Sunday, 27 March 2016

Capital III, Chapter 30 - Part 2

If I am a capitalist and have £1,000, which I use to buy a machine, it can easily be seen that I have a capital of £1,000. If I come to sell the machine that comprises this capital, I can obtain its value. But, if I am a money-capitalist, and buy a share in a company, providing it with £1,000 of money-capital, which it uses to buy a machine, it appears that two capitals of £1,000 have been created. On the one hand, the firm has a capital in the shape of the machine worth £1,000, which it could sell. On the other hand, I have a share certificate with a value of £1,000, which I could equally sell. It appears that £2,000 of capital exists, where previously only £1,000 existed, even though, in reality, there still only exists the real capital of £1,000 in the shape of the machine.

The share certificates exist only as duplicates of the real capital, an imaginary claim upon it, because the shareholder or bondholder, who loans money-capital to the state, or joint stock company, can never actually take possession of the individual assets, whose purchase they finance.

“They come to nominally represent non-existent capital. For the real capital exists side by side with them and does not change hands as a result of the transfer of these duplicates from one person to another. They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained.” (p 477)

To the extent that additional shares are issued to raise money-capital, that is invested in real capital, in the building of factories, railways and so on, the expansion of the share capital reflects the expansion of the real capital. 

“But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest — in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.” (p 477-8)

In fact, although Marx's point that share prices tend to rise when interest rates fall is correct, his other point about a fall in the interest rate, due “... merely to the tendency for the rate of profit to fall” does not at all seem to follow. As Marx has already described, the rate of interest can rise or fall, whether the rate of profit itself is rising or falling. If the rate of profit is rising, this will cause a rise in the demand for money-capital, but it will also cause a rise in the supply of money-capital. Similarly, if the rate of profit is falling, the supply of money-capital will also be falling, which may cause the rate of interest to rise not fall. But, in any case it would be a strange situation where the rate of profit was falling, and the value of shares was rising, because the share price generally acts as a discounting mechanism of future earnings, i.e. profits.

Its far more likely that if the rate of profit is falling, that share prices would fall, and money would move out of equities, and into bonds, as the safer asset, where yield would have also become relatively higher, which would then cause the price of bonds to rise and their yield to fall. In other words, Marx has the causal relation back to front here.

Marx gives an example of how the expansion of share capital can be an expression of the expansion of actual capital.

“A portion of the accumulated loanable money-capital is indeed merely an expression of industrial capital. For instance, when England, in 1857, had invested 180 million in American railways and other enterprises, this investment was transacted almost completely by the export of English commodities for which the Americans did not have to make payment in return. The English exporter drew bills of exchange for these commodities on America, which the English stock subscribers bought up and which were sent to America for purchasing the stock subscriptions.” (Note 7, p 478)

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