by ISMAEL HOSSEIN-ZADEH
While paying homage to Marx for his profound understanding of “the laws of motion of the capitalist mode of production,” most contemporary economists argue that, nonetheless, his economic analysis cannot be of much service when it comes to the study of modern banking and big finance, since these are relatively recent, post-Marx developments. I will argue in this essay that, in fact, a careful reading of his work on “fictitious capital” reveals keen insights into a better understanding of the instabilities of today’s financial markets [1].
It is true that his discussions of fictitious capital remained brief and fragmented. Nonetheless, what he wrote (in broad outlines) on the distinction between “money capital and real capital,” between productive and unproductive labor, and between speculative and real investment can be of significant interest in relations to the rise of finance capital and its destabilizing effects on the advanced market economies of our time [2].
The Marxian theory of value, as the product of human labor generated in the process of production, and its twin theory of surplus value—value over and above the cost of production—as the source of profit, interest and rental incomes implies that, to have a viable economy, the monetary sum of these various types of incomes cannot deviate much from the total surplus value created in the process of production. In other words, the overall sum of money incomes and/or profits in an economy is limited, ultimately, by the total amount of real values produced in that economy.
Policy implications of this theory in terms of what really sustains an economy are enormous, as it can readily alert policy makers to the dangers of an impending economic crisis when deviations of monetary magnitudes from real-value magnitudes tend to become too big and, therefore, unsustainable.
This stands in sharp contrast to the mainstream/neoclassical economic theory that, instead of human labor, views ownership and/or management as sources of profits, or economic surplus. Accordingly, there are no systemic limits to the amounts of income/profits made by “smart” capitalist managers and financial “experts”: it all depends on how creative they are, including all sorts of clever “financial innovations” that could create paper or electronic wealth out of thin air, without being limited by any underlying real values.
Not surprisingly, most mainstream economists did not see a problem with the astronomical growth of fictitious capital (relative to industrial capital) in the immediate period preceding the 2008 financial implosion. Indeed, not long before the market crash, these economists were cheerfully predicting that there would be no more major crisis of capitalism because “creative financial innovations” had essentially insured the market against risk, uncertainty and crash.
The Marxian theory of financial instability (and of economic crisis in general) goes beyond simply blaming either the “irrational behavior of economic agents,” as neoliberal economists do, or “insufficient government regulations,” as Keynesian economists do. Instead, it focuses on the built-in dynamics of the capitalist system that fosters both the behavior of the market agents and the policies of governments. It views, for example, the 2008 financial meltdown as the logical outcome of the over-accumulation of the fictitious finance capital, relative to the aggregate amount of surplus value produced by labor in the process of production.
Instead of simply blaming “evil” Republicans or “neoliberal capitalism,” as many left, liberal and Keynesian economists do [3], it focuses on the dynamics of “capital as self-expanding value,” as Marx put it, that not only created the huge financial bubble that imploded in 2008, but also subverted public policy in the face of such an obviously unsustainable bubble. In other words, it views public policy not simply as an administrative or technical matter but, more importantly, as a deeply political affair that is organically intertwined with the class nature of the capitalist state, which has increasingly become dominated by powerful financial interests.
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