Fictitious Capital and the Elusive Quest in Understanding its Implications: Illusions and Paradoxes

This paper deals with the interaction between fictitious capital and the neoliberal model of growth and distribution, inspired by the classical economic tradition. Our renewed interest in this literature has a close connection with the recent international crisis in the capitalist economy. However, this discussion takes as its point of departure the fact that standard economic theory teaches that financial capital, in this world of increasing globalization, leads to new investment opportunities which improve levels of growth, employment, income distribution, and equilibrium. Accordingly, it is said that such financial resources expand the welfare of people and countries worldwide. Here we examine some illusions and paradoxes of such a paradigm. We show some theoretical and empirical consequences of this vision, which are quite different and have harmful constraints.

1. Introduction
There is an extensive controversy concerning traditional models of economic equilibrium and new development paradigms based on an interdisciplinary, broader study of economics. When faced with the harmful effects of misguided directives in an economic and global sense, theorists have the obligation not only to explain their causes, but also to offer a practical solution or alternate thinking. After all, consistent levels of poverty, unemployment and low growth are results which were not expected in orthodox economic models of equilibrium and should be dealt with instead of being thrown aside as a politically restricted issue. Moreover, typical third world problems such as unemployment, recession, debt and social turbulence sided with corruption are now appearing in developed countries. There is an ethical dimension in social sciences which must not be forgotten, when presenting new views on solving crises.

It is in this sense that Jacobs points out an arrangement of guidelines destined to comprehend new economic theory.1 Amongst an extensive list, he points out that all economic theory must be goal-oriented. This means that social sciences should have a practical use, that of improving human welfare. They must abandon hope of achieving a fully complete and dynamic model able to explain and control all variances of the environment. Elegance and Originality may shine through abstract theory; but it is necessary, moreover imperative, that such a theory have its adequate means in adapting itself to the reality of material means of existence.

In this paper we focus on the capitalist world after the surge of globalization, following the global 2008 crisis. For us, it is essential that the analysis of such an occurrence be linked with other disciplines, particularly the Social Sciences. After all, Economics places itself in a faulty position when it fails to emphasize human welfare as the ultimate purpose. It is in this vein that Jacobs also emphasizes that new theory “must integrate with all other fields of social life (…) and replace the concept of externalities with a growing awareness of the complex nexus of political, legal, commercial, organizational, technological, social, cultural and psychological factors that determine economic performance and results.”

In order to make an interdisciplinary study on the reasons why crises occur (and what can be done), it is important to get to the roots of conventional economic theory and then to point out its differences in empirical reality.

According to neoclassical economics, a commodity’s economic value is determined by the amount of labour time spent in its production process. In the classical world, labour-value and competitive market prices rearrange each other in a state of equilibrium in which money plays an intermediate role of neutral effect. Its only effect or defect would be, as a last resort, a perverse influence on price rearrangement through inflation.

Such a theory receives merit for its elegance and simplicity. However, reductionism and critical omissions may be spotted on labour-value theory, which could compromise the entire structure of the model if taken under consideration. In fact, the chosen exchange background is as simple as a barter economy. And if we can find a variety of economies based on barter, medievalism, mercantilism or slavery, the capitalist mode of production makes the approach more complex. Even though in archaic societies, cattle creation sufficed for nourishment, today our complex relations demand the rise of industry, slaughterhouses and distribution channels for socialization of consumption. In the same manner, the specialization of technology demands less hours of labour-time and more of capital use.

Thus on adding a historical component, capitalism offers an essential controversy to the model: the role of Money not as a passive extra, but as the main actor in a system where the quest for Money (and not exchange) reigns. The idiosyncrasy of such affirmation signals the importance of Money and its expanding network on the rearrangements of power structures involved in the capitalist mode of production. In this vein, Weber, Bloch and Braudel have commented notably on the role of Money throughout historical development.2,3,4 But it was Marx who was the main analyst on the importance of Money, and the harmful effects that could occur should Money be detached from the productive dimension of an economy.5

Marx in Capital has arrived at a specific conclusion: in capitalism, circulation of Money and production of goods are relatively independent of one another, where Money is the central axis which reflects the social labour division. It does so not only because average income is determined by social needs, but also because generated income plays a greater part in determining the consumption of produced goods. However, this monetization that allows for the exchange and circulation of commodities at a generalized level is subject to a number of disturbances. These are given by credit, by the creation of money without anchorage on production, and by the “magic formulas” in which invested money may render income, without the intermediate process of merchandise and production necessary for the division of socialized labour.

Since the exchange of commodities is always underlined within the statute of production prices, one manner in which crises could occur would be through Fictitious Capital. Hence, heterodox economic theory of value does not assert its position based on a reductionist model, but as the main generalization of private and social processes at an accurate moment in history (capitalism).

This paper is organized as follows: after this introduction, Section 2 presents an overview of the theory which deals with fictitious capital, its definitions and the quest in understanding its foundations. Section 3 is concerned with implications of fictitious capital, crises, illusions and paradoxes of the liberal approach to economic policy. Section 4 concludes with some aspects of orthodox economics’ adventures and misadventures in global development.

2. Fictitious Capital
A clearly observable role of Money is its possibility to separate in time operations of purchase and sale. With the rise of capitalism, money can also be seen as capable of generating surplus value and thus becomes a commodity desirable in itself. In the process of credit overture, lent money has the ability to synchronize the production capability of distinct time periods – present and future. Thus, through a credit document a firm may gain instantly an expectation of future income. It should be noted, however, that such lent credit ratifies only the supposition that a firm could generate such competence through a forthcoming capital accumulation not yet realized within the circulation process.

It should also be considered that such credit carries out periodically a charge of interest. Marx pondered on the idea that interests are not derived from supply and demand forces between lenders and borrowers of credit, but are in fact anticipations from a share of hypothetical surplus value which the capitalist would obtain if he were inclined to follow its enterprise solely on his capital accumulation. This separation between time periods conferred by credit may generate two results: i) the well-succeeded flow of capital throughout its different phases, or ii) crisis.

An especial type of capital that may produce crises is Fictitious Capital. In this vein, heterodox thinkers present alternative views or meanings.6,7,8,9

On the one hand, it is possible to see fictitious capital as resources that (in the same manner as credit) possess a double value, an imaginary component without anchorage on production, but may have value after a productive investment. In such matters, one can consider government bonds as fictitious capital, since they render interest based on debt. Suffice it to say that it makes its owner richer starting from indebtedness.

On the other hand, amongst Mollo’s thesis and others, fictitious capital can be seen as a secondary and artificial valorisation of applied capital, without anchorage on production. In this matter, the primary issue of a stock is without doubt linked to the corresponding firm’s use-value; significant changes in the use-value (excessive capital accumulation or loss of it) also influence the stock price. Nonetheless, financial market is much more than the primary issuance of a stock. Usually, assets are securitized, issued amongst investment portfolios with derivative credit. Hence their generated income surpasses far beyond a company’s use-value, and is instead determined by speculative supply and demand of a number of assets.

This alteration on an enterprise’s production process and its assets’ profitability arises because the spring of credit allows the creation of endogenous money without correspondence to production. At first, the portrayer of such assets will always become wealthier with new profit, but in the scheme of circulation of commodities there was no productive creation enough to support such creation of wealth. As fictitious capital also presents a higher and faster profitability compared to the production process, the exceeding profits of the latter also tend to be reinvested on the former. The dissociation between prices and value intensifies, whereas the real market of production relatively impoverishes at a steep pace.10

The creation of credit has allowed banks to create money endogenously without an anchorage of production and has opened the room to the possibility of crises. Gradually, fictitious capital started to gain immense powers – it has the tendency to create, like a spell, money that becomes more money, richness which prompts more richness in an uncontrolled spiral. In the capitalist system where the quest for easy and fast profit is imperative for survival, it is not surprising that a great amount of money can be reallocated and invested in the financial market leading to an artificial creation of capital through interests. This severely damages the accumulation of capital and the circulation of commodities, whether by great capital outflow, or by the direct and indirect effects that the speculative market has on production. Notwithstanding, in the medium term, the attractiveness of fictitious capital binds a group of powerful followers which will advocate free capital flow. This support is given not only by governmental institutions with high economic expertise and low engagement with history, but also by theoretical economists themselves, who present a sufficient argument for wealth provided by fictitious capital and thereby the maintenance of orthodox economic theory.

In this vein, liberal mentality brought by standard economics is strengthened, the same mentality that always cared for global economic balance between all nations’ exchange rates and balance of payments, paying hardly any consideration to the issue of domestic poverty and income concentration.11 However, the so-called balance reached during the Pax Britannica hegemony was deformed to the free flow of fictitious capital within the globe, as remarked by Chesnais and Teixeira & Ferreira.12,13

Joanílio Rodolpho Teixeira: Fellow, World Academy of Art & Science; Emeritus Professor, University of Brasilia, Brazil
Paula Felix Ferreira: Post-graduate Student, Autonomous University of Madrid, Spain
1. Garry Jacobs, “Need for a New Paradigm in Economics”, XI International Colloquium: Global Crises and Changes of Paradigms, Brasília, 2014.
2. Max Weber, General Economic History (New York: Cosimo Classics, 2007).
3. Marc Bloch, The Royal Touch (New York: Dorset Press, 1989).
4. Fernand Braudel, On History (Chicago: University of Chicago Press, 1982).
5. Karl Marx, Capital (Rio de Janeiro: Civilização Brasileira, 1998).
6. David Harvey, The limits to Capital (London: Verso Books, 2006).
7. Suzanne de Brunhoff, La politique monetáire – un essai d’interpretation marxiste (Paris: Presses Universitaires de France, 1974).
8. Duncan Foley, “Marx’s Theory of Money in historical perspective” in Marx’s Theory of Money – Modern Appraisals ed. F. Moseley (London: Palgrave Macmillan, 2005).
9. M. de Lourdes Rollemberg Mollo, “Credit, fictitious capital and financial crises: reviewing the antecedents of the current crisis”. VII International Colloquium Getting out of the current economic crisis in light of alternative development paradigms, Paris 2010.
10. Gerard Duménil and Dominique Levy, “The crisis of the early 21st century: general interpretation, recent developments and perspectives” Preliminary draft 2011
11. Robert Gilpin, The Political Economy of International Relations (Princeton: Princeton University Press, 1987).
12. François Chesnais, La Finance Mondialisée (Paris: La Découverte, 2004).
13. Joanílio R. Teixeira and Paula F. Ferreira, A Hegemonia do Capital Fictício: a crise global sob a perspectiva heterodoxa (Curitiba: CRV, 2014)

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