Vanquishing the demons

What is the role of fictitious capital in the current recession? Chris Gray examines the connection and proposes a series of economic demands

The English 19th century economic journalist, Walter Bagehot, once wrote:

… at particular times a great deal of stupid people have a great deal of stupid money … At intervals … the money of these people - the blind capital, as we call it, of the country - is particularly large and craving: it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’.1

In this connection Martin Wolf asks pertinently:

So why are markets unstable and why does that instability make crises endemic (and epidemic) features of free market finance? The answer comes from the links between debt, money and credit.2

Marx refers to fictitious capital directly in Theories of surplus value. He contrasts it with productive capital, describing it as the “object of gambling on the stock exchange” and equating it to “the selling and buying of entitlement to a certain part of the annual tax revenue”.3 The Moscow editors explain in a note that

By fictitious capital Marx here means the capital of the national debt, which is brought into being by loans (of the bourgeois-landowner state) and never intended to be invested as capital and on which creditors are paid interest.4

It seems legitimate to extend the meaning of the phrase to include titles to enterprise revenue which are not realised in money because the revenue fails to materialise: Marx in effect does this in the course of his analysis of the role of credit in the process of metamorphoses of capital. He writes

Titles of ownership to public works, railways, mines, etc are indeed … titles to real capital. But they do not place this capital at one’s disposal. It is not subject to withdrawal. They merely convey legal claims to a portion of the surplus value to be produced by it. But these titles likewise become paper duplicates of real capital ... They come to nominally represent non-existent capital.5

Credit and crisis

Credit, then, plays a functional role in the overall production process:

Credit … promotes here: (1) as far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of related and dovetailing spheres of production; (2) as far as the merchants are concerned, the transportation and transition of commodities from one person to another until their definite sale for money or their exchange for other commodities,6

So everything carries on fine and dandy until a sufficient number of debtors find it impossible to service their debts. Hence, as Marx asserts,

the credit system accelerates the material development of the productive forces and the establishment of the world market … At the same time credit accelerates the violent eruptions of this contradiction - crises - and thereby the elements of disintegration of the old mode of production.7

It would appear - at least in the more accessible parts of his writings on political economy - that Marx does not explore the relationship between the credit system and economic cycles in general apart from what has been said above. Later writers are forced to fill the gap. The question is of considerable contemporary interest, given the explosive development of investment assets following the banking deregulation process of the late 20th century.

This is precisely the point at which a recent work by Michael Roberts becomes highly relevant. For Roberts, capitalist competition drives capitalists to find new ways of raising profits. Once they have exhausted the exploitation of the workforce, they can only raise profit by using new labour-saving forms of technology. That requires extra capital invested in machinery and plant over labour. This rising proportion (that Marx called the organic composition of capital) begins to drive the rate of profit down, just as the mass or overall total of profit rises. Eventually, the falling rate of profit will exert enough influence to stop the mass of profit rising.

Michael Roberts writes:

That process began in earnest in 1997. Eventually the hi-tech boom of the 1990s bust in a stock market collapse of 2000 and the mass of profit stopped rising and there was a mild recession. But the recession was only mild because capitalism tried to keep the system going by the expansion of credit into unproductive areas like finance and property. The boom in property provided a cushion against the collapse of productive forces. It even reversed the fall in profitability for a while, from 2002 to 2006. Employment and economic growth also picked up.

But to achieve this, there had to be a huge expansion of money credit, indeed the largest in capitalist history. Credit is money supply ..., debt ... and stock market values ... When this expands way beyond the accumulation of real capital, it is fictitious. The prices of shares, bonds and houses do not match the value appropriated by capitalists from the sale of things and services produced by workers in factories, offices and transport facilities, namely profits.

So, just as the rate of profit started to fall, fictitious capital exploded.8

Roberts then goes on to mention the extraordinary growth of “derivative contracts”9 which fuelled this phenomenon.

All this is enormously important because if the crisis is merely a financial phenomenon, as bourgeois commentators assert, then measures of a financial nature will suffice to extricate us from it, whereas if there are deeper underlying causes then such measures, even if necessary, may not suffice.

In fact, if we look at the 2008-09 crisis we surely find a plurality of factors at work. Michael Roberts asserts that this latest crisis “was a combination of what Marx called the most important law of motion of the capitalist system [the long-run tendency of the rate of profit to fall] and the new forms of anarchic excess in capitalist expansion [innovatory derivatives]”.10


This suggests that reform of the system in the latter area would go some way to mitigating the damage inherent in it, without putting an end to such damage. Such a conclusion is clearly music to the ears of those economists who remain wedded to the approach associated with the august name of John Maynard Keynes. Roberts is scathing about these people:

They saw no crisis coming - on the contrary, credit was accelerating, consumers were borrowing and spending up to 2007. Indeed all was well. Now the great recession has come, they call for more credit and more government spending like repetitious parrots.11

Perhaps the chief parrot is one Paul Krugman, author of End this depression now! The title, of course, assumes that the depression can be consciously ended by means of government economic policy. This is plausible, since depressions do end: the question is whether we can get out of this one by adopting Paul Krugman’s approach and policies.

Krugman notes that the tried and tested response to these sorts of problems is ‘quantitative easing’: ie, state-driven expansion of the money supply. In his view,

It worked spectacularly after the severe recession of 1981-82, which the Fed was able to turn within a few months into a rapid economic recovery … It worked, albeit more slowly and more hesitantly, after the 1990-91 and 2001 recession. But it didn’t work this time round.12

The policy combines with low interest rates, but there is a limit to how low these can fall - a zero rate of interest.

Unfortunately, a zero rate turned out not to be low enough, because the bursting of the housing bubble had done so much damage. Consumer spending remained weak, housing stayed flat on its back, business investment was low, because why expand without strong sales? And unemployment remained disastrously high.

And that’s the liquidity trap: it’s what happens when zero isn’t low enough, when the Fed has saturated the economy with liquidity to such an extent that there’s no cost to holding more cash, yet overall demand remains low.13

As James Rickards explains in Currency wars (London 2012), the famous Keynesian “multiplier” is not working - rather the reverse. Unfortunately Rickards does not elucidate why. But never mind, says Paul Krugman: what’s needed is government spending.

What sort of government spending? Well, for a start, says Paul, there could be “a stimulus of $300 billion per year that could be accomplished simply by providing enough aid to states and localities to let them reverse their recent budget cuts”.14 He goes on: “That said, there should be new projects too. They don’t have to be visionary projects like ultra-high-speed rail; they can be mainly prosaic investments in roads, rail upgrades, water systems, and so on.”15 More aid for the unemployed would also be a good idea. Etc, etc.

Most of this is very laudable, and we would not be in principle opposed, but, if our analysis is right, it will only count as a temporary stop-gap. One is reminded of Rosa Luxemburg’s favourite ‘myth of Sisyphus’, in which the Greek hero rolls a huge boulder nearly to the top of a slope, only for it to slip from his grasp and plunge all the way down again.

It is interesting to compare this approach with Michael Roberts. According to him, balancing the books should not be the main priority. Faster economic growth, coupled with a redistribution of resources to raise real incomes and create proper public investment should be the main task. If the capitalist sector of the economy cannot do this - and this is clearly the case - it needs to be replaced.16

Another bourgeois economist who proffers advice is Nouriel Roubini. Roubini is a rare bird among such people, having predicted the 2007-09 crash. He appears to differ from Paul Krugman, however, in giving more credence to the policy stance of the so-called ‘Austrian School’ (associated with messrs Von Mises, Von Hayek and Schumpeter), with their espousal of the ostensible curative powers of the slump in dealing with surplus capital, a process classically described by Joseph Schumpeter as “creative destruction”. For Roubini

Financial institutions that no amount of liquidity or regulatory forbearance can save remain in operation. Like the infamous zombie banks that became a symbol of Japan’s Lost Decade, these firms must go bankrupt and, the sooner they do, the better.17

One can be forgiven for regarding this as indiscriminate Armageddon: when numerous institutions are sailing close to the wind, why should these actual victims suffer rather than others? Indeed, why should they suffer at all? A major rule of welfare economics should surely be that factors of production should be preserved in operation as far as possible.

Having said that, we should note that Roubini has a number of sensible suggestions. First, we have the ‘bad bank’ scenario, called Grant Street National Bank, into which the Mellon Bank’s bad debts were channelled. This approach, of course, has been adopted in Ireland with the National Asset Management Agency. Despite the difficulties involved here, Roubini, by urging this approach, at least shows a willingness to advocate intervention. He also acknowledges the need to put a ceiling on bankers’ bonuses and is not averse to banning collateral debt obligations (CDOs - the technique whereby good and bad loans are parcelled up together and sold on). He is for an increase in banks’ capital-asset ratios and favours the return of the principle of the US 1933 Glass-Steagall Act, which separated retail banking from investment banking - but in a tougher form.

In addition to all this regulation, however, Roubini seems to come down in the end outside the Keynesian camp by approving action by the US authorities in raising taxes and cutting spending where necessary. But maybe the conditions are now “post-Keynesian”.18

Economic programme

How, then, are we to vanquish the demons of speculative (‘fictitious’) capital?

This final section must remain, in a sense, utopian, as in order to deal with these problems - just as, effectively, to help the new Greek government rid Greece of its absurd mountain of debt - we need state power in more than one (European at least) country, and we do not as yet hold power in any. Nonetheless, it may be useful to outline the sort of programme we would attempt to put in place internationally if we were in a position to do so. So here goes:

1. A viable agreement on climate change, to keep the planet’s temperature increase to within 2 degrees Centigrade - or, better still, one degree in line with Joseph Hansen’s recommendations.

2. A basic income for every citizen (with the necessary negotiable transfer rights between countries).

3. A short-term injection of cash direct into the bank accounts of individual taxpayers, as proposed by Martin Wolf.19

4. Investment in renewable energy resources worldwide.

5. International action against unemployment: eg, via public works.

6. Action against tax havens (including the City of London).

7. Open the books of all major institutions.

8. Ban CDOs.

9. Cap bonus payments to CEOs and bank staff.

10. Separate investment banking from retail banking.

11. Reduce the leverage ration (the debt-equity ratio) of banks to 10:1.

12. Simplify the banking rules laid down by the Basel Committee on Banking Supervision (dealing with bank lending).

13. Special measures for the euro zone, including a Constituent Assembly to draft a new federal constitution, a conference on debt reduction, a banking union, and the issue of Eurobonds.20

14. Reform of the International Monetary Fund, World Bank and World Trade Organisation.

Implementation of the above programme will not solve all the various problems we face: most importantly, it will not by itself abolish the capitalist mode of production worldwide, which is a necessity, but it will, if enforceable, enable us to move forward to that highly desirable goal.


1. Quoted by Martin Wolf in The shifts and the shocks London 2014, p78.

2. Ibid p119.

3. K Marx Theories of surplus value Vol 3, p111.

4. Ibid p568.

5. My emphasis, K Marx Capital Vol 3, Moscow 1976, p466.

6. Ibid p471.

7. Ibid p432.

8. M Roberts The great recession - profit cycles, economic crisis: a Marxist review London 2009, pp179-80. See his graph on p180.

9. Ibid pp180-81.

10. Ibid p236.

11. Ibid pp278-79.

12. P Krugman End this depression now! New York 2012, p31.

13. Ibid pp33-34.

14. Ibid pp214-15.

15. Ibid p215.

16. See Labour Briefing February 2015.

17. N Roubini Crisis economics London 2011, p156.

18. Ibid p251.

19. M Wolf The shifts and the shocks London 2014, p330.

20. See M Wolf The shifts and the shocks London 2014, pp313-17.