of mergers and acquisitions, such as Mitchell and Mulherin (1996), Weston, Chung and Siu (1998) or Winston (1998), are usually insufficient. Although these studies acknowledge the role of structural changes, such as increased competition, technical change and policy deregulation, they tend to treat these changes as external societal 'shocks' to which business 'responds' with amalgamation.
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slow down the depletion process, not to stop it. Indeed, the very process of amalgamation, by directing resources away from green-field investment, has the countervailing impact of reducing growth, and that reduction hastens the depleting process. Thus, sooner or later, dominant capital is bound to reach its 'envelope', namely the boundaries of its own corporate universe with few or no takeover targets to speak of. 15
Finally, corporate amalgamation is often socially traumatic. It commonly involves massive dislocation as well as significant power realignments; it is restricted by the ability of broader state institutions to quickly accommodate the new corporate formations; and it is capped by the speed at which the underlying corporate bureaucracy can adapt (a point emphasized by Penrose 1959). The consequence is that as amalgamation builds up momentum, it also generates higher and higher roadblocks, contradictions and counter-forces. 16
Taken together, the depletion of takeover targets, the negative effect on growth associated with lower levels of green-field investment and the emer- gence of counter-forces suggest that corporate amalgamation cannot possibly run smoothly and continuously (Proposition 4 in Chapter 14).
Breaking the envelope
But then, why should amalgamation move in cycles? In other words, why does the uptrend resume after it stumbles? And what does this resumption mean?
15 A typical illustration of this process is provided by the food business (based on data from the authors' archives). During the 1980s, the sector went through rapid amalgamation. In 1981, a $1. 9 billion merger between Nabisco and Standard Brands created Nabisco Brands, which then merged in a $4. 9 billion deal with R. J. Reynolds to create RJR Nabisco. A few years later, KKR, which had earlier acquired Beatrice for $6. 2 billion, paid $30. 6 billion to take over RJR Nabisco in what was then the largest takeover on record. Elsewhere in the sector, Nestle? took over Carnation ($2. 9 billion) and Rowntree ($4. 5 billion); Grand Metropolitan acquired Pilsbury ($5. 7 billion) and Guinness ($16 billion); Phillip Morris bought General Foods ($5. 7 billion) and Kraft ($13. 4 billion); BCI Holdings took over some Beatrice divisions ($6. 1billion); and Rho^ne-Poulenc bought Hoechst ($21. 9 billion). By the end of the 1980s, the merger flurry died down. According to the Financial Times, food companies at the time were very cheap, yet 'shareholders have deserted food stocks . . . partly because of the absence of genuinely attractive acquisition targets' in an industry whose 'biggest problem has been minimal sales growth' (Edgecliffe-Johnson 2000). During the 1990s, there were a few more big transactions, such as the $14. 9 billion acqui- sition of Nabisco by Philip Morris, but these were mostly reshuffles of assets among the large players. The experience of reaching the 'envelope' was summarized metaphorically by a Bestfood executive whose company had been taken over by Unilever: 'I have been to Bentonville, Arkansas [home of Wal-Mart's headquarters], and I would like to say that it is not the end of the world, but you can see it' (ibid. ).
16 The 1933 Glass-Steagall Act, for instance, barred US banks from making industrial invest- ments, a prohibition that only recently has been relaxed. Similar transformational effects were brought on by the post-war dismantling of the Japanese Zaibatsu, by the 1990s unbundling of South African holding groups and the divestment of Israeli banks of their 'non-financial' holdings, and by the transnationalization of the Korean Chaebol during the 2000s.
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From the perspective of dominant capital, amalgamation is simply too important to give up. And while there may not be many candidates worth absorbing in their own corporate universe, outside of this universe targets are still plentiful. Of course, to take advantage of this broader pool, dominant capital has to break through its original 'envelope' - which is precisely what happened as the United States moved from one wave to another (Proposition 5 in Chapter 14).
The first, 'monopoly' wave marked the emergence of modern big business, with giant corporations forming within their own original industries. Once this source of amalgamation was more or less exhausted, further expansion meant that firms had to move outside their industry boundaries. And indeed, the next 'oligopoly' wave saw the formation of vertically integrated combines whose control increasingly spanned entire sectors, such as in petroleum, machinery and food products, among others. The next phase opened up the whole US corporate universe, with firms crossing their original boundaries of specialization to form large conglomerates with multiple business lines ranging from raw materials, through manufacturing, to services and finance. Finally, with the national scene having been more or less integrated, the main avenue for further expansion now is across international borders, hence the latest global merger wave. 17
Until recently, the global wave was characterized by considerable de- conglomeration, with many firms refocusing on so-called core activities where they enjoyed a leading profit position. The main reason is that global- ization enables additional intra-industry expansion across borders while legitimizing further domestic centralization in the name of 'global competi- tiveness'. Eventually, though, such refocusing is bound to become exhausted, pushing dominant capital back toward conglomeration - and this time on a global scale. In fact, such re-conglomeration is already happening in areas such as computing, communication, transportation and entertainment, where technological change is rapidly blurring the lines between standard industrial classifications. 18
17 The process of course is hardly unique to the United States. For example, 'Before [South Africa] started the progressive unwinding of exchange controls in 1994', writes the Financial Times, 'large companies were prevented from expanding overseas. With capital trapped at home, they gobbled up all available companies in their industries before acquiring compa- nies in other sectors and becoming conglomerates' (Plender and Mallet 2000). For analyses of differential accumulation, business consolidation and globalization in South Africa and Israel, see Nitzan and Bichler (1996) and Nitzan and Bichler (2001).
18 For instance, information, telecommunication and entertainment companies such as Cisco, Alcatel-Lucent, Microsoft, Time Warner, NewsCorp, Hutchison Whampoa and Vivendi increasingly integrate computing (hardware and software), services (consulting), infra- structure (cables and satellite), content (television, movies, music and print publishing) and communication (internet and telephony), while leisure firms like Carnival Cruise own ship- ping lines, resort hotels, air lines and sport teams. Other companies, like General Electric or Philip Morris, have never abandoned conglomeration in the first place and continue spreading in numerous directions.
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And, indeed, the pivotal impact of mergers is to creorder not capitalist production but capitalist power at large. The reason is rooted in the dialec- tical nature of amalgamation. By constantly pushing toward, and eventually breaking through their successive social 'envelopes' - from the industry, to the sector, to the nation-state, to the world as a whole - mergers create a strong drive toward 'jurisdictional integration', to use Olson's terminology (1982). Yet this very integration pits dominant capital against new rivals under new circumstances, and so creates the need to constantly creoder the wider power institutions of society, including the state of capital, interna- tional relations, ideology and violence.
Although this merger-driven creordering of power is yet to be theorized and empirically investigated, some of its important patterns can be outlined tentatively. In the remainder of the chapter we examine several key develop- ments that unfold as mergers enter their ultimate, global envelope.
Globalization
From the viewpoint of capital as power, globalization is the capitalization of power on a global scale, and its key vehicle is the movement of capital. 19 The notion of 'movement' here can have different meanings, so some clarification is in order before we begin.
In common parlance, reference to international capital mobility connotes a macro-statist frame of reference: capital is seen as an 'economic-productive' entity that somehow 'flows' from one state to another. But that isn't what happens in practice. By definition, capital mobility is a purely pecuniary process. Usually, the only thing that happens is a reshuffle of ownership claims, in which foreign capitalists acquire an asset from (or sell one to) their domestic counterparts. Occasionally, the acquisition alters the value of the transacted asset, but that change, too, is entirely pecuniary. The accountants simply adjust the value of equity or debt on the right-hand side of the balance sheet and of goodwill on the left-hand side, and that's it.
There is no cross-border flow of machines, structures, vehicles, technical know-how, or employees. These items may or may not move later on, but such movements are merely rearrangements of the left-hand side of the balance sheet; they have no bearing on the act of foreign investment per se.
The real impact of capital flows is on the underlying nature of power. When ownership crosses a border, it alters the organization and institutions of power on both sides of that border and, eventually, the significance of the border itself. In this sense, capital mobility creorders the very state of capital -
19 Globalization of course has numerous other dimensions, but these are secondary for our purpose here. For more on the globalization debate, see Gordon (1988), Du Boff et al. (1997), Sivanandan and Wood (1997), Burbach and Robinson (1999), Hirst and Thompson (1999), Radice (1999), Sutcliffe and Glyn (1999) and Mann et al. (2001-2).
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that we need to decipher.
Capital movements and the unholy trinity
Most analyses of capital movement concentrate on its alleged cyclicality. The common view is that, although capital flow has accelerated since the 1980s, the acceleration is part of a broader recurring pattern, and that the peaks of this process in fact were recorded during the late nineteenth and early twen- tieth centuries (Taylor 1996).
The standard approach to these ups and downs in capital mobility is the so-called 'Unholy Trinity' of international political economy. According to this framework, there is an inherent trade-off between (1) state sovereignty, (2) capital mobility and (3) international monetary stability - three conditions of which only two can coexist at any one time (Fleming 1962; Mundell 1963; Cohen 1993). 20
Thus, during the 'liberal' Gold Standard that lasted until the First World War, limited state sovereignty allowed for both free capital mobility and international monetary stability. During the subsequent inter-war period, the emergence of state autonomy along with unfettered capital flow served to upset this monetary stability. After the Second World War, the quasi-statist system of Bretton Woods put a check on capital mobility so as to allow domestic policy autonomy without compromising monetary stability. Finally, since the 1970s, the rise of neoliberalism has, again, unleashed capital mobility, although it is still unclear which of the other two nodes of the Trinity - state sovereignty or monetary stability - will have to give.
Why has the world moved from liberalism, to instability, to statism and back to (neo)liberalism? Is this some sort of inevitable cycle, or is there an underlying historical process here that makes each 'phase' fundamentally different? The answers vary widely. 21
Liberal interpretations emphasize the secular impact of technology that constantly pushes toward freer trade and greater capital mobility, with unfor- tunate setbacks created by government intervention and distortions. From this perspective, post-war statism, or 'embedded liberalism' as Ruggie (1982) later called it, was largely a historical aberration. After the war, governments took advantage of the temporary weakness of capitalism to impose all sorts
20 The rationale is based on the external account identity between the current and capital balances. If the international monetary system were to remain stable (in terms of exchange rates), governments can retain domestic sovereignty over exports and imports only if capital movements are controlled to 'accommodate' the resulting current account imbalances. In the absence of such capital controls, governments would have to give up their policy autonomy; if they don't, the mismatch between the current and capital balances would lead to currency realignment and international monetary instability.
21 For views and reviews, see Cerny (1993), Helleiner (1994), Sobel (1994) and Cohen (1996).
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of restrictions and barriers. Eventually, though, the unstoppable advance of information and communication forced them to succumb, as a result of which the rate of return rather than political whim once again governs the move- ment of capital.
Critics of this natural-course-of-things theory tend to reverse its emphasis. Thus, according to Helleiner (1994), the key issue is neither the expansionary tendencies of technology and markets, nor their impact on the propensity of capital to move, but rather the willingness of states (i. e. governments) to let such movements occur in the first place. From this viewpoint, state regulation is not an aberration, but rather the determining factor - and one that govern- ments remain free to switch on and off.
One important reason for such cyclical change of heart, suggests Frieden (1988), is the shifting political economy of foreign debt. According to this view, during the Gold Standard, Britain became a 'mature creditor', and therefore was interested in liberalization so that its debtors could have enough export earnings to service their foreign liabilities. The United States reached a similar position during the 1970s, and since then it has used its hegemonic power to re-impose liberalization for much the same reason. According to Goodman and Pauly (1995), this second coming of liberalism was further facilitated by the desire of governments to retain the benefits of transnational production. The latter desire required that they also open the door to trans- national financial intermediation, hence the dual rise of portfolio and foreign direct investment.
Global production or global ownership?
Plus c? a change, plus c'est pareil? According to the globalization sceptics, the answer is pretty much yes. Despite the recent increase in capital mobility, they point out, most companies remain far more national than global (see for instance, Doremus et al. 1998; Weiss 1998; Hirst and Thompson 1999). The extent of transnational production is fairly limited: its share in global GDP rose from 5. 6 per cent in 1982, to 6. 8 in 1990, to 10.
