Property,credit,and monetary sabotage: Contemporary capitalism in institutionalist perspective

Abstract

Capitalism is a social order that evolves over time. While market exchange, private property, and the profit motive are generic features of capitalist systems, studies of contemporary capitalism aim to highlight what is specific about capitalism today. In this article, we develop the concept of monetary sabotage to pinpoint a phenomenon that has become more pronounced in recent decades, but which has not been sufficiently elaborated so far. Monetary sabotage refers to the utilization and, eventually, manipulation of the monetary infrastructure for private profit, creating instability and perpetuating inequality. Drawing on old institutionalism, with its emphasis on law, and articulating it with contemporary theories of credit and insights from the sociology of money, our analysis highlights the evolution of incorporate and intangible property as premises for financial profit-making at the expense of the public. This institutionalist approach adds new insights to the prevailing financialization literature and complements other critical perspectives.

Capitalism and “old” institutionalism

When we speak of capitalism, we refer to a specific way in which a society organizes its economy, which encompasses all forms of social provisioning (Stilwell, 2012, p. 185). As a form of social order, capitalism rests on a distinctive set of institutions, with market exchange, private property, and the profit motive featuring prominently (Fraser, 2022). The latter takes shape as an orientation toward the calculation and accumulation of capital, which the term capitalism derives from (Chiapello, 2006).

In this article, we put forward an institutional theory of capitalism, which builds on the classical works of Thorstein Veblen (1932 [orig. 1904]; 1923) and John R. Commons (1924; 1959 [orig. 1934]), two American economists who gave shape to what is now referred to as old, or original, institutionalism. This school of thought is more concerned with the institutional realities of capitalism than so-called mainstream economics with its focus on abstract economic principles and equilibrium models, and it offers important inspiration for contemporary scholarship in the interdisciplinary fields of political economy and socioeconomics (Thornton, 2017) as well as institutional law and economics and legal institutionalism (Deakin et al., 2017; Medema et al., 2000). By demonstrating the relevance of old institutionalism for conceptualizing capitalism today, we want to put Veblen and Commons on the map for scholars interested in theorizing capitalism, but not familiar with their works, and align with similar efforts to bring the concepts and insights of somewhat undervalued theoretical traditions (marked as “heterodox” in economic discourse) up to date.

Old institutionalism promotes an evolutionary perspective on the economy (Veblen, 1898), which sheds light on the continuity of capitalist organization while it also furthers an understanding of institutional change. In this article, we focus on law and money, or property and credit, as institutions shaping modern capitalism and developing ever new forms. In an institutionalist perspective, law and money are neither natural nor neutral, but contingent social infrastructures that format economic behaviors and relations in specific ways. We integrate inputs from Veblen's and Commons’ original works, which usually appeal to different audiences (even in the old-institutionalist camp), expand their analyses to include more recent institutional developments, namely of property and credit, and point to monetary sabotage as an effect of new forms of financial profit-making, which compromise the monetary infrastructure as such.

Our argument proceeds in four major steps. The section Sabotage as a systemic feature of capitalism introduces Veblen's concept of the capitalist sabotage of production (industrial sabotage), considers its generalizability, and critically discusses Nesvetailova and Palan's (2013, 2020) adaptation of the concept to the financial sector (financial sabotage). In this context, we propose a broader understanding of sabotage invoking the monetary infrastructure (monetary sabotage). The subsequent section Property as a foundation of capitalism lays out the constitutive function of law in defining property rights in a way that facilitates capitalist sabotage. This amounts to the legal right of capitalist owners, creditors and investors to withhold their property from its use to the benefit of others, which yields a form of economic power. This applies not only to tangible, physical property with its immediate use-value, but also to intangible property, whose market-based exchange-value plays a central role today. Moreover, economic power does not only emerge from property rights but is also embodied in other legal positions and potentials privileging capitalist owners—not least in their role as taxpayers (fiscal sabotage).

The following section Money in the modern credit economy shows that the accentuation of the exchange-value of property over its use-value highlighted by Commons is also key for understanding the new forms of credit money driving contemporary capitalism. Building on legal exchange relations around the negotiability of debt, there are now a variety of legal constructs underpinning the process of financialization and new forms of profit-making. Under present conditions, the power to withhold extends not only to money as an asset but implies a manipulation of the monetary infrastructure for the purposes of private profit. This economic power unfolds in the context of a hierarchy of different forms of credit, which expands internationally and includes public guarantees enhancing collective trust. Having outlined key ideas of Veblen and Commons and explored what these mean for an analysis of capitalism today, the section Monetary sabotage in contemporary capitalism elaborates in more detail on the phenomenon of monetary sabotage using illustrations from different stages in the cycle of credit (creation, circulation, and elimination) which involve new forms of intangible property (repurchase agreements, credit assessments, and compensation claims).

Sabotage as a systemic feature of capitalism

Veblen's critique of capitalism—or an important aspect thereof—can be condensed in the concept of industrial sabotage. This is premised on a distinction between industry and business as different spheres of activity, which each follow their own logic: business puts profit-making center stage, while industry aims at the production of material values. This terminology resonates with later debates setting “real” and “financial” aspects of the economy against each other, or “production” against “finance” (Krippner, 2011, p. 4, n. 10, 168), and the related idea that we witnessed a “shift from industrial to finance capitalism” in the late 20th century, also referred to as “financialization” (Van der Zwan, 2014, p. 99). Hence, our first point is that the financialization studies of today were preceded by, and are partly premised on, earlier approaches outlining a “monetary theory of production,” including Veblen next to Marx and Keynes (Dillard, 1987; Todorova, 2015). This perspective reflects a concern that production is not simply aimed at satisfying the material needs of society but has come to be targeted at profit-making. Veblen speaks of sabotage, which is both an effect and a means of profit-making.

Industrial sabotage as a capitalist business strategy

For Veblen (1923, p. 65), “[m]odern industry is a system of mechanical processes devised and directed by expert knowledge and carried out by means of mechanical apparatus and raw materials.” In its totality, it is described as “a machine process”, which constitutes the “material framework of modern civilization” (Veblen, 1932, p. 1, 7). Interference with industrial production on “other than technical grounds” (Veblen, 1923, p. 268) is considered to compromise collective material welfare. At the time of Veblen, a highly productive industrial system, which transforms ever more material inputs into products in a wasteful economy and ultimately sabotages nature (Plotkin, 2023, p. 164), had not yet been seen as a problem.

In contrast, “[b]usiness principles” are less concerned with using the capacities of industrial production to improve social outcomes, but rather take shape as “pecuniary principles” to increase the wealth and income of capitalist owners by relying on private property and return on investment (Veblen, 1932, p. 66; cf. Veblen, 1923, p. 404). These principles have become the foundation of modern business organization and, ultimately, corporate finance. As a consequence, “[t]he production of goods or services […] is carried only so far as will yield the largest net gain in terms of money” (Veblen, 1923, p. 85). Importantly, for Veblen (1932, p. 153), there is no clear relation between the “material serviceability” of industry to society, and the “earning-capacity” of business, or useful production and pecuniary profits.

Veblen's distinction of industry and business points to a changing relation between productive and commercial activities: from business as a “servant of industry” to industry as a “servant of business,” with an increasing “level of finance” involved in increasingly “big business” (1923, p. 113). Under these circumstances, “pecuniary traffic” becomes a source of irritation or “disturbance” for industrial processes (Veblen, 1932, p. 210). The differentiation of industry and business manifests itself in an increasing division of labor between the industrial experts and engineers in charge of the productive efficiency of the machine process and the “business manager[s]” and “employer-owners” focusing on the financial success of the company (Veblen, 1923, p. 106). In the modern corporation, “financial control and direction” become more accentuated (Veblen, 1923, p. 83), as evident in the joint-stock company with shareholders not directly involved in industrial business.

An indirect means for increasing financial profits is what Veblen calls “sabotage on production and output,” which is carried out in a “businesslike” manner (1923, p. 196, n. 7, 217, 223; cf. ibid., 73, 285). It is called sabotage as it goes against the industry's logic of increasing efficiency and “let[ting] the forces of production take their course” (Veblen, 1923, p. 217). Instead, the “[business] principle of net gain” may even require to artificially limit production by way of “slowing down, curtailing output, holding back” (Veblen, 1923, p. 180). As a business strategy to increase profits, such “discretionary idleness” (Veblen, 1923, p. 66) is successful only if a certain scale of (in)activity is reached, which increases scarcity and drives up market prices. This is why industrial sabotage is often linked with cooperation, collusion, and conspiracy between formally independent parties (cf. Veblen, 1923, pp. 222–223, 409–410).

Toward a generalized understanding of capitalist sabotage

One can extrapolate from counter-productive and collusive activities in the industrial sector to similar manipulation and conspiracy in other economic spheres to identify other forms of “capitalistic sabotage” (Veblen, 2001, p. 5). Veblen (1923, p. 353) briefly touches on “fiscal sabotage” as the rejection of funds to potentially useful but not sufficiently profitable enterprises. Nesvetailova and Palan (2013, p. 726) use the concept of “financial sabotage” to describe the manipulative business strategies of financial companies. We will invoke the concepts of fiscal sabotage (reapplying it to harmful effects on governments’ taxation policies) and financial sabotage (which can also be applied to non-financial corporations (Crotty, 2003, pp. 275–276)), and take a broader view at monetary sabotage, which concerns the collective infrastructure of money as such.

Our expansion of Veblen's critique of sabotage is premised on an articulation of his approach with that of Commons, who does not use this concept except in reference to Veblen (Commons, 1959, p. 659, 672, 680). Moreover, Commons (1959, p. 673) distances himself from “Veblen's cynical antithesis of business and industry.” Compared to Veblen, Commons was more willing to recognize monetary measures, such as capital values based on expected profits and earnings, as the new “reality” of the political economy of his time (Maucourant, 2001, p. 276). His focus came to be to what extent exchange values, or market prices, could be shaped by a collective process promoting a “reasonable value” that would not prioritize private profits only but also reflect the “public purpose” (Commons, 1924: ch. 9, 1959: ch. 10). These nuances notwithstanding, Commons’ analysis of capitalism builds in relevant aspects on Veblen's work and takes them, conceptually and empirically speaking, to a higher level. This generalization facilitates adaptation of the old-institutionalist approach to new questions and concerns, such as monetary sabotage.

Shortcomings in prior work on financial sabotage

Our work goes beyond Nesvetailova and Palan (2013, 2020), who describe a behavior of financial actors that is harmful to other actors—clients, competitors, governments—as financial sabotage. This is in line with finance often being referred to as a collective subject (e.g., haute finance, global finance), but it distracts from the object of sabotage: the monetary and financial system, or what we refer to as the monetary infrastructure. In analogy to Veblen's use of industrial sabotage, with its effects on industry and the common good, we prefer to speak of monetary sabotage. This puts the object of sabotage—the monetary infrastructure—center stage rather than the actors using or abusing it for their own benefits.

Moreover, there is a strange tendency in Nesvetailova and Palan's work to take the efficient market hypothesis as a normative reference point of how financial markets should be functioning (2020, pp. 3–5, 34, 87). They picture Veblen as “early believer in efficient market theory” (Nesvetailova and Palan, 2020, p. 10), even though the latter's concern was more with the efficient use of productive capacities for social provisioning than with efficient markets or the price mechanism in the abstract. In line with contemporary discourse on market failure, their idea seems to be that if regulation properly targeted the “sabotaging instinct” of profit-seeking financial business, financial markets would automatically work in the public interest (Nesvetailova and Palan, 2013, p. 725; cf. Nesvetailova and Palan, 2020, p. 168). In contrast, scholars in the old institutionalist tradition point out that an efficient allocation of goods and services is premised on the distribution of (property) rights, which is contingent as such. Market efficiency is then only a secondary concern to relations of power encoded in the law (Medema et al., 2000).

Lastly, Nesvetailova and Palan's focus on “predatory” business practices (2020, p. 10, 149) and financial scandals risks diverting attention from the institutional underpinnings of financial sabotage. This does not mean that they ignore the “foundational legal framework governing finance” (2020, p. 166), but the latter is little elaborated in their key works on financial sabotage. Going beyond an understanding of law as regulation, our contribution lays emphasis on the constitutive and enabling functions of law, which are at the bottom of all (formal) transactions, such as market exchange involving contracts and property rights (Deakin et al., 2017).

Property as a foundation of capitalism

The (old) institutional variant of law and economics (Mackaay, 2000, p. 69) markedly differs from more mainstream approaches (Furubotn & Richter, 2010; Posner, 2007) in that law and property are conceived and analyzed as part of complex political–economic regimes in which power relations play a role. Accordingly, the law and the state cannot be neutral in defining and assigning property and other rights, or in drawing a line between public and private. At the same time, the source of legal change can often be found in evolving customs, such as the norms and practices of business communities: public and private legal ordering go hand in hand (cf. Deakin et al., 2017, pp. 188–189).

For Veblen and Commons, private property is one of the institutional cornerstones of capitalism (Broda, 2001). Major works of both (Veblen, 1923; Commons, 1924), having (recently had) their 100th anniversaries, emphasize the centrality of legal features to understanding the capitalist social orders of their time. Veblen (1923) highlights in his work that the owners of capitalist enterprise have become “absentee owners,” who pursue their financial interests without direct involvement in industrial activities. Commons (1924, p. 369) develops a more general theory of the “proprietary relations” underlying capitalism, which also extends to other legal and social relations than property relations as such.

The legal right to withhold from others what is needed

Veblen (1932, p. 76, 78) points to the material conditions from which the idea of a “natural right of ownership,” including the freedom to buy and sell and assuming “free labor [as] the original source of wealth,” could emerge. He argues that these beliefs took shape in the era of handicraft/small industry and petty trade (Veblen, 1932, pp. 269–271, 376) before commercial and, later, industrial capitalism took over. Rather than being timeless, the natural-rights conception reflects the economic reality of, prototypically speaking, “masterless men” running their own trade and securing their own livelihood (Veblen, 1923, pp. 45–49).

In contrast to the craftsmen and (small) landowners, who worked with their own hands and means for a living, the absentee owners of modern business enterprise are, by origin, creditors, investors, and employers who own more than they can deal with on their own (cf. Veblen, 1923, p. 12, 46) and who let their capital work in return for an expected (future) income stream. Besides making investments in corporate assets, this includes lending money (as a creditor) and hiring labor (as an employer) (Veblen, 1923, p. 50). What differentiates absentee ownership from earlier forms of business that rested on the “productive work” of their owners (Veblen, 1923, pp. 56–57) is the right of absentee owners to use their accumulated wealth to generate income from other persons’ productive activities at arm's length.

Veblen's criticism of absentee ownership is directly linked to his concept of industrial sabotage: in the hands of (absentee) creditor-investors and employer-owners, the purportedly natural right of ownership turns into “a legal right to withhold any part of the necessary industrial apparatus or materials from current use”, that is, “a legal right of sabotage” (1923, pp. 65–66). Capitalist owners would not only be able to reap the benefits of their investment but they would also be authorized “to withhold [their] property from productive use in whole or in part” (Veblen, 1923, p. 66) if this is in line with their business goals to maximize (short-term) monetary gains.

Thus, private ownership enables, and perhaps even encourages, industrial sabotage as well as other forms of withholding capital from (productive) work, be it in the form of jobs and wages for the workforce, creating unemployment, or in the form of credit and investment, leaving potentially useful enterprises underfinanced. As Veblen points out, businesslike sabotage is “countenanced by the law,” and the property rights of capitalist owners are routinely enforced by the state (1923, p. 434; cf. ibid., 405–406, n. 3).

Commons (1924, p. 32) does not specifically speak of the right to sabotage but offers an important generalization of private property as “the power […] to withhold from others what belongs to self but is needed by others.” The salience of this formula can better be understood against the backdrop of the distinction between use-value and exchange-value. Keeping property for oneself may accentuate the (security of the) use-value, as in “exclusive holding for self” and “for one's own future use”; however, withholding from others what they need, “until a price is agreed upon,” is mainly targeted at raising the exchange-value (Commons, 1924, p. 53; original emphasis; Commons, 1959, p. 403). Again, this formula can not only be applied to withholding productive investment but also to withholding, or withdrawing, money from other purposes than those valued highest by the investors.

Following Commons (1924, p. 28), property is the legal foundation for “bargaining power” in market exchange. This form of economic power is based on which rights and whose rights are protected as property, or how existing property regimes play out for different types of owners. Commons highlights the increasing relevance of bargaining power, which is concomitant with the increasing reliance on market exchange, for making a living and providing for one's needs. Arguably, this conception is more sophisticated than Veblen's dichotomy of making money and earning a living in grasping the impact of capitalist developments for society as a whole (cf. Veblen, 1932, p. 24). On the other hand, Commons is less pessimistic regarding the (superior) bargaining power of property owners, namely absentee owners, as he also observes legal efforts to define a reasonable value, or what could be considered a fair price. This would ideally reflect a “negotiated” compromise between different (property) interests and (social) needs (Commons, 1959, p. 618; cf. Papadopoulos, 2013, p. 10, 15).

Conceptually speaking, Veblen's and Commons’ concern with capitalist owners’ right, or power, to withhold property differs from the “exploitation” of formally free workers in unequal labor relations and the “expropriation,” or “dispossession,” of people who are subjected, enslaved, or colonized: a terminology used in the Marxist critique of capitalist development.

Intangible property as the new workhorse of capitalism

Veblen (1932, p. 159) identified the process of capitalization and the use of loan-credit based on the “vendibility of corporate capital” as central to business activities. Capitalization refers to the ongoing evaluation of the “presumptive earning-capacity” (Veblen, 1932, p. 127) or the “expected earning-power” of property (Commons, 1924, p. 16), with intangible assets playing an increasingly important role in the then emerging credit economy. The modern corporation uses its assets as collateral to obtain additional funds on credit, which in turn raises its expected earning capacity, setting in motion a cumulative process—“an ever-recurring valuation of the company's properties, tangible and intangible” (Veblen, 1932, p. 138) based on their market value. This leads to an increasing divergence between (physical) industrial capital and capitalized values. This cumulative process of credit extension can come to an abrupt end as “speculative business enterprises” collapse when a discrepancy between capitalized values and actual earning capacity is revealed (Veblen, 1904, pp. 462–463).

Commons (1959, pp. 4–5, 649–677) owes much to Veblen in exposing the role of intangible property in modern business valuation, but likewise develops this perspective further. For Commons (1924, p. 199), the law emerging from the customs of the people and the law imposed by the state are ultimately “inseparable.” While Veblen (1923, p. 15, 207) mainly criticizes how lawyers resort to “immutable principles” and “legal fiction” to solve property conflicts in the unprecedented constellations of the industrial age, Commons offers a more nuanced account of “how changing business practices prompted changes in legal definitions of property and how changes in property definitions propelled further changes in business practices” (Atkinson, 2010, p. 290).

More specifically, Commons (1924) describes how the concept of property evolved from the use-value of physical things to the exchange-value of any marketable assets, even the most intangible ones. This includes

one's reputation, one's horse, house or land, one's ability to work, one's goodwill, patent right, good credit, stocks, bonds or bank deposit, in short, […] anything that enables one to obtain from others an income in the process of buying and selling, borrowing and lending, hiring and hiring out, renting and leasing, in any of the transactions of modern business (Commons, 1924, p. 19).

Only the horse, house, or land and, perhaps, the ability to work have an immediate use-value irrespective of their potential exchange-value. In the course of financialization, loans, stocks and bonds became a foundation for new forms of intangible assets, such as asset- and mortgage-backed securities, which are created by means of “securitization” and used as collateral in an increasingly leveraged economy. The quality of “good credit” has undergone a process of abstraction and quantification in the hands of service providers selling credit information. In the digital platform economy, the algorithmic production of goodwill via review and rating systems arises as a new virtual asset dubbed “cloud capital” (Varoufakis, 2023, p. 229). Intangible property is the new workhorse of capitalism.

The code of capital in times of regulatory competition

The analytical lens developed from Veblen's and Commons’ work, focusing on ownership as the right to withhold and the locus of economic bargaining power, is not restricted to property rights in a narrow sense. Besides property law as such, contract law, tort law, company law, bankruptcy law, etc. also include relevant provisions privileging capitalist owners, creditors and investors over others. In turn, legal rules and policies providing protections for the weaker party, e.g., workers, consumers, or tenants, restrain the power to withhold.

In line with old institutionalist thinking, Pistor highlights the constitutive role of law in shaping economic power in the financialized economy of today. A special focus of her work is on “financial assets and intellectual property rights that do not exist outside the law” (Pistor, 2019, p. 19). While Veblen and Commons identified the expected earning-power of property—or, intangible property as such—as a driving force of capitalist development, Pistor more straightforwardly speaks of the “pecuniary value” that law has for economic actors: “law creates value […] that can be monetized” (2020, p. 165; cf. Pistor, 2019, p. 12). Her analysis of contemporary capitalism centers on the legal coding of capital, that is, the legal forms that make capital (more) resilient as a wealth-generating asset (Pistor, 2019, p. 4). This includes giving priority to the claims of capital owners in case of conflict (e.g., bankruptcy), securing their privileged position beyond time and social context, and allowing them to cash in by converting their assets into legal tender (cf. Pistor, 2019, p. 3, 13–15).

While the legal techniques used for coding capital have a long pedigree, financialization is marked by incremental and purposeful innovation. Irrespective of the degree of financial (de)regulation, one can expect activities aimed at the circumvention of rules. Quite typically, this occurs with the help of legal professionals. Veblen already identified lawyers, next to bankers and brokers, as members of the “pecuniary occupations” (1932, p. 316) and the wider “business community” (1923, p. 404), who pursue profit based on ownership claims. These lawyers are often no longer independent professionals but work as employees, associates, or partners in “mega-law firms,” which consider “law as business” (Morgan & Quack, 2010, p. 290). Pistor describes lawyers who help capital owners maximize their profits as the “true masters of the code of capital” (2019, p. 20; cf. ibid., 160).

A new quality of legal relations can be seen in the effects of regulatory competition and the possibilities of forum shopping in the global age. With ideological support from the economic analysis of law (Posner, 2007), law appears more as a cost factor to economize on than as a custom that a given community is bound by. Lawyers provide services in navigating the “law market” (O'Hara & Ribstein, 2009): they support transnational corporations in optimizing their portfolios and outcomes across different legal regimes and in adapting their business structure to avoid taxes and take advantage of “regulatory arbitrage” (Palan & Phillips, 2022, p. 23; Pistor, 2019, p. 73). Thus, lawyers also become handmaidens of what can be called fiscal sabotage, which undermines the taxation powers and governing capacities of states, whose infrastructures are used for business purposes. This includes concealing financial flows and ownership structures by using offshore constructions, combining legal and financial ingenuity (Binder, 2023; cf. Nesvetailova & Palan, 2020, pp. 126–129).

Money in the modern credit economy

In old institutionalism, capitalism is understood as a profit-driven monetary economy, in which money features as a “strategic institution” (Dillard, 1987, p. 1623, 1625). This understanding of money is in stark contrast to the orthodox economic view of money as politically and theoretically neutral (Patinkin & Steiger, 1989; cf. Commons, 1959, p. 605). In the foreground are the directive functions of credit money and financial capital in the “credit economy,” which both Veblen (1932, p. 133, 150–151, 158; 1923, p. 358, 364–365) and Commons (1924, p. 242; 1959, p. 234) see on the rise in the early 20th-century USA.

The conception of money that can be distilled from their writings resonates with so-called credit theories of money, which make no analytical distinction between money and credit (Ingham, 2004; Schumpeter, 1994, p. 288–290; 1110–1117). In this perspective, money can be understood as a credit–debt relation, not only between specific individuals but spanning society as a whole (Simmel, 1907). Thus, the question of “what is money” cannot be adequately answered with reference to a material “thing,” but requires consideration of a social process (Chambers, 2023, p. 11), a social relation (Ingham, 2004) or social institution. While the specific “money-stuff” may appear as commodity (e.g., gold), this is historically contingent, and the value of money is seen in its ability to redeem types of debt (Innes, 1913, 1914).

More recent approaches view modern money as a complex, interdependent web of contractual obligations, or IOUs in the broadest sense (literally “I owe you,” with IOU notes being the simplest form of debt contracts, which became exchangeable and means of payment on their own). This gigantic, dynamically interconnected and collectively run infrastructure (Sahr, 2022a, p. 40–41) is also subject to conflicting interests and mechanisms of power and coercion, resonating with the idea of money as a strategic institution.

A theory of money for the credit-based market economy

While Veblen and Commons both learnt their trade at times of the international gold standard, they also witnessed a time between the two World Wars when the gold standard was no longer effective. Their views of money already reflect the growing independence of credit money, including state-issued paper money and bank-issued debit money (cf. Commons, 1959, p. 597), and the increasing role of central banking in maintaining (Veblen, 1923, p. 371) or restoring public confidence (Commons, 1959, pp. 589–590, 611).

At the beginning of the twentieth century, Veblen (1904, pp. 470–471) argues that “in making a loan […] the banker or any similar concern […] creates a new volume of credit […] and so adds to the borrower's funds available for purchase […] and by doing so helps to enhance prices.” While he acknowledges the earlier rush for gold and the specie character of commodity money, Veblen's emphasis is on credit money and its backing by a “fiduciary currency” that has become more detached from its “specie basis” (1923, p. 369; cf. ibid., 175–178). As to the monetary underpinnings of capitalist sabotage, this set-up is key: “The fabric of credit and capitalisation is essentially a fabric of concerted make-believe resting on the routine credulity of the business community at large” (Veblen, 1923, p. 383).

For Veblen, the collective belief in the rising values of credit-funded business seems to reflect the collusive spirit of absentee owners, and the lawyers and investment bankers in their service (cf. 1923, p. 340). He also finds that profit or property interests are sometimes served effectively even if there is “no formal tenure of ownership of the underlying business traffic,” as factual economic power in the “credit system” may work to produce the same results (Veblen, 1923, p. 365). The avoidance of formal ownership and respective liabilities, while ensuring financial flows to investors, would later play a role in securitization processes (“originate-and-distribute”): assets are transferred to “special purpose vehicles” that are controlled but not owned by the originating institution (Carruthers, 2015, p. 382).

By studying how credit creation affects both the business cycle and the price-level, Veblen's monetary theory of production served as an early inspiration for the view that money is created endogenously (Davanzati & Pacella, 2014, p. 1049). In providing a “conceptual basis for a general theory of a credit-based market economy” (Wilson, 2006, p. 1031), Veblen anticipated an understanding of the inherent instability of this system, a notion developed later in post-Keynesian frameworks, such as Minsky's (1986) financial instability hypothesis (Davanzati & Pacella, 2014, p. 1045).

Commons (1959, p. 514) describes money “in its modern meaning” as a “social institution of the creation, negotiability, and release of debts arising out of transactions.” Replicating his emphasis on the legal (including customary) dimension of economic transactions, he considers money not as a commodity exchanged on the market, but as an institution that facilitates market exchange and, more precisely, the transfer of property rights (Commons, 1959, pp. 392–395; Maucourant, 2001, pp. 270–273). While the object of exchange is property, which includes incorporate property, or debt, whose negotiability is, ultimately, a “legal invention” (Commons, 1959, p. 397; cf. Commons, 1924, pp. 250–252), the means of exchange is money, which provides a standard of value and is recognized in a given society as “customary or legal tender” (Commons, 1959, p. 463). Moreover, price-setting as such is framed by social conventions, or what Commons calls “working rules,” which develop incrementally in economic and legal practices. Accordingly, monetary exchange is imbued with legal relations.

While price-building for property rights has moved from assessing material use-values to economic exchange-values, something Commons describes more generally as the “futurity” orientation of contemporary economies (1959: ch. 9), he also finds “a new kind of use-value” in the collective action embodied in working rules enabling the payment of debts (1959, p. 467), which may protect individual liberty, safeguard social stability, and promote fairness. Compared to Veblen, Commons thus sees collective beliefs and action in more positive terms. Just as the power of private actors to withhold credit may harm the collective interest, an orchestrated extension of credit through monetary policy may undergird the public character of money (Maucourant, 2001, p. 281). In the context of the Great Depression, this helped respond to social needs, restore public confidence, and initiate economic recovery.

From financial expropriation to monetary sabotage

Some of the phenomena discussed in terms of financialization at the turn of the 21st century have their precedents in developments that the old institutionalists could already observe at their time. Consequently, the “two periods of financial hegemony” that marked the beginning and the end of the 20th century (Duménil & Lévy, 2004, p. 156) are a subject of shared interest in at least part of the literature (cf. Lapavitsas, 2013). However, the analysis and critique of financialization is often linked with Marxist categories and implies a monetary theory of credit, according to which money arises out of commodity exchange, with fiat money and credit money being considered only secondary—albeit increasingly important—forms (Lapavitsas, 2013, p. 51, 69–70, 80–82). Moreover, Marxist theory usually comes with a focus on the exploitation of workers in the sphere of production, that is, the appropriation of the surplus value of wage labor. In contrast, exploitation in the sphere of circulation—say, when the stronger party exploits the weaker party in a debt contract—is described as a zero-sum game, which is not considered characteristic for capitalism as such. Put differently, from a Marxist perspective, “financial expropriation” looks like a very old form of profit-making, and not as something characteristic of contemporary capitalism (Lapavitsas, 2013, p. 4, 145–146).

These scant remarks will not do justice to all the ways to resolve the “conundrum of financial profits” in Marxist thinking (Lapavitsas, 2013, p. 138), and Marx's underlying theory of money is still subject to debate (Chambers, 2023, p. 59; Eich, 2022: ch. 4). Our point here is to clarify differences in research orientations. Old institutionalism does not claim that “[financial] profits result from the redistribution of surplus value created elsewhere” (Duménil & Lévy, 2004, p. 131). It does not subscribe to this specific theory of value creation, or related Marxist theorems (like the tendency of the rate of profit to fall, which serves to explain recurrent crises). At the same time, Veblen obviously shares an interest with Marxist scholarship and others in how financial profits may have counterproductive and socially harmful effects. Enriched with Commons’ analytical and empirical observations, old institutionalism offers an advanced understanding of the functions of property and credit in the highly leveraged economy of today.

More specifically, their focus on intangible property draws attention to new legal and economic constructs that underpin contemporary forms of financial profit-making, which—as the concept of sabotage suggests—feed back into the sphere of production, hamper social provisioning, and may undermine the public interest. With regard to money “as a special form of property” (Dillard, 1987, p. 1625), the move from use-values (stored in the past, available in the present) to exchange-values (derived from the future, anticipated in the present) is from savings to expected income. Against this backdrop, credit theories of money help to see that the power to withhold from others is not just about “playing with other people's money” (Nesvetailova & Palan, 2013, p. 727) or “[expropriating] money income […] that belongs to others” (Lapavitsas, 2013, p. 146), as if money was a present or future “thing.” It means playing with the relational and institutional attributes of money, referring to credit, creditworthiness, and collective trust (cf. Alary & Desmedt, 2019). This is what our concept of monetary sabotage aims to highlight.

The hierarchy of different forms of credit

While at the times of Veblen and Commons, credit expansion was primarily a matter of traditional banks, the financialization of capitalism has been characterized by the rise of “shadow banking” (Adrian & Shin, 2009; Poszar, 2014). Our interest in monetary sabotage for private profit is in line with credit theories of money that pay particular attention to privately created credit and acknowledge that “it is a private decision […] to accept something as a substitute” for sovereign money (Beggs, 2017, p. 469). This includes the “debit money of commercial banks” at times of the gold standard (Commons, 1959, p. 597) as much as the new forms of “shadow money” today. This scholarship may subscribe to a “weak form” of chartalism (Beggs, 2017, p. 470), that is, a “state-based” theory of credit which acknowledges the role of private actors, or it may be accentuated as a “market-based” credit theory of money (Murau & Pforr, 2023, pp. 3–4).

From a macrosocial point of view, the monetary and financial system may best be understood as a web of interlocking balance sheets (Mehrling, 2017; Murau & Pforr, 2020), or what can be called the monetary infrastructure (Sahr, 2022a). Credit-claims exchanged in a payment system simultaneously appear as both an asset and a liability on different balance sheets (Murau & Pforr, 2023, p. 9). This includes debt as well as equity both as assets and liabilities; the term “credit” is thus used in a broader way than in other definitions. Given that some credit-claims are considered more trustworthy than others, they appear as hierarchically ordered. Within the resulting monetary hierarchy, any credit instruments are “promises to pay higher-ranking money” (Murau & Pforr, 2020, p. 62). While state-issued, or sovereign, money often serves as the most reliable form of credit, the monetary hierarchy is historically contingent (Murau & Pforr, 2023, p. 10). Further, relationships between different participants in the payment system (which may be able to issue a variety of credit instruments) are also hierarchical (Murau & Pforr, 2023, p. 10).

In contemporary capitalism, sovereign money, or central bank money, sits at the top of the monetary hierarchy, followed by bank deposits, or commercial bank money. The power to create money at this state-granted level of security (Wullweber, 2021) is shared between central banks and private banks (Deutsche Bundesbank, 2017; McLeay et al., 2014; Wray, 2007). Banks can create IOUs per “keystroke” (Sahr, 2022b) without being effectively limited by minimum reserve requirements. Further down the hierarchy follow “credits with various grades of safety,” with or without collateral of private or public provenance (Wullweber, 2021, p. 74), which includes new forms of “shadow money.” Within the shadow banking system, various financial institutions have the power to create IOUs, which are “embedded in a chain of par claims to the unit of account,” and thereby ultimately linked with sovereign money (Murau & Pforr, 2020, p. 62).

Moreover, the reality of a globalized economy with central nodes for the settlement of credit–debt implies the existence of a “key currency” (Kindleberger, 1983) and a corresponding international hierarchy (Murau et al., 2023). While the gold standard was, in this perspective, rather a sterling (and later, dollar) standard, the contemporary monetary system can be described as an “offshore USD system,” which is “based on the creation of private USD-denominated credit instruments abroad” (Murau et al., 2020, p. 768). Consequently, the Federal Reserve (Fed) serves as the hierarchically highest monetary institution (Murau et al., 2023, p. 495), issuing the “ultimate means of settlement” (Murau et al., 2023, p. 510).

As a tool, the “monetary-financial hierarchy” (Braun & Koddenbrock, 2023, p. 16) supports the analysis of power relations in the international political economy, which is a relevant context for understanding the conditions and dynamics of monetary sabotage.

Monetary sabotage in contemporary capitalism

Given its function in regulating social exchange (cf. Papadopoulos, 2013, p. 10) and in coordinating the social provisioning process, money fulfills an important role for the general public. The monetary infrastructure, not unlike other infrastructures, thus resembles a public good which should ideally be managed in a way reflecting the interests of the collective, and not be instrumentalized for private profit-making. With Veblen and Commons, property relations could be understood as power relations, with the question being whose rights and which rights are protected as property—implying the legal right to withhold from others what is needed, or the legal right to sabotage. With regard to money as a collective infrastructure to provide credit, the question becomes “whose or which needs” will be supplied with the “ability to pay” (Sahr, 2022a, p. 214; our translation, original emphasis), not only individually but also systemically speaking.

Against the backdrop of contemporary credit theories of money, which use the idea of interlocking balance sheets, we consider monetary sabotage as the purposeful expansion or contraction of the monetary infrastructure for private profit, with no discernible benefits for the public or even harmful effects for society, including creating instability and perpetuating inequality.

Based on the career of credit-claims (creation, circulation, elimination) (cf. Braun & Koddenbrock, 2023), we provide three different examples of monetary sabotage. First, specific actors have the power to create new IOUs, increasing the amount of valid credit-claims largely independent of productive activities. Second, actors like exchanges, rating agencies, index providers, and payment services exert power over the circulation of specific IOUs by controlling access to the monetary infrastructure on a for-profit basis. Third, some actors are in a better position than others when it comes to the elimination of IOUs, that is, the ultimate settlement of credit–debt relations, including by law enforcement.

While Veblen pointed to absentee owners and business managers, supported by lawyers and investment bankers, as the agents of industrial sabotage, taking a closer look at the career of credit-claims has the advantage of making visible a variety of actors and their profit-maximizing strategies within the monetary hierarchy. In the credit- or futurity-based economy, in which expected future profits and incomes are valorized, creditors and investors appear as strategic actors with economic bargaining power, who have an interest in using the monetary infrastructure for their own purposes. What unites the examples below is that they feature new forms of intangible property (repurchase agreements, credit assessments, compensation claims), which are underpinned by specific legal constructions and legal support structures.

Private credit creation as self-serving and causing instability

As to the creation of credit-claims, IOUs can be created by both public and private actors. We will focus here on private credit creation, even though public money creation is not neutral either, as exemplified by the contested asset-purchasing programs by the European Central Bank (van ‘t Klooster & Fontan, 2020, p. 873). Our emphasis is on how private actors expand their balance sheets for the generation of private profit, while the risks of their monetary operations are externalized to the public.

Important contemporary forms of private credit include asset-backed commercial papers, money-market fund shares, and overnight repurchase agreements (repos), with FX swaps starting to get more attention (Murau & Pforr, 2020, pp. 59–60). These forms of private credit may be described as “shadow money,” given their stable price relationship to the official unit of account. Following Michell (2017), the creation of such IOUs is dependent on the prior creation of loans by traditional banks, which resort to shadow banking to shift loans off their balance sheets. The shadow banking system then engages in maturity transformation and credit transformation (Valckx et al., 2014). The transformation of longer-term into short-term credit amounts to “money market funding of capital market lending” (Mehrling et al., 2013, p. 2). Credit transformation involves securitization, that is, asset-pooling and trenching of already existing IOUs. In this “symbiotic process” (Michell, 2017, p. 355), banks and shadow banks collectively profit from the creation and transformation of debt, generating liquidity and leveraging themselves by turning debt into marketable assets while “promot[ing] and sustain[ing] a market for their own monies” (Sgambati, 2019, p. 305; original emphasis; cf. ibid., 297). This “perverse” (Michell, 2017, p. 374) and “paradoxical” (Passarella, 2014, p. 147) monetary circuit is largely disconnected from the funding of productive activities. Besides increasing inequality by allowing banks to leverage themselves for the acquisition of ever more assets, the expansion and contraction of the shadow banking system threatens economic stability (Mehrling et al., 2013, p. 15).

Of the above-mentioned forms of privately issued IOUs, repos stand out due to their high trading volume (Cheng & Wessel, 2020) and their role in the Global Financial Crisis (Gorton & Metrick, 2012). The presence of tradable collateral ensures that the depositor can convert repos into higher-ranking (settlement) money in case the borrower defaults (Gabor & Vestergaard, 2016, p. 10–11). From the 1980s onwards, private actors successfully lobbied for exempting repo and derivates markets from standard provisions of US bankruptcy law, making it possible for repo traders to seize and liquidate collateral more easily (Gorton & Metrick, 2012, p. 432; Sissoko, 2010, p. 8). In a European perspective, the buyer of a repo legally becomes the owner of the collateral for the duration of the repo, while the economic risks and returns connected with the collateral remain with the ultimate repo borrower (Gabor, 2016, pp. 971–972; Gabor & Vestergaard, 2016, p. 11). Facilitated by legal developments, more and more forms of intangible property (such as stocks, bonds, and securities) have come to be used as collateral in repo contracts (Sissoko, 2010, p. 11). This financial instrument not only creates security for lenders but also provides an incentive for “aggressive risk-taking” (Gabor, 2016, p. 972), and liquidity concerns in repo markets can threaten the stability of the system as a whole (Gorton & Metrick, 2012, p. 426). Regulatory measures taken during and after the Global Financial Crisis provided a public “backstop” for repo-markets via emergency facilities, which came to be institutionalized (Braun, 2020; Murau, 2017, p. 828). This is in line with the facilitative rather than restrictive function of the legal environment. In terms of the monetary hierarchy, the “security” or trustworthiness of repos as a form of shadow-money has been upgraded with support of the state (Wullweber, 2021, pp. 77–78).

Private service providers assuming infrastructural power

As to the circulation of credit-claims, some private actors have acquired considerable infrastructural power in this regard (Braun & Koddenbrock, 2023, p. 17). In this case, the focus is not on those actively creating credit or settling debt, expanding or contracting balance sheets, but on service providers who help to organize and sustain financial flows and add their own selectivity to the operation of the monetary infrastructure. We lay emphasis on actors taking part in the assessment of the trustworthiness of financial claims within the monetary hierarchy, which is underpinned by collective beliefs.

This includes so-called index providers, such as MSCI, FTSE Russel and the S&P Dow Jones, which offer numerical tools for asset evaluation. Index providers have become increasingly powerful due to the rise of large exchange-traded index funds (Braun, 2016). By routinely classifying countries (“emerging” markets, “developed” markets), index providers act as “de facto private regulators,” directing capital around the globe (Fichtner et al., 2023, p. 109). Fichtner et al. (2023, p. 112) depict index providers as the “shape and form of ‘the' investment community,” which is “dominantly […] Anglo-American in origin,” reflecting the architecture of the US-led monetary hierarchy. The threat of exclusion from indices alone can suffice to influence economic policies of peripheral countries (Fichtner et al., 2023, pp. 115–119). From a US legal perspective, index providers are likened to “news gatherers,” whose indices would enjoy similar protection as “quasi-intellectual property akin to news” (Rauterberg & Verstein, 2013, pp. 51–52).

Similar to index providers, rating agencies supply creditors with information, or assessments of creditworthiness, which are likewise traditionally understood as intellectual property. The “legal status of ratings” has long been “defined as akin to opinions,” for which rating agencies could not legally be held accountable (Carruthers, 2015, p. 383). When these private opinions came to be incorporated as a reference point in public regulations, their effect was multiplied: a change from “investment grade” to “below investment grade” would entail a collective move out of the downgraded bonds, as many institutional investors would have to comply with the respective minimum regulations (Carruthers, 2015, p. 385).

Index providers and rating agencies could thus not only control access to their information-as-property, and its use by unlicensed others, but effectively limit access to credit in domestic and global lending markets (Pistor, 2023, p. 255), while the pecuniary pressure emerging from their actions forces states and companies into compliance with the expectations of the investment community. Actors in line with these expectations are able to expand their credit activities, while others have to downscale them.

Absentee owners enforcing cross-border financial claims

The elimination of specific IOUs refers to the settlement of debt, with or without the help of the law. What we want to highlight is the case of absentee owner-investors enforcing their right to property in cross-border constellations, specifically against host states. In these proprietary relations, financial claims amount from business activities in the host country (including the transfer of profits), while legal claims may arise if normal business is disturbed by a change in the investment conditions or regulatory environment of the host country.

The relevant phenomenon is the rise of international investment contracts and treaties (individual, bilateral, regional, or as chapters in trade agreements) and of investor-state dispute settlement (ISDS) as a means to solve related conflicts. In the postwar decades, the ISDS regime developed from “a vague idea into an expansive, decentralized legal architecture” that provides “robust” access to arbitration (St. John, 2018, p. 5). On an asymmetrical basis, though: investors driving this process leave host states in a more passive role, resulting in an ISDS regime which is pro-investor in orientation (Simmons, 2014, p. 33, 41). It protects the property of investors against what may be seen as “indirect expropriation,” that is, interference with their legal right to use their property (for the purpose of profit-making), or the economic loss resulting from regulatory intervention (Bonnitcha et al., 2017, pp. 106–107). While within a less absolute interpretation of property rights concessions can be made for legitimate regulatory purposes, a second line of defense for investors is a vaguely specified clause, contained in many agreements, entitling them to “fair and equitable treatment” by their host-states. This allows investors to invoke their “legitimate expectations” regarding a stable legal environment or specific commitments made (Bonnitcha et al., 2017, pp. 108–112), and the exchange value of (expected) future returns on their investment becomes a benchmark to assess (potential) losses.

With regard to the type of property protected, investment agreements feature very broad definitions of “investment,” including not only in physical assets, the classical realm of foreign direct investment, but also in financial assets, or “portfolio investment” (Bonnitcha et al., 2017, p. 51). Moreover, the pro-investor orientation of the ISDS regime and the use of counterfactual reasoning (profits that could have been realized if the host state had refrained from certain action) in assessing the value of intangible assets and the damages incurred tend to inflate claims for compensation. Under these circumstances, it is hard to believe that a reasonable value is arrived at, as Commons (1924, pp. 67–68) expected from judges or arbiters as the third party to a transaction.

While ISDS is a private arbitration system, the decisions are legally binding and can be enforced. Governments anticipating legal action might refrain from introducing new legislation, resulting in “regulatory chill” (Janeba, 2019). As such, the ISDS system represents a striking case of how private investors and creditors gain leverage over sovereign states and their regulatory activities (cf. Pistor, 2019, pp. 136–138, 154–157). Compared to the ex-ante assessment of the investment quality or climate in the previous example, the present constellation is about an ex-post verdict that trust has been deceived. Contraction is involved in that the (monetary) compensation for damages is a debt to be settled, while there may also be less incoming investment in the future. As an additional aspect, third-party funding of investment arbitration claims has been on the rise since the late 2000s, as part of what is more broadly known as “litigation finance” (Dafe & Phillips, 2023, pp. 189). As a result, legal claims are turned into financial claims, increasing the intertwinement of law and money in profit-seeking business.

Conclusion

This article pursued a threefold aim: to demonstrate the relevance of old institutionalism as a school of thought for analyzing and understanding contemporary capitalism; to promote an institutionalist understanding of law and money, property and credit as influential factors shaping modern economies; and to develop and illustrate the concept of monetary sabotage as an element of an institutional theory of contemporary capitalism.

We started from Veblen's concept of industrial sabotage, which describes the withholding of industrial capacities from social provisioning for the purpose of maximizing profits. With the turn from use-values to exchange-values, the legal right to withhold came to encompass ever more intangible forms of property. As a consequence, more forms of capitalist sabotage come into sight. We identified financial sabotage as the manipulative business strategies of financial as well as non-financial companies to secure extraordinary profits with the help of innovative financial techniques, and fiscal sabotage as using similar strategies and legal ingenuity for the purpose of tax avoidance and regulatory arbitrage in a global setting. To these forms of capitalist sabotage, which could be described based on the existing literature, we added, in a Veblenian spirit, the concept of monetary sabotage, which focuses on whose or which needs for credit are prioritized. This promotes a systemic perspective on the manipulation of the monetary infrastructure, which brings the character of money as a public good to the fore.

Monetary sabotage has been illustrated with regard to repurchase agreements, credit assessments, and compensation claims. In the first example, banks and shadow-banks are able to expand balance sheets for private profit, with no obvious benefits or even harm for the public, in a largely supportive legal environment. In the second example, index-providers and rating agencies exert a directional effect on whose balance sheets will expand or contract based on private opinions and assessments, which are protected as intellectual property. In the third example, compensation claims are enforced against governments who allegedly betrayed the trust put in them as a safe ground for foreign investment, with the help of a lop-sided dispute settlement system in which private property interests are prioritized.

Beyond our general aims, our article shows that Veblen's and Commons’ approaches work well together despite some theoretical and political differences that may be emphasized in other scholarly contexts, and it complements the financialization literature with a fresh perspective that leverages insights from credit theories and the sociology of money.

Understanding capitalism as a constantly evolving, dynamic system, Veblen's diagnosis of the early 20th century that “pecuniary traffic” disturbs the social provisioning process (1932, p. 210) has been shown to be still valid, in a much larger scope and on an international scale. Like other forms of capitalist sabotage, monetary sabotage rests on the constitutive but also adaptive role of the law, with owners, creditors, and investors translating their legal right to property and related privileges into economic power. This diverts funding from productive activities, increases economic inequality, and causes economic instability. Our article does not offer any concrete solutions, but it suggests a normative perspective to counteract monetary sabotage by extending democratic control over money, which is premised on an understanding of money as a public infrastructure rather than a private tool.