the city

Tony Norfield’s The City explains British finance capital and its global role, and also has important political implications, argues Chris Nineham


Tony Norfield, The City: London and the Global Power of Finance (Verso 2016), 288pp.

There is a lot of fascinating detail in Tony Norfield’s book about how the City of London works, but it is outstandingly useful for two main reasons. First it provides an accessible, systematic and updated account of the Marxist understanding of finance capital. Second, it applies that analysis to Britain’s current role in the world system in a way which helps to explain the predicament our rulers are in and the prospects for the rest of us.

Norfield worked in the City for twenty years as one of the – presumably – small club of Marxist city dealers, but if it was a lonely position for him it had the advantage of allowing a fruitful fusion of technical knowledge and big-picture theory. His key insights challenge a number of misconceptions that cloud much thinking about finance and the British economy, even on the left.

The system is global

First, the role of big finance simply cannot be addressed at a purely national level, it can only be understood as part of a global system. The most obvious proof of this is the amount of profit generated by investment in foreign industries, shares and so forth:

‘In 2013 alone, US receipts from investments in foreign companies, foreign equities and bonds etc., amounted to $773.4bn. This was more than the entire economic output of Switzerland, as measured by GDP!’ (p.9).  

The book makes it clear that international flows of a number of different kinds are central to the functioning of the system, and that it is impossible to understand Britain’s economy without understanding its role in the world.

It’s interconnected

Second, and related, finance capital is not a separate entity from productive capital. ‘Good (productive), capital’ versus ‘bad (finance) capital’ distinctions, common amongst Keynesians, are based on fantasy. The two types of capital are in fact interdependent. This is proved at one level by the fact that many ‘productive’ companies are deeply involved in banking and financial speculation.

In fact, the connections are even more fundamental than that. Banks are necessary for the productive system because they are repositories of spare surplus value generated by production across the system. They make it possible for businesses to borrow more than they have themselves in capital in order to make big investments. However, there is a constant temptation for the banks to overextend themselves by increasing the ratio of their lending to actual deposit rates, called leverage. In ‘normal times’ banks operate a leverage ratio of around twenty times their equity, in the period before the 2007 crash, this rose to a ratio of around one hundred (p.131).

Apart from banking, other, expanding, circuits of capital exist outside the cycle of producing, selling and buying commodities. These include the circulation of bonds, securities and futures. Financial capitalists make money from money rather than through the production of surplus value through production. That is why Marx called finance capital ‘fictitious capital’; notional money that is essentially predicated on future profits, or future payments on mortgages.

While these forms of capital benefit the whole class of capitalists, they store up and magnify problems. Because capitalism is a competitive, blind system, the amounts of finance capital in circulation far exceed any real profits that are ever likely to be made. Fictitious capital does not break the link between the production of value from labour power or assets like commodities, plant, equipment and so forth, but it does stretch it, sometimes to the point of crisis. The expansion of fictitious capital enables capitalism to expand faster but also ensures it will crash further.

‘Pricing fictitious assets at their ‘future value’ persists until a crisis shatters what is called ‘market confidence’: then prices collapse, and what was thought to be real wealth disappears as the red digits flash across the dealing screens’ (p.147).

The problem is profits

There is another, important dimension to the relations between finance and productive capital. The recent, massive and ultimately destabilising expansion in fictitious capital is not just a result of greed, stupidity or excessive speculation, it is linked to the (under) performance of productive capital:

‘Even when the financial system appears to be the cause of a crisis, a closer look at the background would reveal how its origins lie in the trouble capitalism has generating enough profits’ (p.148)

This trouble in turn has its foundation in a structural tendency of capitalism as it ages, what Marx called ‘the general tendency of the rate of profit to fall’. The problem for business is that while workers are the source of profit, capitalists are compelled to invest more and more in technology, a fact which means over time the amount of profit they receive from each dollar, euro or pound invested tends to fall.

As profit rates fall, the attraction of the financial markets grows. In turn, reduced interest rates which often accompany economic slowdowns, encourage riskier speculation in particular by reducing the bank’s margins – the difference between their cost of borrowing and lending. This in turn encourages increased leveraging.

‘A debt crisis is not really a crisis of debt, but more a sign that the economy’s production of value can no longer support the previous illusion of wealth. The chronic nature of the current crisis, with persistently low rates of growth compared to earlier decades, is another sign the game is up’ (p.151).

In reality it is this deeper problem of profitability rather than concern over debt that has been driving the economic policies of recession in recent years, when profits are being squeezed:

‘why bother paying to educate workers with public funds when there are plenty of skilled and educated workers available already? Why bother providing more than the absolute minimum of health and welfare services? This is the reality behind the so-called austerity policies today, to the extent that even the privileges of the middle-class professionals, traditional bastions of support for the mainstream political parties in all countries are coming under attack’ (p.152).

The blood bank

Norfield’s account of Britain’s role in this process is illuminating. One of his central themes is the imperialist role that finance capital performs. ‘Finance is both a necessary part of capitalism and a way for rich countries to draw income from the rest of the world’s economy’, he writes. More graphically, he argues that British imperialism has created ‘a financial machine that functions as vampire’s blood bank for the surplus value created elsewhere’ (p.228).

London remains the pre-eminent international financial centre for the world economy, and British banks and other institutions take a cut of all the capital that passes through. This privileged position is a function of historic commercial and power relations developed in Britain’s imperial heyday; the international reach of British corporations, strength and trust in the pound, the scale of its level of accumulation. All of course are related to different forms of state power:

‘Being bigger can also mean being able to provide services or capital at a lower cost or at least being in a more influential market position. The ability to secure a larger scale of operations depends not only on the national market, but also on the international market, and here the position and power of the national state is a factor’ (p.100).

The trouble has just begun

Two observations follow for Norfield. One is that this role and position is crucial for Britain’s capitalist class. The international revenues provided play a vital role in offsetting the UK’s chronic deficit in its trade in goods with the rest of the world. The City provides an often low-cost source of funding for the deficit on the balance of payments and gives British companies access to vital funds.

Secondly, though, there are storm clouds on the horizon. Focus on the City has a distorting effect on the economy. Britain is becoming more and more indebted, relying on greater and greater levels of foreign inward investment. The ability of Britain’s financial operations to fill the gap is diminishing (p.217). The kind of economic regime produced by the predominance of finance capital is also creating domestic turbulence expressed in the near-miss Scottish Independence vote in 2014, the Brexit vote this year and a rise in radical politics. None of this is good news for the City which depends on its reputation for reliability and the UK’s stable image.

More widely, Norfield suggests global shifts are threatening the dominance of Western finance. The City has done its best to make itself indispensable to the rising economies around the world, but China in particular is showing signs of independence, including developing currency deals with partners in Asia, South America, Africa and Europe. China’s currency is now the fifth most used on the biggest interbank payments system (p.225). As Norfield notes, ‘China is not the usual supplicant at the imperial table of the kind the Americans and Britain have dealt with before’ (p.224). 

The politics of economics

Norfield stops short of drawing many political conclusions from his analysis. Tantalisingly, he fails to make more than implicit links between Britain’s financial operation and its increasing number of direct military imperial interventions. There are hints in the book of a rather pessimistic view that a large enough share of Britain’s population benefits from its imperialist financial operations to provide stability for the current set up. This would contradict Norfield’s comments about austerity, and his general sense of the growing discontent in society, not to mention the fact that Britain has had the biggest and most sustained anti-war movement in the world. His comments about those on the left who supported an EU exit also sit oddly with his account of the imperial roles of the Western powers.

That said, The City is an ambitious, compelling assessment of the way Britain works and it provides the basis for an analysis that would probably include three points. First, it is no surprise that Britain is radicalising; British capitalism is amongst the most rapacious and parasitic in the world. Second, Britain’s economic imbalances, volatility and vulnerabilities are becoming critical. Lastly, the City’s dominance at home and abroad means that while a left-wing Labour government will, hopefully, make a welcome start in tackling its power, it is going to need a popular movement of some size, and international reach, to really tame it.

Chris Nineham

Chris Nineham is a founder member of Stop the War and Counterfire, speaking regularly around the country on behalf of both. He is author of The People Versus Tony Blair and Capitalism and Class Consciousness: the ideas of Georg Lukacs.