[A-List] Fictitious capital

["Charles Brown" <charlesb@xxxxxxxxxxxxxxxxxxxxx>]

Fictitious capital

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Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in the third volume of Das Kapital, a manuscript which Marx never edited for publication.

Fictitious capital could be defined as a capitalisation on property ownership. That ownership itself was very real and legally enforced, and so were the profits made from it, but the capital involved was fictitious in the sense that it was not backed by any real physical asset value or earning power.

Fictitious capital could also be defined as "tradeable paper claims to wealth" but this definition disregards that tangible assets themselves may under certain conditions also gain a vastly inflated value, far beyond what they are really worth.




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Contents [hide]
1 Origins 
2 Effects 
3 Illustration 
4 See also 
5 References 
 


[edit] Origins
Marx saw the origin of fictitious capital in the development of the credit system and the joint-stock system.

Governments and banks could create additional money or credit, which generated purchasing power unrelated to the value of real production or real consumption, or to the real value of physical assets owned.

They could also issue debt securities of various kinds which could be traded in, regardless of whether these were backed by assets or deposits, and which became objects of speculation.

Companies could likewise issue share certificates that were speculated in. Again, this caused fluctuations in asset values unrelated to what a business and its production were really worth.


[edit] Effects
The general effect was that:

the market value of physical and financial assets could, backed by credit, be driven up and artificially inflated by some margin, purely as a result of supply and demand factors which could themselves be manipulated for profit. That margin of value could, however, just as suddenly disappear, if large amounts of capital were withdrawn. 
profit could be made purely from trading in a variety of financial claims existing only on paper. 
profit could be made by using only borrowed capital to engage in (speculative) trade, not backed up by any tangible asset. 
In addition, changes in underlying technology of a competitor, such as a labor saving advance, can render market value of paper claims to an asset "fictitious." Many features of modern global capitalism reflect the impact of such changes. Thus, a business firm may attempt to prop up the market value of its stock by increasing the rate of exploitation of its work force in order to keep up with the innovating firm. Other firms may attempt to use legal sanctions in the form of, for example, intellectual property law to prevent competitors, or potential competitors, from developing labor saving advances.


[edit] Illustration
Marx cites the case of a Mr Chapman who testified before the British Bank Acts Committee in 1857:

"though in 1857 he was himself still a magnate on the money market, [Chapman] complained bitterly that there were several large money capitalists in London who were strong enough to bring the entire money market into disorder at a given moment and in this way fleece the smaller money dealers most shamelessly. There were supposed to be several great sharks of this kind who could significantly intensify a difficult situation by selling one or two million pounds worth of Consols and in this way taking an equivalent sum of banknotes (and thereby available loan capital) out of the market. The collaboration of three big banks in such a maneouvre would suffice to turn a pressure into a panic." (Das Kapital Vol. 3, Penguin edition, p. 674).

Marx added that:

"The biggest capital power in London is of course the Bank of England, but its position as a semi-state institution makes it impossible for it to assert its domination in so brutal a fashion. None the less, it too is sufficiently capable of looking after itself... Inasmuch as the Bank issues notes that are not backed by the metal reserve in its vaults, it creates tokens of value that are not only means of circulation, but also forms additional - even if fictitious - capital for it, to the nominal value of these fiduciary notes. And this extra capital yields it an extra profit." (ibid., p. 674-675, emphasis added).


[edit] See also
Capital accumulation 
Economic bubble 
Speculation 
Stock market bubble