Fictitious Capital and the Crisis of Capitalism

Some comments on a discussion between Aufheben and Loren Goldner

The discussion between Loren Goldner and Aufheben is, in essence, about the role of fictitious capital in the crisis of capitalism but they disagree already about what fictitious capital actually is.

What is fictitious capital?

While for Goldner, fictitious capital originates in devalorization and pseudo-value creation in production, for Aufheben, “fictitious capital (and for that matter fictitious value) only arises when we consider the financial and credit system. If we abstract from finance and credit we cannot talk about fictitious capital”.

To explain the concept of fictitious capital, Aufheben gives the example of a sum of money borrowed to finance production and repaid with interest (part of the surplus value which that production yielded). That sum of money, Aufheben writes, is fictitious, since it “exists separately from the real capital that is in the hands of our capitalist enterprise.” For Aufheben, the fictitious character of that capital is independent of the question whether the production which it finances yields surplus value or not. It is determined by the fact that it is not that financial capital directly, but machines, labor-power etc (C and V) that serve to produce and to realize surplus value (despite the fact that the moneylender de facto owns that C and V or a portion of it). Since all capital in its money-form “exists separately from the real capital” that it can represent, it would seem that for Aufheben, fictitious capital is just another word for financial capital. In a certain sense that is correct, of course, since the value of all financial capital, its power to represent real commodities, ultimately depends on a fiction, on “faith in money-value as the immanent spirit of commodities” (Marx). But money is also “only a different form of the commodity”, of capital. If ‘fictitious capital’ is used as a mere synonym for money, the term becomes useless to express the distinction between capital that does correspond to real value and capital that doesn’t. Indeed, according to Aufheben, fictitious capital may correspond to real capital, but then again, it may not.

The concept of fictitious capital predates Marxism and it has had, over the course of time, many definitions but not much systematic theoretical development. Marx never gave a precise definition of fictitious capital and never developed, as far as I know, a specific analysis integrating the concept explicitly in the framework of his value-theory. Of course, any concept is merely an analytical tool. Once you have defined that tool, what matters is what you do with it. The problem with Aufheben’s concept of fictitious capital is that it is so broad that it can be used for little more than to point out the particularities of capital in its financial form. But for that we don’t need the category of ‘fictitious capital’. ‘Fictitious financial capital’ would merely express a tautology, unable to distinguish between money that expresses illusory value and money that mobilizes productive labor and thereby realizes itself; that is, in other words, real capital.

In contrast to Aufheben’s, Goldner’s use of the concept of fictitious capital acknowledges the difference between capital that realizes real value and capital that doesn’t. He sees (if I understood him correctly) the source of fictitious value in the capitalization of earnings that are expected but don’t materialize, in the creation of financial assets on the basis of the assumption of a valorization that doesn’t occur. The root of the problem then, lies in the production process itself. Why is the valorization of capital at times so much smaller than expected that gigantic bubbles of fictitious capital appear, usually right before the outbreak of open crisis? Goldner’s answer is that the growth of fictitious capital in the financial sphere corresponds to a growth of fictitious capital in the sphere of production. He identifies two sources of the latter: the moral depreciation of fixed capital as a result of technological innovation, or technodepreciation as Goldner prefers to call it, and the growth of production destined for unproductive consumption. Both are indeed important elements in the crisis of capital but there are problems in the way Goldner analyzes them.

Unproductive labor

Let’s begin with the latter. According to Goldner, capital that is used for the production of commodities that are unproductively consumed, that don’t become the C and V of the next cycle, creates no value and is therefore fictitious from the standpoint of capitalism as a whole. No value is created in it, the labor that goes into it, is unproductive. Yet this capital claims its share of the total surplus value, without creating any. Capitalization based on this kind of production therefore automatically expands fictitious capital in the financial sector.

The heart of the problem here, is Goldner’s concept of unproductive labor, which is quite different from Marx’s and in my opinion stands in contradiction to his value theory. The term, again, predates Marxism and has had many definitions. Marx defined it strictly within the context of his analysis of value in capitalism. Because the value of a commodity is the value of the C and V transferred in it plus surplus value, the value created is greater than the value invested. This growth is due to productive labor, the labor that valorizes capital, that is productively consumed by it. That definition excludes all extra-capitalist labor (not because its products have no value when exchanged but because it is not capital) and all labor that does not create commodities, either directly or indirectly. The latter is obviously a drain on capitalist accumulation while the former provides a welcome injection of value to it, so it is somewhat confusing to lump them together.

Personally I think that trying to calibrate precisely which labor is productive and which is not, has largely been made pointless by the very evolution of capitalism that Marx foresaw: “With the development of the real subsumption of labor under capital, or the specifically capitalist mode of production, the real lever of the overall labor process is increasingly not the individual worker. Instead, labor power socially combined and the various competing labor powers which together form the entire production machine participate in very different ways in the immediate process of making commodities, or, more accurately in this context, creating the product. Some work better with their hands, other with their heads, one as manager, engineer, technologist, etc., the other as overseer, the third as manual laborer or even drudge. An increasing number of types of labor are included in the immediate concept of productive labor, and those who perform in it are classed as productive workers, workers directly exploited by capital and subordinated to its process of production and expansion. If we consider the collective worker, i.e. if we take all the members comprising the workshop together, then we see that their combined activity results materially in a collective product which is at the same time a quantity of goods. And here it is quite immaterial whether the job of a particular worker, who is merely a limb of this collective worker, is at a greater or smaller distance from the actual manual labor”. (1)

Many types of work that, at the time Marx wrote this, would still fall under his definition of unproductive labor are now, with the advance of capital’s real domination, clearly integrated into the collective worker, including health care, education, transportation and distribution, many types of free-lance work, gardening and cleaning, even many public sector jobs, etc. Of course there still is a lot of unproductive labor, work that is neither directly nor indirectly linked to the valorization of capital but that falls under the ‘faux frais’ necessary to capitalist rule (the work of soldiers, policemen, tax collectors, etc). But this category is not so huge that its weight should be considered a primary cause of capitalist crisis. In any case, Goldner’s concept of unproductive labor is much wider. For him, all labor that creates commodities which are consumed unproductively, is unproductive. Not the way in which the commodity is produced but the way in which it is consumed is the criterion. In this, he clashes with Marx, who wrote: “ A large part of the annual product which is consumed as revenue and hence does not re-enter production as its means, consists of the most tawdry products (use-values) designed to gratify the most impoverished appetites and fancies. As far as the question of productive labor is concerned, however, the nature of these objects is quite immaterial (although obviously the development of wealth would inevitably receive a check if a disproportionate part were to be reproduced in this way instead of being changed back into the means of production and subsistence, to become absorbed once more -productively consumed, in short- into the proces of reproduction either of commodities or of labor-power). This sort of productive labor produces use-values and objectifies itself in products that are destined only for unproductive consumption.” (2)

Goldner is aware that his view differs from Marx’s but he explains this by pointing to Marx’s shift, from the vantage point of the single capitalist in the first volume of Capital, to the standpoint of capitalist production as a whole in the third volume. It is only from the latter that the unproductive nature of labor that goes into the production of commodities destined for unproductive consumption becomes clear, according to Goldner. Indeed, for the individual capitalist, such production yields profit, it valorizes his capital and allows him to accumulate, while for capital as a whole, unproductive consumption destroys capital, it makes it disappear. Goldner concludes from this that this capital never existed, that it was fictitious all along, by virtue of its destination. While I agree with Goldner that Marx’s shift in vantage point from individual capital to capital as a whole is real and a cause of much confusion, I don’t think he is right in this case. Besides, the difference is less black and white than Goldner makes it appear; there are parts in vol. 1 and 2 where Marx explicitly analyzes capitalism in its entirety and others in vol.3 where he looks at things from the standpoint of individual capitals (3). Consider how the passage quoted before continues: “Ordinary economic theory finds it impossible to utter a single sensible word on the barrier to the production of luxuries even from the standpoint of capitalism itself. The matter is very simple, however, if the elements of the process of reproduction are examined systematically. If the process of reproduction suffers a check, or (..) is held up by the disproportionate diversion of productive labor into unreproductive articles, it follows that the means of subsistence or production will not be reproduced in the necessary quantities. In that event it is possible to condemn the manufacture of luxury goods from the standpoint of capitalist production. For the rest, however, luxury goods are absolutely necessary for a mode of production which creates wealth for the non-producer and which therefore must provide that wealth in forms which permit its acquisition”. (4)

In this passage from “Results of the Immediate Process of Production”, the ‘unpublished chapter’ of Capital, vol.1, Marx clearly looks at the matter from the standpoint of capitalist production as a whole. He answers pre-emptively those who see in the growth of unproductive consumption a solution to capitalism’s market contradiction, as well as Goldner, for whom any unproductive consumption is a drag on accumulation and undermines capitalism.

Goldner is of course entitled to use a definition of unproductive labor that differs from Marx’s. But his also goes against the logic of Marxist value theory.

What happens in the production of commodities that are destined for unproductive consumption? Is there C and V transferred into them? Not according to Goldner: by virtue of their ultimate destination, the C and V employed in that production cease to exist as value, become fictitious capital and no surplus value is extracted. If we follow that logic of destination, all the C and V and S that went into the production of the C and V of the sector that produces for unproductive consumption, would be fictitious too. And the same for the capital that went into the production of that C and V and so on. Furthermore, the same labor that produces things like foodstuff ,cars, clothing or computers would be productive or unproductive depending on who buys the stuff. And on what would the exchange between the sector whose commodities are productively consumed and the sector whose commodities are unproductively consumed, be based? All the value would be on one side, none on the other. On what basis are the prices of the latter formed, if they have no value?

These are just some of the problems which Goldner’s definition of unproductive labor creates. It seems to me more ‘productive’J to stick to Marx’s concept of productive labor. The total advanced capital C+V is valorized by productive labor and becomes C+V+S. Part of the surplus value (Sa) is reinvested, the rest (Sb) is unproductively consumed. It doesn’t really matter how, but it does matter that it is consumed, that the surplus value (which it does not contain according to Goldner) is realized. The proportion is important, as Marx emphasized. If Sa would take up the entire surplus value (something only theoretically imaginable), either there would be massive overproduction or productivity would have to be abysmally low.

And if Sb becomes too large, if there is a “disproportionate diversion of productive labor into unreproductive articles”, there will be less productive labor, and thus less valorization, in the next cycle of production.

The higher productivity becomes, the cheaper it becomes to produce commodities, (or in Goldner’s reasoning: the more productive labor becomes, the more unproductive labor there can be). At first sight, a drop in value of the means of production, C+V, seems great: so much more of the total product can go to Sb, to the pleasures of the ruling class with plenty of crumbs for the plebs. But capitalism is not in the business of creating use-values at the lowest cost possible. It is in the business of accumulating exchange value, of valorizing capital. The fact that less value goes to the means of production does not automatically mean that more goes to the surplus product. The less value that goes into productive capital, the less capital valorizes. And, since value rarely is stable, the capital that doesn’t valorize, tends to devalorize.

The more unproductive consumption, the heavier the burden on surplus value extraction. For the necessary proportionality to be respected, the surplus value that the sector which produces reproductive commodities devotes to unproductive consumption, must be equal in value to the new means of production C+V of the sector which produces unreproductive commodities in the next cycle. If we call the first sector x and the second y then xSb = yC+yV+ySa. That is a huge burden on xSb. Does the rate of exploitation in y make a difference? Or does it not matter, because production there yields no surplus value, as Goldner thinks? It does matter because the value of the use-values x would be buying from y would be higher if no surplus value were extracted in their production. Capital as a whole owns this surplus value and it allows it to devote less S to xSb.

The question then is what happened to that proportionality? Goldner is right that the growing weight of production for unproductive consumption strangles capitalism’s capacity to valorize. Why doesn’t the magic of the free market establish the proportionality that would correspond to capitalism’s needs? Before we go into that, let’s move to Goldner’s second source of fictitious capital from within the sphere of production: ‘technodepreciation’. Technological devalorization and fictitious capital

When technological innovation makes existing technology obsolete, when competition forces capitalists to abandon part of their fixed capital before its entire value has been transferred into commodities, obviously there is a problem. Goldner is right to identify it as a source of the formation of fictitious capital. Capitalization takes place on the assumption that the capital advanced (C+V) will grow in production to C+V+S (otherwise, there’d be no reason to invest). But only a part of the value of C is transferred so the actual value of the commodities produced will be smaller than the assumed C+V+S on which base financial assets have been created. So part of that financial capital does not correspond to any real value and is therefore fictitious, unless the surplus value S has somehow grown beyond expectations, enough to compensate for the value that is lost by the impossibility to transfer all the value of C into the commodities.

That seems evident but Aufheben does not seem to agree, although it’s hard to say for sure because it never directly addresses the question of the loss of value that can’t be transferred into the commodities, even though this is crucial to Goldner’s argument. Instead Aufheben argues that technological innovation, and in particular in the example that Goldner gives to illustrate his point, leads to “a gain in the overall profitability of capital which is first captured by the innovating capitalists and then, with the fall in the market value, is generalised to the capital as a whole through a slight rise in the general rate of profit.” Aufheben points out that in his example, in which Goldner imagines a sector with ten firms, one of which employs new technology that reduces the value of his fixed capital with 15%, he wrongly assumes that this innovation immediately devaluates the fixed capital of the entire sector by 15%, and yet also assumes that the market value does not change. That is not tenable; if the value of the fixed capital of an entire sector falls, the market value of what it produces does too. Goldner leaves the market value unchanged because he wants to argue that profits in that sector are inflated, accounted on the original value of the fixed capital rather than on the new lower one, and therefore fictitious, based on illusory value. He overreaches ( it’s not the profits of capitals that are behind the curve of technological innovation that are fictitious capital and Goldner does not need to make that claim to establish the connection between technological devalorization and fictitious capital) and shoots himself in the foot. In its critique, Aufheben explains that there is nothing fictitious about the origins of those profits: it’s all surplus value. And it reminds that the market value of a commodity is “determined by the average socially necessary labor time that is required for its reproduction”. The firm with the technological innovation produces under the market value (its commodity contains less labor time than the one produced under average conditions) but sells at it, so it makes a surplus profit. The most backward firm produces commodities whose value are above the market value but must also be sold at it, so its profit is smaller than average. There is a transfer of surplus value within that sector but there’s not any formation of profit to which no surplus value corresponds. I agree with this, except that it’s a little bit misleading to write, as Aufheben does (and as I have), that the market value of a commodity is determined by the average of the individual values of that commodity. This is a kind of shorthand formulation that explains the mechanism and Marx used it himself. But in fact it’s only true, as Marx explained further, when the bulk of the commodities in that sector is produced under average conditions and when there is no over- or underproduction. In Goldner’s 10 firm-sector, only one firm adopts new technology in the first year, so the bulk of the commodities are still produced onder the unchanged, less favorable conditions. The market value then is not an average but is equal to the value content of the commodity produced by the 9 more backward firms. That would remain so for some years, even while several other firms adopt the new technology, if Marx is right when he writes: “Suppose (..) that the total mass of the commodities in question brought to the market remains the same, while the value of the commodities produced under less favorable conditions fails to balance out the value of commodities produced under more favorable conditions, so that the part of the mass produced under less favorable conditions forms a relatively weighty quantity as compared with the average mass and with the other extreme. In that case, the mass produced under less favorable conditions regulates the market, or social, value.” (5)

Market value, or social value, is a social concept. It is an interpretation by society, that comes into being through uncounted economic transactions, of what the ‘average social time’ is that is required for the production of a commodity. The flexibility of the market value (not just the price) of labor power (beyond its devaluation as a result of rising productivity) illustrates its ‘man-made’, subjective quality. In the above quote, Marx assumes a stable market. Not because market conditions have no influence on market values, quite the contrary. As he explains elsewhere, overcapacity pushes the market value to the value of the commodity produced under the most favorable conditions because the more technically advanced capitals make room for themselves on the market by lowering the prices of their commodities to their value. But if the market is stable, and there is still “a relatively weighty quantity” of the supply that is produced in the more backward conditions (which is rather vague but this isn’t a lab-situation allowing for precise measurements) than there is no incentive for the other producers to sell below the value of the technically backward and to give up their surplus profits. Why then don’t they always sell at the value resulting from the least favorable conditions and rake in maximal surplus profits? That is what happens, Marx writes, in conditions of underproduction. But the movement of capital tends to eliminate underproduction, ever faster as its mobility grows. If a sector underproduces, capital moves in to reap the surplus profits and soon undercapacity becomes overcapacity and lowers the market value to the value of the more advanced production.

From this follows that the sum of the market value of all the commodities of a sector can be greater than the sum of all the individual values of those commodities. That is the case in the early stages of Goldner’s schema. One firm innovates and as a result obtains a surplus profit. The others don’t but since the market value doesn’t change, neither does their profit fall. So the surplus profit cannot be explained by a transfer of value within the sector, since no firm has to give up any. “So what is going on here?”, Aufheben asks, “Where do these surplus profits come from?” Either they are fictitious capital, or they must come from surplus value outside the sector. Value-analysis makes clear it’s the latter. The buyers of that sector pay the sum of the market value but what they get is less, the sum of the individual values. There is an unequal value-exchange: They exchange more value for less. I had thought Aufheben would respond to the question in a similar way but their answer steps outside the framework of value-analysis. The techological innovation reduces the costs of production, Aufheben explains, “less dead labour is required to produce the same mass of commodities” and as a result, the profitability of capital as a whole increases which allows for the surplus profit. Case closed. I emphasized it earlier, capitalism is not in the business of creating commodities with as little as possible dead labor. It’s aimed at accumulating value. It is true that a decline in the value of fixed capital means that relatively less value needs to be invested in it but does that imply that the profit per capital invested ( S/C+V) automatically rises, as Aufheben assumes? It looks that way for the individual capitalist who lowers his costs with new technology and thereby goes under the market value and obtains a surplus profit. But what matters for capital as a whole is not the cost of dead labor per se but how much labor power is set in motion and how productive that labor power is. If the value of the constant capital falls, so does the market value. There is a time-lag between the technological change and the market value’s adaptation to it and in the meantime the firm or the sector that went under the market value obtains a surplus profit. But that surplus profit is surplus value transferred from elsewhere so the reduction of dead labor does not automatically increase the surplus value for total capital. At the contrary. Aufheben assumes that when the value of C falls, the value of V and S remain the same but historically, technological innovation went hand in hand with an increase in the OCC (organic composition of capital, or the ratio between dead and living labor in production). This narrows (relatively) the basis for productive labor and thereby causes the profit-rate (tendentially) to fall.

So the surplus profit is not fictitious capital but real surplus value even though it comes from outside the sector. This sector cannot hold on to the surplus profit for very long. Commodities are not (or rarely) sold at their market values because they are continually transformed into production prices, which equal the value of the capital invested plus an average rate of profit. This transformation occurs because the sector in which surplus profits are made, receives an influx of capital which continues until the rate of profit equalizes with the general rate of profit of that economy. This process also establishes a proportionality between the different sectors but not necessarily the proportionality which capitalism needs for harmonious accumulation. I will come back to this point.

But to conclude on this part of the debate: I don’t think that Aufheben has really addressed Goldner’s main point. To put it in a wider framework: a falling general profit-rate provokes intense competition, intense pressure to produce under the market-value. There is no choice but the flight forward into overcapacity and premature obsolescence of fixed capital. An assumed value was capitalized but the real value falls short of it. So inevitably part of that capital is now fictitious.

Some qualifying remarks are required.

Accelerated write-offs

When premature obsolescence is expected, when capitalists know that a machine will be outdated in 5 years even though it will still do what it was designed to do for another 10 years, the value of that machinery will be transferred into the output in 5 years, rather than over the ‘natural lifespan’ of that machinery. So both the individual and the market value will remain higher than it otherwise would be. This acts as an obstacle to market expansion but in terms of valorization, the entire value of the fixed capital is realized in this accelerated cycle. But for total capital the cost of C includes the full value of the devalorized fixed capital plus the new one that replaces it. This compounds the negative effect on the rate of profit caused by the rise in the OCC: the same yield of surplus value requires a higher (value)quantity of constant capital. In a sense, the accelerated write-off of fixed capital is just an accounting trick to pass on the cost of moral depreciation to the customers. It is made possible by the high threshold of capital formation in many sectors. This makes it very difficult, often impossible, for new capital to invade a sector and force down the market value. This high threshold protects entrenched capitals and tends to create an implicit cartel “conspiracy” (and increasingly explicit ones, which these days are called “international strategic alliances”, whose main purpose is to share the burden of technological devalorisation and spread the cost of new technological development. (6) But accelerated write-offs of fixed capital make a difference concerning the creation of fictitious capital, since the assumed value of that production does not exceed the real one. It is only to the extent that the ‘technodepreciation’ is not anticipated that it creates fictitious capital. Technological change and the rate of exploitation

Secondly, technological innovation usually goes together with a rise of productivity (and thus the greater availability of use-values) and a rise of the rate of exploitation. The latter compensates, to a greater or lesser extent, for the technological devalorization. The two are not the same. If productivity rises in a branch of industry, it doesn’t follow that more surplus value is extracted there, that the rate of exploitation rises (even though this branch will likely take in a surplus profit on the market). But a general rise in productivity shortens the average social labor time needed for the creation of the workers’ means of subsistence and thus lowers the value of labor power, so that a greater part of the working day is unpaid, surplus value. Technological innovation stimulates the rate of exploitation in other ways too. It restructures the labor process always with the goal of making it more intensive; it gives capital greater mobility and greater access to labor power of low value or whose wages can be pushed under its value, and so on. It seems clear that capitalism received a boost from all these factors in the era known as ‘globalization’. The productivity-rise that it brought may be overrated and mask, on the one hand bogus operations and thus fictitious capital, and on the other forms of increased exploitation such as an increase of unregistered unpaid overtime. In any case, productivity-growth itself has been overrated as a kind of Holy Grail saving capitalism. As I said, productivity-growth does not automatically raise the rate of surplus value, and that is what counts for the valorization of capital.

The limit of the rise of the rate of surplus value is that it never can be more than part of the whole, the productive labor employed. “Its barrier always remains the relation between the fractional part of the day which expresses necessary labor, and the entire working day. It can move only within those boundaries. The smaller already the fractional part falling to necessary labor, the greater the surplus labor, the less can any increase in productive power perceptibly diminish necessary labor, since the denominator has grown enormously. The self-realization of capital becomes more difficult to the extent that it has already been realized.” (7)

There is no similar limit for technological development and the rise in the OCC that goes hand in hand with it. It goes on, compelled by competition, by the drive to get under the market value, by the inner impulse of technology to connect with other technology, to constantly remake the world of commodities in its image. It goes on, while the growth of the rate of surplus value becomes more difficult to the extent that it has grown. Consequently, capital’s irresistible tendency to reduce the value of commodity-production, reduces surplus value as well.

The funhouse mirror of the market (8)

A final remark on this: the real cost of moral depreciation for capital as a whole is masked by the profits of the innovating sectors because sectors with a higher than average rate of technological innovation tend to obtain a surplus profit, that is surplus value from the rest of the economy.

The incentive for technological innovation is either to produce a commodity under its market value or to improve the quality (or perceived quality) of the commodity above that of others ( so that for this new commodity, the capital in question has a monopolistic position). The reward, in both cases, is surplus profit. And even though this reward is only temporary, as market values are constantly transformed into production prices and this process gradually takes away the surplus profit, equalizes the profit-rate with the general profit-rate, it is still real, both for a company and for an entire sector that adopt new technology . The time-lag between the fall of the value of a commodity as a result of new technology and the adaptation of the market value to this decline may be considerable, especially if a high threshold of capital formation and a cartel-like control by the main firms in that sector limit competition. And while that advantage is temporary, the same firm or the same sector that obtained it may yet again achieve another technological gain by the time the market value has fallen to its own or by the time its monopolistic position has been broken. In other words, “the special productivity of labor in any particular sphere enables that particular sphere, vis-a-vis the total capital to make an extra-profit.” (9) The movement of capital establishes an (unstable) proportionality between this sphere and others. But the proportions are obviously different from what they would be without the incentive of this extra-profit. Even when its output already outstrips its market, this sphere still attracts capital because up to a point, the extra-profit amortizes the cost of overcapacity/moral depreciation. When it no longer does, there is no more special incentive for capital to go there. At that point, there is some sort of equilibrium, but one with a structural, built-in overcapacity in the spheres with a higher than average rate of technological innovation. That means value that could otherwise be productively used in spheres of lower OCC is sterilized.

So the proportionality that is brought about by market forces is not the one required for the smooth accumulation of capital and tends to erode it more to the extent that the gap between production with a high rate of technological growth and production with a low rate increases. In volume 2 of Capital, Marx logically proved capitalism’s capacity to self-expansion. But he also showed that this expansion must be proportional, and that to the extent that it isn’t, the valorization of capital is undermined. Marx focused on the proportionality needed between production goods and consumer goods but in a way that was just an example to demonstrate that the cycle of value must be kept whole (at least, broadly speaking. To put it more precisely: the value quantity that disappears from the cycle must be smaller than the value created in it). Many other examples could be given to illustrate this need to conserve value in order to grow. There is, for instance, a precise proportionality required, in use values and in exchange value, in what the sector of shoe production gives and gets from the rest of the economy. Enough value must go to it or shoes while be scarce and expensive. If the shoe-sector gets sufficient capital, its market expands, its market value falls which helps to lower the value of labor power. The market establishes a proportionality, not because market forces seek to accomplish this but because they hunt for higher profit. If technological innovation allows a shoe-capitalist to go under the market value and obtain a surplus profit, he will do so provided the shoe-market can further expand because “to set up a new technology costs a lot of money. To justify that expense, you have to build big capacity. Then you need volume to justify the capacity” (10) But the elasticity of the shoe market isn’t great, especially not in a context of global overcapacity: the rising OCC restricts the relative demand for productive consumption of shoes, the relentless pressure of capital to push the price of labor power under its value reduces it further and the demand for unproductive consumption of shoes is not that flexible either: most people, Imelda Marcos not withstanding, can use only so many pairs of shoes. Their demand for them will not necessarily rise because shoes become cheaper.

Compared to commodities destined mainly for productive consumption such as shoes, many commodities destined for unproductive consumption have a much greater market-elasticity. As the gap between low tech and high tech production keeps widening, so does the gap between the haves and the have-nots. While capitalists constantly try to push wages and thus the market for productive consumption down, they don’t subject their own unproductive consumption to the same pressure, as the well known statistics about the ever widening gap between the incomes of workers and CEOs illustrate. Similarly, budgetary pressure leads to savage cuts in state expenditures that are part of the social wage of the collective worker and thus earmarked for productive consumption, while unproductive state consumption such as military spending continues to expand. The market for unproductive consumption’s continuous expansion makes its suppliers receptive for a high rate of technological innovation (it’s no coincidence that technological changes often originate in military R&D) which means a more or less continuous transfer of surplus value from the rest of the economy to them. And that means that the proportionality that market forces establish between production for productive consumption and production for unproductive consumption implies underaccumulation in the former and (a tendentially growing) overaccumulation in the latter.

So this answers our earlier question, why doesn’t the magic of the free market establish the proportionality between Sa and Sb that Marx saw as essential for capital’s accumulation? Goldner may be mistaken in his analysis of unproductive labor but he is absolutely right in his insistence that the growing weight of production for unproductive consumption strangles capitalism’s capacity to valorize.

Fictitious capital, source and symptom of crisis

Finally, there is another proportionality to consider: the one between the commodity money and all other commodities. As a general commodity, money mediates the exchange of other commodities by stepping into their place, constantly changing places with them, making their circulation possible. As such it is a human construct, a social concept, an idea given form in precious metal, paper or nowadays mere dots on a computer screen. The value of its material substance (both use and exchange value) is irrelevant but its quantity is very important: since it represents the total value in circulation, money devaluates (inflation) when its quantity increases more than the value it circulates. But money is not only a general commodity representing all others but also a particular commodity for which a demand exists that is separate from the demand of all other commodities and that can exceed it. It is not just a means to circulate other commodities but also the universal material representative of wealth, the commodity in which value can be stored, because “all commodities are perishable money (but) money is the imperishable commodity” (11). It is the only one that “satisfies every need, in so far as it can be exchanged for the desired object of every need, regardless of any particularity. The commodity possesses this property only through the mediation of money. Money possesses it directly in relation to all commodities, hence in relation to the whole world of wealth, to wealth as such." (12) As the general commodity, money remains enclosed in the circulation process, while the other commodities are withdrawn from it. As a particular commodity, money steps out of the circulation process, turns its back to it, acquires a seeming autonomy from it. Depending on the point of departure one takes, the cycle of value can be seen as either C-M-C or M-C-M. As the general commodity, money is the middleman making C-M-C and thus reproduction possible. But as a particular commodity, it is the goal of M-C-M, not a means but an end in itself. All other commodities must be exchanged quickly, be transformed into money, or lose their value. Only money (I use the term here in a broad sense, including all financial assets and other commodities used to store value that can fairly quickly be made liquid such as real estate, art, etc) must not be transformed. C-M must always go on, at any price, even if oversupply drags the price under its value. But M-C must not go on. M has no incentive to accomplish M-C unless the next step C-M will increase its value. Therein lies money’s competitive advantage over all others commodities.

This function of money as a particular commodity, as abstract exchange value stored for its own sake, is part of the essence of capitalism and crucial to its functioning, which requires that the total quantity of money represents a higher value than the value of the social production it circulates. Accumulation requires saving: exchange value must be able to leave circulation and return to it. Money must be able to pull back from production when overaccumulation threatens and remain a means of payment while no longer functioning as a means of circulation. Every economy needs a hoard of money capital that functions as latent productive capital that flows into the sphere of production when accumulation requires it. The problem is once again one of proportionality and its distortion by competitive advantage.

In a context of global overcapacity, the competitive advantage of money as particular commodity is enhanced because the elasticity of the market for financial assets is far greater than the elasticity of the market for all other commodities. The more the expansion of the latter is in trouble, the more the demand for the former increases, and the more it increases, the more financial assets rise in price. The more their prices rise, the more exchange value they represent and thus the more sense it makes to store money in them, rather than reinvesting it in production. This further diminishes the demand for constant and variable capital, pushes their prices down and further erodes the creation of new value. So the demand for money can exceed the demand for all other commodities and thereby create a shortage of demand for the latter, because the incentive to convert commodities into abstract exchange value can be stronger than the incentive to reconvert abstract exchange value into use values.

The more the incentive to transform exchange value into use values weakens in relation to the incentive to transform commodities into exchange value, the more prices of financial assets increase in relation to those of commodities, and the more rational it becomes to sell without buying and to store the profit in money-capital. So the financial market and commodity-production are pulling apart. What must be one, supply and demand, sale and purchase, increasingly separate. It is that dynamic which leads capitalism from crisis to meltdown. The two roles of money, as a general commodity that circulates social production and as a particular commodity that stores abstract value are united by the acceptance of money as a means of payment. But this unity is threatened when more and more means of payment are hoarded while the actual value that is circulated by money decreases. The latter pulls down the value represented by the total quantity of money while in the hoard, its value is (seemingly) pushed up by the demand for money as a particular commodity. So the money in the hoard more and more represents value that does not exist and is not being created in the real economy. The more the gap increases, the more thunderous the collapse of that fictitious capital eventually must be. Then money’s capacity to store value collapses and this transforms a partial, contained breakdown into a global one, because if money cannot store value it cannot function as a means of payment and if it cannot do that, it cannot circulate commodities, so the process of realization of value is thrown in disarray, the chain of payment obligations breaks at a million places and production is paralyzed.

So the collapse of the bubble of fictitious capital must be prevented to prevent the collapse of the economy. The cause of the growth of fictitious capital is the difficulty of the phase M-C in the cycle of value. But all attempts to stimulate M-C involve the creation of more fictitious capital. Since a growing disinclination of M to become C means that money withdraws from the circulation process, it comes with the obligation of increasing the money supply to prevent its shortage in circulation. Therein already lies a source of creation of fictitious capital. But it is not enough to make sure that M-C takes place. The state directs capital to the productive sphere, subsidizing industry or its customers. But that again may lead to overcapacity and problems to accomplish C-M, which in turn discourages M-C.

The history of capitalism since the return of global crisis after the long post-war boom, has been marked by the subsequent strategies of the capitalist class regarding fictitious capital. In the ‘70’s, the attempts of the state to stimulate M-C inflated public debt. But far more dangerous was the rising inflation resulting from the stepped up use of the money-printing presses. Inflation is a form of devalorization of fictitious capital but at a certain level -‘hyper-inflation’- it too attacks the social concept of money as a means of payment and incites money to a desperate flight into gold and other illusory safe havens. In the ‘80’s the growth of the money supply was curtailed. But state debt exploded. Across the OECD-countries, the stock of government-debt grew at an annual rate of 9 % from 1980 to 1992, more than three times faster than their combined GNP. The danger of hyperinflation waned but the growth of fictitious capital just took another form. As a means to stimulate M-C, it gradually lost effectiveness because an ever growing part of state expenses no longer served to stimulate M-C but to pay interests on previous borrowing. In the ‘90’s, the growth of government debt was reined in but now, as a result of a variety of factors related to the restructuring of capital, new technology and globalization, the stock market and corporate debt became fertile ground for the growth of fictitious capital. In 1992, the financial assets of the OECD-countries were already priced at double the value of the combined economic output of those countries, by 2000 they were valued at triple the total OECD-GNP.

This obviously can’t go on. There has been some devalorization of fictitious capital, through inflation, through the explosion of various bubbles and the decline of the stock markets in general in recent years but not nearly enough to prevent its overall size from increasing in relation to the real valorization of capital. The most developed capitals, and especially the US with its unique role of central banker of the world, have been helped tremendously by “globalization” not only because of the access it facilitated to cheap labor power and because the difficulty of weaker capitals to accomplish C-M forces them to sell below value, at a depressed rate of profit, in effect transferring surplus value to their customers, but also because the increased mobility of capital made it easier for money to flee into the stronger hoards, to run from the periphery to the center. There in part it stimulates production in general but production for unproductive consumption in particular, fostering the illusion of prosperity on the upper decks of the Titanic. For the weaker countries, that means a growing difficulty for their financial capital to store value, leading to asset-deflation and a relentless pressure to devaluate their currencies. The obstacles to accomplish M-C and C-M grow hand in hand. We have seen that C-M must go on, at any price because C loses its value if it doesn’t. In a general context of excess capacity, the downward pressure is the hardest on the weakest competitors and those most dependent on their external market. Falling prices make it impossible to realize the value of C and thereby further discourage M to become C. The process feeds on itself; so to the growth of fictitious capital corresponds a growth of deflationary pressure.

How, in this decade, can the fiction of fictitious capital be maintained? Real estate has functioned to some degree as an alternative terrain to absorb fictitious capital, but for how long? Deficit spending is on the rise again but given the worsening global context it is unlikely that the economy could sustain a return to the growth-rates of government debt of the ‘80’s, just as it could not withstand a return to the inflation-level of the ‘70’s. The policy levers of the state to prevent a process of general devalorization are wearing out. It can’t substantially raise taxes, it can’t substantially lower interest rates anymore. And after force-feeding the economy for decades with fictitious capital, it is less and less capable to stem the panic which would ensue once a major devalorization sets in at the center of the global economy. The highly liquid foreign-exchange market by itself already dwarfs the financial reserves of the states and has therefore more control over their currencies than they do themselves. In 1983, five major central banks (the US, Germany, Japan, Switzerland and Britain) held $139 billion in reserves versus an average daily turnover of $39 billion in the foreign exchange markets in these countries. The central bankers had more than three times as much firepower as the market traders. By 1986, the two were about even in size. By 1993, the traders controlled three times as much as the central banks. And so on. Despite the national political structure of capitalism, money-capital has no loyalty but to itself. When the shit hits the fan, every owner of capital will only think of himself, dumping stocks and bonds, closing factories, laying off workers, marking down prices to unload commodities. And so the unraveling will feed on itself, dragging the world economy into its worst depression.

In trying to prevent that outcome, capitalist states cannot address the root of the problem. They can only try to protect their own value, their own fictitious capital, at the expense of everyone else. So it is to be feared that they will increasingly resort to military means to seek “valorization” in the sense Marx said commercial capital valorizes -by stealing surplus value created elsewhere; which at the same time serves to project power and maintain faith in the solidity of its hoard, to stimulate M-C through military production and to contain social tension and class conflict fueled by devalorization.

Provisional conclusion

Much more needs to be said on the role of fictitious capital in the crisis of capitalism but I must stop for now. My main concern is to place the analysis in an integrated, dynamic crisis theory. Yes, this is a crisis of profit, of a decreasing return on investment, yes, this is a crisis of unproductive consumption, of disproportional growth, yes this is a crisis of massive waste of value through ‘technodepreciation’, yes this is a crisis of overproduction, of too limited demand for productive consumption. Which of these factors is most decisive is unimportant because they are all related, even though they manifest themselves at different moments in the cycle of value accumulation. They all stem from the same source: the fact that capital “on the one hand, calls to life all the powers of science and nature, as of social combination and of social intercourse, in order to make the creation of wealth independent (relatively) of the labor time employed on it. On the other side, it wants to use labor time as the measuring rod for the giant social forces thereby created, and to confine them within the limits required to maintain the already created value as value.” (13) It is the law of value itself which is no longer compatible with the evolution of human society. It remains to be seen how much disaster, how much suffering, is needed before this become sufficiently clear to get rid of it.

1. Marx, Results of the Immediate Process of Production, Appendix to Capital, Vol.1, Penguin Edition, p. 1039-1040.
2. Ibid. p. 1045
3. For example in Vol.3 Marx states that commercial workers are productive, not because their labor adds value to commodities but because it obtains some of the surplus value created in production for their employer. In that sense, it valorizes the latter’s capital. Marx clearly looks here at the matter from the point of view of the individual capital, in this case the merchant. Since the commercial workers create no surplus value (according to Marx) but only causes its transfer, this analysis seems questionable. That way you could say that waging war is productive labor too. I think it’s more correct to see commercial workers (in general all the labor that transports and distributes the commodities) as integral part of the ‘collective worker’. The rate of exploitation in this sector certainly makes a difference for the general rate of profit, which shows that surplus value is extracted there.
4. Ibid. p.1045-1046
5. Marx, Capital Vol.3, (New World Paperbacks) p.183
6. See Chapter 9, “Cooperative Capitalism”, in William Greider’s One World, Ready or Not: the Manic Logic of Global Capitalism, Simon & Schuster 1997, p.171 a.f. “Many sectors, especially those on the leading edge of invention, also face a staggering escalation in capital costs -the new investment money needed just to stay in the game, never mind winning. In these circumstances, global firms have decided, one by one, to cooperate with the enemy and are fashioning limited truces with major rivals”.
7. Marx, Grundrisse (Penguin Edition) p.340
8. I develop this and the next point more in “From Decline to Collapse” in Internationalist Perspective #32-33
9. Capital, Vol.3 p198
10. Siemens CEO Walter Kunerth, quoted in Greider op.cit. p.177
11. Grundrisse, p.212
12. Ibid., p 218
13. Ibid. p.706.

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