Andy Blunden September 2010

Fictitious Capital

The on-going global financial crisis has led many commentators to remark that perhaps Marx was right[1] all along. But right about what exactly? Marx clearly regarded capitalism as a transient historical formation,[2] but he generally refrained from making predictions. However, he did devote a considerable amount of energy to exposing the shallow and self-deceptive economic science of the day, and things have not improved since.

There is one concept from his economic work in particular which is well worth the effort of understanding and bringing back into economic discourse: fictitious capital.[3] This is a concept which present day economists cannot accept, even in the face of the overnight disappearance of vast fortunes. However, it is the concept of fictitious capital which is key to understanding almost all of the economic crises since Marx’s day as well as the historical crisis of capitalism itself. But first it is necessary to sketch what Marx meant by capital and particularly the sense in which capital can be real, and not fictitious.

In the simplest, archetypal case, an employee works, say, a 40-hour week, and by the time they have completed a mere 10 hours, has already produced for their employer enough product (or more generally ‘added value’) to cover the cost of their own take-home pay. But they have to work a further 30 hours before they get paid. The product of this additional work the employer takes for themself,[4] distributes amongst shareholders, pays rent, interest on debt, taxes and so on. The value that the worker has, after tax, for their own living expenses and raising their children is called the necessary labour; the value that the employer divides up with his fellow parasites is called the surplus labour. [5] So the labour of the working class is divided into necessary labour time which is paid for in the form of wages, and surplus labour time which is unpaid. It is this unpaid labour which supports not only the lifestyle of the employers and their hangers-on, but the activity of all the money-lenders, insurance brokers, advertising people, middlemen, civil servants, landlords, policemen and so on, who produce nothing, but live off the workers’ backs. There is plenty of room for arguing about how long is that necessary labour time, what should be counted as necessary and what surplus, what labour is productive and what unproductive, but there is no denying the fact of necessary and surplus labour.[6]

So this is the normal life of capital: a portion of the population produces everything we need and are paid just enough to buy what they need to live. Everything else which goes on in society is paid for from the surplus extracted by employers who make their employees do unpaid labour, cash in the surplus, and distribute it around to fund everything from warfare to the opera to the lifestyle of the rich. The employers are able to get away with this because they are the owners of capital, which allows them to control access to means of production, land, materials and so on, pay wages and obtain credit. By continuously investing and reinvesting this capital to exploit workers, they are able to distribute portions of the surplus to their various hangers-on and at the same time expand their own capital by the portion of the surplus they are able to retain for their own enrichment. This is the basic and essential mechanism of capitalism. There is nothing fictitious about the capital accumulated in this way. But we still need to clarify exactly what capital is.

Like any form of value, capital is a claim to a certain portion of the social labour. It may take the form of money or title to goods which may be sold for money or means of production whose value can be recovered by embodying them in new products and sold. Alternatively, it can take the form of shares, bank balances, bonds and so on. What makes a sum of value capital is that it can be successively withdrawn from circulation (such as when goods and labour are purchased) and then enter circulation again as money (such as when the product is sold), having increased in value.[7] A hoard of money hidden under the floor boards is not capital because it does not move in and out of circulation; a rusty old factory is not capital because it cannot recover its value at a profit. Small amounts of money are generally not capital either, because they are not sufficient to profitably command a portion of social labour.

It needs to be noted that the form taken by a unit of capital or where it came from makes no difference. Money has no smell.[8] Just so long as a promissory note, lottery ticket or race horse can be exchanged for money and transformed into capital, it is capital. There is nothing about the form in which capital is materialised which makes it real or fictitious.

Capital, and all forms of value in fact, are not things as such, but social relations,[9] but social relations which are mediated by various kinds of artefact, which are in turn invested with ideal, or social, properties.[10] So a block of land is capital only insofar as it grants the owner command over a portion of the social labour and can be bought and sold at a profit. Land in feudal society was not capital in this sense, because land ownership was tied to social position and land could not be put into circulation. Being capital means being part of the whole cycle of capital, that’s all.[11]

To understand fictitious capital and how it arises we need to look at the struggles which take place over division of the social surplus. For example, Marx distinguished between absolute surplus value and relative surplus value. The capitalist extracts absolute surplus value by making the worker work longer hours, unpaid, so as to add to the amount of surplus they extract. The capitalist can gain relative surplus value if the amount of necessary labour is reduced. Necessary labour is necessary because it is what the employee must have to live, so in general, the capitalist cannot simply cut wages. Necessary labour time is reduced because of a general increase in the productivity of labour, with other workers producing the employees’ needs in a shorter period of time, leaving a larger proportion of the working week to be appropriated by the capitalist.[12]

Of course, all this doesn’t happen without a struggle; the value of the workers’ wages may be withered away by inflation, or simply cut, but workers also use their industrial strength to force up wages and/or reduce their hours of work.[13] The insight that workers, having no access to means of production other than by selling their labour on the market, will be paid the bare minimum needed to survive, dates back not to Marx but to Adam Smith.[14] But workers’ standard of living is not given by nature, but is the outcome of struggle. As the productivity of labour has increased, workers have resisted efforts to reduce their share of the total product and have been relatively successful. On the other side, every manner of parasite is continuously at work devising ways of grabbing their share of the surplus extracted by productive capitalists, who have appropriated surplus labour from productive workers. But the total amount of capital is always nothing but the total surplus labour. The only way to increase the total amount of capital is to make workers work longer, make them live on a smaller proportion of their labour or exploit more workers. If the productivity of labour increases, this merely signals an opportunity to reduce the proportion which must be paid to workers in their wages. Increases in the length of the working week, that is, absolute surplus value, increase the value of the total surplus. Such increases are relatively marginal because workers fiercely resist attempts to increase the length of the working week, understanding that wage increases can always be eroded by inflation, but the length of the working week is an absolute.

But just as there is a continual struggle between workers and their employers over the division of the total social product between the workers and capital, there is just as fierce a struggle going on amongst the parasitic classes over the division of the surplus, and it is in this struggle that we find the main source of fictitious capital.

Typically, fictitious capital is created through credit. Suppose our industrial capitalist sells his factory, puts the money in the bank, to retire and live off an interest rate similar to the income he got by exploiting unpaid labour. No problem here; this is just the same as if he had appointed a manager to run the factory; instead of holding a title to the factory, he holds title to a bank account. But the bank now holds the value of the whole factory and generates income from people such as the buyers of the factory. Still no problem. But - and here’s the rub - so long as the retired gentleman doesn’t ask for his money back, the bank can loan that money out again and again and again, and it keeps coming back to them. They can borrow from Peter to pay Paul. If the depositors all tried to withdraw their money, the whole thing would fall down, but in the meantime the bank is seen as creditworthy, and they can safely loan out many times the capital they have been entrusted with: capital extracted by exploitation of unpaid labour. But this multiplication of capital is fictitious.

Fictitious capital is capital which circulates through exchange with other units of capital, but cannot be exchanged for commodities because insufficient wealth in commodities exists.

The problem is this: no matter how many times that original capital is loaned out, it is the same amount of surplus labour which is being divided up amongst the parasites: the number of workers, times the number of hours of surplus labour extracted from each worker. But every time fictitious capital is injected into the capital market, the share of total capital owned by the industrialist is reduced. Putting it the other way around: the same number of workers have to support a larger and larger mass of capital (most of it fictitious) supporting a larger and larger mass of unproductive activity: wars, advertising, accounting and so on. This makes it harder and harder of course to make a profit by forcing workers to work beyond the point where they have produced the equivalent of their own needs. On the other hand, the growing mass of parasites become more and more sophisticated in dreaming up new ways of generating fictitious capital, grabbing for themselves a share of the total social product without having got their hands dirty by actually cracking the whip over productive workers and producing commodities that people really need.

But it is quite impossible to distinguish between one unit of capital which is real and another unit of capital which is fictitious. Leaving aside counterfeit and outright fraud, every new scheme worked out by hedge funds, futures traders and derivative brokers dilutes the whole social capital. The wealth of these scoundrels smells just the same as that of capitalists who are screwing surplus out of workers in sweatshops in Thailand.

Nonetheless, the generation of fictitious capital is necessary for the survival of capital. For example, the post WW2 boom was possible only thanks to international agreement to use the US dollar as a medium of international trade and authorise the US government to print as many dollars as necessary to rebuild capitalism in Europe. Like any pyramid scheme, capital requires the continual generation of new credit for its continued vitality. If you are robbing Peter to pay Paul, you always need more Peters. Not only to sustain more and more unproductive activity, but even for the reproduction of new capital equipment and material. Because workers have resisted working for smaller proportions of the value of their product and industrial capitalists have had to go to far flung corners of the globe to find sources of cheap labour, the only source of the necessary quantities of new capital is the fictitious capital conjured up out of nothing in the finance sector. As a result, finance capitalists gradually gain control of real production which, from their point of view, is useless; they can generate profits far more easily through stock market swindles. The problem is, of course, that it is only productive workers who create the pie in the first place, before anyone gets to take a slice of it.

The other problem with reliance on fictitious capital to keep the wheels of production in motion is that all kinds of fictitious capital creation are basically like pyramid schemes. Like the bank which loans out the same capital multiple times over, all goes well so long as the lenders don’t ask for their money back. They don’t ask for their money back if (1) they are receiving better dividends than they could get by using it themselves, (2) the people to whom the bank has lent the money are meeting their repayments and give no cause for concern and above all (3) the bank can be trusted, it is creditworthy, it cannot fail, it will always be there. But alas, as more and more fictitious capital is pumped out to keep the whole thing going, like pumping steroids and stimulants into an ageing athlete, soon or later overproduction of capital causes cracks to appear and very soon the whole thing collapses, just like every pyramid scheme sooner or later collapses. Every unit of capital demands its pound of flesh, but only so much hours of unpaid labour can be squeezed out of the workers. Because there is no way to say that one unit of capital is real and another fictitious, the collapse does not just affect the parasites who have been lining their pockets with monopoly money, but destroys all capital; even productive factories and farms close.

So like a juggler who has too many balls in the air, the system becomes more and more unstable, wholesale collapse can only be forestalled by the most creditworthy institutions stepping into the breach and accepting the role of guarantor. As the banking system collapsed in the US and around the world in 2008, collapse could only be forestalled by the US government stepping in as lender of last resort. The US government is regarded (ironically) as the most trustworthy institution in the world, from the point of view of finance capital. But does the US government have the capacity and will to raise the amount of real capital needed, in the only way a state can raise real capital, by taxing its own citizens? This is unlikely. It has its nuclear weapons and a powerful army and air force and a massive hoard of gold in Fort Knox. But actually these resources are economically quite ineffectual.

No other government has so far been to have pockets which are sufficiently deep. Iceland, Greece and others, faced financial bankruptcy. Is the confidence in the US government really justified? Compare the $700 billion the US put up to stem in the collapse in 2008. That’s 20% of the Federal Government’s annual spending, but the New York Stock Exchange turns over that amount in a mere 2 days! And the New York Stock Exchange itself is dwarfed by the quantity of money circulating in the various money markets, futures exchanges on so on. International trade in actual goods is only a fraction of one per cent of trade in the various forms of paper which make up finance capital. If there is a loss of confidence in the guarantor of absolute last resort, this fictitious capital which makes up the overwhelming majority of capital supported by the sweated labour of the workers of the world cannot be sustained.

But without that maelstrom of various forms of promissory note, no business can be done. Economic life would grind to a halt. The USA is still by far the largest market in the world, capable of buying and consuming everyone’s products. Every government has a stake in propping up the high-spending US consumers; dollars are held in reserve in every central bank in the world.

Governments do have to capacity to solve all manner of problems if they so decided, but the command over real capital they possess is absolutely minuscule alongside the fictitious capital which is in circulation. An economic solution would be impossible in the event of a crash. This ocean of fictitious capital is not only crushing productive labour, it is also stymying the power of governments to act within the framework of capitalism.

US government debt has been dangerously large since the Reagan administration cut taxes and increased government spending. By the end of Bush II’s reign, the US government debt was increasing at a rate of US$3.3 billion a day. Every US citizen owes a US$34,000 share of that debt. At a bare minimum, to withstand the current crisis, this debt will have to be reduced. But its growth has actually accelerated under Obama, because no class in American society is prepared to take a pay cut. But someone is going to have to pay. The entire history of capitalism attests to this.

Printing money is their only option, but that will be just the beginning of the end.

24 September 2010


1. For example, Gail Collins, New York Times, October 17 2008; Stuart Jeffries, The Guardian, October 21 2008.

2. Although usually cautious in his published work, in private letters Marx seemed to see the Revolution looming behind every crisis and war. His addresses on the Paris Commune are outstanding declarations of Marx's revolutionary optimism.

3. The main reference in Marx for fictitious capital is Chapter 32 of Volume III of Capital.

4. Workers distribute a lot of the surplus themselves through indirect taxes and all kind of imposts included in the cost of the subsistence goods they buy.

5. See Capital Volume I, chapter 9.

6. A wide range of questions are being overlooked here, because we are interested in fictitious capital alone.

7. See Capital, Volume I, chapter 4.

8. Non olet. Capital, Volume I, chapter 3, 2.

9. Capital, Volume I, chapter 33.

10. Capital, Volume I, chapter 1.

11. Of course if a banknote turns out to be a counterfeit or a container load of computers prove to be obsolete, we could say that its value is fictitious, but this is not what we mean by fictitious capital.

12. Marx closely followed the effect of the repeal of the British Corn Laws in 1846 which exposed British farmers to foreign competition. Industrialists had successfully campaigned for the repeal because cheap foreign imports reduced workers' cost of living allowed the industrialists to reduce wages and increase the surplus extracted by industrial capital.

13. In his lecture to members of the International Workingmen's Association, "Value Price and Profit," MECW Volume 20, pp. 101-149, amply demonstrates that the workers had the capacity to improve wages and hours, and that wages and hours were not determined by any kind of "iron laws."

14. See "Wealth of Nations," Book I, chapter 8.