2000s >> 2009 >> no-1253-january-2009

Cooking the Books 2: Fictitious capital

 The present crisis has led journalists to look for quotes from Marx. Here’s another example, this time from John Plender of the Financial Times (18 October):

“Karl Marx was wrong about many things, but in 1893 he provided as good an account of today’s financial implosion as any living commentator. “To the possessor of money capital, the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.”

Plender was wrong about many things. First, Marx died in 1883 so he could not have written anything in 1893. This was the date that Engels published the second German edition of  Volume II of Capital. Second, it is not even an accurate quote. The first six words are not part of the quote, but something the person Plender was quoting from added in square brackets to introduce the context. Third, the last sentence about “all nations” was added by Engels, as he explained in a footnote (in section 4 of chapter 1).

This said, the passage brings out well that the aim of production under capitalism is not really to make things – that is only incidental – but to make money, more money than those with or controlling money-capital set out with. The source of the added money is the unpaid labour of those who actually produce wealth, the class of wage and salary workers, but this is obscured in financial dealings.

Marx dealt with the illusion that money can give rise to more money without production in Volume III of Capital. Here (chapter 29) he introduced the concept of “fictitious capital”. There is nothing dodgy about such capital. It’s something insurance companies have been doing for years. As Marx explained:

“The formation of a fictitious capital is called capitalization. Every periodic income is capitalized by calculating it on the basis of the average rate of interest, as an income which would be realized by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%. All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.”.

Examples of this are government bonds, the price of land, and stocks and shares. Marx called these “fictitious” capital because the capital sum did not really exist, only the estimated future income stream did and that depended in the end on future production. In the case of shares, the real capital is in the fixed assets (factories, equipment, machines) and working capital (to buy materials, pay for energy, the wages fund) of the capitalist firm; this capital does not exist a second time in the prices of the shares.

One thing that banks had been doing in recent years was to increase the amount of such fictitious capital by turning mortgage repayments into bonds, “securitising” them in the jargon. If, however, the future income stream is threatened or fails to materialise – as has happened – the fictitious capital so created is depreciated or ceases to exist. But this does not mean that the real capital to which it corresponds has ceased to exist, only that its paper duplicate has gone to money heaven. A reminder that “the conception of capital as something with automatic self-expansion properties” is an illusion.

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