Speed, Power and the Physics of Finance Capitalism

“Time is money”…”speed is power”: We have moved from the stage of the acceleration of History to that of the acceleration of the Real. This is what ‘the progress’ is: a consensual sacrifice. – Paul Virilio “Paul Virilio On The Crisis” in Radical Perspectives on the Crisis

The French urbanist and philosopher Paul Virilio is one of the principal theorists of speed. After many years pursuing the relationship between concepts of velocity and the paradox of being in a virtual world – of being somewhere and nowhere at the same time – Virilio explains how real time has supplanted real space such that “A synchronization has taken place of customs, habits, mores, ways to react to things, and also, of emotions,” exemplified in the hysteria that followed the global financial crisis. He maintains: “Since speed earns money, the financial sphere has attempted to enforce the value of time above the value of space” and while this has led to massive profits for the few and increasing inequalities, to truly understand the phenomenon of an economy of speed, the left has to jettison its old framework that insists capitalism is dead, and all we need is more social justice. This is a false deduction that proceeds from adopting the same old materialist analysis.”

Whether one accepts Virilio’s analysis or his predictions, it is clear that speed and velocity are the main aspects of a new finance capitalism that operates at the speed of light based on sophisticated “buy” and “sell” algorithms. Already researchers have demonstrated that data transfer using a single laser can send 26 terabits per second down an optical fiber and there are comparable reports that lasers will make financial “high-frequency” trading even faster.

This is how Tyler Falk blogging for Smartplanet describes it: “With high-frequency trading, firms use complex algorithms to exploit price discrepancies in the stock market. All of this trading happens in a flash, microseconds… Dealing in microseconds means companies need to have the fastest technology to complete their transactions. Superfast fiber-optic networks were the hot technology, then microwave networks came along, and now: lasers?”

He notes that two companies, Anova and AOptix, are pursuing this vision that looks to a new technology that will shave microseconds off financial trades. As a BBC story explains: “High-frequency trading (HFT) is driven by complex algorithms that allow traders to jump ahead of competitors by exploiting minute discrepancies in price on exchanges in different cities.”

In such trading, every millisecond counts and the competition to provide ever-faster trading networks is fierce. The first microwave connection between London and Frankfurt was turned on last October by Perseus Telecom. According to the company, the system cut about 40 percent off the time taken to complete a trade compared with traditional fibre-optic networks.

Western modernity (and developing Global systems) exhibit long-term tendencies of an increasing abstraction described in terms of formalization, mathematicization, aestheticization and biologization of life. These are characteristic of otherwise seemingly disparate pursuits in the arts and humanities as much as science and technology and driven in large measure through the development of logic and mathematics especially in digital systems. Much of this rapid transformation of the properties of systems can be captured in the notion of “bioinformational capitalism” that builds on the literatures on “biocapitalism” and “informationalism” (or “informational capitalism”) to develop the concept of “bio-informational capitalism” in order to articulate an emergent form of capitalism that is self-renewing in the sense that it can change and renew the material basis for life and capital as well as program itself. Bioinformational capitalism applies and develops aspects of the new biology to informatics to create new organic forms of computing and self-reproducing memory that in turn have become the basis of bioinformatics.

The notion of “algorithmic capitalism” as I have previously described it is “an aspect of informationalism (informational capitalism) or “cybernetic capitalism,” a term that recognizes more precisely the cybernetic systems similarities among various sectors of the post-industrial capitalist economy in its third phase of development – from mercantilism, industrialism to cybernetics – linking the growth of the multinational info-utilities (e.g., Goggle, Microsoft, Amazon) and their spectacular growth in the last twenty years, with developments in biocapitalism and the informatization of biology, and fundamental changes taking place with algorithmic trading and the development of so-called financialization.”

I used the notion to examine and explain the phenomenon of the “Flash Crash” when the Dow Jones lost 700 points (some $800 billion) – one of its biggest one-day falls in history – and recovered within minutes.

Algorithmic trading is sometimes seen as an explanation of market volatility especially when risk is not transparent or able to be effectively tracked and monitored. Automated buy-sell programs now account for over 80 per cent of all US equity trading. Increasingly, global information systems that operate at the speed of light are now harnessed by HFT (high frequency trading) firms to create Automated Trading Desks that are capable of trading hundreds of millions of shares daily. So-called “quant trading”, after “quantitative trading programs” are now designed by mathematicians and underlie HFT, where stocks are held often for only microseconds.

The staggering growth of the finance industry sometimes referred to as “financialization” represents a set of overlapping processes that refer not only to the rapid expansion of the financial sector of the capitalist system – to the growth of financial institutions of all kinds – but also to a qualitative change in the mode of production where banking systems jettison traditional banking practices to become commercial investors and multinational corporations develop as financial institutions able to invest and trade directly in financial markets.

Richard Peet (2011) writing for Monthly Review puts it succinctly: “Over the last thirty years, capital has abstracted upwards, from production to finance; its sphere of operations has expanded outwards, to every nook and cranny of the globe; the speed of its movement has increased, to milliseconds; and its control has extended to include “everything.” We now live in the era of global finance capitalism.

Some critics argue that the rise of neoliberalism is explained by the growing role and power of finance in the political economy of capitalism and that neoliberalism “is the expression of the desire of a class of capitalist owners and the institutions in which their power is concentrated, which we collectively call ‘finance,’ to restore … the class’s revenues and power…” Others suggest that financialization is result of neoliberal restructuring, but has deeper historical roots. Financialization is not just quantitative expansion, but change in nature of financial institutions and banks that have jettisoned traditional banking practices to pursue the creation and sale of their own financial instruments. As many theorists suggest, neoliberalism, beginning 1980 in US, encouraged a shift from state-regulated capitalism to deregulated neoliberal capitalism. The Glass-Steagall Act, the mainstay of the 1933 Banking Act, up until recently had controlled commercial banks from engaging in securities trading – including the capacity to gamble with depositors funds through affiliated banks. These controls were finally removed with the repeal of affiliation restrictions (Sections 20 and 32) in 1999 under the Clinton regime – which permitted financial institutions to diversify their products and increase their sources of revenue.

Financialization is a systematic transformation of capitalism based on the following trends: 1. the massive expansion of the financial sector where finance companies have taken over from banks as major financial institutions and banks have moved away from old lending practices to operate directly in capital markets; 2. large previously nonfinancial multinational corporations have acquired new financial capacities to operate and gain leverage in financial markets; 3. domestic households have become players in financial markets (the ascendancy of shareholder capitalism) taking on debt and managing assets; and 4. in general, financialization represents the dominance of financial markets over declining production by the traditional industrial economy and a corresponding abstraction of “fictionalized” capital that increasingly controls price mechanisms, but adds little or nothing to real value.

The remarkable growth of finance capital in relation to real wealth is represented in the graph below from the McKinsey Global Institute.

Figure 2: Financial and Real Wealth

Source: McKinsey Global Institute.

This unreal growth is also demonstrated in statistics that record that in 2011, the Gross World Product (GWP) totaled approximately $79.39 trillion while the world derivatives market was estimated in excess of $1.2 quadrillion, some twenty times larger than the world’s productive economy.

Some commentators argue that these derivatives are not attached or anchored to anything physical and that they have also contributed to the unsustainable sovereign debt problem with central banks following quantitative easing policies. After the Lehmann collapse, the big investment banks stepped in to create a shadow banking system through new forms of money proxies. Now the United States faces trillion dollar deficits every year for the foreseeable future and a huge $16.4 trillion public debt which has led to austerity politics. As Mark Congloff of the Huffington Post reports a recent paper in the Journal of International Money and Finance argues “that derivatives, namely credit default swaps, have actually made the European debt crisis worse, driving up interest rates for shaky sovereign borrowers such as Greece and Italy.” Congloff goes on to say: “Credit derivatives played a clearly important role in the US financial crisis, but in a much different way. AIG was nearly dragged under by its massive portfolio of CDS, which nearly brought down the entire financial system and required a massive government bailout of the insurance giant. And CDS helped make it easier for banks to load up on other weapons of mass financial destruction, bundles of risky mortgage securities.”

Because derivatives are bundled, sliced and on-sold many times over, financial risk is not transparent. Add to this the new physics of HFT and the problem becomes hugely magnified, defying the ability of world governments or any monitoring agency to track the quantity and direction of these global trades.

To return to Virilio’s remark that the old left approach of demanding yet more social justice is just not going to get us very far: If we accept that the financial crisis and increasing financialization is an expression of the exhaustion of the neoliberal model of capitalist development, that its continuing abstraction and increasing speed are ultimately unstable, untraceable and unable to be properly regulated, and that its perpetual expansion while not anchored in anything productively real nonetheless controls the price mechanism and leads to extensive global inequalities, then how long can it last and where are its suitable substitutes? Financialization characterizes the politics of late neoliberal capitalism allowing it to extract value from the commons: to raid social security and medicare, to privatize education and infrastructure, to monetize medicine and medical insurance, to massively mortgage student debt, to confiscate depositors’ funds, to asset-strip state enterprises. These are all forms of enclosure that permit a tiny but powerful minority to plunder the commonwealth in the same way that this global elite plundered the personal wealth of the majority via the housing bubble and the huge drop in household wealth for all but the very very few. Finance capitalism trumps industrial capitalism, but what trumps finance capitalism? This is the first planetary crisis of this global magnitude and it is linked closely with a wider ecological, social and unemployment crisis. Both the scale and speed of its inexorable development might indicate that nothing can save the system and it must continue to the end of an inevitable collapse. The new logic of post-finance capitalism must recognize the failure of deregulation policies and debt-driven growth and may be forced to accept again as at the height of the 2008 crisis the opening for big government solutions in an era of global sustainability and social solidarity.