Chapter 6 – Fictitious Capital
It is, of course, not the case that fictitious capital grew whilst real capital did not. What is the case is that the former expanded at a faster pace than the latter, and for the reasons described, this is not sustainable, and must ultimately end in a financial crash, and a huge destruction of those financial asset prices. It ultimately comes down to a showdown between conservatism and social-democracy, as the owners of fictitious capital seek to defend the nominal value of their paper wealth, at any cost, including the destruction or limitation in the growth of real capital.
“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”
In 1999, capital entered a new long wave boom phase. Real capital accumulation did proceed apace. But, as Marx sets out in Capital III, in describing this interest rate cycle, at the point of this initial phase of growth, following the period of stagnation, interest rates may not rise, or may even fall, because the expansion of economic activity itself produces a greater mass of realised profits, available for direct reinvestment by firms in additional capacity, or to be thrown into money markets, increasing the supply of money-capital.
“This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising.”
In addition, the increased tempo of economic activity raises the velocity of circulation of money and capital, and encourages the extension of commercial credit releasing currency to be used as money-capital.
Moreover, changes in the nature of capitalist production and consumption, with service industries becoming the dominant sphere of value and surplus value creation, meant that capital accumulation – the employment of additional labour-power, which produces increased masses of surplus value – now required much less in terms of additional accumulation of constant capital. This creates a tendency for the rate of profit to rise..
For these new service industries, it was large chunks of fixed capital investment that were characteristic, as opposed to manufacturing industry, where it is more continuous, ever-expanding volumes of raw material being processed due to rising productivity, which drives the accumulation of capital, and a rising organic composition of capital.
For this new service industry, it is large one-off investments in infrastructure, such as new communications networks (the Internet, mobile telephony, new road and rail networks) along with the construction of other fixed capital (new large high rise commercial buildings etc.) that are characteristic. This investment in fixed capital can then be amortised over long periods, with the requirement for only marginal additional investments, as the existing capacity is then more and more fully utilised. In this sense, it is more like mineral production.
The rise in social productivity means that the value of the machines used in these service industries, for example, personal computers, becomes less and less significant, whilst the marginal cost of adding additional nodes to the communications networks is near zero. Hence, real capital accumulation takes place, and an expansion of variable-capital, without the kind of additional large-scale fixed-capital accumulation seen in the past, and this expansion of the economy, via an expansion of this now dominant service industry does not result in the same proportional rise in the accumulation of circulating constant capital (materials) that typified capital in previous periods. To use the term used by orthodox economics, investment becomes more lumpy as described in these case studies, .
The consequence of this is not only that this greater weight of variable capital reduces the organic composition of capital, but the rate of turnover of this capital is higher, resulting in a higher annual rate of profit, which further limits the potential rise in interest rates.