In this post, I provide some speculative thoughts and questions on the nature of fictitious capital. I have only read Marx’s incomplete discussion of the concept in Capital and listened to David Harvey’s discussion in his Volume II class, so these thoughts will not take into account most current research on the topic.
The best approximation I can provide at this point as to the definition of fictitious capital is, in one word, leverage. It is the additional capital over and above the real capital—that which corresponds to real value—that can be applied to augment the power of real capital. Fictitious capital most appropriately fits into Marx’s economic system as the fourth form of capital, the first three being money, commodity and productive capital. These first three represent value in all its forms while fictitious capital represents that portion of capital that has no value. Together, these four forms constitute the entire capital of a capitalist social formation.
In Capital, Marx moves back and forth between the physical and ideal incarnations of capital accumulation. While the physical is primary, the ideal is real too because humans consciously and unconsciously create and follow—and sometimes break and destroy—rules that bound our social behavior. The ideal representation of capital accumulation exerts real force on the physical processes of production, circulation, distribution, etc.
From a physical standpoint, mechanical advantage, such as applied by a lever, serves to amplify the effect of a given force, for example, in a factory. A given level of mechanization amplifies the power of a given number of workers to produce a greater amount of product than those workers would produce individually without tools. The ideal representation of fictitious capital works in the same way—a given level of fictitious capital, i.e. the lever, amplifies the force of a given amount of real capital to produce greater value. It is no accident that the field dedicated to the application of leverage is called “financial engineering.”
How can we break this down mathematically? If the degree of mechanical advantage is the ratio of the force provided by a machine to the force applied to the machine, then the degree of financial advantage is the ratio of the force of the fictitious capital to the force of the real capital. The next question becomes, how can we measure these respective forces?
On a general level, Marx’s understanding of the laws of motion of capital relies on a vital factor that he does not develop in great detail: the coercive laws of competition. It could be said that competition provides the force that sets humans in motion with their environment to drive the capital accumulation process. As the capitalists seek to accumulate greater capital, the key factor becomes the need to increase the rate of surplus-value, which largely takes the form of relative surplus-value, i.e. the application of technology and technical organization to increase the rate of surplus-value.
If competition is the force that drives capital accumulation, how would we go about measuring it? One potential answer lies in understanding how Marx’s concept of centralization influences competition. As centralization increases, does competition fall, and why? Can these laws be extended to the theory of financial leverage?
Given that government bonds represent a primary form of fictitious capital and a benchmark for valuations more broadly, can it be said that the 40-year bull market in sovereign debt represents a steady increase in the value of fictitious capital over this period? Marx makes clear that the local laws governing interest rates—pure supply and demand—are different from those that govern real value—socially-necessary labor time. It would follow that on a fundamental level, declining interest rates represent an oversupply or lack of demand for interest-bearing capital. Holders of real value provide excess demand for fictitious capital, driving down interest rates. In other words, there is an oversupply of real value.
This conclusion provides credence to the theory of the long-term savings glut. This paper by Michael D. Bauer and Glenn D. Rudebusch of the San Francisco Federal Reserve may provide some answers:
“The drop in the neutral real rate likely reflects a number of structural factors (Fischer 2016). First, the trend rate of U.S. economic growth has slowed significantly due to lower trend productivity and population growth (Fernald 2016). In general, economic theory links the neutral real rate to the trend growth rate of output, so slower trend growth should translate into lower long-term interest rates, although the empirical evidence is not definitive (Leduc and Rudebusch 2014). Second, a surplus of global saving, in particular from export-based emerging market economies, may have also lowered the neutral real rate (Bernanke 2005). Third, demographic factors, in particular an aging population, tend to increase the supply of saving and are likely to have pushed down the neutral real rate (Rachel and Smith 2015). These and other structural forces holding down the neutral real rate are generally slow moving. Therefore, the neutral interest rate, and with it the expectations component in long-run interest rates, is likely to remain depressed for some time to come. This observation has prompted Williams (2016) and others to speak of a “new normal” for interest rates that is persistently low.”
The first factor indicates that large existing pools of real value will be chasing decreasing returns due to persistently low growth, i.e. value holders will receive less demand for investment of their money as long as this low-growth environment persists. The second two indicate that this low-demand environment coexists with an oversupply of real value due to domestic and foreign accumulation.
This leads to the tentative conclusion that when a large volume of real value is available for investment in an environment with low growth, the value of fictitious capital will be high. Low returns mean more demand for leverage to amplify those returns. Conversely, in an environment with a low volume of real value and high growth rates, the value of fictitious capital will fall because existing pools of value already find high returns.
What role does centralization play in this dynamic? Fictitious capital and centralization of capital have something in common: they both allow capitalists to leverage existing value to do more. As each increases, the power of the lever increases as well. But one of the byproducts of centralization is, presumably, less competition, which is the motor force that drives accumulation. Are we witnessing a dynamic whereby centralization of capital has driven down the system’s capacity for accumulation and, concurrently, driven up the value of fictitious capital vis-à-vis real capital? More research is needed.
The final point is that it is important to view fictitious capital dialectically, i.e. using a perspective that goes beyond good and evil. A workers state would need some mechanism that anticipates future growth and therefore reckons up the value of current assets to some degree. The point of analyzing the minutiae of these different forms of capital and how they behave as they move around the capitalist economy is not so that we can say, “Gotcha! Capitalism is horrible and we therefore need to completely negate all aspects of the system.” In fact, a revolutionary workers state would make use of many of the same tools to manage the economy as a capitalist state except that the working class would be doing so to build its own society. Recall the following quote from Trotsky from The Revolution Betrayed: “The state assumes directly and from the very beginning a dual character: socialistic, insofar as it defends social property in the means of production; bourgeois, insofar as the distribution of life’s goods is carried out with a capitalistic measure of value and all the consequences ensuing therefrom.” (56)
It is utopian to assume that capitalist notions of value would disappear after a revolution. A workers state would need to understand and struggle with the capitalist value regime for some time in order to subordinate it to the development of a workers-run society.
World of Lenidzky 