Fictitious Capital

michael perelman michael at
Thu Dec 23 09:31:15 MST 1999

I also did a piece on Fictitious Capital in 1991.
"The Phenomenology of Constant Capital and Fictitious Capital." Review of Radical
Economy, Vol. 22, Nos. 2 & 3 (Summer and Fall): pp. 66-91.

Patrick Bond wrote:

> On 23 Dec 99, at 8:07, George Pennefather wrote:
> > George: But if investments are going into these forms alluded to above then there
>must be
> > sufficient ongoing surplus value available for such forms of investment. If so
>then the
> > accumulation of industrial capital must be on a scale sufficient to makes such
> > amounts of surplus value available. Given this then these large amounts of
> > capital are supported by the valorisation process.
> I think the point here is the balance between fictitious capital
> undergrided by surplus value creation and that represented merely
> by speculative paper-chasing, shifts qualitatively at a ripe moment
> in the (over)accumulation cycle. I highly recommend David Harvey's
> reissued Limits to Capital (out a few weeks ago from Verso), which
> I think treats fictitious capital formation and devalorisation better
> than anyone has done since Grossmann.  A few months ago I tried
> to do a rap on the inevitable outcome for a mainstream IPE
> encyclopaedia and it came out like this:
> Financial panics and crises
> A financial crisis typically consummates a period
> of irrational speculation, in the wake of
> monetary/credit expansion during a structural
> stagnation (or even decline) in underlying
> economic growth rates. Starting with the 1720
> South Sea Company bubble, panics occurred in
> financial, commodity or property markets in 1763,
> 1772, 1793, 1797, 1799 and 1810. Such panics
> reflected relatively immature markets,
> underdeveloped institutions, the uneven expansion
> of financial systems, the gullibility of investors,
> and systemic vulnerability to emotion. Wars and
> geopolitical conflict were often catalysts. The Bank
> of England and City of Amsterdam performed
> lender-of-last-resort functions.
>         More disturbingly, the past two centuries of
> world capitalism were punctuated by the 1815-48,
> 1873-96, 1917-48, and 1974-99 episodes of
> stagnation, speculation and crashes. Such periodic
> cycles (or `long waves') suggest that a crescendo
> of financial turbulence may contribute to economic
> catharsis and renewed capital accumulation (Marx
> described `violent eruptions... forcible solutions of
> the existing contradictions which for a time restore
> the disturbed equilibrium'). Yet discrete crashes are
> sometimes insufficient to restore conditions for
> recovery, generating instead `payment-freeze'
> which in turn makes commerce or investment very
> difficult to finance in subsequent years. (Thus the
> past three cycles were interrupted by severe
> financial panics--1873, 1882, 1890, 1893; 1920,
> 1929, 1931; and various 1980s-90s crises--which
> did not immediately rejuvenate growth.)
>         Even where recovery follows, the panics cause
> enormous financial, social and ecological harm,
> often to firms, workers or entire societies which
> were innocent of speculation. Concedes
> contemporary speculator George Soros, financial
> markets `move in a herd-like fashion in both
> directions. The excess always begins with
> overexpansion, and the correction is always
> associated with pain'. Given the late 1990s role of
> the Bretton Woods Institutions and New York
> Federal Reserve in baling out emerging-market
> investors, the asymmetric liability (or `moral
> hazard') for the enormous costs associated with
> financial panic was one important reason for the
> challenge to `Washington Consensus' economic
> policy, by even World Bank economist Joseph
> Stiglitz.
>         The most recent speculative bubbles and
> panics--to some extent offset by limited baleouts,
> but generally destroying a third or more of the
> value of financial assets--included the dollar crash
> (1970s), gold and silver turbulence (1970s-80s),
> Third World debt crisis (1980s), farmland collapse
> (1980s), energy finance shocks (mid 1980s),
> crashes of international stock (1987) and property
> (1991-93) markets, and the long fall (from 1973-
> 99) in non-petroleum commodity prices and related
> securities. Emerging markets offered spectacular
> late 1990s examples of financial panic, including
> Mexico (early 1995), South Africa (early 1996 and
> mid-1998), Southeast Asia (1997-98), South Korea
> (early 1998), Russia (periodic but especially mid-
> 1998) and Brazil and Ecuador (early 1999). Other
> examples of investment gambles gone sour
> included derivatives speculation, exotic stock
> market positions, and bad bets on currency,
> commodity and interest rate options, futures and
> swaps, with specific victims covering enormous
> losses: Long-Term Capital Management ($3.5
> billion)(1998), Sumitomo/London Metal Exchange
> (œ1.6 billion)(1996), I.G.Metallgessellschaft ($2.2
> billion)(1994), Kashima Oil ($1.57 billion)(1994),
> Orange County, California ($1.5 billion)(1994),
> Barings Bank (œ900 million)(1995), the Belgian
> government ($1 billion)(1997), and Union Bank of
> Switzerland ($690 million)(1998).

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael at

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