Periodically, Michael Roberts, producer of The Next Recession blog produces a post on “fictitious capital.” Sometimes the category fictitious capital is supposed to explain the failure of the next recession to appear; sometimes FC is supposed to explain why the recovery from this present next recession is impaired ; sometimes it’s supposed to express the recession that looms straight ahead, with some luck, good or bad.
Roberts recently explained
The Federal Reserve and other major banks injected huge quantities of cash/credit into the banking system and even directly into corporations through the purchase of government bonds from the banks and corporate bonds; as well as through direct government-backed COVID loans to businesses. Interest rates on this credit fell towards zero and, with so-called ‘safe assets’ like government bonds, interest rates even went negative. Bond purchasers were paying governments interest in order to buy their paper!
Much of this credit largesse was not used to keep staff in pay and employment or to sustain corporate operations. Instead, the loans have been used as very cheap or near zero-cost borrowing to speculate in financial assets. What is called ‘margin debt’ measures how much of stock market purchases have been made by borrowing. The latest margin debt level is up 7.7% month-over-month and is at a record high.
Marx called financial assets, stocks and bonds, ‘fictitious capital’. Engels first composed this term in his early economic work, the Umrisse; and Marx developed it further in Capital Volume 3 (Chapters 25 and 29), where he defined it as the accumulated claims or legal titles, to future earnings in capitalist production; in other words, claims on ‘real’ capital, ie capital actually invested in physical means of production and workers; or money capital, cash funds being held. A company raises funds for investment etc by issuing stocks and/or bonds. The owners of the shares or bonds then have a claim on the future earnings of the company. There is a ‘secondary’ market for these claims, ie buying and selling these existing shares or bonds; a market for the circulation of these property rights.
Stocks and bonds do not function as real capital; they are merely a claim on future profits, so “the capital-value of such paper is…wholly illusory… The paper serves as title of ownership which represents this capital.” As Marx put it: “While the stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises…; this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises.” The capital “exists only in the latter form“, while the stock or share “is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it”.
Investors (speculators) in financial markets buy and sell these financial assets, driving prices up and down. If cash (liquidity) is flush, share and bond prices can rocket, while banks and financial institutions invent ever new financial ‘instruments’ to invest in. As Marx put it: “With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this ‘money-capital’ is purely fictitious.”
Well, in a couple of words….not really. Marx and Engels, and the spiffy quotes to the contrary notwithstanding. They got it poetically right, practically wrong. Meaning? Well, to get the right answer, let’s ask the right question.
What’s the difference between the container ship owned by Maersk, and the corporate debt or loans, financing the construction and deployment of that container ship? Is one “real” because it’s a physical object, and the other “fictitious” because it’s a social relation? Of course not, in fact the container ship itself in order to be capital is part and parcel and the whole of that precise same social relation that necessitates the use of credit and debt. Ownership of the means of production as private property requires “title” to the property, and enough force to back up that title.
Is there “fictitious capital”? Sure there is: Bernie Madoff’s schemes were “fictitious capital,” but the profusion of corporate debt instruments, and equity “floats” are not fictitious capital. Such instruments may take on the appearance of fictitious capital to the extent that ALL capital becomes “fictitious,” i.e. the social relation encapsulating the physical assets behind the credit instruments cannot be reproduced profitably enough. And we know what happens then, or is supposed to happen then.
I’ve been hearing about “fictitious capital” for 50 years, so long ago that Lyndon LaRouche, one of the greater floggers of this notion of fictitious capital, was still calling himself, and accepted by some deluded souls as, a Marxist. And for 50 years, fictitious capital was supposed to mark the persistent decay of capital as a mode of production, the detachment or decoupling of “growth” from underlying profitability, but at the same time the explanation for the continued dominance of the social relations of capital.
On and on it went, and still goes. Fictitious capital is the “deep state” or the “fake news” of fictitious Marxism.
Turns out of course that capital has sustained itself, has weathered severe contractions, and has continued to exhibit a cyclical, if decelerating, growth pattern despite the so called “death agony” now I guess “zombie corporations” of the system identified by a “reliance” on fictitious capital.
Fictitious capital is just one way of explaining the persistence of capital while providing a rationale for predicting its imminent, not immanent, collapse. FC belongs in the same category of pseudo-explanations as the various iterations of Hubbert’s Peak Oil theory, the euro vs. the dollar theory, Japan then replacing the US as the linch-pin of capital (and China now), and the superior productivity of labor in the (pick one) Soviet Union, China, or any country of choice.
[Re: China and replacement. Certainly can happen. Just as certainly not without a war]
Credit instruments originate in 1) the uneven reproduction times of capital 2) as revenue instruments, for apportioning the total available profit, or surplus value, among the “hostile brothers” of capitalism.
We would all be better off throwing the various theories, explanations, and uses of fictitious capital into the scrap heap, where they belong, next to the retired jet liners, surplus locomotives, that capitalism self-devalues as an essential process of its persistence.
At a certain point, for Marx, critical economics is supposed to “dissolve itself” into class struggle. And when it doesn’t do that? It, the critical economics, becomes a rationale, a supposed single straw of explanation eluding the grasp of an infinite number of hands.
January 26, 2021