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Book Review: "The Victory of Capital" by Ulrike Herrmann

by Wolfgang Lieb
A society can only provide for the future by investing today in the production of tomorrow... What may be sensible economically for a private household or individual business could be harmful for the national economy, particularly when the economy staggers...The public authority can act as an investor, create demand and thus stimulate the economy...With deregulation, investment banks became the most profitable business in the world... The rage that bank losses are borne by taxpayers at the end is understandable.

By Wolfgang Lieb

[This book review published on November 7, 2013 is translated from the German on the Internet.]

This book explains what capitalism really is, how it arose and how it functions. Different than the Anglo-Saxon speech area, the term “capitalism” is awkward for us in Germany. We prefer the term “market economy” which sounds very “cuddly.” Ulrike Herrmann shows why “market economy” is inadequate as a description of modern economics. Markets always existed in the history of humanity. Flourishing trade was carried out in the Tigris-Euphrates area, in the Roman Empire, in imperial China, in medieval Europe and from time immemorial. A money economy with banks already existed in antiquity. The Bible and the Koran grappled with interests. Centuries ago there were free currency exchanges and astonishingly sophisticated “financial products.” There was competition between people and continents. Steam power existed among the Romans. There was pursuit of profit and wealth in all times. But there wasn’t capitalism. What is capitalism?

Ulrike Herrmann’s new book “The Victory of Capital – How Wealth Came into the World” is a very interesting and readable book that is not only for the economically trained. Ulrike Herrmann bursts many widespread political-economic myths and current economic platitudes and opens up perspectives for economic connections that were blocked in the course of the last decades by the dominant dogma of so-called “neoliberalism.” Economic correlations are derived historically and explained clearly and not represented with economic models or mathematical formulas. Even if one does not agree with all Ulrike Herrmann’s theses, they offer important food for thought and bring to light buried alternatives to the alleged lack of alternatives. Surprisingly this book is the work of a relatively young author and not the late work of a retired economic historian. Ulrike Herrmann’s “The Victory of Capital” deserves many readers like her last book “Hurrah, we will pay for the crisis!”

“The term capitalism has the advantage that it describes precisely what characterizes today’s economic form: using capital to gain even more capital, that is realizing a profit. This process produces exponential growth.” [p.9]


At the end of the 18th century – from England’s poorest section – an economic form started out that continued its triumphant advance over nearly the whole globe. For the first time in history, machines – invested money – replaced human labor power. That was the starting signal for the industrial revolution for Ulrike Herrmann.

Was the driving force of labor replaced by capital (or by technology)? Relatively high wages of textile workers in rural northern England – compared to competition from India – were the driving force. Thus the wage was the whip for technical and industrial progress which is still true today.

However the misunderstanding that wages must fall so the economy stays competitive in the “global competition” persists in the current political debate. The opposite is really true. “Capitalism is driven by high wages, not low wages. Technical innovations that increase productivity and produce growth are only rewarding when workers are expensive.” [p.44]

This thesis of wage pressure may perhaps be relativized as a monocausal reason for the transition from earlier economic forms to the epoch of capitalism. Then there was the English agricultural revolution, the conquest and settlement of the nobility that led to higher productivity and greater general prosperity. Ulrike Herrmann describes how nearly all other elements of capitalism, starting from wealth, pursuit of profit, money, credit, interest, exploitation, competition and technical knowledge already existed historically without engendering a permanent growth. In earlier epochs, there was no pressure to “invest” in technical improvements and generate growth. Increased general prosperity through higher wages first made the replacement of workers by technology “profitable.” Real growth is only possible through technical progress. Capitalism is at its end without technical progress [p.83]

In every chapter of her new book, Ulrike Herrmann presents surprising insights in the functioning of capitalism. She explains the misunderstandings that capitalism could be identical with a “market economy,” that the state is only a troublemaker of “free” market events or that globalization is something “completely new.”


Big businesses arose with the ever higher investment costs for railroads, mines, steel plants and factories for mass production and market-dominant positions and “cemented” the market for more than 100 years. [p.68] The emphasis nowadays on “the markets” – from the financial and housing markets to the marriage markets – is “a fiction.” [p.75] Discovering a genuine market in the official “market economy” called Germany is almost impossible. [p. 82]

“The market is a game for the little ones. The economy is dominated by a few big corporations who control the large share of the sales.” [p. 70]

For example, almost all DAX companies come from the time before the First World War. Less than one percent of the largest corporations have almost two-thirds of sales in Germany. [p. 68] The big corporations do everything to avoid competition by merging, cooperating or vertically integrating. “This enormous concentration never shocks neoliberal thinkers. Untiringly they preach the doctrine of free competition and then ennoble this into the basis of political freedom.” [p.69]

A “free” market economy does not exist any more than an "achievement- or performance-oriented society.” The same men always circle through the boards of directors and the top positions of the big corporations. Studies of the elite researcher Michael Hartmann revealed that the origin of top managers was ultimately crucial for gaining their leadership positions, not their ability. 85 percent of the chief executives of the largest 100 corporations came from the upper middle class which only constituted 3.5 percent of the population. [p.72] “The theory of the `free market economy’ is a very powerful political weapon that benefits a few firms and their shareholders.” [p.84]


The author demystifies or breaks the spell on the dominant doctrine of the “labor market.” The market economy can only function rightly when there is no pressure because otherwise there would be a one-sided price dictation. “The labor market cannot be a genuine market that automatically produces a fair wage. Unprotected employees are forced to sell their labor power at the lowest prices to survive. A power gradient prevails between employers and employees as Adam Smith recognized far-sightedly.” [p.76]

Therefore the “labor market” first functions when there are unions that like cartels put a stop to price wars. “A paradox is involved. The `free’ labor market was first possible when competition between employees was limited.” [p.77]

“Solidarity” is the opposite of market-based competition. [p.80] “The breakthrough to the modern affluent society first began around 1880 when real wages began to rise. This happened because unions were legally allowed in England in 1871. A new mass purchasing power developed that changed capitalism again. The consumer society arose.” [p.49]

Ulrike Herrmann draws concrete conclusions for present policy from historical reflection. The Red-Green Hartz laws were the breach in the dam against this limitation of competition between employees. These laws forced the unemployed to accept almost any wage without a simultaneously existing legal minimum wage. “Since then employees can be extorted. This is not only felt by the lower sectors. The middle class also experienced stagnating salaries. Between 2000 and 2010 German real wages fell 4.2 percent although the German economy grew 14 percent at the same time.” [p. 77]


The economic correspondent of taz unmasks another "propaganda trick":: the doctrine of the free market economy,” that everything good is ascribed to the market, freedom, individual development, correct price formation, a goods production corresponding to needs and above all efficiency while everything bad is charged to the state, leading by the nose, bureaucracy, egalitarianism or leveling, corruption and inefficiency. [p.84]

Since Thatcherism and Reaganomics, the ideology has gained acceptance that the state must be “starved” {“starve the beast” was and is the battle-cry from the Anglo-Saxon zone and the American Tea Party movement). Nevertheless capitalism has always enjoyed state aid and did not arise against the state. [p.89] A description of the role of the state changing in the course of capitalism’s development is missing in this book.


Ulrike Herrmann supports Albrecht Mueller’s 2004 thesis in his “Reform Lies” that “globalization” historically considered is “nothing new.” This phenomenon was only felt to be relatively new because this process of global linkage of trade streams and worldwide price competition was interrupted by the world wars of the last century. [p.100] “Globalization is not new. That it was misused as a neoliberal argument to force down wages, lower taxes for corporations and deregulate the financial markets is new. These were political decisions beginning in 1980 that can be corrected, not practical constraints or practical necessities.” [p.104]

The author grapples with the fears that businesses could move, jobs lost and thus the prosperity of the “old” industrial countries reduced with globalization. This threat is also a cliché. Today Europeans fear the Chinese as the British a 100 years ago swathe imitation of technical developments by the Germans as dangerous. However worldwide prosperity grows when new producers are added – even though they produce more cheaply than the older producers. The additional rivals also create additional prosperity in their own countries. Adam Smith already recognized that new additional demand could only arise where prosperity develops.


In explaining the eternally puzzling phenomenon of “money,” Ulrike Herrmann gives a pragmatic answer “money is what is accepted as money.” Money was only covered by the economic output of a country, not by gold or a mystery – through “innovations” in the financial sector. “Money is only worth a lot when one can buy real products.” [p.115]

She argues critically with critics of the money system and “compound-interest theoreticians” within the political left and the Occupy movement. Like the speculators and bonus-chasers, the interest-critics believed in the mysticism of money, that money is the driving force of the real economy. However money-creation or interests did not have any economic “magic power.” Money first fuels the economy when money finances capital and is investe3d productively. [p. 118f] Money and capital are not the same. Money only becomes capital when it is productively invested to manufacture goods. A society can only provide for the future by investing today in the production of tomorrow. “If the interest critics were right, reacting to an economic depression would be very simple. The Central Bank would only need to raise the interests to trigger a “growth pressure” and stimulate the economy again. However the exact opposite happens.’ [p.131f]


In Ulrike Herrmann’s opinion, it would have been more sensible if Occupy would have camped outside the chancellor’s office instead of before the European Central Bank in Frankfurt. The European Central Bank is the only institution that acted rightly in the Euro-crisis by “printing money.” The “austerity policy” of the German government is a genuine danger for the euro, not the Central Bank. [p.221f] What may be good for an individual business is allegedly good for the whole national economy. Merkel is wedded to this political-economic thinking. She has not understood the “austerity paradox” derived from the “moderate conservative” British economist John Maynard Keynes as a bitter lesson from the worldwide economic crisis. Saving can be dangerous since it strangles demand and thus the economy. What may be sensible economically for a private household or individual business could be harmful for the national economy, particularly when the economy staggers. When businesses and private households save, only the state can solve this paradox. The state cannot guarantee to save because what is put into taxes is spend immediately and thus can stimulate the economy. [p.177] Therefore it is even in the self-interest of businesses and the well-to-do when the state siphons off a part of the savings by taxing the rich at a higher rate. With these increased tax revenues, the public authority can act as an investor, create demand and thus stimulate the economy so businesses can make more profit again.

In further chapters, the author explains why the economy cannot grow without debts and why a (slight) inflation is more beneficial than a deflation that can hardly be controlled with political-economic instruments (“inner depreciation”). [p.134ff] “As long as wages keep up with prices, whether an egg costs four times more than 50 years ago does not make a difference.” [p.139].

Inflation first triggers crises through credit-financed speculation and the arising bubbles.

Simple bookkeeping thinking or simple logic makes clear that all sectors cannot save at the same time in a national economy. The economy would collapse. When someone saves, another must become indebted. Otherwise the money remains at the bank [p.232f] and one cannot eat money as everybody knows.


In a country like Germany where the hyper-inflation of the early 1920s and the worldwide economic crisis from 1927 have become engraved in the collective memory of the population, Ulrike Herrmann commendably describes the causes of these catastrophes at the beginning of the last century. She emphasizes the difference between an economic crisis and a financial crisis. An economic crisis may lead to distressing business bankruptcies since individual firms become insolvent. In other words, the profits and company assets are not sufficient to cushion the losses. A financial crisis can trigger a liquidity crisis. The firms or banks could easily satisfy their liabilities if the whole monetary system does not become paralyzed because the money circulation collapses. A central bank plays a crucial role here as “lender of last resort.” “When the money circulation comes to a standstill, the banks are flooded with money. As soon as the panic is calmed, this money will be collected again since the emergency credits will run out. The banks simply repay the central bank what they borrowed during the panic. That would be beautiful.” [p.157]

Many examples where this simple “trick” was successful in the past are shown in the book. That the European Central Bank – unlike the British or American central banks – is hindered from assuming the role of lender of last resort is certainly awkward.

The book explains how speculation functions and how this differs from a genuine value creation. Day after day the stock markets showed that “assets” are volatile. These assets can fluctuate dramatically without much changing in real value. The “true value” of an asset is measured in the yield from the current economic output. [p.140]


Ulrike Herrmann describes how the “pseudo-victory” of neoliberalism over Keynesianism occurred in the 1970s. A “new rule of the game” of capitalism gained acceptance with the doctrines of the neoliberal thinker Milton Friedman. With the deregulation and “provocation” of the financial markets, investment banks became the most profitable businesses of the world while the profits of the real economy decreased comparatively. Thus the “value” of stocks swelled to several times the annual economic output. “A giant financial mountain of virtual assets piled up. Since 2000, governments and central banks concentrated on only stabilizing this mountain so it does not come down like an avalanche and bury the real economy.” [p.198] The author outlines how the financial crisis occurred in an understandable way for the financial laity. Monitors, rating agencies and investment bankers ultimately succumbed to the error of diversifying “risk.” However the risk did not diminish but remains in the system and is only spread differently.” [p.204]


Ms. Herrmann thinks she found the real reason why famous economists underrated the dangers of this phenomenon on the financial markets that was in no way completely new.

“Here is one reason: The damage with the banks was not especially great. The International Monetary Fund estimated the losses with mortgage securities at $500 billion. This sum sounds huge but in truth is rather insignificant since the financial assets of $80 trillion are parked worldwide by the banks. Therefore many economists thought for a long time that the breakdowns of individual banks and funds were singular events. They did not see that a system crisis was involved. That the real victims in a crash are always the banks’ customers and never the banks helped to this misjudgment.” [p.206]

Still this “remainder” of losses of 500 billion euros overstrains many banking institutes. The explanation is shockingly simple. The banks had much too little capital holdings of their own to cushion losses.” [p.207]

Chaos broke out with the “catastrophic mistake” to let the relatively small investment bank Lehman Brothers go bust to warn the other banks so to speak. Instead of giving a warning, the states now had to take out comprehensive insurance for the banks. “The governments were not left with any choice: they had to guarantee bank balances.” [p.209]

It was no accident6 that German banks “imported” so much toxic securities. That was the backside of the German export surplus. [p.211]

With the bank crisis, the crisis jumped over to the real economy since a deflationary spiral started as known from the 1929 economic crisis. Stock prices collapsed, investments were delayed, consumption paralyzed, awarding credit at a standstill and unemployment soared. [p.210]


Ulrike Herrmann proposes her own way of solving the banking crisis, a way that clearly differs from the way of conservative ordo-liberals and leftist capitalist critics. “In the present euro-crisis, demanding that banks calmly declare bankruptcy when they cannot bear their losses is very popular. A strange alliance is often forged between conservative ordo-liberals and leftist capitalist critics. Conservatives have never understood that “financial markets” are not markets and therefore urge that banks should be liable for their losses like all normal businesses. Capitalism-critics do not see why capitalist “fraudsters” should be bailed out. The rage that bank losses are held by the taxpayer at the end is understandable. The right way would be to rescue the banks to nationalize them and then ask the profiteers to pay by raising the taxes for the wealthy. [p.210]


The term “euro-crisis” is misleading when used in the singular. Four dislocations are involved:

1. The mountains of huge debts of crisis countries are owed to the credit bubbles [p.217]

2. The monetary zone is wrongly constructed because a “brake called currency risk” is lacking [p.220f]

3. A “competition crisis” triggered by the German Agenda 2010 leads to a “deflation spiral” [p.22f]

4. A “management crisis” by the politicians of the euro zone [p.226] The Troika confused national economy with business administration. The adopted austerity course leads into economic (and social) depression because demand is lacking – with dangerous consequences for democracy. The adopted course has not solved any problems anywhere.

The alternative to solving the “debt crisis” would be the central bank helping out in the breach (as in Ireland) and buying state bonds or prolonging the debts. The Brits applied this “trick” in the 19th century. [p.228] The European Central Bank must become a normal central bank. Otherwise it will soon be superfluous because the Euro breaks down.

“Strictly speaking, there is only a single cost-point: imposing an economic package on the South. Greece, Portugal and Spain need help to fight unemployment, poverty and homelessness. The euro zone can easily afford this support. The rest of the bailout should be free of charge. [p.229]

If the Euro should fall apart, Germans would be the greatest loser, not the main loser. The new “D-mark” would be quickly upgraded so foreign assets would be destroyed and the export industry seriously damaged. [p.230]


In her new book Ulrike Herrmann does not limit herself to historical explanations and descriptions of economic sequences. She makes concrete proposals for genuine future provisions.

“Firstly: the state must invest itself and not wait until firms invest.

Secondly, the state could calmly raise property taxes to finance these sensible projects. A little would-be siphoned off the superfluous savings of the rich. That would only be just…

Thirdly, the German economy will hardly grow or will not grow at all as long as real wages stagnate. That is also pure logic. Growth means more goods are produced. But who should buy these additional goods when salaries do not rise?...

Fourthly, since so much is saved, the state compelling its citizens to save by forcing private old age provisions is very inopportune. The private pension is an asset-destruction machine.

Fifthly, if the financial bubble does not burst, it must be pumped up again. A financial transactions tax could help… In addition the capital holding of banks and shadow banks must clearly increase so they can bear the losses themselves: “Banks could quietly become savings banks again.’ [p.237]…

The book “The Victory of Capital” ends with an optimistic statement: “A new system will form that cannot be seen today. Its contemporaries will be surprised as they were surprised in 1760 in northwest England. Nobody expected, nobody planned for it and yet it happened. One of the fascinating human qualities is that a person neither foresees nor totally understands his/hoer own cultural achievements. The end of the person is open.” How such a “new system” can form and how one can work in a democracy that needs a majority in society could be the themes of Ulrike Herrmann’s next book. The last chapter of this book could be the introduction for a new work.

Ulrike Herrmann, The Victory of Capital. How Wealth Came into the World. The History of Growth, Money and Crises


By Ingo Stutzle

[This article published on 11/19/2013 is translated from the German on the Internet,]

The howling was great after the 2008 bankruptcy of Lehman Brothers. However the euphoria that the crisis would lead at last to renouncing the neoliberal market radicalism was even louder. The state now returns. The economists had lost their credibility. Many leftists were glad about the middle class unease in capitalism in the Frankfurt Allgemeine entertainment pages. The radiating power of neoliberalism and the promise of free trade would fade, many believed. No way! No such luck!

The political class of the EU officially declared the end of the euro-crisis: capital finally made a profit again. The second round of negotiations for the Transatlantic Trade and Investment Partnership (TTIP) should be tackled. The TTIP is the set of agreements for the Transatlantic Free Trade Agreement TAFTA. The largest free trade zone of the world should arise between the US, Canada and Mexico on one side and the EU, Iceland, Lichtenstein, Norway, Switzerland and EU-member candidates like Macedonia and Turkey on the other side. What is happening?

First of all, several free trade classical theories should be carried out. Tariffs and trade barriers (including fees and import restrictions) should be abolished or reduced. This should also be carried out for services in the areas of health care, finance, transportation and subcontracted labor with the goal of strengthening competition since competition stimulates business. In short, there will be winners and losers.

Much cannot be won at the front of the trade barriers. Less than ten percent of the transatlantic trading volume is subject to tariffs. More is involved: acknowledgment of regulation standards in health insurance, security, social-and environmental standards. Where the trip goes is clear: the standards should be lowered.

The whole should be ensured institutionally. Because there is no world state, independent investor-state (investor-to-state) and inter-state (state-to-state) arbitration procedures are necessary – similar to the procedure of the World Trade Organization (WTO). The goal is to “protect” capital from “unwarranted” claims. This means corporations should be able to sue future governments when investments are devalued or unprofitable through state incursions (better industrial safety, higher environmental standards).

The arbitration system follows the principle of mutual mistrust. A third authority is needed that covers the whole and prevails against individual states since all states could infiltrate the liberalization-agreements to their favor. Capital has long waited for this. The right to profit is finally raised to the heaven of universal human rights.

But the TTIP should not only be disciplinary “inwards.” It is also a challenge to the up-and-coming Asian economic zone. On one hand, the German government has in no way fallen away from the neoliberal faith. On the other hand, the European internal market has long not been enough for German capital; it was merely the springboard or stepping stone for the world market. Big cars, expensive medicines and machines will hardly be sought in the future on account of the decreed austerity. With the TTIP, Germany will secure a good place under the world market sun.


Dean Baker, Technology didn't kill middle class jobs, public policy did, November 25, 2013, the guardian
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