Mainstream, VOL LIV No 20 New Delhi May 7, 2016
Karl Marx’s Discovery of Fictitious Capital
contemporary opposition between finance and productive capital
Saturday 7 May 2016, by
May 5 this year marks Karl Marx’s 198th birth anniversary. On that occasion we are carrying the following article.
Karl Marx made great discoveries regarding fictitious capital and the money form of capital. They are of seminal importance to understand the contemporary contradictions between finance and productive/industrial capital. The references to fictitious capital can be found in Chapter 29 of Volume III of his great work Capital and in his Theories of Surplus Value, Part III. Marx has described fictitious capital as opposed to productive capital. The discovery helps us understand finance capital and its split from productive capital, which is the main contradiction of contemporary capitalism and imperialism today.
Analysis of Fictitious Capital
Karl Marx counterposes fictitious capital to ‘real capital’, which is one invested in the production process. This clearly means fictitious capital is one which is not in production, is away from it. Stocks, securities, shares and bonds traded on the stock market are the forms of fictitious capital. Claims on the present and future profits, legal claims, accumulated claims and legal titles to future production etc. represent unreal capital.
Fictitious capital is money thrown into circulation as capital without any productive material base, simply a paper claim to wealth.
Karl Marx made a simple yet profound discovery in the course of his critique of the contemporary political economy. He pointed out that money is not capital; it is only capital’s representation. It is a real representation only when and till there is continuous creation of capital during the production process. Money unrelated to the production process is fictitious as it is valueless.
In the course of its development, a section of capital splits off from its production form and takes on an independent form in the stock exchange, joint stock companies and circulation. A growing number of powerful joint stock companies came into being in the second half of the 19th century.
Discoveries in Capital and Theories of Surplus Value
The concept of non-productive capital explains the separation of Finance capital from production related capital. In his notes on interest-bearing capital in relation to industrial capital in Vol III of Capital and Part III of Theories of Surplus Value, Marx describes how industrial capitalism evolves into banking and financial systems. According to him, the historical task of industrial capital was to rescue society from usurious money lending, replacing parasitic tendencies of banking by steering credit to finance productive investment. Industrial capital subjugates these forms as its own derivatives. Marx describes how industrial capital encounters these older forms in the epoch of its formation and development. (Theories of Surplus Value, Part III) Where capitalist production has become the dominant mode of production, interest-bearing capital is dominated by industrial capital, and commercial capital becomes merely a form of industrial capital, derived from the circulation process.
Marx thus traces the very dialectics of motion of capital from commercial (circulating) to industrial and then to the transformation of a section of it into speculative finance capital. This latter part is developed more by Lenin.
Capital, Vol III says that it was the great achievement of industrial capital to mobilise credit to finance production, subordinating hitherto usurious interest-bearing capital to “the conditions and requirements of the capitalist mode of production”.
Tangible and non-tangible capital: Industrial capital is basically the tangible means of production, contrasted with the intangible or fictitious capital in form of bank loans, stocks and bonds. The intangible, fictitious forms of capital do not create surplus but are like sponges absorbing the income and property of debtors. Marx makes a profound statement in Capital III: “Usury centralises money wealth.” “It does not alter the mode of production, but attaches itself to it as a parasite and makes it miserable. It sucks its blood, kills its nerve, and compels reproduction to proceed under even more disheartening conditions. ... usurer’s capital does not confront the labourer as industrial capital,” but “impove-rishes this mode of production, paralyses the productive forces instead of developing them.”
Marx called money lent out at interest an “imaginary” or “void form of capital.” (Capital, Volume III) He characterised finance as based on “fictitious” claims for payment because it consists not of means of production, but of bonds, mortgages, bank loans and other ‘claims on the means of production’. Instead of creating value, bank credit absorbs value.
Marx and Lenin
The great merit of Lenin was that he carried forward the analyses of Marx in the era of imperialism and finance capital. It was Lenin who showed that finance capital has common origins in both industrial production and banking spheres, and simultaneously negates them by evolving independent of them. Finance capital becomes a massive growth over and above entire capitalism, in opposition to productive capita-lism, surviving more and more as a parasite on it.
Lenin was proved correct by the split between financial and production capital and the consequent crises of the early 20th century. The Great Financial Crisis of 1907 in the USA was one of the first reflections of this split. It signified the entry of the American capital into the financial age, with an attempt to subordinate industrial capital. President Theodore Roosevelt represented the industrial and anti-trust lobby, which led to his subsequent defeat.
In his theory of imperialism, Lenin describes its five features on the basis of new factual data. The theory shows that capital in far excess of productive needs moves all over the globe, enslaving and subjugating various economies, particularly the backward ones. Consequently, big capital alienates all other capital including the small-scale ones, petty production, non-monopoly sections etc. Finance capital does not allow productive capital itself to grow. Hence its reactionary nature.
This goes against the whole of society and economy, and an anti-imperialist economic front comes into being, objectively speaking. This is the higher phase of capital.
Opposition between Industrial/Productive and Finance Capital
Crisis in the US beginning in 2008 shows a new feature of imperialism. Despite huge amounts of wealth, the US economy suffers from severe lack of productive investments. Wealth is there but not capital! As a result, the growth of industries there and in many other advanced countries is suffering severe dearth of capital.
Marx‘s forecast came true. His analyses on money capital provide key to understand the present crisis. The economy may have huge amounts of money (fictitious capital), yet it suffers from serious lack of capital!
Finance capital threatens the very productive base of the society. And therefore is a hurdle to social development. Today, the main source of the world crisis is that parasitic finance capital is dominating productive capital increasingly.
Various terms are being used to denote the phenomenon. The domination is being termed ‘casino’ capitalism, ‘parasitic’ capitalism, ‘money’ capitalism etc. They are various aspects to the same thing, that is, fictitious or finance in opposition to productive capital.
The key problem is to restore productive capital to its dominant position. It is the key to the contemporary worldwide democratic revolution.
‘Money Manager Capitalism’
The term ‘money manager capitalism’ is used by Hyman P. Minsky (2010) to describe the domination of the excess of money (‘finance capital’). Capitalism in the United States is now at a new stage, money manager capitalism, in which the owners of a vast proportion of financial instruments are mutual and pension funds. The total return on the portfolio is the only criteria used for judging the performance of the managers of these funds, which translates into an emphasis upon the management of business organisations. Financial managers have taken over industrial companies to create what Minsky has called “money manager capitalism”.
Describing the 1857 financial crisis in Volume III of Capital, Marx showed that “The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”
Marx was profoundly correct. As four financial giants collapsed in the US in 2008, the US Government came forward in a series of strategic ‘bail-outs’. Since then, bail-out has become the form of state intervention in favour of finance capital (not productive or industrial). It has not solved most of the problems because it is not a bail-out favouring for industrial capital except on occasions.
In autumn 2008 the US Treasury paid off all of AIG’s gambles and other counterparty “casino capitalist” losses at taxpayers’ expense, followed by the Federal Reserve buying junk mortgage packages at par. That is how ‘casino capitalism’ has come into being at the cost of productive and industrial capitalism.
In Capital, Volume III and in Theories of Surplus Value, Part III, Marx described how industrial capital makes profits through the formula M-C-M’. Money (M) is invested to produce commodities (C) that sell for yet more money (M’) by making labour power produce more than its own value. Contemporary finance and ‘casino’ capital (contrast with industrial capital) seeks to make money in “sterile” ways, characterised by the M-M’, using money to make money, which simply is not possible! Finance capital takes on a life of its own, flying away from production.
Financial engineering aims not at industrial engineering to increase output or cut the costs of production, but at M-M’, that is, at making money from money, in itself an sterile attempt to garner ‘profits’. Once subordinate to productive capital, finance capital today tries to subordinate it to itself. Hence the worldwide crisis.
Consequently, the main task of the democratic forces is to restore productive capital to the commanding position of world economy and society. This is the key to the contemporary democratic revolution.
The author is a Marxist ideologue.