The culture of financialisation

Fictitious capital and the rate of profit

Arthur Bough takes issue with Chris Gray

There are a number of fundamental errors in Chris Gray’s article concerning fictitious capital and the current economic situation (‘Vanquishing the demons’, June 25).

First of all, this is not a recession - the economy in the UK, US, China and Japan is growing, the core EU countries are likely to return to growth in the coming months and the world economy itself is expanding. If you want to understand the situation, it is first necessary to actually tell yourself the truth about the conditions you are analysing. In fact, the fundamental errors contained in Chris’s article amount to a repetition of the very fallacies perpetrated by the bourgeois economists that Marx was criticising.

Chris’s description of fictitious capital from the beginning seems to equate it with gambling and speculation, but that is to fundamentally misunderstand its nature. Fictitious capital, as indicated by the quote Chris gives from Marx, certainly does become the “object of gambling on the stock exchange”,but it is not at all this fact that distinguishes it as fictitious capital, as Marx and Engels set out in their detailed analysis of fictitious capital in Capital Vol 3. I have given a summary of that analysis elsewhere.[1]

Fictitious capital is any asset that appears to have the property of capital as self-expanding value, but in fact is only able to expand by attracting the payment of interest. In other words, it is only able to expand because it has a claim on the surplus value produced elsewhere by productive capital. So a loan made by a bank to a firm to buy a machine is fictitious capital, in the shape of the loan agreement held by the bank.

There is nothing any more speculative in the nature of this fictitious capital, in the shape of the loan, than there is in the investment of the actual productive capital. Payment of interest on the loan is a function of the success of the productive capital in realising a surplus value. The nature of the loan as fictitious capital resides not in the fact that it is speculative, but in the fact that the loan itself is not self-expanding value, is not capital, but represents only a claim on the surplus value produced by the real capital.

Chris refers to the state debt in this respect, but in Capital Vol 3 Marx makes clear that, in fact, the state debt is not just fictitious capital, but doubly fictitious. In other words, a government bond, held by a bank, company or individual, is fictitious capital for the reason set out above - that is that it is not real capital, it does not self-expand in value, but only attracts interest. However, unlike a bond, a share or a loan, used by a firm to buy real, productive capital, which does produce surplus value, from which the interest can be paid, the purpose to which the money obtained by the government from the sale of the bond is put does not constitute capital either!

In this respect, it is like a mortgage. The mortgage held by the bank is fictitious capital. It has no potential to be self-expanding value. It only attracts interest from the borrower. But the purpose to which the borrower puts the borrowed money is not capital either. The money used in buying a house goes simply to fund consumption - it constitutes revenue, not capital. The house has no potential to be self-expanding value. The buyer of the house is only able to pay this interest by obtaining revenue to do so from elsewhere, and one way or another that amounts to a deduction from surplus value. For example, a worker, in order to pay the interest on their mortgage, must have that cost reflected in the value of labour-power/wages - and if wages rise surplus value falls.

Similarly, the government obtains no surplus value from the roads and other purposes to which the state puts the borrowed money. It is only able to pay the interest on these bonds by levying taxes, which themselves are a deduction from surplus value.

A share issued by a company is no different, in this sense, to a loan undertaken by the company. In all these cases, the lenders of the money-capital - be it the bank, the shareholder or bondholder - stand as creditors in relation to the company. This is the difference between the socialised capital of the joint stock company and the monopoly of private capital that preceded it, as Marx describes, again in Capital Vol 3. The owner of the productive capital is the company itself. The individual shareholder is no more able to go to the company and stake their claim to this or that machine or piece of material than the sovereign bondholder is able to go and take possession of a road! The shareholder or bondholder is merely a provider of money-capital, and as such is entitled to interest on the money-capital they loan out.

It is not speculation that determines the nature of fictitious capital, but, for the reasons Marx and Engels describe, fictitious capital lends itself to being used for speculation. The owners of shares and bonds are thereby able to gamble that the market prices of these assets may rise or fall, providing the owner of the asset not with a profit, but with a capital gain. Moreover, as Engels describes in Capital Vol 3, in his and Marx’s analysis of fictitious capital, once loanable money-capital takes the form of shares and other financial assets, these too can become the basis of other financial assets. Not only does the fictitious capital owned by a bank in the form of shares and bonds form part of the bank capital, upon which further loans and further fictitious capital is erected, but, as Engels describes, unit trusts and other such funds are developed, in which the shares and bonds of a range of companies are aggregated, and these funds are then divided into units, which act like shares and are then traded in financial markets. In the last 20 years, this development of derivative products, whereby one layer of fictitious capital becomes the basis of further layers built on top of it, has grown in mammoth proportions, but the genesis of it was discussed by Engels in Capital Vol 3.


Chris also makes a further fundamental error by confusing money and capital, and credit and debt. In doing so, he repeats the fallacies of bourgeois economists like Lord Overstone and Thomas Tooke, against whom Marx was polemicising in Capital Vol 3 in his analysis of credit and money. Marx points out that, because banks come to play a central role, the bankers themselves mistakenly come to see all the money they advance as capital. But it is not capital.

I find it hard to understand why Chris believes that “Marx does not explore the relationship between the credit system and economic cycles in general”. Firstly, Chris seems to confuse here credit with the loaning of money-capital. Secondly, a huge amount of the analysis undertaken by Marx and Engels in chapters 24-34 of Vol 3 is precisely about the role of credit in the business cycle, and the interaction of credit with the demand for money and money-capital on the interest rate cycle.

So, for example, Marx sets out that when the economy is enjoying a period of prosperity, businesses are prepared to extend commercial credit. Firm A, which sells to firm B £1,000 of commodities, agrees to accept payment in three months time and a bill of exchange is accordingly drawn up. But, as Marx and Engels describe, this bill of exchange is not fictitious capital, in the way that a loan from a bank to a firm to buy a machine is. The bill of exchange, as commercial credit, acts merely as money. Its exchange-value, just as with a bank note, or a precious metal coin, is the equivalent form of value to the £1,000 of commodities that A has sold to B. It acts merely as a means of circulation.

In fact, when there is this kind of prosperity, the very fact that such credit is given on an extended scale acts to cut interest rates, because it reduces the demand for actual money in circulation. If B sells later £1,000 of commodities to A, drawing up a bill of exchange accordingly, then these two will cancel each other out, so that no money is required either in circulation or as means of payment. But, as Marx and Engels describe, even where these various credit claims do not totally cancel each other out, the only money that needs to be used for payment is that which is left over as the balance. Not only does less money have to be in general circulation, but the amount of cash that firms need to retain in their bank accounts is thereby reduced, at least in proportion to the volume of trade, and so, as Marx sets out, during such periods the rate of interest tends to fall.

The banks and institutions that discount the bills of exchange are able to obtain a lower commission because firms then have less pressure to have their bills discounted. But it is partly the fact that the banks provide money to businesses by discounting the bills, and obtaining a commission in doing so, which deludes them into a belief that what they have provided to the firm is money-capital, when, in fact, all they have done is to swap exchange value in the shape of the bill of exchange for exchange value in the shape of money. This is not, says Marx, an advance, but a straightforward sale.

The same is true, according to Engels, when a bank lends money to a firm in return for collateral. In that case the firm already had capital, and all that the bank has done is to exchange possession of capital in one form - money-capital - for possession of capital in another form: the collateral. Debt as fictitious capital only arises where money-capital itself is loaned out, without collateral being provided in exchange: in other words, where the lender does not obtain temporary possession of capital of an equal value, but obtains only a claim to a share of future revenue - for example, interest on a loan, coupon on a bond, or dividends on shares. Debt in this form represents an advance of money-capital, whereas credit represents only an exchange of money for commodities.

Contrary to what Chris says, Marx and Engels, particularly in chapter 25, give a lengthy and detailed analysis of the role of credit in the trade cycle, and its role in crises. They set out the way various frauds were perpetrated, so that businesses both in England and India were able to obtain advances of money against shipments, which was then used for speculative purposes, particularly to buy railway shares, as part of the speculative frenzy. In fact, as I have pointed out in my book,[2] there are striking similarities between the financial crisis of 1847, analysed by Marx and Engels, and the financial crisis of 2008.

Rate of profit

Chris writes:

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.

But this is again fundamentally wrong, although he is not the only one to put forward this fallacy. The rising organic composition of capital that leads to a tendency for the rate of profit to fall is not equivalent to a rise in the quantity or value of fixed capital (machinery) compared to labour-power. Quite the contrary: Marx makes clear that the tendency is for the value of both the fixed capital and labour-power to decline as a proportion of the value of the total product.

The reason for the rising organic composition of capital is rather due to the much higher mass of material that this fixed capital and labour-power processes, and which is itself the manifestation of the higher productivity that the new machinery has brought about. The higher productivity arises precisely because each new machine replaces several older machines, and thereby reduces the mass and value of the fixed capital relative to the value of output.

Chris then says: “Eventually, the falling rate of profit will exert enough influence to stop the mass of profit rising.” But, not only does Marx not say this: he says the exact opposite. This is actually the claim made by Ricardo, which led him to worry about the potential future collapse of capitalism. It is also the view put forward by Malthus. But, Marx spends considerable time polemicising against this view. He describes in Capital Vol 3 how a concomitant of the falling rate of profit is precisely an increase in the mass of profit. In chapter 17 of Theories of surplus value Marx further demolishes this idea put forward by Ricardo about the ultimate decline of the mass of profit!

There are other aspects of Chris’s article with which I would want to take issue, but for now I have confined myself to the actual misstatements of Marx’s theory contained within it.


[1]. http://boffyblog.blogspot.co.uk/2014/12/fictitious-capital-part-1.html.

[2]. www.amazon.co.uk/gp/product/B00MNHZCLU?*Version*=1&*entries*=0.