Marx on Financial Bubbles: Much Keener Insights Than Contemporary Economists

Source : vivalascuola.studenti.it

It is true that his discussions of fictitious capital remained brief and fragmented. Nonetheless, what he wrote (in broad outlines) on the distinction between “money capital and real capital,” between productive and unproductive labor, and between speculative and real investment can be of significant interest in relations to the rise of finance capital and its destabilizing effects on the advanced market economies of our time [2].

The Marxian theory of value, as the product of human labor generated in the process of production, and its twin theory of surplus value—value over and above the cost of production—as the source of profit, interest and rental incomes implies that, to have a viable economy, the monetary sum of these various types of incomes cannot deviate much from the total surplus value created in the process of production. In other words, the overall sum of money incomes and/or profits in an economy is limited, ultimately, by the total amount of real values produced in that economy.

Policy implications of this theory in terms of what really sustains an economy are enormous, as it can readily alert policy makers to the dangers of an impending economic crisis when deviations of monetary magnitudes from real-value magnitudes tend to become too big and, therefore, unsustainable.

This stands in sharp contrast to the mainstream/neoclassical economic theory that, instead of human labor, views ownership and/or management as sources of profits, or economic surplus. Accordingly, there are no systemic limits to the amounts of income/profits made by “smart” capitalist managers and financial “experts”: it all depends on how creative they are, including all sorts of clever “financial innovations” that could create paper or electronic wealth out of thin air, without being limited by any underlying real values.

Not surprisingly, most mainstream economists did not see a problem with the astronomical growth of fictitious capital (relative to industrial capital) in the immediate period preceding the 2008 financial implosion. Indeed, not long before the market crash, these economists were cheerfully predicting that there would be no more major crisis of capitalism because “creative financial innovations” had essentially insured the market against risk, uncertainty and crash.

The Marxian theory of financial instability (and of economic crisis in general) goes beyond simply blaming either the “irrational behavior of economic agents,” as neoliberal
economists do, or “insufficient government regulations,” as Keynesian economists do. Instead, it focuses on the built-in dynamics of the capitalist system that fosters both the behavior of the market agents and the policies of governments. It views, for example, the 2008 financial meltdown as the logical outcome of the over-accumulation of the fictitious finance capital, relative to the aggregate amount of surplus value produced by labor in the process of production.

[dropcap]I[/dropcap]nstead of simply blaming “evil” Republicans or “neoliberal capitalism,” as many left, liberal and Keynesian economists do [3], it focuses on the dynamics of “capital as self-expanding value,” as Marx put it, that not only created the huge financial bubble that imploded in 2008, but also subverted public policy in the face of such an obviously unsustainable bubble. In other words, it views public policy not simply as an administrative or technical matter but, more importantly, as a deeply political affair that is organically intertwined with the class nature of the capitalist state, which has increasingly become dominated by powerful financial interests.

While blaming policies or strategies of deregulation, securitization, and other financial innovations as factors that facilitated the financial bubble is not false, it masks the fact that these factors are essentially instruments or vehicles of the accumulation of fictitious finance capital. No matter how subtle or complex, they are essentially clever tools or strategies of transferring surplus value generated elsewhere by labor, or of creating fictitious capital out of thin air. Marx characterized this subtle transfer of (real/labor) value from productive to unproductive fictitious capital as “an extreme form of the fetishism of commodities” in which the real, but submerged, source of surplus-value is concealed. In discussing how fluctuations in the magnitude of fictitious capital, or financial asset prices, may not necessarily reflect changes in the real economy, Marx wrote:

“To the extent that the depreciation or increase in value of this paper [assets] is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value. . . . Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated [productive] enterprises . . . the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital” (emphasis added0 [4].

Marx prefaces his discussion of the relationship between finance capital, which he calls “loanable money-capital,” and industrial or productive capital by posing this question: “to what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process?” [5].

The answer, he points out, depends on the stage of the development of capitalism. In the earlier stages of capitalist development, that is, before the rise of big banks and the modern credit system, growth of finance capital was regulated or determined by the growth of industrial capital. For, in the absence of monopolistic big banks and modern credit system the dominant form of credit consisted of commercial credit. Under commercial credit system, where one person lent the money to another in the reproduction process (for example, the wholesaler lent to the retailer, or the retailer lent to the consumer), finance capital could not deviate much from the industrial capital: “When we examine this credit detached from banker’s credit it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here” [6].

But at higher stages of capitalist development, where banks scoop up or centralize and control national savings, the growth of finance capital no longer moves in tandem with the growth of industrial capital. Under these conditions, “Profit can be made purely from trading in a variety of financial claims existing only on paper. . . . Indeed, profit can be made by using only borrowed capital to engage in (speculative) trade, not backed up by any tangible asset” [7].

These brief passages reveal that Marx makes a clear distinction between real profit and profit from financial bubbles. While real profit is rooted in, and therefore directly limited, by production of surplus value, profit from inflation of fictitious capital (or asset price inflation) is not—at least, not directly, immediately, or in the short-term. Marx distinguishes between a variety of profits and/or incomes—all dependent, ultimately, on the amount of surplus value created by human labor in the process of production.

The main and the obvious category is profit that results from manufacturing or real production, or profit of “enterprise,” as Marx called it. According to his labor theory of value, profit of “enterprise” is essentially unpaid labor. Starting from production, he expresses the value of total gross national product (GNP) by this simple equation: GNP = C + V + S, where C stands for “constant” capital (or depreciation and inputs, including raw materials), V stands for “variable” capital, which is the equivalent of (production) wages, and S stands for surplus value, which is the basis of (production) profits, or profit of “enterprise.” Interest payments for borrowed (and invested) capital as well as rental payments for the space rented for doing business would be deducted from the profit of enterprise, or surplus value.

Part of the remaining profit of enterprise would normally be set aside for reinvestment and/or expansion—which is called “retained earnings” in today’s business vernacular —and the rest would become dividend income and/or entrepreneurial/managerial income. [In the above equation, Marx calls C “dead” labor, that is, labor ossified or congealed in the machinery or means of production; (V + S) “live” or “living” labor, that is, total labor (hours) performed, or total value created; which is today called net national product, or value added.]