I did it to myself I know. First Michael Roberts posted about “fictitious capital,” and I felt compelled to dismiss the entire category and its attempted application as pretty much inaccurate, irrelevant, and incoherent. Then Brian Green, he of The Planning Motive decided to argue that fictitious capital not only exists, but is a critical category in its very “fictitiousness” to the persistence of capitalism.
So here I am, with 18 inches of snow outdoors and several bottles of very good and not expensive Bordeaux inside and access to a computer, the internet and enough time on my hands, and do I need to explain any further? Obviously not.
Well first things first: as erudite and diligent as is comrade Green in his discussion of fictitious capital, he fails to define exactly what he means by fictitious capital. That failure diminishes his subsequent efforts because he lumps together stocks and bonds and derivatives and mortgages when these are quite different instruments of the bourgeoisie attached to much different processes and relations. It’s only by emptying the term “capital” of the specific content and context as developed by Marx, as a relation between laborers and the specific conditions of their labor, namely property, that “fictitious capital” can be applied to all these instruments. Some aren’t capital and have never been used as capital. None are fictitious
So we’ll start with the definition provided by Roberts, citing Marx (as edited by Engels):
accumulated claims or legal titles to future earnings in capitalist production; in other words claims on ‘real’ capital, i.e. 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…
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 capital.”
Marx in Chapter 30 of Volume 3 says this:
Titles of ownership to public works, railways, mines, etc., are indeed, as we have also seen, titles to real capital. But they do not place this capital at one’s disposal. It is not subject to withdrawal. They merely convey legal claims to a portion of the surplus-value to be produced by it. But these titles likewise become paper duplicates of the real capital; it is as though a bill of lading were to acquire a value separate from the cargo, both concomitantly and simultaneously with it. They come to nominally represent non-existent capital. For the real capital exists side by side with them and does not change hands as a result of the transfer of these duplicates from one person to another. They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained. To the extent that the accumulation of this paper expresses the accumulation of railways, mines, steamships, etc., to that extent does it express the extension of the actual reproduction process — just as the extension of, for example, a tax list on movable property indicates the expansion of this property. But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest — in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.
Okay, let’s begin:
- Stocks, the purchase and sale of shares of the company, are different than bonds. The owner of the stock is an owner of the portion of the company. In the event of reduced earnings or zero earnings or collapse or bankruptcy, the shareholder has no claim on the company as the claim against the company is a claim against himself or herself.
- In fact, ownership of the “titles”– the stock– in sufficient quantity does place the “real capital” at one’s or more’s disposal (see the history of leveraged buy outs, private equity funds, hostile take overs, etc.). Shares may or may not become representative of “non-existent” capital, and their prices might appear to rise or fall independent of the underlying asset value of the “real capital” but that variance is no different than the variation between price and value that any particular, or the universe of all, commodities may represent.
- What is critical is the condition under which capital itself becomes non-existent, cannot realize its value, and thus precipitates its own devaluation.
- Bonds are not certificates of ownership. Bonds are promissory notes issued by an enterprise obligating the enterprise to pay a certain fee on an annual basis for use of the bondholders’ cash ( interest), with the enterprise required to return the face-value, the principal of the bond at an agreed upon time. The bond is a loan obligation.
- In the secondary markets where bonds are traded among institutions, investors, banks, brokers, and other enterprises, the interest rates as well as the market-values (opposed to the notional value) fluctuate, in reverse relationship to each other. These fluctuations produce a “yield to maturity,” which is derived from the market value and the coupon of the bond at the time of purchase for the length of time before the bond matures, or is “called.” The coupon (interest rate) is fixed at origin, but the actual yield depends on the appreciation or depreciation of the bond in the secondary market. The secondary market means the bonds act not only as IOUs, but as trading platforms where profit appears to be made from the deviation of price from value, through the arbitrage process. In fact in these markets, as in all markets, the deviation of price from value functions as a distributing mechanism, allocating portions of the total surplus value among the actors and agents of the ruling class.
- However much the interest rate and principal may fluctuate in the secondary markets, the issuing enterprise itself is “only” on the hook for the interest rate and principal amounts fixed when the bond is first issued.
- Bonds do not convey any ownership to the holder of the bonds. Bonds may be secured by the assets of the corporation, and in the event of default by the issuer, the bondholder may require liquidation of the corporation’s assets to meet the bond obligation. It is only under a specific set of separate conditions that ownership can be transferred–for example a debt-for-equity swap.
- Everything, including the original investment in production, and every moment of realization in capitalism is a “claim” against streams of surplus value, present and future. Once removed or extracted from that circuit of exchange, the investments in “producing assets” lose all claim to any portion to the pool of the socially available surplus, and hence, are devalued. The initial transformation of M-C is itself an anticipation, or “claim” on future profits and no capitalist enters this process without anticipating a future return.
- The function of “paper values” or paper capital, as distinct from and opposed to fictitious capital, is made clear when: a) the central organizing principle of capital and b) the historical “singularity” of industrial capitalism are identified.
- The central organizing principle of capital is the private ownership of the means of production. This is achieved through the dispossession of original producers from the means of their own subsistence. This dispossession is a product of both the market, and the state. It is the origin of the economic and the political in the mash-up of “political economy.” Dispossession doesn’t take place without force, and private ownership cannot be established without a coincident legality, or title, recognizing and validating that ownership.
- The “singularity” of industrial capitalism is that the means of production are themselves commodities, are produced for the purposes of exchange, are produced as values. Value realizes itself in circulation, if it’s lucky, as money-as a substance at one and the same time distinct and derived from the value embedded and invisible in all commodities.
- The connection of these two foci transforms simple ownership of the means of production into a complete mode of production
- Then the “titles to” the means of production and the “claims upon” the production of values are but different moments in the circuits of reproduction of the entire mode; and as different moments or facets, they appear to be separate, detached– separable, detachable– just as the commodities appear separate, detached– separable, detachable– from money.
- As separable, detachable, exchangeable values, the titles to and claims upon production are established as another arena for arbitrage; another trading platform; another mechanism for distributing profit; and another attempt at establishing, or achieving, a general rate of profit. There is nothing fictitious in this other than the fiction intrinsic to the identification of capital as a thing rather than a social relation.
- Every commodity exists as capital– able to command labor power in exchange, while the exchange of all commodities exists as a trading platform to distribute the labor power already congealed in the universe of commodities.
- So… trade leads to speculation; speculation is intrinsic to trade; trade imagines itself all grown up to be speculation. Speculation may even command more effort, space, time than trade, but it is never “fictitious trade.”
- The credit instruments originate from the different periods of realization of commodities in the exchange process, and those differing periods arise from the different concentrations of fixed capital employed in production.
- Just as money represents, through its separation from any particular commodity, the abstraction, the universal equivalent to all commodities, credit and debt securities exist, in their separation, as an abstraction of capital, and the aqua regia that can dissolve and circulate all capital values.
So, comrade Green thinks the deviation of the prices of shares, and credit and debt instruments, from the replacement cost of assets, or the “real capital,” embodies the fiction in fictitious capital:
“If it was the case that the claims on surplus value…traded at their face value or at the replacement cost of the assets the represent, the issue of fictitious capital would hardly arise as there would be no market for these assets.”
Green fails to distinguish between shares of stock and debt instruments in this assertion, a critical failure since assets only represent collateral for the money value identified in a bond, and then only if the bond is secured.
In the case of shares of stock or the “float” of a company, the price of shares always deviates from the value of existing fixed and circulating assets of company in that the shareholder is not purchasing the shares as proxies for the first transformation in the circuit of capital, M-C, but rather purchases the shares as representatives of the complete circuit of capital, M-C-M’, the anticipated growth predicated on the appropriation of surplus value.
Where the industrial capitalist pays nothing for the surplus value appropriated in production, the investor will pay nothing without that appropriation. Market values of companies exceed “book values” of US companies by a factor of three, ranging from 1.8 at the trough of a recession to 5.0 at the peak of a market expansion. There’s nothing “fictitious” in this shareholders’ valuation. It is the anticipation of capital as self-expanding value.
…it is important to stress, that which is seldom mentioned, money as notes and coin is not fictitious capital. Only once it leaves the hand of the lender in the form of a loan or a bond does the loan or bond instrument become potentially fictitious capital.
Actually, money as notes and coin is neither fictitious nor ‘actual’ capital. Only when the money or coin encounters certain conditions, actually pre-conditions, can it function as capital– as the reproduction of the relations of capital, i.e. the classes of capitalism. Those conditions are commodities available for exchange including human labor power encapsulated by the wage.
Likewise “leaving the hand of the lender” as a loan, or mortgage, or a credit or debt instrument does not make the money fictitious capital. “Leaving the hand” makes the instrument a money-equivalent, capable of exchange in and of itself with other instruments. “Leaving the hand” means the instrument is marketable.
Green goes on to divide the “buyers for… fictitious capital” into two categories, a Tier 1 where the owners are “directly tied to the revenue streams provided by the surplus value, we think of shares…bonds and mortgages;” and Tier 2 where the owners possess “instruments based on Tier 1 claims, and which seek to profit from the movement in the prices of these claims. Tier 2 claims instruments are not a claim on a specific flow of surplus value. They are pure leverage…”
Neither agent nor purpose change the role, the functions of the credit, debt, or shareholding instruments in capitalist reproduction. Those functions are expressed in the commodity, or security, as a trading vehicle; as a representation of value in motion, as the movement of its price. There isn’t a shareholder in the world who doesn’t own a stock in anticipation of a price movement, whether the shareholder holds the stock for 60 hours or 60 years. The price movement is the claim on the revenue streams provided by surplus value.
While bonds are advertised as “more stable, secure investments for the longer term,” that’s advertising. The bond as a money-capital equivalent is also a trading instrument where price and interest deviations are the method for distributing surplus value.
Clearly, derivative instruments, futures, options, swaps, would be classified as the Tier 2 instruments. However, these are no more and no less capital than any other position in the commodity markets. A contract to purchase of pork bellies for delivery in November at X dollars is “closed out” by another contract to sell pork bellies at X+n at the same time. Physical movement of the commodity itself is irrelevant; movement of the price is everything in that it is the result of the market for exchange.
Credit instruments are but another attempt of the bourgeoisie to “emancipate” exchange value from use value; or more accurately, the heavenly nature of value from the earthly chains of physical objects. That such instruments succeed, fail, inflate, devalue, proliferate and contract only proves how intrinsic to capital, how essential to production and circulation of capital the instruments are.
I’ve repeatedly asked those who claim that “fictitious capital” can be distinguished from capital, and that the distinction has historical significance, to explain what makes a container ship “real capital” and the notes and credit instruments that financed the production, operation, and maintenance of the container ship “fictitious capital.” The usual answer is that the container ship has a physical presence.
During the maritime overproduction period that began in 2006 and continues to erupt in cycles to this day, massive devaluations of the credit instruments, as well as price declines in container rentals, led to 10 percent of the container fleet riding at anchor in a “warm” shutdown mode. It resulted as well as in the liquidation of the northern German Landesbanks and investment funds that held those notes. The physical presence was no obstacle to the devaluation of shipping.
Value, at certain moments, requires self-annihilation of all the moments of value. Credit and debt instruments are just that: a moment of capital.
Comrade Green gives us his take on this:
(Artesian) poses the following question: ‘What’s the difference between the container ship owned by Maersk and the corporate debt or loans financing the construction of the container ship ? Is one ‘real’ because it is a physical object…’ The answer is not because they are physical but because ships and containers are products of labour. Before computerized share registries share certificates were also physical pieces of paper, therefore products of labour, but here lies the difference, the labour expended on them was less than one millionth that expended on a ship, and yet, that share certificate could change hands at a price worth many ships.
We’ll ignore, and probably not for the last time, comrade Green’s inability to distinguish a “share” of ownership from a loan or a promissory note, but we won’t ignore the simple-mindedness of an argument that says the share or note is “fictitious” because the labor time necessary for the reproduction of the note or share is so much less than that of the physical object. He might as well, he is in fact arguing that money itself is fictitious, and all exchanges for money are swindles because the labor time required for the production of the paper money is so much less than the time required for the production of commodities.
Misses the point, no? Misses the point, and by a mile, yes? The money represents the “image,” the equivalence of all the value extracted by the mode of production. The exchange of the commodity for money is in fact the realization of both that universe of value, and the particular object’s place in that universe. It’s a moment of metamorphosis, not equivalence.
However, all is not lost for comrade Green. There is indeed a point at which we are in total agreement, and that point contains the real corporeality of credit and debt instruments in the production of value. Says Green:
The real significance lies in this. Without these claims, titles or instruments, capitalism could not have developed.
Absolutely, positively. That’s no fiction.
That took a while, but it beats the hell out of shoveling snow.
February 6, 2021