When wealth destroys wealth
Inverse capitalism and its limits
by Ernst Lohoff
[This article published in 2015 is translated from the German on the Internet, https://www.krisis.org/2015/wenn-reichtum-reichtum-vernichtet/.]
In the social science discussion, the term financial market capitalism has become established as a term for the current stage of development of our economic system. While until the 1970s capital accumulation meant above all the increase of capital employed in the production of goods, today it is primarily the accelerated accumulation of financial securities that is the main focus of this discussion. Karl Marx already distinguished between fictitious capital, which increases our financial wealth in an abstract way, and functioning capital, which increases our sensual-material wealth in a concrete way. With the triumphant advance of fictitious capital, the extinction of sensual-material wealth, i.e. our basis of life, is foreseeable.
An analysis of capitalism in its current form must take into account the rise of the financial industry as the real economic engine. But what is the function and character of capital market goods, and why were the money and capital markets able to become the actual engine of the economy?
In the search for an answer to these questions, hardly anyone would think of Marx's theory. According to popular understanding, the critique of political economy attributes all capital formation to the use of living labor and regards the financial market activity as a zero-sum game in which only existing wealth is redistributed. However, this view falls far short of the insights that Marx actually developed in his major theoretical work. In Capital, it is by no means assumed that capital formation must always be based on prior value production. Because Marx systematically distinguishes between sensual-material wealth on the one hand and abstract wealth on the other, he can differentiate conceptually between two basic types of capital of very different origins: In the case of "functioning capital" (industrial capital and merchant capital), its new formation actually presupposes a real value production through the expenditure of labor in the production of goods and services. In the form of "fictitious capital", on the other hand, which consists of financial market securities, i.e. tradable property titles, the prospect of value still to be produced, of future value that may never be produced, is transformed into capital in advance.
The emergence of fictitious capital and the associated inversion (reversal) in the temporal sequence of value and capital formation can only be understood if one takes a look at the special relationship that buyers and sellers enter into with each other on the capital markets. This is fundamentally different from the relationship on the goods markets, particularly in the following respects: The sellers of cars or pencils give their goods away once and for all and leave the use of the utility value solely to the buyers. They now drive around in their cars or chew on their pencils, while the sellers can dispose of the money they have received in return. When a property title is sold, however, something completely different happens. The buyer gives his money to the seller, but in no way loses the right to it. The same amount of money is used twice.
Marx explained this mechanism using the example of the loan: the borrower comes into possession of a certain sum of money by making a commitment to the lender to repay this sum at a later date and to pay interest for the term of the loan. With this loan the borrower can now make investments, purchase goods, etc. However, the lender does not renounce the practical value of his money. On the contrary, it is precisely by allowing another person to use it that he himself uses it. More precisely, he uses its utility value as potential capital, because he only gives his money away to get it back more often. Thus, according to Marx, "the same sum of money (...) becomes capital for two people". Thanks to the double use of the utility value of this sum of money, its exchange value also exists twice. Once as the initial sum of money transferred to the borrower, once as the lender's claim to repayment and interest, as anticipation of value not yet created.
The creation of fictitious capital takes on a new quality as soon as the monetary claims themselves take on a commodity form (shares, debt instruments, derivatives, etc.) and become arbitrarily transferable. In this case, the mirror image of the initial capital participates in the circulation of goods and capital in the same way as the original money: for example, a share as fictitious capital represents an important part of the total economic value of the company, not only for the current owner, but also for the overall economic performance.
The doubling of initial capital has become a social reality.
During its lifetime, fictitious capital is not a bit less social reality than functioning capital. The attribute fictitious deserves it for another reason: in contrast to that of the functioning capital, its existence is ghostly-fugitive. Functioning capital can also disappear from the scene, for example when companies go bankrupt. But as long as the functioning capital is exploited, it is imperishable: its concrete form then goes the way of all flesh: money is invested, machines and raw materials are consumed, the goods produced are sold. But the represented value lives on in this constant change of form. Fictitious capital, on the other hand, is capital with an imprinted expiration date. Dissolving back into thin air is part of its existence. Take a loan, for example. Once the loan has been repaid, the lender has regained the money he lent out, along with interest income; the mirror image, and thus the additional social capital, is thus extinguished. The realization of the fictitious capital always means its definitive end.
Faster into the crisis
Capital is just another word for the transformation of money into more money. Capital that does not grow is not capital and has forfeited its right to exist. This applies to each individual capital as well as to the total capital of the system. As soon as the total capital temporarily interrupts its growth, the world economy falls into crisis.
The increase in total capital, which is indispensable for the capitalist mode of production, can be achieved in two ways: either by increasing the actual production of value or by increasing the anticipation of value. From the beginnings of capitalist development until the 1970s, the increase of functioning capital based on the use of human labour was the main vehicle of total accumulation. In the wake of the third industrial revolution, living labour was pushed out of the production process across all sectors, thus blocking this path once and for all. A new basis for capital accumulation was therefore needed, and this was found in the accelerated creation of fictitious capital. Since the 1980s, financial industrial production (the production of more and more property titles), i.e. paradoxically the financial superstructure, has taken over the role of "basic industry".
With the transition to inverse capitalism, a new scope for development has opened up for the ruling economy. However, capitalism based on the pre-capitalization of future value production reaches its inner barrier much faster than classical capitalism based on mass labor exploitation. Its life expectancy is limited to a few decades for one reason in particular: compared to the key industries of classical capitalism, financial-industrial production is subject to an increased compulsion to grow due to the fleeting nature of fictitious capital formation. As long as functioning capital kept the capitalist machine as a whole running, the growth industries only had to ensure an increase in value production compared to the previous period. But in order for fictitious capital to keep the entire accumulation process going, the reissuance of property titles must also ensure the renewal of the capital stock of society as a whole: On the one hand, the place of the expiring titles of ownership must be newly occupied, on the other hand a considerable part of the capital generated by the financial industry and flowing into the real economy has been spent for consumption; this applies, among other things, to credit-financed government expenditure and private consumer loans. The monetary capital consumed in this way must be replaced again and again by a renewed anticipation of future value. The longer capitalism processes itself in this way, the faster the masses of anticipated and already burned value production grow, which must be carried along as ballast.
In addition there is something else: with the production of fictitious capital, the formation of capital emancipates itself from the previous production of value, but this does not mean that all reference to the real economy is cut off. The systematic anticipation of future wealth can only be maintained if there are (or are being constructed) certain sources of hope outside the financial sphere on which monetary expectations of the future can be reasonably credibly directed. For example, the stock market boom of the 1990s was based on the idea that sooner or later huge profits could be made in the then emerging IT sector, and the sub-prime boom of the 1990s was based on the illusion of ever-increasing real estate prices.
This dependence on real economic hope represents the Achilles' heel of inverse capitalism. The supply of real economic reference points to which hopes of returns can be attached is by no means skyrocketing.
After the crash of 2008, the dynamic of fictitious capital creation has once again taken off and is currently (in spring 2015) running at full speed. In April 2015, the DAX reached a new all-time high, and one month later the DOW Jones Index followed suit. However, when one considers the conditions of this boom, it documents how financial market-driven capitalism is coming ever closer to its historical barrier. The earlier boom phases - think of the New Economy era - were still supported by the inner-private production of fictitious capital. The current upswing, on the other hand, is based on the highly active role of central banks in the new production of fictitious capital. They are buying up distressed government securities on a large scale and thus taking over the devaluation needs originally accumulated by the private banks; above all, however, they have been pressing fresh fictitious capital into the capital markets for years with their negative interest rate policy. Under the label of combating deflation, monetary policy today has no other content than to create speculative bubbles with the means of money creation, in a kind of public private partnership. That these will burst sooner or later is as certain as the Amen in the Church.
Sacrifice of our livelihoods
After every major crash, new real economic reference points are needed to get the production of fictitious capital back on track. When, after the collapse of autumn 1987, the short golden age of inverse capitalism dawned, the IT sector, with its then brand-new products and services that had become omnipresent, moved to the centre of the capitalisation of supposed or actual profit prospects. There are no longer any comparable shining heroes in sight. Of all the processes in the real economy, the capitalization of natural resources is still the one most likely to arouse high expectations of returns. One example of this is gene patents. The transfer of the right to use parts of the common natural heritage of humankind to private property represents a double benefit for the system of abstract wealth production. On the one hand it turns a "worthless" free good into capital, on the other hand this capital in turn becomes the reference point for the creation of fictitious capital as soon as bio-tec companies issue shares or take out loans.
As far as sensual material wealth is concerned, however, the balance sheet looks devastating. The biodiversity of crops and animals, which has been created over centuries of breeding, falls victim to the privatization of the gene pool. It is making agricultural producers liable to pay tribute. Wherever inverse capitalism rediscovers the natural resource for itself and draws its (last) honey from it, the picture is the same. The temporary rescue of the system of abstract wealth production is accompanied by the destruction of sensual-material wealth and human livelihoods. An extreme intensification of this crazy logic is experienced in phenomena like the speculation of raw materials and land grabbing. The threatening scarcity of key resources is transforming previously almost worthless land into coveted future capital. And because it is foreseeable that the rampage against the natural foundations of life will cause the prices for the leftovers to skyrocket, those who secure the power of disposal in advance will generate capitalist wealth.
On top of this comes the generation of additional capitalist wealth through newly introduced methods of destroying nature. At least as far as the USA is concerned, this was a very central factor in the economic recovery after the crash of 2008. The boom that the US stock markets have experienced in recent years deserves the name fracking boom. The sudden rise of the US as an oil exporter and the huge investments in this post-pollution technology have provided the profit prospects needed to turn the floods of money from the US central banks into fictitious capital. Fictitious capital, which in turn put the US economy back on the growth track.
In this country, there is one area in particular where the intensified capitalization of natural resources is having a direct impact on the living conditions of the general population. In view of the policy of low interest rates and in search of investment opportunities for the capital generated by the financial industry, gigantic sums have flowed into the real estate sector since the crash of 2008. However, because the real estate sector is dependent on land, a natural resource that cannot be reproduced, this is reflected in steeply rising real estate prices, especially in large cities. For the system of abstract wealth this development is of course a gain. The wealth represented by the building stock has grown by leaps and bounds. Things are different for people who are looking for a roof over their heads. Compared to other boom countries such as Turkey or Brazil, the German development is still moderate. For their economy, the explosion of real estate prices plays a much more important role and therefore the flaring up protests against this land grabbing are being quashed there with all the force. As in a magnifying glass, this shows that from the point of view of the sensual-material wealth and the existential needs of people, not only the collapse of inverse capitalism is a catastrophe, but also its continued functioning is already disastrous.
The term "inverse capitalism" (derived from the Latin inversio = inversion, conversion) describes contemporary capitalism determined by the dynamics of the financial market. Unlike the common descriptive term "financial market-dominated capitalism", this neologism refers to a certain theory of capital accumulation. In "inverse capitalism", the relationship between financial superstructure and the real economy has been turned upside down compared to classical capitalism. The accumulation of total social capital is no longer based primarily on the production of goods market goods, but above all on the formation of fictitious capital by the financial industry.
Use and exchange value:
The common understanding equates the utility value with the concrete-material benefit of a good. The critique of political economy, on the other hand, reserves the category of utility value for the world of commodities and uses it in a purely analytical and unemphatic way. Every commodity has a dual character. As a utility value it must be able to satisfy some need of potential buyers, as a carrier of exchange value it represents abstract social wealth.
In the case of goods market goods, the Marxian view partially overlaps with the common notion of utility value as the concrete-material use of a thing. But Marx also uses the term for those goods whose utility value has a supersensory character, because it consists in increasing the abstract social wealth. Thus the commodity labor has the special utility value of generating added value. And insofar as money is traded as a commodity on the financial markets, its practical value consists in serving as potential capital.