Workers Want Tax Credits NOT Tax Cuts

Canada discouraging investment says C.D.Howe Institute

The only country that's higher than Canada when it comes to what the CD Howe Institute calls the effective tax rate on capital is communist-led China, according to the think-tank's 2005 Tax Competitiveness Report: Unleashing the Canadian Tiger. Canada's effective rate of tax on capital is 39 per cent while China's is 45.8 per cent, the study found, when all taxes are taken into account including corporate income taxes and other taxes on capital including sales levies. By comparison, the United States' is 37.7 per cent.

But China has billions to spend in the market place, and are a growing global tiger despite the tax regime. Hmmm wonder where all that capital comes from....see my articles on China in the archives.

The think-tank's report comes just as Ottawa and the provinces are drawing up plans for their spring 2006 budgets and Finance Minister Ralph Goodale has been talking up the need to fix Canada's weak productivity growth.

Ho hum we have heard it all before. At least once a week. Tax cuts, tax cuts, what we have to say is tax cuts. Haven't got a clue of what to do but what we can say is tax cuts.

If you want working people in Canada to invest, beause the capitalists don't or won't, you don't offer tax cuts you offer investment incentives, and not RRSP investments for the wealthy. Instead you offer Labour Sponsored Investment Funds with matching provincial and federal tax credits, this has produced the largest source of venture capital in Canada.

Despite some shady dealings with managment of a Manitoba LSIF fund; Crocus, LSIF's they have gotten unwarranted abuse in the press. However given the shady dealings by CIBC, Royal Bank, TD Bank/Price Waterhouse, and the Porteus fund and others which make LSIF's problems pale in comparison, they are still the way to go for working class investors.

Don't kill labour-sponsored funds
The recent debate over the role of labour-sponsored investment funds (LSIFs) in Ontario ignores one critical element: the success of Quebec's Solidarity Fund QFL. The fact that Solidarity Fund QFL manages between 55% and 60% of all capital under management by LSIFs justifies looking at our record before drawing any conclusions about LSIFs.

LSIF's are based on Union start up capital investment based on pension funds, which encourage investment by union members and other workers giving them a very real tax break, due to matching provincial and federal tax credits which can be between 15-20%. Very real money in our pockets, thank you. And given it is held for eight years and has a maximum investment of $10,000 it is a real opportunity for workers to make both a tax credit and interest while directly contributing to the growth of capitalist enterprise.

VENTURE CAPITAL-Startups to face tougher conditions for funds

Canadian startups will face a liquidity crisis soon if current investing trends continue, according to a private equity investment bank. The amount of money investors are committing to venture capital pools has declined steadily since last fall, even as the funds themselves have been financing more companies, according to Toronto-based Fusion Capital Partners Inc. The median deal size in August fell to less than $2-million, the lowest level this year, compared with $3.5-million a year ago, the firm said in its monthly market survey."A lot of companies are going to be scrambling, and the terms and conditions are going to get tighter," said Mike Middleton, managing director of Fusion Capital.

"While there continues to be plenty of money in the system, a significant portion is being held for follow-on investments, and in the case of [Labour Sponsored Investment Funds], to meet their regulatory reserve requirements."Indeed, in the first eight months of the year, Canadian VC funds distributed $1.45-billion, up 23 per cent from the $1.19-billion in the year-earlier period. But Fusion Capital estimates that last month only $1.6-billion of funds were raised on a trailing 12-month basis, compared with approximately $2.6-billion in August, 2004.The slowdown in fund raising comes at the same time that the Ontario government is planning to eliminate the 15-per-cent tax credit for investors in LSIFs.

The government has cited an increase in funds from U.S.-based venture capitalists as one of its reasons for getting rid of the credit. But Mr. Middleton said that most U.S. investments are directed in large chunks to later-stage companies.It's too soon to tell how quickly the crunch could come, as the managers of LSIFs remain in talks with the Ontario government about the policy change, he said.

Some twit writes to the Windsor Star the following letter to the Editor, which of course is contradicted by the article above. Betcha this idiot is another of the tax cut crowd.

Grits' big plans will offset benefit of LSIF demise
With uncharacteristic good sense, the Ontario government plans to eliminate its 15 per cent tax credit for investors in labour-sponsored investment funds. Such funds, known as LSIFs, have been economic and financial disasters since their creation back in 1991. Now that Ontario's Liberals have taken the plunge, federal Finance Minister Ralph Goodale has an easy political opportunity to remove Ottawa's 15 per cent tax credit, thereby ending the LSIF program after 15 years of unproductive existence, at least in Ontario. British Columbia would surely follow.

LSIF have not been a failure, they are start up venture capital, and as such are a Risky investment, while they may not have made as much in interest as other funds, or bonds, or stocks, they have made interest and they have a 30% tax credit in Ontario. Now the Liberal government in Ontario wants to cut its nose to spite its face.....

Ontario Liberals killing tax credit for labour sponsored funds
Decision will impact 46 funds with $3 billion in assets

First Ontario Fund responds to provincial announcement regarding phase out of LSIF tax credit

The contribution of LSIFs to Ontario's economy over the past decade has
been significant. LSIFs have invested over $2.7 billion in more than
550 Ontario companies, creating 27,000 jobs. In the case of First Ontario Fund
alone, an independent study concluded that total employment of the companies
that received funding more than doubled from 1,111 to 2,339 up to
September 2002, and that the Fund's investment activity contributed
$130 million to the Gross Domestic Product of the Ontario economy.
The Fund was launched in 1995 and has provided capital to over 30 Ontario
mid-sized companies. It currently has about $40 million in net assets, of
which roughly $25 million is invested in the venture portfolio. Liquid
reserves make up more than 35% of the Fund's net assets.

Labour funds reel as Ont. axes tax credit

LSFs are a key source of funding in Ontario with about 40 per cent of VC investment in the province coming from the asset class.

Robin Louis, president of Canada's Venture Capital and Private Equity Association, doubts private and U.S.-based venture capitalists will move quickly to take up the slack in Ontario.

"If the tax credit goes away, that amount will diminish very quickly . . . I think their [LSFs'] participation in new investments is going to dry up very quickly. It's going to be harder to put together substantial-sized financings and that will be bad for everybody."

Alberta has no such LSIF, our Provincially funded Venture Capital fund was sold off years ago, and workers in Alberta do not have the opportunity to benefit in tax credits like workers in other provinces. While LSIF have been responible for investing in start up companies in Alberta. Ironic that. Hey you know its bad when the capitalist press attacks the idea.

Ontario will join Alberta, P.E.I. as labour fund Scrooges

Once it eliminates tax credits for labour-sponsored venture-capital funds, Ontario will join the ranks of the least supportive jurisdictions for these funds. That distinction is currently shared by Alberta and Prince Edward Island, neither of which provides any tax breaks for labour fund investors. Investors in these two provinces receive only the 15% federal tax credit of up to $750, which applies across Canada.

And is it any wonder workers don't invest in RRSP's. Sheesh I get more of a tax credit from my union dues than I do investing in an RRSP! Which is why LSIF are so popular with workers.

Ontario's tax credit currently is 15% to a maximum of $750 a year on up to $5,000 invested. This puts Ontario solidly in the mainstream among the 10 provinces. It's the same level of tax breaks that applies to eligible labour funds in Manitoba, Quebec and New Brunswick.

In addition to the 15% credit for all provincially registered funds, Ontario offers an additional 5% credit for labour funds that qualify under its research oriented investment fund (ROIF) program. The ROIF credit, to a maximum of $250 based on a maximum eligible investment of $5,000, applies to funds with an emphasis on research and development ventures. This tax credit is also being eliminated.

In dollar amounts, the province that is the most generous to labour fund investors is British Columbia. The 15% tax credit in B.C. can be as high as $2,000 a year, since it applies to a maximum eligible investment of $13,333.

Labour fund provincial tax credits
Province	Credit	Maximum eligible investment	Maximum tax credit payable
B.C.	15%	13,333$	2,000$
Alberta	None	N/A	N/A
Saskatchewan	20%	5,000$	1,000$
Manitoba	15%	5,000$	750$
Ontario 1	15%	5,000$	750$
Quebec	15%	5,000$	750$
Nova Scotia	20%	5,000$	1,000$
New Brunswick	15%	5,000$	750$
P.E.I.	None	N/A	N/A
Nfld. & Labrador 2	15%	10,000$	1,500$
1 In Ontario, an additional 5% tax credit is available to research-oriented labour funds, for which the maximum tax credit payable is $250, based on a $5,000 investment. 2 In Newfoundland, the maximum tax credit payable in the 2006 tax year will be $750, based on a $5,000 investment. Source: Government and fund company sources

The current runner-up in tax relief offered is Newfoundland and Labrador, a relative newcomer to labour fund subsidies. For the 2005 tax year, the province's 15% tax credit can be as high as $1,500, since the maximum eligible investment is $10,000. However, the amount eligible for tax relief will be slashed in half to $5,000 for the 2006 tax year, bringing the maximum tax credit down to $750.

The C.D. Howe Institute of course once again calls for an increase in the RRSP ceiling on investment, which benefits the rich but not workers, who have very little in RRSPs.

Other recommendations to “unleash the Canadian tiger” include:

Tax Prepaid Savings Plans at the federal and provincial level that allow individuals to put up to $5,000 per year into accounts where the investment income earned would be free from taxation.

Further liberalize RRSP rules, raising to $30,000 from a planned $22,000 ceiling for the maximum annual contribution. Also, allow Canadians to contribute up to 30 per cent of their earned income instead of 18 per cent and boost to 73 years the maximum age for contributing to retirement savings plans.

And guess where that RRSP money goes........

Canadian investors drop a further $3.7B into foreign securities in July
Canadians continued their shopping spree for foreign securities during the first full month after limits on such purchases were officially abolished. Canadians invested $3.7-billion in foreign securities in July, after a $5.6-billion investment in June, the month the government finally passed budget legislation lifting the 30% ceiling on RRSP and other pension fund investments in non-Canadian securities. It was the sixth straight month of heavy investment in foreign securities, Statistics Canada noted. While Canadians continued to be big buyers of foreign, especially U.S., securities, foreigners in July returned to the Canadian stock market, whose gains outpaced U.S. gains during the month.

Since LSIF are start up capital the majority of it staying in Canada in risky technology start ups and biomedical companies. Without the tax credits start up Canadian companies will have to rely on Amercian Venture Captial. So while the rich in Canada invest their RRSP's abroad, without LSIF venture captial Canadian companies become prey to US Capital. This makes us a Tiger? Nope it makes us a kitten.

Business leaders jeer tax grab
By Ottawa Business Journal Staff
Tue, Sep 6, 2005
News that Ontario will be eliminating the 15-per-cent tax credit it gives investors who pour their money into labour-sponsored investment funds (LSIFs) has been received with loud jeers by local business and financial leaders. The government says the credit is no longer needed "to kick-start the venture capital sector in Ontario." "I am aghast to hear about this potential development," railed Zelos Therapeutics CEO Duffy Dufresne. "It would effectively gut the Canadian VC community, certainly in Ontario and most likely across Canada. I would be happy to do anything I can to help in this situation. "I can certainly give an honest assessment of the pressures that are already in place (from U.S. VCs) to move opportunities entirely out of Ontario (and Canada), and how without a viable Canadian VC industry, early technologies will either no longer be developed or else they will be transferred at the earliest stage to U.S. biotech entities with no resulting economic advantages to Ontario whatsoever. Zelos would never have had a substantial and growing economic presence in Ottawa without the strong Series A financing that we attracted from VenGrowth and Genesys."

The real source of Venture Capitalism in Canada are Labour Sponsored Investment Funds, ironic that, isn't it. Another damn fine Proudhonian idea of the working class. So ask yourselves why the Chambers of Commerce, the Canadian Small Business Association and the C.D. Howe Institute aren't crying out against the Liberals in Ontario and also demanding Alberta and PEI institute this marvel of capitalism. Hmmm perhaps they are economically dyslexic, and being EDD can't get their brains around the idea that what workers in Canada need is Tax Credits NOT Tax Cuts.

Annual Review of Labour Sponsored Investment Funds - 2005
Labour Sponsored Investment funds have grown in both popularity and diversity in the last ten years. In fact, the number of new funds in the last few years has made deciding on making an LSIF investment more complicated.While these funds do have to be sponsored or "endorsed" by a Labour group, their real purpose is to invest in small companies and to help create jobs. Federal and provincial governments encourage us to invest in these funds by offering individual investors generous tax incentives.

Labour-sponsored investment funds: FAQs
Have they been successful in raising money?
By some estimates, labour-sponsored investment funds account for up to 40 per cent of all the venture capital raised in Canada.

According to Investor Economics, the country’s 113 LSIFs had $3.7 billion in assets as of April 30, 2005. The largest (Vengrowth II) has almost $500 million under management. But only eight LSIFs have assets of more than $100 million. By comparison, the biggest mutual funds in Canada each have several billion dollars in assets.

LSIFs want to invest in companies that they can either sell at a profit to other companies or take public and clean up on if the stock price soars. The best example of an LSIF success story is Research in Motion, the Waterloo, Ont., wireless mobile company that is now worth more than $17 billion.

How bad have the returns been?
For most LSIFs, the returns have been, shall we say, less than spectacular. Of the 10 biggest funds, nine have a five-year history. All nine lost money over the five years ending May 31, 2005. Over the last year, only one of the “big 10” has made money.

It’s not hard to see why. Most LSIFs invest in high technology and life science companies. Up to 1999, these were the sectors to be in. For instance, the average LSIF made 21.6 per cent in 1999 and 11.6 per cent in 2000.

Alberta Government Discounts the Advantages of LSIF. In 1998 the Alberta Government having experienced its own failure to develop a state capitalist Venture Capital Fund (called Vencap) that was not plaqued by insider disincentives because the government used it to put to pasture its Tory friends,
denies Albertan's access to Labour Sponsored Investment Funds. The main reason is that the Tax Credits are "too genourous" to workers!!!

This report was issued to then Provincial Treasurer, and former Labour Minister, Stockwell Day. Yep same Stockwell Day that was Leader of the Alliance Party and now is a Federal MP in the Conservative Party.

Alberta Tax Review
Committee 1998

Access to patient venture capital

The Committee heard specific concerns about the lack of venture capital, particularly from investors who are willing to wait a considerable period of time before they see a return on their investment for early stage development. On the other hand, the Committee also heard that the problem is less with the availability of investment capital and more with the lack of commercially viable initiatives. Some argued that the problem isn’t a shortage of venture capital – there are many pools of funds available and investors interested in R&D investments. In some cases, a problem lies with the lack of management skills and difficulty some of these businesses have in developing a viable business plan. In others, it’s simply a matter of connecting the person with the ideas with the right venture capitalists. The Committee also heard concerns about regulations that create a bottleneck at the Alberta Stock Exchange.

The Committee reviewed several of the vehicles that had been used in other provinces and in Alberta to establish pools of venture capital.

The Committee also reviewed the option of labour sponsored venture capital corporations (LSVCCs) and other publicly-funded venture capital funds. With LSVCCs, individual taxpayers receive a tax credit against their federal and provincial income tax for investments in eligible venture capital corporations. All provinces except for Newfoundland, Prince Edward Island and Alberta have adopted some form of LSVCCs.

Legislation varies from province to province, but generally the objectives of LSVCCs are to create jobs and to strengthen economies by increasing the availability of equity capital to support small and medium sized business opportunities. Another objective is to build a liaison between business and labour. LSVCCs must be sponsored by a labour organization or professional organization. The specific purposes of LSVCCs in various provinces range from concentrating investment in health technology to broad objectives of creating superior long-term value for shareholders and contributing to the prosperity of the Canadian economy.

LSVCCs have generated substantial controversy. Concerns most often cited include a slow pace of investment and extensive tax benefits. In the early years, LSVCCs were successful in raising investment funds but had more difficulty in placing the funds in business ventures. The performance of individual funds in different provinces varies considerably. At best, their success has not been proven to date. While the investment community would benefit from the marketing of LSVCCs, the Investment Dealers Association recommended against establishing them in Alberta. Also the significant administrative costs for government and for the LSVCCs was a concern.

In terms of publicly-funded venture capital funds, Alberta’s experience has not been positive. Vencap was established by the Alberta government with funding of $240 million and the objective of investing in venture capital. Vencap experienced many of the same problems as LSVCCs – a lack of good investments and a reluctance to take risks. As a result, a relatively small percentage of Vencap’s equity ended up in new Alberta ventures. The Alberta Opportunity Company faced similar problems in operating a program to support investments in start-up knowledge-based industries.

3. The province should not introduce any type of provincial tax incentives for investment in venture capital funds, including Labour Sponsored Venture Capital Corporations.

The Committee reviewed various Labour Sponsored Venture Capital Corporations funds in other provinces and heard views from the Investment Dealers Association of Canada, KPMG, and the Alberta Science and Research Authority on these funds.

As noted previously, LSVCCs are controversial and have had varying degrees of success or failure. Most of these funds have not been able to invest more than half the money they received, and in most cases, they do not address the need or gap for seed and early stage capital in emerging high tech firms. All similar programs in Alberta such as Vencap, Small Business Equity Corporations, and the Alberta Stock Savings Plan, have been costly failures for the Alberta government.

In the Committee’s view, the refundable nature of the R&D tax credit proposed under recommendation 1 will help address the problem of access to capital since it will provide additional funds for R&D investment.

The hand picked Tax Review Committee was made up of Tory insiders, hangers on and MLA's. Under the Ralph Reich LSIF never stood a chance of being objectively assessed.

1998 Tax Review Committee

Co-Chairs

Gary G. Campbell, Q.C.
Jack C. Donald

Committee Members

Brian A. Felesky, Q.C.
Richard W. Forest
Denis A. Herard, MLA
Ron Hierath, MLA
Leo R. Kelly, FCA
Audrey E. Luft
Michael Procter
Dr. Roger S. Smith

Executive Co-ordinator

Al Kalke

And as a result of this lack of venture capital in Alberta, small cap technology companies which are one of the fastest growth industries in the province suffer from lack of capital investment to start up with. Five years after the government tax report found that the province suffered a lack of R&D investment capital, well nothing had changed. However had the province had approved LSIF then these are exactly the kind of high tech businesses that would have benefited. All because LSIF were too generous in their tax credits for the average worker investor. Now Ontario intends to follow Alberta's lead, which will result in the same short fall of investment capital as Alberta small high tech companies have faced.

Between 1999 and 2004 LSIF were a growing source of venture capital for start up businesses in Canada except in Alberta, which had decided for politcal reasons to not allow Albertans the opportunity to take advantage of this . Another economic mistake by the Ralph Reich driven by their neo-con ideology. One that has been a costly mistake. And the Ontario government is about to make the same mistake.

Alberta Technology Report - 2003 - Analysis Ernst and Young

Alberta technology sector leaders remain cautiously optimistic about their future. However, the growing competitive nature of global outsourcing, several lean years of scarce funding, and comparatively low use of government programs are issues that require the attention of those interested in the sustainability of the sector in this province.

The very small companies that make up the majority of the technology sector (90% of respondents have fewer than 50 employees) are looking for relatively small amounts of seed capital. This means they are completely off the radar of the venture capitalists who are, as reported by MacDonald & Associates, looking to fund larger deals in traditional businesses, with 70% of their funds invested last year in follow-on deals.

The lack of funding in the early stages is evident. In 2003, 38% of companies looking for less than $1 million received no funding whatsoever, and 25% of companies seeking $1 million to $5 million received nothing. On the other hand, every company surveyed that was looking to raise more than $5 million raised at least some capital—and 52% raised more than $5 million.

Recently created angel investment networks in Alberta (Deal Generator, Keiretsu Forum and the Calgary Angel Network) have proved to be timely additions to the financing landscape. The number of companies citing angel investment rose to 25% from just 17% a year ago. However, the importance of these networks is much greater than their significant contributions of capital—the input available from angel investors who have successfully run one or more businesses can be a major success factor for a new technology company.

Provincial government programs that suit the needs of the smaller, more nimble companies—be they investment tax credit programs, programs to promote excellence in sector education and research, incentives to attract outsourcing opportunities into the province, more of the already proven support of the angel network, or simply raising companies’ awareness of federal support programs—could make a difference in addressing the early-stage seed fund challenge.

Government Programs
In a poor funding environment, one avenue that Alberta technology companies do not appear to be taking full advantage of is government incentives.

Alberta technology companies continue to underutilize the Industrial Research and Assistance Program (IRAP) and the Scientific Research & Experimental Development (SR&ED) tax credit. More than half (56%) of survey respondents either don’t know about IRAP or have never benefited from it and don’t expect to. The same holds true for 41% of tech company executives concerning SR&ED. Overall, just 30% of companies have benefited from IRAP, and only 43% have utilized the SR&ED program.

Statistics from the National Research Council Web site indicate that the use of IRAP by Alberta companies has been significantly lower than by companies in other provinces. IRAP contributed to only 298 projects worth $8.92 million in 2001-2002 in Alberta/Northwest Territories/Nunavut, compared to 501 valued at $13.96 million for British Columbia/Yukon and 1,115 valued at $39.88 million for Ontario.

Examination of the projects funded by Technology Partnerships Canada (TPC)—including $33.9 million to Research In Motion, $33 million to IBM and $41.4 million to CAE—suggest it would be worthwhile for Alberta technology companies to pursue TPC support for their strategic research and development projects. However, they seem to be underrepresented here as well, receiving only 2% of the contributions made by TPC.

Would a matching provincial SR&ED tax credit help? Asked to comment on the potential impact of a 10% SR&ED provincial/investment tax credit, respondents anticipated only a modest success in increasing R&D budgets.

Is there an alternative solution? Alberta technology leaders show very broad support for an investor tax credit that would encourage investment in emerging companies. Because the credit would be investment-based, it could be used to support a broader range of business initiatives, such as sales and marketing, operations, hiring, and expanding production capacity. Such a credit could result from direct investment by investors in eligible technology companies—similar to the flow-through share incentives currently available in the resource sector, the Alberta Stock Savings Plan that existed in the 1980s, and the recently introduced BC Equity Capital Program. Alternatively, a program could be designed to encourage investment in venture capital pools of managed equity capital, which in turn would invest in defined types of technology businesses.

Survey respondents want the provincial government to focus on assistance with technology commercialization, promoting Alberta as a technology destination, and supporting research and development. Technology executives also believe the government’s policy of minimizing corporate and personal taxes provides a key support to their industry. In view of the tremendous opportunity that outsourcing represents for the province, it is important to recognize that competing on a cost basis means Alberta technology businesses will benefit from any efforts to encourage global trade, reduce border restrictions, minimize the costs of transporting goods, promote Alberta businesses and assist in building industry focus and centres of excellence that encourage economies of scale.

Access to Equity Capital Issues
Equity Capital and the Commercialization of
Early Stage Technology in Alberta

Alberta Economic Development
April 10, 2002

EXECUTIVE SUMMARY
ISSUE: Access to equity capital in Alberta – Status, actions and issues.
BACKGROUND:
· Most analysts agree that Alberta’s banking marketplace is adequately meeting the debt
financing needs of Alberta businesses. Alberta industry stakeholders are not expressing
concern with access to debt financing. In 1998, knowledge-based businesses made up 2.22%
of major bank customers in Alberta compared to 2.34% for all of Canada and 2.86% in
Ontario and 2.47% in Quebec. In the same year, one and a half percent of Canadian
chartered bank business loan authorizations in Alberta were to knowledge-based industries as
opposed to 2.14% for Canada as a whole. Alberta businesses also have access to other
lenders such as the Alberta Treasury Branches and the Alberta Opportunity Company.
· Access to equity capital in Alberta as opposed to debt financing has been under extensive
review since 1996. It focuses on the perceived lack of seed and venture capital funding for
new and emerging industries. Alberta has averaged between 2% and 6% of the total
Canadian venture capital investment over the past 10 years. Alberta’s economy made up
about 14% of total Canadian GDP in 2001.
· The institutional supply of venture capital in Canada grew dramatically in the 1990’s and2000. The development of Labour Sponsored Venture Capital Corporations (LSVCCs) inparticular, offered a new tax shelter to individuals and doubled the institutional supply of venture capital during the decade. Alberta is one of only two provinces in Canada that doesnot piggyback federal LSVCC tax credits with provincial tax credits.
· The concern of some industry leaders is that the emerging manufacturing and technology industries in Alberta may be limited by a gap in the availability of equity capital at the early stage of commercialization.
· The comparatively low level of venture capital investment in Alberta in the 1990’s has been
explained in different ways:
o Alberta’s relatively small presence of locally managed venture capital does not attract the same interest as proposals from provinces that have more local venture capital and therefore greater local support.
o Alberta is not generating a sufficient deal flow (outside of the energy sector) to justify
establishment of venture capital funds in Alberta.
o Canadian Venture Capital Association statistics may be under reporting Alberta
venture capital activity due to a low Alberta membership in the Association.
· Over the past two years, steps have been taken by both the Alberta and federal governments
to facilitate private equity investment in business. Insufficient time has passed to assess their
impact.

Canadian Labour Sponsored Venture Capital Corporations:

Bain or Boon?

Douglas J. Cumming

School of Business

University of Alberta

Edmonton, Alberta

Jeffrey G. MacIntosh

Toronto Stock Exchange Professor of Capital Markets

Faculty of Law

University of Toronto

Draft: March 2002

Abstract

We provide an empirical analysis of the legal and economic factors that affect the supply and demand for venture capital and the integration of venture capital markets across the Canadian provinces over the 1977-1999 period. The data provide strong support for the propositions that venture capital requires an active stock market, and that the supply of and demand for venture capital is affected by the real interest rate, and changes in real gross domestic product. The effect of government sponsorship on the supply of venture capital is also considered. The evidence suggests Labour-Sponsored Venture Capital Corporation (LSVCC) legislation has crowded out the supply of venture capital in some jurisdictions, particularly where both federal and provincial LSVCCs are allowed to operate in the jurisdiction. On the demand side, the data indicate that venture capital in a province increases with the number of new federal incorporations from that province, but not provincial incorporations. This incorporation evidence is consistent with the existence of a separating equilibrium in which a more expensive federal incorporation enables higher quality entrepreneurs to signal their ability to prospective venture capital investors

German Elections: Bosses Win

Analysis: German vote inconclusive

Actually it's a conclusive win for the interests of business and the neo-con agenda.

Since the SPD the Social Democrats will have nothing to do with the Party of the Left, the only party besides the bosses party the FDP to gain in votes, neo-conservative reforms in Germany are the reality either coalition government will have to face. Workers are the losers in this election. Period.
Regardless of who makes up the coalition government. Its a move to the right.

German election brings political uncertainty

Theoretically there are now four possible coalitions, but all the four will realistically be very difficult.

-- Red-Green-Yellow: The current SPD-Green government set up a traffic-light with the FDP. But the FDP has rejected cooperation with the SPD-Green alliance.

-- Red-Red-Green: the SPD-Green cooperate with the Left Party. Schroeder ruled out a coalition with the party composed of former eastern German communists and renegade Social Democrats.

-- Black-Yellow-Green: The CDU/CSU and FDP alliance will form a government with the Green Party, which is now a ruling party with the SPD.

-- Grand coalition: The CDU/CSU and the SPD would sit together to form an absolute solid majority. Many pollsters said prior to the voting that such a coalition could be the outcome.


The fact that these same reforms have occured over a decade ago in North America, shows that social democratic governments in Europe are only good for slowing the inevitable. Not challenging it. So its a simple case of brutal cuts versus massive cuts, as the slogan of the Liberals in the provincial election in Alberta in 1993 was.

Germany's FDP Scores Best Election Result Since Reunification
Germany's pro-business Free Democratic Party, out of power since 1998, yesterday scored its best election result since the country's reunification 15 years ago. The success of the FDP, the only major grouping to gain votes in yesterday's election apart from the post-communist Left Party, may increase its influence in any coalition negotiations. German opposition leader Angela Merkel and Chancellor Gerhard Schroeder each claimed the right to lead the government after an inconclusive election result. Merkel's Christian Democrats beat Schroeder's Social Democrats by 35.2 percent to 34.3 percent. Either party would need the FDP's support in any government except a ``grand coalition'' of CDU and SPD. ``I think a coalition of the CDU, the FDP and the Greens is likely,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt, in an interview. ``The Greens as the party that may tip the scales would have an incentive to agree to that as otherwise they would be forced into opposition. The CDU will try by any means to avert a grand coalition.''

Germany's three main business lobby groups had backed a CDU- FDP administration, including the BDI industry federation, which represents 107,000 of the country's biggest companies including Siemens AG and DaimlerChrysler AG. BDI President Juergen Thumann said a grand coalition would ``lead to paralysis.'' ``A coalition of the CDU, the FDP and the Greens would be a more effective coalition than a grand coalition, but less effective than a coalition of the CDU and the FDP alone,'' Barclays' Polleit said.

The FDP wants to freeze pension contributions, force people to spend more on providing for their retirement, privatize the state-controlled health-insurance system and provide a choice between different health-insurance packages.

Captains of industry fret about reform stagnation
Chief executives had pinned their hopes on a Christian Democrat-led government under Angela Merkel to renew Germany's confidence and reinforce the reform process started by Chancellor Gerhard Schröder.

Yep whats good for workers in North America and Britain is good for workers in Germany and France and the rest of the European Union. Same prescription which only guarntees short term gain for long term pain as we have found out here. But what it will do is weaken the unions and their party giving genuine working class struggle and self organization a chance to come to birth in the fight against this class war agenda of business. Tis the end of the social contract and tripartiism in Germany, which while harsh will be a good thing for the international workers movement.

And finally the Truth is out about the Green Party, like its counterpart in Canada it is a right wing populist party, more interested in appealing to the small shop keeper, farmer and university student, than to the industrial workering class and mass proletarian working class. If they join the CDU and FPD coalition government their opportunist politics will finally doom what is just another phoney political party of the bosses.

German Vote Split, Parties Seek Coalition

Battles over trimming cradle-to-grave benefits have engulfed legislatures across Europe, including France and Italy, which recently imposed unpopular cuts in social and labor programs.

Corporations are demanding less government. In Germany, for example, nearly two-thirds of the $233 billion in annual tax revenue funds social entitlements.

"It's high time to bring all those unemployed lazybones and enlist them into something useful instead of the state just feeding them," said Katrin Link, a saleswoman in a tobacco shop who voted for the CDU. "There are too many people who just don't want to work and still they get by wonderfully."

Liberals' success leaves bitter taste
By Hugh Williamson in Berlin
Published: September 19 2005
Fiancial Times

Germany's liberal Free Democrats last night faced the bitter prospect of another four years on the opposition benches, despite securing their best result in 15 years.

If, as appears likely, the CDU/CSU and SPD form a grand coalition, the liberals, who were junior partners with chancellor Helmut Kohl's CDU from 1982 to 1998, will have to satisfy themselves with being the largest opposition party in parliament.

Pollsters said the FDP had won votes from the CDU. Conservative voters, believing Angela Merkel's party would win, gave their second votes to the market-friendly FDP. Some conservative voters uneasy with Ms Merkel could also have given votes to the party, some CDU members acknowledged last night.

Despite the strong showing, the result is a blow for Guido Westerwelle, the FDP leader, who also failed at the election in 2002 to return his party to government.

FDP leaders last night ruled out entering talks with the SPD and Greens on forming a three-way coalition.

Another winner among the smaller parties was the ex-communist Left party, formerly the Party of Democratic Socialism. It is to return to the lower house of parliament with a fully-fledged parliamentary group - since 2002 the party has had two parliamentary seats, not enough to qualify as a parliamentary group.

The party's success is partly due to Oskar Lafontaine. The former finance minister and SPD chairman abandoned Gerhard Schröder's government in 1999 and in May announced that he would support the Left party as a representative of a group of SPD dissidents set up last year.

After seven years in government, the environmental Greens said last night they were ready to join the opposition, and expressed relief the party's support was almost unchanged compared with 2002.

They ruled out entering a coalition with the CDU and FDP.

Joschka Fischer, foreign minister, is likely to become leader of the Greens' parliamentary group.

Analysts said the Greens would face internal battles over the party's direction

China: The Truimph of State Capitalism

If It walks like a duck, and quacks like a duck, it must be a duck

READING BUKHARIN IN LIGHT OF MODERN CHINA

Anyone out there that still believes that China is a 'communist' nation please leave the room immediately what I am about to say will upset your whole ideological perspective.

Now if you are a right winger blinded by your post cold war reds under the beds paranoia, no matter what the facts are you will deny them. Instead you will see China's move into the world marketplace of capitalism as some sort of incideous conspiracy of the 13th Communist International.

If you are a die hard bolshevik tendency all unto yourself, like the Spartacus League or the Marxist Leninists, you will see China as a truimph of Stalinism, and so called socialism in one state, which it is not.

Rather it is in transition from State Capitalism to Monopoly Capitalism,( ala Baran &Swezzy of Monthly Review). To misquote Lenin, though Bukharin would approve;

State Capitalism is the highest form of Monopoly Capitalism.

Being a very large shareholder in the state capitalist trust, the modern state is the highest and all-embracing organisational culmination of the latter. Hence its colossal, almost monstrous, power. N.I. Bukharin: Imperialism and World Economy Chapter XI

Thus the principles of class antagonisms reach a height that could not have been attained hitherto. Relations between classes become most clear, most lucid; the mythical conception of a "state elevated above classes" disappears from the peoples' consciousness, once the state becomes a direct entrepreneur and an organiser of production. Property relations, obscured by a number of intermediary links, now appear in their pristine nakedness.
N.I. Bukharin: Imperialism and World Economy Chapter XIV

State Capitalism emerged during the post War era and the Great Depression and continued after as an inevitable outgrowth of both a national and global expansion of post-WWII capitalist reconstruction, it is now mobilizing regional and national captials around monopolies. Whether they are American Transnational Corporations which are bound hand and foot to the American State by being part of the military industrial complex, or if it is large State funded corporations that are being privatized like those in China, it is still capitalism.

There is class struggle and class war, but there has never been a workers paradise. The fatal illusion of the Soviet Union and later the Chinese Revolution under Mao, is that they were some how socialist revolutions. The fact is that they were not working class revolutions at all since they were national revolutions. Socialism was the ideology but the practice was State Capitalism no different than its other manifetations, The New Deal in the U.S. and Facism in Italy, Spain, Germany, and Japan.

In the third world the attempted National Liberation Struggles either ended up a failure of capitalist developement, such as we are witnessing in the Congo or were successful in moving from a peasant economy to a proletarian economy, such as Lesotho and Angola, and of course South Afica.

The Marxist Leninist Gueveraist Third World struggles of the Sixties while ideologically were supposedly left wing, they in fact were needed for capitalism to develop a marketplace and a working class in these countries.

The role of the ML movement was to modernize their economies through National Liberation. No differently than previous National Liberation revolutions like the American, French and Haitian.

They existed to create a bourgoise revolution, to create a bourgoise class and a working class out of the peasant and colonial conditions they were burdened with.

China is now a full blown capitalist and Imperialist state, capable now of challenging the hegemony of the United States. With the successful launch of its first space flight, it has joined the great powers of Russia and the US.
While Russia is weakend a wounded bear suffering the indignities of privatization and criminal capitalism, China remains a solidly Monopoly Capitalist economy on where the reforms to its State Capitalist regime do not endanger it's national capitals and their monopolies.

Simply put you can't have a banking crisis in a workers paradise, cause the struggle against capitalism is about abolishing wage slavery. There are no banks in a workers paradise.


Bad debt sale delayed by ICBC loan bungle

The delay comes amid mounting evidence that the whole loan-disposal program is in disarray. The four AMCs were set up in 1999 to get rid of 1.4 trillion yuan of bad loans accumulated by the big four state-owned banks - Bank of China, Construction Bank, ICBC and Agricultural Bank. Yet they have managed so far to sell off a paltry US$6 billion (HK$46.8 billion) in bad debts - just 3 percent of the total - via open auctions to foreign and domestic bidders. The rest have merely been transferred between AMCs at inflated prices or sold off privately to domestic bidders for less than their true worth. Meanwhile China's banking system remains saddled with bad loans estimated at US$300 billion.

Nikolai Bukharin

Imperialism and World Economy

Introduction by V.I. Lenin

---

Written: 1915 and 1917
Source: Nikolai Bukharin "Imperialism and World Economy", Monthly Review Press, no date
First Published in English: Nikolai Bukharin "Imperialism and World Economy", International Publishers 1929
Online Version: Marxists Internet Archive (marxists.org) 2001
Transcription/Markup: Mathias Bismo

N.I. Bukharin: Imperialism and World Economy Chapter III

It is a profound error to think, as the bourgeois economists do, that the elimination of free competition and its replacement by capitalist monopolies would do away with industrial crises. Such economists forget one "trifle," namely, that the economic activities of a "national" economy are now conducted with a view towards world economy. As to the latter, it is by no means an arithmetical total of "national" economies, just as a "national" economy is by no means an arithmetical total of individual economies within the boundaries of the state territory. In either case, there is a very substantial element supplementing all the others, namely, connections, reciprocal action, a specific medium which Rodbertus called "economic communication," without which there is no "real entity," no "system," no social economy, only isolated economic units. This is why, even if free competition were entirely eliminated within the boundaries of "national economies," crises would still continue, as there would remain the anarchically established connections between the "national" bodies, i. e., there would still remain the anarchic structure of world economy.)

The perspectives of development can be pointed out only after analysing all the main tendencies of capitalism. And since the internationalisation of capitalist interests expresses only one side of the internationalisation of economic life, it is necessary to review also its other side, namely, that process of the nationalisation of capitalist interests which most strikingly expresses the anarchy of capitalist competition within the boundaries of world economy, a process that leads to the greatest convulsions and catastrophes, to the greatest waste of human energy, and most forcefully raises the problem of establishing new forms of social life."


N.I. Bukharin: Imperialism and World Economy Chapter IV

World economy, as we have seen above, represents a complex network of economic connections of the most diverse nature; the basis of this are production relations on a world scale. Economic connections uniting a great number of individual economies are found to become more numerous and more frequent as we proceed, within the framework of world economy, to analyse "national" economies, i.e., economic connections existing within the boundaries of individual states. There is nothing mysterious about this; we must not attribute that fact to an alleged creative role of the "state principle" that is supposed to create from within itself special forms of national economic existence; neither is there a predestined harmony between society and state. The matter has a much simpler explanation. The fact is that the very foundation of modern states as definite political entities was caused by economic needs and requirements. The state grew on the economic foundation; it was only an expression of economic connections; state ties appeared only as an expression of economic ties. Like all living forms, "national economy" was, and is, engaged in a continuous process of internal regeneration; molecular movements going on parallel with the growth of productive forces, were continually changing the position of individual "national" economic bodies in their relation to each other, i.e., they influenced the interrelations of the individual parts of the growing world economy. Our time produces highly significant relations. The destruction, from top to bottom, of old, conservative, economic forms that was begun with the initial stages of capitalism, has triumphed all along the line. At the same time, however, this "organic" elimination of weak competitors inside the framework of "national economies" (the ruin of artisanship, the disappearance of intermediary forms, the growth of large‑scale production, etc.) is now being superseded by the "critical" period of a sharpening struggle among stupendous opponents on the world market. The causes of this phenomenon must be sought first of all in the internal changes that have taken place in the structure of "national capitalisms," causing a revolution in their mutual relations.

Those changes appear, first of all, as the formation and the unusually rapid spread of capitalist monopoly organisations: cartels, syndicates, trusts, bank syndicates. We have seen above how strong this process is in the international sphere. It is immeasurably greater within the framework of "national economies." As we shall see below, the "national" carteling of industry serves as one of the most potent factors making for the national interdependence of capital.

We have seen in the preceding chapters what tremendous significance is attached to participation in and financing of industrial enterprises. The latter is one of the functions of modern banks.

An increasingly large section of industrial capital does not belong to the industrialists who apply it. The right to manipulate the capital is obtained by them only through the bank which, in relaiton to them, appears as the owner of that capital. On the other hand, the bank is compelled to place an ever growing part of its capital in industry. In this way the bank becomes to an ever increasing degree an industrial capitalist. Bank capital, i.e., capital in money form, which has thus been in reality transformed into industrial capital, I call finance capital.

Thus by means of various forms of credit, by owning stocks and bonds, and by directly promoting enterprises, banking capital appears in the role of an organiser of industry. This organisation of the combined production of a whole country is the stronger, the greater; on the one hand, the concentration of industry, on the other, the concentration of banking.

Mention must be made here also of the important part played by state and communal enterprises, which enter into the general system of "national economy." Among state enterprises we find, first of all, mining (in Germany, e.g., out of 309 coal mines with an output of 149 million tons, 27 mines with an output of 20.5 million tons belonged to the state in agog; the total value of state production amounted to 235 million marks; salt mines and others also belong to this category; the gross income from all state enterprises of Germany in 1910 amounted to 349 million marks, while the net income was 25 million marks); next to mining are state railroads (only in England, and only prior to the war, were the railroads exclusively in the hands of private owners); then the post office, the telegraph, etc., also forestry. Among communal enterprises of great economical importance are mainly the water system, the gas system, and the electric constructions, with all their ramifications.The powerful state banks also form part of this system. The interrelation between those "public" enterprises and the enterprises of a purely private character assumes various forms; the economic connections, in general, are numerous and variegated, and credit is not the least among them. Very close relations arise on the basis of the so‑called mixed system (gemischte Unternehmungen) where a certain enterprise is composed of both "public" and private elements (participation of large‑scale, usually monopolistic, firms)‑a phenomenon not infrequent in the realm of communal economy. The example of the German Empire Bank (Reichsbank) is of particular interest. This bank, whose part in the economic life of Germany is tremendous, appears so closely connected with "private economy" that there is an unsettled dispute going on as to whether it is a stock company or a state institution, whether it is subject to the laws governing private or public undertakings.

All parts of this considerably organised system, cartels, banks, state enterprises, are in the process of growing together; the process is becoming ever faster with the growth of capitalist concentration; the formation of cartels and combines creates forthwith a community of interest among the financing banks; on the other hand, banks are interested in checking competition between enterprises financed by them; similarly, every understanding between the banks helps to tie together the industrial groups; state enterprises also become ever more dependent upon large‑scale financial‑industrial formations, and vice versa. Thus various spheres of the concentration and organisation process stimulate each other, creating a very strong tendency towards transforming the entire national economy into one gigantic combined enterprise under the tutelage of the financial kings and the capitalist state, an enterprise which monopolises the national market and forms the prerequisite for organised production on a higher noncapitalist level.

N.I. Bukharin: Imperialism and World Economy Chapter V

It is thus obvious that not the impossibility of doing business at home, but the race for higher rates of profit is the motive power of world capitalism. Even present-day "capitalist plethora" is no absolute limit. A lower rate of profit drives commodities and capital further and further from their "home." This process is going on simultaneously in various sections of world economy. The capitalists of various "national economies" clash here as competitors; and the more vigorous the expansion of the productive forces of world capitalism, the more intensive the growth of foreign trade, the sharper is the competitive struggle. During the last decades quantitative changes of such magnitude have taken place in this realm that the very quality of the phenomenon has assumed a new form.

Those changes proceed, so to speak, from two ends. On the one hand, the process of mass production is becoming extremely accelerated, i.e., the volume of commodities seeking for a foreign market is increasing-a phenomenon highly characteristic of recent times; on the other hand, the free market, i.e., that section of it which has not been seized by the "great power" monopolies, becomes ever narrower.

N.I. Bukharin: Imperialism and World Economy Chapter VII

Two sets of causes have been and are operating here. In the first place, the accumulation of capital proceeds with an unusually rapid tempo, due to large-scale capitalist production accompanied by incessant technical progress which makes gigantic strides and increases the productive power of labour, and to the unusual increase in the means of transportation and the perfection of means of circulation in general, which also hastens the turn-over of capital. The volumes of capital that seek employment have reached unheard of dimensions. On the other hand, the cartels and trusts, as the modern organisation of capital, tend to put certain limits to the employment of capital by fixing the volume of production. As to the non-trustified sections of industry, it becomes ever more unprofitable to invest capital in them. For monopoly organisations can overcome the tendency towards lowering the rate of profit by receiving monopoly superprofits at the expense of the non-trustified industries. Out of the surplus value created every year, one portion, that which has been created in the nontrustified branches of industry, is being transferred to the coowners of capitalist monopolies, whereas the share of the outsiders continually decreases. Thus the entire process drives capital beyond the frontiers of the country.

In the second place, high tariffs put tremendous obstacles in the way of commodities seeking to enter a foreign country. Mass production and mass overproduction make the growth of foreign trade necessary, but foreign trade meets with a barrier in the form of high tariffs. It is true that foreign trade keeps on developing, foreign sales grow, but this is taking place notwithstanding the difficulties and in spite of them. This does not mean, however, that the tariffs do not make themselves felt. Their influence is, first of all, expressed in the rate of profit. Tariff barriers, making the export of commodities very difficult, do not interfere in any way with the export of capital. Obviously, the higher the wave of duties, the larger, other conditions being equal, is the flight of capital from its home country.

N.I. Bukharin: Imperialism and World Economy Chapter VIII

To sum up: the development of the productive forces of world capitalism has made gigantic strides in the last decades. The upper hand in the competitive struggle has everywhere been gained by large-scale production; it has consolidated the "magnates of capital" into an ironclad organisation, which has taken possession of the entire economic life. State power has become the domain of a financial oligarchy; the latter manages production which is tied up by the banks into one knot. This process of the organisation of production has proceeded from below; it has fortified itself within the framework of modern states, which have become an exact expression of the interests of finance capital. Every one of the capitalistically advanced "national economies" has turned into some kind of a "national" trust. This process of the organisation of the economically advanced sections of world economy, on the other hand, has been accompanied by an extraordinary sharpening of their mutual competition. The overproduction of commodities, which is connected with the growth of large enterprises; the export policy of the cartels, and the narrowing of the sales markets in connection with the colonial and tariff policy of the capitalist powers; the growing disproportion between tremendously developed industry and backward agriculture; the gigantic growth of capital export and the economic subjugation of entire regions by "national" banking combinesall this has thrown into the sharpest possible relief the clash of interests between the "national" groups of capital. Those groups find their final argument in the force and power of the state organisation, first of all in its army and navy. A mighty state military power is the last trump in the struggle of the powers. The fighting force in the world market thus depends upon the power and consolidation of the "nation," upon its financial and military resources. A self-sufficient national state, and an economic unit limitlessly expending its great power until it becomes a world kingdom - a world-wide empire - such is the ideal built up by finance capital.

N.I. Bukharin: Imperialism and World Economy Chapter XI

When competition has finally reached its highest stage, when it has become competition between state capitalist trusts, then the use of state power, and the possibilities connected with it, begin to play a very large part. The state apparatus has always served as a tool in the hands of the ruling classes of its country, and it has always acted as their "defender and protector" in the world market; at no time, however, did it have the colossal importance that it has in the epoch of finance capital and imperialist politics. With the formation of state capitalist trusts, competition is being almost entirely shifted to foreign countries; obviously, the organs of the struggle that is to be waged abroad, primarily state power, must therefore grow tremendously. The significance for capitalism of high tariffs, which increase the fighting capacity of the state capitalist trust in the world market, must increase still more; the various forms of "protecting national industry" become more pronounced; state orders are placed only with "national" firms; income is guaranteed to all sorts of enterprises, which present great risks but are "useful" from a social point of view; the activities of "foreigners" are hampered in various ways. (Compare, for instance, the stock exchange policy of the French government as mentioned in Chapter II). Whenever a question arises about changing commercial treaties, the state power of the contracting groups of capitalists appears on .the scene, and the mutual relations of those states-reduced in the final analysis to the relations between their military forces-determine the treaty. When a loan is to be granted to one or the other country, the government, basing itself on military power, secures the highest possible rate of interest for its nationals, guarantees obligatory orders, stipulates concessions, struggles against foreign competitors. When the struggle begins for the exploitation by finance capital of a territory that has not been formally occupied by anybody, again the military power of the state decides who will possess that territory. In "peaceful" times the military state apparatus is hidden behind the scenes where it never stops functioning; in war times it appears on the scene most directly. The more strained the situation in the world sphere of struggle-and our epoch is characterised by the greatest intensity of competition between "national" groups of finance capitalthe oftener an appeal is made to the mailed fist of state power. The remnants of the old laissez faire, laissez passer ideology disappear, the epoch of the new "mercantilism," of imperialism, begins.

N.I. Bukharin: Imperialism and World Economy Chapter XII

It follows from the above that the actual process of economic development will proceed in the midst of a sharpened struggle between the state capitalist trusts and the backward economic formations. A series of wars is unavoidable. In the historic process which we are to witness in the near future, world capitalism will move in the direction of a universal state capitalist trust by absorbing the weaker formations

We have seen in the second section the peculiarities in the structure of modern capitalism and the formation of state capitalist trusts. This economic structure, however, is connected with a certain policy, namely, the imperialist policy. This not only in the sense that imperialism is a product of finance capitalism, but also in the sense that finance capital cannot pursue any other policy than an imperialist one, as we characterised it above. The state capitalist trust cannot become an adherent of free trade for thereby it would lose a considerable part of its capitalist raison d'être. We have already pointed out that protectionism allows the acquisition of additional profits on the one hand, facilitates competition in the world market on the other. In the same way finance capital, expressing as it does capitalist monopoly organisations, cannot relinquish the policy of monopolising "spheres of influence," of seizing sales markets and markets for raw materials, or spheres of capital investment. If one state capitalist trust fails to get hold of an unoccupied territory, it will be occupied by another. Peaceful rivalry, which corresponded to the epoch of free competition and of the absence of any organisation of production at home, is absolutely inconceivable in the epoch of an entirely different production structure and of the struggle among state capitalist trusts. Those imperialist interests are of such magnitude for the finance capitalise groups, and they are so connected with the very foundations of their existence, that the governments do not shrink before the most colossal military expenditures only to secure for themselves a stable position in the world market. The idea of "disarmament" within the framework of capitalism is particularly absurd as far as the state capitalist trusts that occupy the foremost positions in the world market are concerned. Before their eyes there always shines the picture of subjugating the whole world, of acquiring an unheard of field for exploitation-a thing termed by the French imperialists l'organisation d'économie mondiale and by the German imperialists, Organisierung der Weltwirtschaft Would the bourgeoisie exchange this "high" ideal for the pot of porridge of disarmament? Where is the guarantee for a given state capitalist trust that a pernicious rival will not continue the "abandoned" policy in spite of all formal agreements and guarantees? Everyone acquainted with the history of the struggle among cartels even within the boundaries of one country knows how often, when the situation changed, when the market conditions changed, agreements dissolved like soap bubbles. Imagine a strong state capitalist trust like the U. S. waging war against a union of all other trusts-the "agreement" will then be shattered to pieces in no time. (In the latter case we would have a tremendous formation constructed after the type of an ordinary syndicate, and having the state capitalist trusts as its component parts. Such an agreement between the state capitalist trusts would not be able at once to skip all intermediary stages, to become a real centralised trust. A type of agreement, however, that implies intense internal struggle is easily amenable to the influence of changing conditions.) We have taken a hypothetical case where formal unification is a fact. However, this unification cannot take place because the bourgeoisie of every country is by no means as naïve as many of its bona fide pacifists who wish nothing more than to persuade the bourgeoisie and to "prove" to it that it does not understand its own advantages....


N.I. Bukharin: Imperialism and World Economy Chapter XIII

The entire structure of world economy in our times forces the bourgeoisie to pursue an imperialist policy. As the colonial policy is inevitably connected with violent methods, so every capitalist expansion leads sooner or later to a bloody climax. "Violent methods," says Hilferding, "are inseparably bound up with the very essence of colonial policy, which without them would lose its capitalist meaning; they are so much an integral element of the colonial policy as the existence of a proletariat divorced from all ownership is generally a conditio sine qua non of capitalism. To be in favour of a colonial policy and at the same time to talk about eliminating its violent methods, is a dream which cannot be treated with more earnestness than the illusion that one can eliminate the proletariat while retaining capitalism."

The same thing may be said about imperialism. It is an integral element of finance capitalism without which the latter would lose its capitalist meaning.

It follows from the above that (as far as capitalism will retain its foothold) the future belongs to economic forms that are close to state capitalism. This further evolution of the state capitalist trusts, highly accelerated by the war, is reflected, in its turn, in the worldwide struggle among state capitalist trusts. We have seen above how the tendency to turn capitalist states into state capitalist trusts found its reflection in the mutual relations of the states. Monopoly tendencies within the "national" body have called forth tendencies to monopolise territories outside the home state by means of annexations; this has sharpened competition and its forms terrifically. With the further progress of internal centralisation, this acute situation will become more acute by leaps and bounds. Added to this is the rapid narrowing of the free field for capital activities. There is, therefore, not the slightest doubt that the near future will be fraught with the most cruel conflicts, and that the social atmosphere will not cease being saturated with war electricity. One of the outward expressions of this circumstance is the extraordinary growth of militarism and of imperialist sentiment. England, the land of "freedom" and "individualism," has already established a tariff and is organising a standing army; its state budget is being militarised. America is preparing war activities on a truly grandiose scale. The same thing is going on in Germany, in France, in Japan, and everywhere. The period of an idyllic "peaceful" existence has sunk into Lethe; capitalist society is whirling in the mad hurricane of world wars.

Chapter 14: World Economy and Proletarian Socialism

The first period of the war has brought about, not a crisis of capitalism (the germs of which were visible only to the most penetrating minds of both the bourgeois and proletarian camps), but a collapse of the "Socialist" International. This phenomenon, which many have attempted to explain by proceeding solely from the analysis of the internal relations in every country, cannot be more or less satisfactorily explained from this angle. For the collapse of the proletarian movement is a result of the unequal situation of the "state capitalist trusts" within the boundaries of world economy. Just as it is impossible to understand modern capitalism and its imperialist policy without analysing the tendencies of world capitalism, so the basic tendencies in the proletarian movement cannot be understood without analysing world capitalism.

Capital implies the existence of labour. Labour implies the existence of capital. The capitalist mode of production is a certain relation between people, between social classes, each of which implies the existence of the other. Viewed from this angle, both capitalists and workers are members, component parts, poles of the same capitalist society. In so far as capitalist society exists, there exists also an interdependence of these opposing classes, a mutual dependence, expressing itself in a relative solidarity of interests that are opposed in substance. This "solidarity" of interests is the solidarity of a moment, it is not that lasting solidarity which welds together the members of the same class. Bourgeois political economy, and together with it its "Socialist" followers, present that which is passing, momentary, accidental for the class struggle on a social scale as essential; they do not see the trees for the forest, and they inevitably sink to the rôle of simple satellites of finance capital.

Here is an example. Everybody knows that at the beginning of the capitalist era, when the working class had just begun to emerge and to separate itself from the small entrepreneurs, when so-called patriarchal relations prevailed between master and worker, the latter to a considerable degree identified his interests with the interests of his exploiter.

This identification of interests that are in substance totally opposed to one another, was, to be sure, not suspended in the air. It had a very real basis. "The better the business of our shop, the better for me," the worker of that time used to reason. This reasoning was based on the possibility of raising wages with the increase of the sum total of values realised by a given enterprise.

We find the same psychology in other variations. What, in fact, is, let us say, the so-called "craft ideology" of the English trade unionists? We find here substantially the same idea: our production, they say, our sphere of production, which embraces both workers and industrialists, must prosper before anything else. No interference of outside elements must be tolerated.

In recent times we find an analogy to this purely local patriotism in enterprises with highly skilled labour. Such enterprises, for instance, are the plants of the well-known American pacifist (and, incidentally, war contractor) Ford. The workers are carefully selected for the plant. They receive higher wages, they are granted various premiums and profit sharing under the condition that they be bound to the plant. As a result, the bamboozled workers are "devoted" to their masters.

On a larger scale the same phenomenon may be observed in the so-called working class protectionism with its policy of safeguarding "national industry," "national labour," etc. This ideology permeates a considerable part of the Australian and American workers: "We" (i.e., both capitalists and workers), they say, are equally interested in our national industry, for, the higher the profits of our employers, the higher will our wages rise.

In the process of competitive struggle between the various enterprises, their situation is not everywhere the same. Enterprises with highly skilled labour always occupy the first ranks, always enjoy exceptional privileges. Their share in the surplus value that is being produced in society as a whole is disproportionately large, for they receive differential profits on the one hand, cartel rents (as far as we deal with modern times) on the other. Thus a basis is created for a momentary interlinking of the interests of capital and labour in a given production branch, a circumstance which expresses itself in the workers giving capital, not the labour of duty, but the labour of love.

It is perfectly obvious that such a "solidarity of interests" between the capitalist and the worker is of a temporary character, and (from the point of view of what "ought to be") it cannot determine the conduct of the proletariat. Were the workers eternally to hang on to the coat tails of their masters, they would never be able to conduct a single strike, and the employers, bribing them individually, would be able individually to defeat them.

However, because the proletariat has not learned yet to distinguish local and temporary interests from general and lasting ones, it is permeated with such a narrow conception. The latter is overcome only when the class struggle achieves great scope, destroying local bigotry, welding the workers together, and throwing them into sharp opposition as a class to the class of the capitalists. In this way the psychology of the patriarchal period was overcome when the bond of unity between the workers and the master of an individual enterprise was severed. In this way the "craft ideology" of the unions organising skilled workers was overcome.

However, the end of the nineteenth century, which to a large degree destroyed the bond of unity between capitalists and workers, which placed against each other those classes and their organisations as classes and organisations hostile to each other in principle, has not yet destroyed the bond of unity between the working class and the greatest organisation of the bourgeoisie, the capitalist state.

The working class connection with this organisation was expressed in the ideology of workers' patriotism ("social-patriotism"), in the idea of a "fatherland," which the working class is supposed to serve.

After what has been presented above, the material basis of this phenomenon will become clear if we turn our attention to the whole sphere of world economy.

We have seen that the competitive struggle was, by the end of the nineteenth and the beginning of the twentieth century, to a large extent transferred to the foreign markets, i.e., it became a competition in the world market. Thus the state organisation of capital, the "fatherland," having turned into a state capitalist trust, took the place of the individual enterprise and appeared on the world arena with all its heavy and ponderous apparatus.

From this angle we must first of all view the colonial policy of the imperialist states.

There is an opinion current among many moderate internationalists to the effect that the colonial policy brings nothing but harm to the working class and that therefore it must be rejected. Hence the natural desire to prove that colonies yield no profit at all, that they represent a liability even from the point of view of the bourgeoisie, etc. Such a point of view is being propounded, for instance, by Kautsky.

The theory unfortunately suffers from one shortcoming, namely, it is out and out incorrect. The colonial policy yields a colossal income to the great powers, i.e., to their ruling classes, to the "state capitalist trust." This is why the bourgeoisie pursues a colonial policy. This being the case, there is a possibility for raising the workers' wages at the expense of the exploited colonial savages and conquered peoples.

Such are exactly the results of the great powers' colonial policy. The bill for this policy is paid, not by the continental workers, and not by the workers of England, but by the little peoples of the colonies. It is in the colonies that all the blood and the filth, all the horror and the shame of capitalism, all the cynicism, greed and bestiality of modern democracy are concentrated. The European workers, considered from the point of view of the moment, are the winners, because they receive increments to their wages due to "industrial prosperity."

All the relative "prosperity" of the European-American industry was conditioned by nothing but the fact that a safety valve was opened in the form of colonial policy. In this way the exploitation of "third persons" (pre-capitalist producers) and colonial labour led to a rise in the wages of the European and American workers.

One highly important circumstance must here be noted: in their struggle for colonies, for sales markets, and markets for raw materials, for capital investment spheres, for cheap labour, not all the "state capitalist trusts" achieve an equal success. While England, Germany and the United States of America forged ahead in their triumphal march over the world market, Russia and Italy, all the strenuous efforts of the imperialists notwithstanding, proved too weak. It was in this way that a few great imperialist powers came to the forefront as pretenders to world monopoly. They have proved, as far as the others are concerned, "above competition."

Economically the situation is this. World surplus value is being divided in the struggle for the world market. As is the case within the framework of "national economy," so also within the boundaries of world economy, the stronger competitor (whose strength is increased by multifarious factors, like the structure of production, the strength of the state militarist apparatus, convenient location due to the presence of "natural monopolies," etc.) receives super-profits, a kind of differential profit (due to the superior structure of production) and a kind of cartel rent (due to the pressure of the militarist apparatus that fortifies monopolies).

Super-profits obtained by the imperialist state are accompanied by a rise in the wages of the respective strata of the working class, primarily the skilled workers.

Such a phenomenon could also be observed in olden times. It was pointed out by Friedrich Engels who referred to the monopoly situation of England in the world market and to the conservatism of the English proletariat that resulted therefrom.

It was on the basis of this relative interest of the proletariat in colonial plunders that its connection with the masters' organisation of the bourgeois imperialist state grew and became strong. In Socialist literature this psychology found expression in the "national" point of view of the Social-Democratic opportunists. This "national wisdom," emphasised on every occasion, signified a complete abandonment of the point of view of revolutionary Marxism.

Marx and Engels viewed the state as an organisation of the ruling class that crushes the oppressed class with blood and iron. They assumed that future society would have no state at all, for the simple reason that there would be no classes. It is true that, for the transition period of proletarian dictatorship, when the proletariat is the temporary ruling class, they most correctly demanded a strong apparatus of working class state power to keep the overthrown classes in leash. Still, their attitude towards the oppressing state apparatus of the bourgeoisie was that of furious hatred, and from this point of view they mercilessly criticised the Lassalleans and other "statesmen." And a connection undoubtedly exists between this revolutionary point of view and the well-known thesis of the Communist Manifesto that the workers have no fatherland.

The Socialist epigones of Marxism have relegated this revolutionary opposition of Marx and Engels to the archives. In its place there emerge the theories of "true patriotism" and "true statesmanship," which, however, are in no way distinguishable from the most ordinary patriotism and the most ordinary statesmanship of the ruling bourgeoisie. Such an ideology was an organic outgrowth of the proletariat's partaking in the "great-nation policy" of the state capitalist trusts.

No wonder if after the outbreak of the great war, the working class of the foremost capitalist countries, chained to the chariot of the bourgeois state power, came to the aid of the latter. The proletariat was prepared for this by the whole preceding development; it was brought to this by its connection with the state organisation of finance capital.

However, the war itself, which could be waged only because the proletariat gave its tacit consent or showed insufficient indignation, has proven to it that its share in the imperialist policy is nothing compared with the wounds inflicted by the war.

It is in this way that there comes the crisis of imperialism and the rebirth of proletarian Socialism. Imperialism has turned its true face to the working class of Europe. Hitherto its barbarous, destructive, wasteful activities were almost entirely confined to the savages; now it thrusts itself upon the toilers of Europe with all the horrifying impact of a bloodthirsty elemental power let loose. The additional pennies received by the European workers from the colonial policy of imperialism-what do they count compared to millions of butchered workers, to billions devoured by the war, to the monstrous pressure of brazen militarism, to the vandalism of plundered productive forces, to high cost of living and starvation!

The war severs the last chain that binds the workers to the masters, their slavish submission to the imperialist state. The last limitation of the proletariat's philosophy is being overcome: its clinging to the narrowness of the national state, its patriotism. The interests of the moment, the temporary advantage accruing to it from the imperialist robberies and from its connections with the imperialist state, become of secondary importance compared with the lasting and general interests of the class as a whole, with the idea of a social revolution of the international proletariat which overthrows the dictatorship of finance capital with an armed hand, destroys its state apparatus and builds up a new power, a power of the workers against the bourgeoisie. In place of the idea of defending or extending the boundaries of the bourgeois state that bind the productive forces of world economy hand and foot, this power advances the slogan of abolishing state boundaries and merging all the peoples into one Socialist family. In this way the proletariat, after painful searching, succeeds in grasping its true interests that lead it through revolution to Socialism.