In a Communist Party of Britain supplement in the Morning Star (18/19 January) one of its leaders, Alex Gordon, ex-president of the RMT, set out its theory of economic crises:
‘Beyond profits extracted from surplus value, capitalists amass capital via bank credit and stock markets. Fractional reserve banking creates new credit many times the original deposits. Stock markets likewise multiply the value of the original means of production. Marx called this fictitious capital, since it separates from and achieves value far beyond the original productive capital. Fictitious capital feeds the economy and finances debt out of all proportion to the means of production it is based on. When this bubble bursts this is a crisis’.
The first sentence is correct. Capitalist firms acquire additional money-capital to invest in production for profit by borrowing from banks and/or selling new shares on the stock market.
The second sentence is incorrect. Banks can’t lend more than they have as their own capital, deposits and what they themselves borrow, so they cannot — and so do not —artificially inflate credit in the way Gordon suggests. It’s a bit surprising that the Communist Party should have fallen for that old currency crank myth.
The third and fourth sentences are incorrect. Stock markets do not ‘multiply the value of the original means of production’.
The fifth sentence is incorrect. ‘Fictitious capital’ does not ‘feed the economy’ in the sense of providing more money-capital that can be invested in production. If anything, it feeds off the economy.
By ‘fictitious capital’ Marx simply meant what actuaries call ‘capitalisation’, or the conversion of an income stream into a notional capital sum which, if loaned, would yield over a given period of time interest of the same amount.
Shares are a form of fictitious capital calculated from the expected future stream of income coming from the profits made by a capitalist firm and entitle their owners to a share in these profits. They are subsequently traded in their own right independently of the capital originally invested in production, whether to share in the profits or to sell later at a higher price. But, as Marx noted:
‘The independent movement of these ownership titles’ values, not only those of government bonds, but also of shares, strengthens the illusion that they constitute real capital besides the capital or claim to which they may give title …. In so far as the rise or fall in value of these securities is independent of the movement of the real capital that they represent, the wealth of the nation is just as great afterwards as before’ (Capital, vol. 3, ch. 29, Penguin, pp. 598-9).
A recent example is ‘China’s cheap AI chatbox wipes billions off Silicon Valley shares’ (Times, 28 January) where a part of the fictitious capital was wiped out without affecting value of the real capital invested in the corporations’ tangible assets. Conversely, contrary to Gordon’s claim, an increase in share prices is not an increase in real capital (though it may reflect this).
Gordon is offering an essentially financial theory of crises, based on a boom in stock exchange prices (and on banks supposedly creating credit by a stroke of the pen) generating additional money-capital that is invested in expanding productive capacity; eventually too much in relation to paying demand is produced and the bubble bursts.
The stock exchange crash is indeed a consequence of such overproduction. It’s when stock market traders realise that the fictitious capital represented by shares is over-priced due to the future income stream of profits on which it is based becoming less than anticipated. But the question is: what causes the overproduction? Marx looked for the explanation in the ‘movement of real capital’ not in what happens in the world of finance.
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