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

3. Fictitious Capital and Crises
Credit is a kind of capital with double-value which links production and circulation of commodities through the anticipation of surplus-value in a manner that its entire amount is invested (though through compression of time) in production. Fictitious Capital is (in our reasoning and also of Foley and Mollo) the artificial and secondary valuation of such credit, subordinate to speculation schemes without anchorage of production and whose main interest resides on the asset itself, not the object portrayed by the asset.

If one were interested in portraying an accurate historical development of credit, it would become clear that such development is heavily linked with political thinking throughout the last few decades. Subsequent to the Second World War, economic models of minimum intervention from the state were questioned, as a reaction to their poor effects: the rise of monopolies, the deprivation of basic and beneficial conditions of life (such as health and education), the shrinkage of small businesses, and so on. This led to the Welfare State, a political and socio-economic model aiming at warranting human dignity through state intervention at all costs where assistance was needed.

However, in the 70s orthodox economics began to have its voice strengthened by the election of several conservative political leaders such as Thatcher, Reagan/Bush and Chirac. Such events were linked with the rise in prices brought by the rise of oil prices, amongst other crises in the decade. The result was that the Welfare State was gradually altered and capital gained more power through flexibilisation and globalization. The development of the Washington Consensus was a key event that occurred after that time and continued during the 90s. It aimed for a world with free global capital flows, and emergence of the euro-dollar market, which made it more difficult to trace money back to its origin and to establish full, effective regulation.

As a result, during the last few decades, capital has multiplied sharply. It is estimated that in 2007, generated income in the U.S. financial markets was ten times bigger that the country’s GDP. Balance Payments Deficits and private indebtedness have also escalated rapidly in the United States since the beginning of this century.14 Whereas on the financial side, wealth was uphill: big companies could splurge in swaps, debt securitization, leverage, and derivative credit to prosper without constraints. Hegemonic nations also have worked consistently to provide free capital flow and also to evade themselves from any responsibility.

For a better regard of such massive fictitious capital flow, Teixeira & Ferreira signal that in 2007 the five largest investment banks in the U.S. possessed leveraged loans up to US $4.1 trillion, which amounted to 30% of the U.S. GDP.15 Around the same period, the appreciation of house value rose 124% from 1997 to 2006 whereas assets derived from said mortgages (such as synthetic collaterized debt obligations and naked CDS) have had their face value estimated at US $35 trillion, that is to say, 14 times the value of the same mortgages which supposedly backed them.16 By 2009 the global financial market already possessed a face value of US $614,674 trillion, which is the equivalent of the global production of the previous 10 years.17 Duyn’s estimates are similar to Mollo’s findings, in which financeirization represented, in face value, almost 10.8 times the global GDP.18 In Teixeira and Ferreira’s work, since some hedge funds promised a 30% annual interest, investing in short run speculative bonds became widespread instead of investing in the productive sector.

“Crises are the only symptom through which capitalism can be reborn and still sustain itself with all its inner contradictions.”

However, the free assimilation of Fictitious Capital increases the amount of presumed wealth in the globe, without further possibility of realization in the commodities’ circulation field. This internal contradiction can only resolve itself through periodic crises, in which capital needs to destroy itself in order to realize its ultimate devaluation.

The triggering of the crisis is correlated with a rise in interest rates, which conveys a difficulty in accessing credit but renders bigger profits for fictitious capital. When the interest rate rises, the payment of loans previously made are compromised and firms need to sell more assets in order to reimburse money for such loans. As many of the firms usually suffer the same conditions, the vast selling of assets knocks down prices and worsens the situation of the firms which need to sell themselves. This triggers the crisis.

In this vein, it is possible to consider that crises are not caused by exogenous and random shocks due to state carelessness, nor do markets spontaneously reach a state of equilibrium. On the contrary, the relative autonomy between prices and value and between production and circulation – entitled by money and credit – is an intrinsic conflict innate in capitalism and it must solve itself periodically through the occurrence of crises. Crisis, depression and recession are elements as common as money and speculative resource allocation in capitalism. Unfortunately, it results that the fictitious capital scheme works in favour of privatization of gains and socialization of losses. There was not, according to FeD’s reasoning, a mere bureaucratic deregulation which ended up in unexpected crisis. Crises are the only symptom through which capitalism can be reborn and still sustain itself with all its inner contradictions.

4. The Orthodox Theory, its Harmful Effects on Growth and Concluding Remarks
Neoliberal theory is strongly based on models of equilibrium proposed by the founding fathers of Economics. Such framework also demands, for its consolidation, the free flow of capital. Believing that capital flexibilisation will converge global economy to a state of equilibrium is the same as assuming that a casual and grotesque fact may imprint on reality the idealized forms of a theory, and that in economics the platonic epistemology applies.

The pseudo-neutrality of equilibrium models (in all its makings) is consubstantiated by formalization born in mathematics. This approach has its origin in positivist reductionism with a normative appeal, for it does not take under consideration the real dilemmas of material means of existence. Amongst them we can cite class conflict, structures of power, and ad hoc political choice perpetrated in a global development and poverty reduction context.

A brief historical and political research shows first-hand that greater flexibilisation of capital does not result in a harmonic price rearrangement, but, rather, in a rash and uncontrollable crusade in which capital hunts, at every concealed hideout of the globe and the markets, which are new ways to improve exponentially its profitability.19,20 And on this quest, the first things to run over are the jobs, the ideals of social welfare and the environment. From time to time, workers themselves are blamed for poverty, whence they are found guilty for the harm they inflict upon themselves.21

“Crisis is not the disease: it is the main solution through which capitalism can sustain itself in time, even when carrying within itself the “seeds of its own destruction”.”

In regard to the analyses on crises, conventional thinking still puts the blame on a cause-effect relation external to the logical and formal equilibrium model. Accordingly, it would be sufficient to eliminate the exterior cause (financial deregulation) as a way of healing and preventing any other crises. This assertion is precisely what our study of fictitious capital aims to criticize. Crises do not occur through an exterior cause, they are embodied within the internal contradictions of capitalism itself. Capitalism is a living historical organism anchored in time and the bearer of a number of symptoms and internal conflicts which can only be resolved through crises. Therefore, crisis is not the disease: it is the main solution through which capitalism can sustain itself in time, even when carrying within itself the “seeds of its own destruction”. This pattern of thinking is parallel to how Freud and Lacan addressed their patients: if a psychotic patient is in a delirium, delirium itself is not considered the disease.22,23 It is a crutch the patient – a crystallized and broken subject – uses to address the disease’s existence. In the same manner, the study of capitalism should not begin from a supposed state of “normality” and “convergent equilibrium” but, rather, as an analysis of a broken subject, an unstable mechanism, uneven, with strong tendencies to capital concentration. In this vein, the subject lends itself to be understood as “delirium”, an unexpected state of affairs which also aims to provide the meaning of its existence. If Freud and Lacan listened to their patients’ delirium, so should we listen to the symptoms of the crisis instead of ignoring them and strengthening our weak faith in normality.

Conventional and normative discourse has been used to bury underneath the ground all historical importance of resource reallocation. Nowadays, history has thrown light on the irrationality of our laws in social life, the victory of cheap labour market over humanitarianism, of profit over reduction of misery. Thus, financial capital still expands throughout the globe under the mantle of a “scientifically neutral” orthodox theory. The domain of critical multidisciplinary vision has become restricted, whereas the scope for theoretical realization is much larger. Economic intellect has become much more demanding in the formal realm and much more modest in the realm of social reality. Economic criticism is no more a combative weapon to attack world injustice, but has become a receded trench behind big companies, bankers and lobbyists. Political economy is no longer an instrument of conquest but one of renouncement.

“Fictitious capital has become a nationless being, unruly, insatiable, thriving for infinite expansion with the promise of extraordinary profit.”

Thereby, even under the occurrence of crises the orthodox speech solidifies itself. And specifically, the idea that capital may grant long term artificially created wealth without further damage to production, since in the long term all supply and demand would cancel themselves in harmony. It is through this reasoning which acquiesces to fictitious capital that we bring Gramsci’s theory: his main idea was that the ruling class did not dominate by force, but by persuasion.24 Persuasion was indirect: subordinate classes learned to view society through their ruler’s eyes, due to an obscure schooling of reality and the foul setting of education in societal organization.

Due to “pure idealism”, an abstract and ideal world is created, reminiscent of a sphere of values autonomous to civilization. This beautiful speech serves well for monopolists and bankers to maintain their power. Science of equilibrium, in this manner, is based on pseudo-neutrality, as a consequence of which science can be utilized either for humanity or for the means of the powerful. We are not nullifying or underappreciating formal science, but are, rather, in the quest of freeing it from its masters that science itself has established.

The alternative line of thought alien to conventional economics, illustrated by Marx, Keynes, Luxemburg, Kalecki and others, helps economic debate regrow after the failure in predicting the great economic disturbance that sprang in 2008.25,26 This line of thought is crucial in revealing intellectual flaws in the model that has allowed the creation of recent crisis. The heterodox view is also important in narrating internal contradictions of the capitalist economy, suggesting a political agenda that may, under certain limits, contour serious problems in growth, distribution and instability within the economic system.

Without this critical view, it is not possible to establish a comprehensive theoretical overview of new paradigms in economic development. These should ally themselves not to capital flexibilisation and conventional economic narrative but, rather, to a multi-faceted study involving sustainable development. The former does not ignore all true questions about full employment, reduction of income inequality, sustainability of the world ecosystem, of economic social welfare and of true governance that support laws far beyond equality of rights, but has social precedents such as access to quality education and health.

The recent global financial and economic crisis has underscored the fact that despite significant increases in income and other “development” indicators in many parts of the world, in the last 50 years or so, the appropriate paths to development require serious rethinking. The rapid growth of the financial sector in the global economy has made economies fragile. Increases in inequality seem to make societies more unjust and unstable.

In short, Fictitious Capital is a specific kind of “asset” that is grown in the speculative financial market (amongst other origins) and promises to generate extraordinary profit, money that multiplies itself into more money, without any anchorage of production. As such, fictitious capital does not take part a priori in the “real world productive process” nor the circulation and realization of commodities; it enriches the pockets of the owners of such assets but does not constitute value which binds and holds together the axis of social relations. It is also able to align itself to the government, bankers and to powerful businessmen to find a variety of paths to expand around the globe. When its size is significant, the law of value strikes back and capital devalues itself, carrying along firms in bankruptcy, unemployment, recession and so on. And surprisingly, the answer orthodox economics offers is more capital freedom – and its dubious ability to bring back equilibrium.

In spite of the emergence of excessive deregulation, a number of financial innovations, the euro-dollar market and globalization, fictitious capital has nevertheless spread through­out the globe and has become a nationless being, unruly, insatiable, and thriving for infinite expansion with the promise of extraordinary profit. This is thus aligned with free capital mobility, and the relative immobility of workers and natural resources, many times located in poor nations with low political strength and vulnerable to market exploitation. The result is great stress not only on workers’ quality of life, but also on great vulnerability to which the environment is exposed.

The recent book by Thomas Piketty signals that inequality is rising, where the author also comments extensively on the harmful effects of capitalism.27 Taking all this information into consideration, we may suggest some guidelines to formulate new development paradigms, such as a new outlook on taxation, a higher stimulus to productive investment, granting more importance to heterodox thinking, and controlling both the rise of the degree of monopoly and of the financial speculative market.

In times of crises, heterodox thinking is most important for avoiding the traps and pitfalls that a normative equilibrium-based theory can offer. Conventional economic thinking, hopeful for a long lost, harmonic restoration point, may trigger an even worse deepening of the crisis, and may launch environmental and labour agenda into oblivion. As for the constant modelization of capital dynamics without further regard to social and historical reality, we can only say that the margins of reality, once fixated through language, cancel each other. Through the same spirit of contradiction which fictitious capital theory offers, we bring another tale narrated by Italian-naturalized writer Italo Calvino.28 In his book, the Invisible Cities, it is said that the tartar emperor Kublai Khan asked Marco Polo to visit a number of places in his empire and describe, as a model, how those cities were. Their discussion is very elusive of the same discussion we hope to have successfully placed in this paper. It is as follows:

“From now on, I’ll describe the cities to you.” the Khan had said, “In your journeys you will see if they exist.”

But the places visited by Marco Polo were always different from those thought of by the emperor.

“And yet I have constructed in my mind a model city from which all possible cities can be deduced,” Kublai said. “It contains everything corresponding to the norm. Since the cities that exist diverge in varying degrees from the norm, I need only foresee the exceptions to the norm and calculate the most probable combinations.”

“I have also thought of a model city from which I deduce all the others,” Marco answered. “It is a city made only of exceptions, exclusions, incongruities, contradictions. If such a city is the most improbable, by reducing the number of elements, we increase the probability that the city really exists. So I have only to subtract exceptions from my model, and in whatever direction I proceed, I will arrive at one of the cities which, always as an exception, exist. But I cannot force my operation beyond a certain limit: I would achieve cities too probable to be real.”

We would like to emphasize that in order to deal with the deleterious destabilizing effects of poorly regulated (or unregulated) financial assets and fictitious capital, it is essential to recast the central focus of economic theory and economic programs. In this vein we need deep integration with other disciplines. After all, we live in an increasingly competitive environment (locally, nationally and globally). In other words, we need a value-based, trans-disciplinary science of society. A science anchored in a solid understanding of institutional configurations, visions and dynamics of society.

14. Duménil and Levy, “The crisis of the early 21st century”.
15. Teixeira and Ferreira, A Hegemonia do Capital Fictício.
16. Winston P. Nagan and Valeen Arena, “Towards a Global Comprehensive Context-driven and Decision-focused Theory and Method for a New Political Economy”, Cadmus 2, No.2, May (2014): 80-97.
17. Aline Duyn, “Derivative Dilemmas” Financial Times 8th December 2010.
18. M. de Lourdes Rollemberg Mollo, “Financeirização com desenvolvimento do capital fictício: a crise financeira internacional e suas consequências no Brasil” Departamento de Economia da UnB Working Paper 2011.
19. Chesnais, La Finance Mondialisée.
20. Rosa Luxemburg, The Accumulation of Capital (Rio de Janeiro: Zahar, 1970).
21. Thomas Palley, “The theory of global imbalances: mainstream economics as apologia for neoliberal globalization”, XI International Colloquium – Global Crises and Changes of Paradigms: Current Issues, Brasilia, University of Brasilia, 2014.
22. Sigmund Freud, Collected Works of Sigmund Freud (La Vergne: Lightning Source, 2007).
23. Jacques Lacan, Le Seminaire, Livre 3, Les psychoses (New York: W.W. Norton, 1997).
24. Antonio Gramsci, Escritos Politicos, volume 1 (São Paulo: Editora Record, 2004).
25. John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Palgrave Macmillan, 1936).
26. Michal Kalecki, “Political Aspects of Full Employment,” Political Quarterly 1943.
27. Thomas Piketty, O Capital No Século XXI (Rio de Janeiro: Intrinseca, 2014).
28. Italo Calvino, As cidades Invisíveis – Le cittá invisibili (São Paulo: Biblioteca Folha, 2003).

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