Fictitious Capital

Patrick Bond pbond at
Thu Dec 23 04:32:22 MST 1999

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
> accumulation of industrial capital must be on a scale sufficient to makes such large
> amounts of surplus value available. Given this then these large amounts of fictitious
> 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
        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).

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