Karl Marx’s concept of fictitious capital is very useful in understanding modern crises. I have explored this in an earlier book, entitled Marx’s Crises Theory: Scarcity, Labor, and Finance.
For Marx, capitalism uses markets to distribute labor into productive activities, but it does so very imperfectly. Part of the problem is that lack of knowledge about the future causes imperfect investments. These imperfections magnify as the economy seems to prosper making people become giddy about their chances of success.
Crises are a way of eliminating unproductive investments, which eventually makes the economy stronger, unless the crisis becomes so severe that it shatters the foundation of capitalism.
The crises will become more violent if the distribution of income becomes too lopsided, leaving investors flush with money, while consumers are relatively strapped. Massive amounts of money will flow into speculative ventures, creating bubbles. In effect, a market which is supposed to be a wonderful feedback system to inform capitalists about the needs of society, takes on logic of its own.
Eventually, the bubble pops and there is hell to pay. The question today is our how extreme shock will be. Capitalism has shown quite a bit of resilience in the past. What is happening now could turn out to be relatively mild or could be severe.
I use San Francisco as an analogy for my students. There will eventually be a serious earthquake that will do enormous damage. Nobody can predict what will happen. Even when the earth begins to tremble, the severity of the event may be in doubt.
Michael,
ReplyDeleteDon't you think that change in the rate of profit of production capital helps initiate greater divergence between real and fictitious, and then also changing relative strength of different segments of the ownership class with one ultimately capturing the state or states?
Michael,
ReplyDeleteI would love to read more of your work. unfortunately it can be hard to find or rather expensive.
Any way you could post digital copies? Kindle versions on amazon would be great.
«capitalism uses markets to distribute labor into productive activities, but it does so very imperfectly. Part of the problem is that lack of knowledge about the future causes imperfect investments. These imperfections magnify as the economy seems to prosper making people become giddy about their chances of success.»
ReplyDeleteBut the premise is clearly wrong: as the Arrow-Debreu-Lucas model clearly shows, rational expectations mean that intertemporal allocations of capital and labor are never wrong. The only problem with the system can only be the distorting effect of government taxation!
(just feeling like channeling a well rewarded Serious Economist today)
:-)
Let me respond to the comments in order.
ReplyDeleteJuan, I agree with what you are saying with one minor tweak. Especially with respect to the financial sector, I would use expected profits. Because of the increasingly unequal distribution of income and the nature of competition, in competitive sectors, profits in material goods tend to decline.
In order to continue making the same level of profits, investments switch to finance. Profits there may be high for a while, creating expectation for even higher profits until POP ....
Cameron, I can only apologize for the extortionary prices for some of my books.
Blissex, I agree with your understanding of market efficiency. That is why I bought so much stock in Enron.
AS a note on history of economic thought, I observe that the term "fictitious capital," which I love, predates Marx. Adam Smith used it, and I think he got it from Richard Cantillon, who, writing in 1755, used it in connection with the Missippi Bubble in France of 1719-20 and the overlapping South Sea Bubble iof 1720 in Britain, both of which Cantillon made money off of.
ReplyDelete«understanding of market efficiency. That is why I bought so much stock in Enron.»
ReplyDeleteYou too have been the victim of the government! It is pretty clear the Enron was the victim of state interference, requiring ridiculously oppressive accounting standards.
(still channeling some Serious Economist)
:-)
Because of the increasingly unequal distribution of income and the nature of competition, in competitive sectors, profits in material goods tend to decline.
ReplyDeleteIn order to continue making the same level of profits, investments switch to finance. Profits there may be high for a while, creating expectation for even higher profits until POP ....
Which I would tweak by adding changing technical composition of production capital (related to but not caused by competition), expansion of unproductive but necessary labor and tendential, becoming absolute, overaccumulation.
As you say, the turn to increasingly speculative activities is an attempt to offset (an attempt which can/did become institutionalized and protected while, same time, exacerbating distributional inequities).
IOW where we are today has its roots in the ending of the 'golden age' and has been facilitated through a near complete change in the structure of credit (money) creation:
-a de facto ending of reserve requirements resulting from attempts to recapitalize traditional banking after the S&L crisis (requirements were reduced and then with generalization of sweep accounts by the mid-1990s, effectively ended).
-turn to defined contribution pension plans and rise in weight of non-bank banks such as money market funds.
-growth of government sponsored enterprises.
-international financial deregulation associated with neo-liberalism and WC.
-interacting of all the above to create global 'nuclear credit fission', an apparently unlimited, self-expanding quantity which, as debt accumulation, had inherent limits no matter the 'miracle' of structured finance.
So here we are with an increasingly desperate ending, one which has been quite predictable yet, given the system from which it grew, also perfectly unavoidable.
Barkley,
ReplyDeleteIsn't it true that Marx was an occasional (small time) punter?
As in punting on the River Cam? I never heard that one, but I do not know. Maybe Michael P. does.
ReplyDeleteAs in buying and selling stocks...but who knows, he may also have boated around a bit.
ReplyDeleteBTW, your earlier post re. copulas might be worth a repeat.
I will post something on the blog about fictitious capital. Here is Marx as a punter.
ReplyDeleteWriting to Lion Philips [Marx's uncle & grandfather of the founders of Philips] in the summer of 1864, Marx claimed, "I have, which will surprise you not a little, been speculating partly in American funds, but more especially in English stocks, which are springing up like mushrooms this year (in furtherance of every imaginable and unimaginable joint stock enterprise) are forced up to a quite unreasonable level and then, for most part, collapse. In this way, I have made over 400 pounds now that the complexity of the political situation affords greater scope, I shall begin all over again. It's a type of operation that makes small demands on one's time, and it's worth while running some risk in order to relieve the enemy of his money"."
Ah, that sort of punting.
ReplyDelete