Egoavil: “Fictitious Capital and the New-Fangled Schemes of Public Credit ”
This was an article on the radical perspectives website which discusses Carl Marx’s theory of fictitious capital. As we all know Carl Marx was very critical of Capitalism and how he believed it only produces class struggles and inequalities. In this particular article, Michael Egoavil discusses Marx’s views on a particular aspect of Capitalism, securities, and why he felt it only produced fictitious capital.
In the third volume of Capital, Marx discusses what he calls “fictitious capital” – what we know as “securities.” Essentially these are titles to streams of income, which are treated as commodities and bought and sold on financial markets. There are significant differences between types of securities. Some represent corporate debts, as with bonds, some represent consumer debts, as with mortgage backed securities, and others represent capital investments, as with shares of stock. But the common aspect of all these different securities is that they all give their owners a right to a stream of income, hopefully leaving them with more money than they started off with. The security owner therefore looks upon his security as capital.
Securities are basically instruments representing financial value. Although you aren’t really purchasing real capital, you are still purchasing some form of value in the form of a legal title. You are only given claim on a stream of income and aren’t producing income yourself. This is what is meant by it being “fictitious”. Also, money never passes hands. When these legal entities are sold, you are only receiving claim to income that exist elsewhere.
Marx gives his three reasons for calling securities fictitious capital:
The first reason is specific to shares of stock. With the creation of shares of stock, it appears as if capital has doubled; as if capital is not only the real capital that firms possess, but also the property titles created to represent that capital. So for Marx, shares of stock are fictitious capital because while they merely represent real capital, they also seem to multiply that capital.
So stock allows the creation of additional capital that may not necessarily have any value. So for Marx, you are essentially taking something that doesn’t represent immediate value, and then continuously manipulating it to “increase” its value.
The second reason Marx calls securities “fictitious capital” is that their value can fluctuate in ways that are entirely independent of the real capital that they represent. A change in interest rates, a rise or fall in profits, the inability of a borrower to repay debt – all of these things lead to a change in the market-value of fictitious capital without at all effecting the value of a firm’s real capital – the cash the firm has on hand, its machinery, buildings, and so forth. The value of all those things can remain constant while the value of a firm’s stocks and bonds rise or fall.
So again, with this additional value created from securities, only the “fictitious” aspect of the value can be drastically changed and manipulated. The real value a firm or corporation possesses will remain unchanged. And this is a major aspect of securities, as markets are created. With Securities there exist both primary and secondary markets, where in the primary markets money is received by the issuer from investors in initial public offerings (this is where stock is issued), and in secondary markets simple assets exchange hands between investors.
And lastly, a security may never have represented any capital at all. Take the case of residential mortgage-backed securities. The income that accrues to their holder is derived from the repayment of a home loan. The home was not capital for the homebuyer – he did not create surplus-value with it. It was just a dwelling. So the initial sum of money advanced was never used as capital at all, although the holder of the security views it as his “capital”.
So you can see how securities gives the illusion of possessing actual capital and value. These particular types of securities are backed by the mortgage payments on the home and are offered as alternatives to more traditional forms of debt and equity financing. What this also does is create an additional market for these types of securities.
Here’s an illustration showing how it all works:
October 26th, 2009 at 7:30 am
Evidently someone who knows what they are talking about at last, great post!