What is fictitious capital?
To begin with, what is fictitious capital? It is capital that is not involved in production, and production here, as always in Marx, means the production of surplus value. Instead, it merely involves a claim to part of the surplus value produced elsewhere. Typical examples include interest-bearing bonds, securities and stocks. Marx' clearest explication of the concept occurs in Chapter 29 ("Banking capital's component parts") in Volume 3 of Capital, where he clarifies that fictitious capital is fictitious because it doesn't function as capital. It seeks revenue or profit without being invested in production. The “profit” expected from the investment in fictitious capital does not derive from production per se, but arises through a mere redistribution of a surplus value expected in the future. As Michael Heinrich explains:
This term [fictitious capital] does not mean that these claims cannot be redeemed. Rather, it refers to the fact that the real capital the owner originally possessed in the form of money has been advanced only once, during the purchase of stocks and bonds. After that, it is possessed by the business and is advanced by it. Securities, stocks, and bonds represent mere claims to certain payments; their ‘value’ (the market price) has nothing to do with the amount of value originally paid for these claims... (Heinrich 2012:164)All credit does not involve fictitious capital. To illustrate with a simple example, money that is borrowed to obtain capital for investment in production is not fictitious capital. But let’s say that the creditor in return for lending money obtains a promissory note stating his or her right to a certain percentage of the surplus value expected in the future. This promissory note is not capital in itself, since the “real” capital has already been advanced and invested in production. The note is a fictitious form of capital. Regardless of its fictitious character, however, it can be traded and become the object of speculations that drive its price upwards. Trading with rights like these can become an important source of profit. It's important to note that the price of these rights is unrelated to the value law since they are decoupled from production and merely involve the redistribution of surplus-value produced elsewhere.
The relation of fictitious capital to the larger circuit of capital can be illustrated by the diagram below (which I've borrowed from here; for the original formula of M-C-...P...C’-M’, see Volume 2 of Capital). As shown in the diagram, money that doesn't find productive investment may instead chase profit by investments in bonds, shares and the like, thereby creating fictitious capital. To the diagram one might add circuits going in loops around these shares and bonds to highlight the extensive trade going on in these assets. As the diagram shows, fictitious capital isn't necessarily trapped in fictitious form. Profits amassed through fictitious capital can potentially always return to the outer circle and become real capital.
The paradoxical quality of fictitious capital
To Marx, the fictitious character of this capital doesn’t mean that it is unnecessary or superfluous in the process of capital accumulation. Why is this? Let us note that the concept has an interesting, paradoxical quality. Fictitious capital is decoupled from production, but still somehow needed by capitalism - which seems strange since capitalism is supposed to be all about the production of surplus value. The paradoxical quality is most evident in the case of banks. Capitalism needs banks and credit, but almost all of banker's capital is "purely fictitious", as Marx writes (Marx 1991: 600). What is the relation between these seemingly contradictory statements, and how is it possible to combine them? Why does capitalism need fictitious capital if the latter is unrelated to the production of surplus value?
The answer seems to be that it facilitates circulation and redistributes money to those capitalist hands where it can become invested in real production. Such facilitation is essential to capitalism. As shown in Volume 2 of Capital, capitalism must constantly strive to shorten “turnover time”, meaning that capital must constantly be channeled back, with as little delay as possible, to those capitalists who are capable of finding profitable production processes where to invest it.
That fictitious capital can facilitate circulation without itself ever being involved in production is quite evident. Even a pyramid scheme facilitates the circulation of money, redistributing it to others who possibly might know of better ways to invest the money than in a pyramid scheme. As noted by Trenkle and Kurz, fictitious capital is therefore always "real capital in spee". No matter how fictitious an investment is, the money gained through fictitious capital always has the potential to become real capital, and the more it circulates the greater the chance is that this will happen. This is also why there is no way to just remove “speculation” and only have healthy, productive investments left.
It's interesting to note that this function of facilitating circulation isn't necessarily impaired by crises that wipe out the numerical value of the fictitious capital. Even the burst of bubbles perform an important function to capital: thus the depreciation of securities "in a crisis is a powerful means of centralizing money wealth", as Marx writes (1991:599). In fact, it is easy to make the case that it is precisely in moments of crisis when speculative bubbles burst that the power of capital reasserts itself the most starkly and nakedly, with outrageous gains being made by the few while whole populations are ruined. Indeed, the burst of these bubbles almost always seem to involve huge transfers of wealth from the working class to the capitalist class. In this sense, fictitious capital represents an alternative but nevertheless hugely important route to enriching the capitalists than the "regular" one represented by the production of surplus value.
The relevance of "fictitious capital" for understanding contemporary capitalism
The concept of fictitious capital seems particularly relevant for understanding contemporary capitalism. After all, aren't we living in times in which fictitious capital has completely overwhelmed and dwarfed all "real" production? The allure of the concept also lies in its seeming capacity to be generalized. In Capital, Marx applies it above all to trade in financial instruments, but wouldn't it be eminently applicable also to real estate speculation? That such a generalization of the concept would be possible is suggested by some definitions proposed by later Marxists, like the following one by Trenkle and Kurz:
Kapital ist einerseits definiert als Vernutzung ("Ausbeutung") von Lohnarbeit, andererseits als Verwandlung von Geld in mehr Geld. Fiktives Kapital entsteht dann, wenn der zweite Teil der Definition den ersten nicht mehr enthält, und zwar nicht etwa als bloß subjektive Einbildung, sondern als gesellschaftliche Realität.This definition suggests that it would be possible to apply the concept to all transactions where capital seeks to obtain profit without being invested in production. This would open up for connecting it to what David Harvey calls "accumulation by dispossession", i.e. ongoing processes of so-called primitive accumulation. Harvey himself seems ready to make this connection. As contemporary examples of such accumulation he mentions the management and manipulation of crises, including the use of bailouts as excuse for pillaging, raiding pension funds and reducing whole populations to debt peonage (Harvey 2005) - all phenomena that are crucially mediated by fictitious capital.
Harvey and Hardt & Negri's "exchange" on fictitious capital
Still it is not self-evident that such a generalization will be fruitful and that it can be done unproblematically. One way to approach the question of the usefulness of such an operation is to look at one of the conflict lines that exist around the concept of fictitious capital. To illustrate it we can use the debate between David Harvey on the one hand and Michael Hardt and Tony Negri on the other (“Commonwealth: An Exchange”, published in Artforum 48:3, November 2009: 210-221).
First out is Harvey:
While Hardt and Negri occasionally mention financialization and concede its general importance in recent times, they have absolutely no theory of fictitious capital, no conjecture as to what it means for a market circulating six hundred trillion dollars' worth of derivatives of various kinds (and from which finance capitalists can extract vast personal wealth, like the three billion dollars George Soros gained in 2007) to be superimposed on a global economy that produces only fifty-six trillion dollars' worth of actual goods and services. This omission could be forgiven were it not for the brute fact that political subjectivities have been as deeply affected by fictitious-capital proliferation - everything from the credit-card culture to speculating on gains in housing value - as they have by any Foucauldian exercise of biopower (i.e., state power over life). Talk about immateriality!And here's Hardt and Negri’s response:
Finance capital can be considered fictitious, in our view, only within the bounds of market relations and, in particular, in the competition among capitalists. From this standpoint, many conclude that the current crisis is due in large part to the separation between finance and real economic production, a view often accompanied by socialist rhetoric against the plutocracy and the parasitic agents of finance. When we focus not on individual capitalists but on collective capital, though, we see a different picture: Financialization is not an unproductive and/or parasitic deviation of growing rates of surplus value and collective savings but rather the central form of the accumulation of capital. Furthermore, whereas in the industrial framework the relationship between economic production and finance might have appeared as reality versus fiction, the economic forms emerging as central today cast this relationship in a new light. In fact, increasingly today the form of finance is symmetrical to the new processes of social and biopolitical production of value. The production of common goods we focus on in our book, such as the production of knowledge, codes, languages, images, services, affects, and social relations, has significant immaterial components but neither these immaterial goods nor finance are for that reason fictional.What is the disagreement about? First let us recall how much Harvey and Hardt & Negri in fact agree about. They both agree that there has been a change in capitalism. Struggles around the “common” have become more central, reflecting the fact that the production of surplus value by exploiting wage labor is becoming less central to capitalism. Instead, capital relies for profits on processes such as “accumulation by dispossession” (a term Hardt & Negri take over from Harvey and use in their book Commonwealth) or “immaterial” commodities much more than in Marx' time. However, they disagree on how to interpret these processes. This in turn is reflected in their differing views on the relevance of the concept of "fictitious capital".
To understand the disagreement, we need to return to the question what it is that drives capital accumulation. This is arguably the central question around which Capital revolves. As we recall, the engima Marx seeks to solve is how such accumulation is possible at all. Famously, his answer is that long-term, systematic accumulation is possible only thanks to the existence of a peculiar commodity, namely labour power, which has the ability to produce more value than is required for its own reproduction. The exploitation of labour power, then, is the crucial source or motor of capital accumulation. Without it, the accumulation process would be erratic and unpredictable, dependent on the contingencies of luck and force. An example of this is the merchant capital of premodern societies that sought to obtain profits by utilizing price differences in different locations or by resorting to plunder, monopolies and political patronage. While such methods could certainly yield spectacular profits, they don't constititute a reliable way to systematically produce surplus value. The only lasting, systematic way for capitalism to grow is to rely on surplus value derived from labour power.
In view of this, it would seem that what is crucial for capital accumulation isn't so much profit in itself, as a steady production of surplus-value through the exploitation of wage labor. However, the problem with this position is that it cannot explain the explosive growth in financial capitalism in recent decades or the increasing reliance on “accumulation by dispossession”. In other words, it cannot explain why investors increasingly seek to draw profits from “fictitious capital” rather than real capital.
The alternative position would be to give up insisting on surplus value and state that what drives capitalists is simply the thirst for profit, no matter from where it is derived. Accumulation by dispossession or gains from speculation are fine as long as they yield profit. What matters to capitalism is that profits are made, not from where they come. As Wallerstein and others have pointed out, this is why capitalism has historically always been happy enough to rely on non-wage labor where it has been expedient, such as serfs in Russia, slaves in America, or unremunerated housework everywhere. The assumption that the crucial thing for capitalism is profits rather than the ability to exploit wage-labour may seem persuasive. Yet there are problems with this assumption too. It would make the value law redundant – or in any case not central to capitalism. Why is this problematic? Here we need to remind ourselves that to Marx, labour is the only reliable source of long-term capital accumulation. This means that to the extent that capitalism turns to other sources of profit than production, the process of capital accumulation will ultimately becomes less stable and orderly, more crisis-prone and more dependent on luck and violence. While fictitious capital can yield enormous profits, it's hard to organize it into a system for long-term, predictable capital accumulation.
To my mind, the concept of "fictitious capital" is still useful since it helps us trace this increasing migration of investment from production to rent and speculation and the like as sources of profit. To explain why fictitious capital is expanding is quite possible without jettisoning the idea that surplus value extracted from labour is central to long-term systematic capital accumulation (this is not a question I want to delve in too much here, but it seems to me that Arrighi for instance does a good job of it in The Long Twentieth Century). But the question then becomes: why do Hardt & Negri jettison it? To understand this we need to turn to their background in "workerist" Marxism:
Firstly, like other workerist Marxists, they see the workers as the driving force of history as well as of capitalism. Relying on the agency of the workers, they have no need for a Zusammenbruchstheorie, a theory of the inherent tendency of capitalism to break down. Capitalism is parasitical and hence in a sense perpetually in crisis, since it cannot do anything but piggyback on the workers, trying its best to keep up with them and extract profit from their powers of self-valorization. Coming from this background, it is hardly strange that Hardt & Negri see little of interest in a theory that says that a capitalism that relies increasingly on fictitious capital will tend to be more crisis-ridden.
Secondly, Hardt & Negri build on the idea that capitalism becomes more diversified as it follows the working class around. It spreads to more and more social domains, learning to profit from all kinds of everyday activities. It becomes increasingly hard (and meaningless) to try to draw any boundary between production and other activities that yield a profit. We end up with everything becoming production and everyone being a “worker” (the social worker) active in the “social factory”. When everything is production, it of course also becomes impossible to draw a boundary between real and fictitious capital.
So are they right? Is this a reasonable way to look at capitalism? Harvey obviously doesn’t think so. To him, it’s still meaningful to draw a boundary between real and fictitious capital. Not because he disagrees with the portrayal of capitalism as relying less on real production, but precisely in order to be able to trace this shift more properly. Against that, Hardt & Negri would probably reply that the pursuit of profit in new forms, through new "immaterial" forms of production, has achieved a new stability and systematicity that means that capital accumulation can rely on it in much the same way that it once centrally relied on exploiting wage labour. In reply to that, however, one might argue that Hardt & Negri don't really show that this is true in regard to fictitious capital. While they are quite right that there has been a growth in "immaterial" forms of labour, they do not clarify how this is related to the growth of financial transactions in securities, derivatives and so on - most of which seem unrelated to labour, even of the "immaterial" kind. In contrast to such fictitious capital, capital that is invested in "immaterial" commodities does involve labour, the creation of a use-value that can be consumed, and the production of surplus value. In that sense, it doesn't represent any break with Marx' analysis of capitalism as dependent on the exploitation of labour. As Negri (1999) himself has stated, labour is still the producer of value in today's capitalism, even if it has lost its role as the "measure" of value (it becomes immeasurable since it has become affective). Fictitious capital, by contrast, is not only devoid of any value input through labour; it also fails to yield any consumable use-value. Since it can never "land" in consumption, it always exists in limbo, unable to complete the circuit of capital on its own accord. As Marx points out, it remains a mere title or claim to a surplus-value produced elsewhere. To my mind, this strongly suggests that it cannot really constitute a reliable ground for systematic capital accumulation. This is also why I'm not prepared to accept the idea that all activities that yield a profit are production. This also makes it relevant to retain the distinction between real and fictitious capital.
As a matter of subjective motivation, it is probably true that capitalists will always strive for profit rather than surplus-value. This is also why fictitious capital will always attract them. It performs wonders for them: not just through direct profits, but also through the rapid redistribution of wealth that it can facilitate, especially in moments of crisis. In its ability to suddenly conjure up masses of fresh "capital" to certain capitalists, it is similar to "accumulation by dispossession", as well as to the windfalls to be had through real estate speculation. All these terms suggest operations that yield profit without any actual production happening. What makes them interesting is that capitalism today seems to rely more and more on such operations. This means that today, capitalism is increasingly driven less by value and surplus value than by profit, no matter in what form. To trace this process, the concepts of real and fictitious capital remain relevant. Marx might still be right: in the long run only the extraction of surplus value through labor power can guarantee a stable capital accumulation. Never in its history has capital been able to rely only on such extraction. There has always also been "primitive accumulation", as Rosa Luxemburg and others have pointed out - always plunder, colonialism, the extraction of money through violence and political power. But the more capitalism shifts towards such forms of accumulation, the more unstable will it be.
Arvidsson, Adam & Elanor Colleoni (2012) “Value in Informational Capitalism and on the Internet”, The Information Society 28(3): 135-150.
Harvey, David (2005) A Brief History of Neoliberalism, Oxford: Oxford University Press.
Harvey, David & Hardt, Michael & Negri, Antonio (2009) “Commonwealth: An Exchange”, Artforum 48(3): 210-221.
Heinrich, Michael (2012) An Introduction to the Three Volumes of Karl Marx’ Capital, New York: Monthly Review Press.
Marx, Karl (1991) Capital: Volume III, London: Penguin.
Negri, Antonio (1999) “Value and Affect”, boundary 2 26(2): 77-88.
Trenkle, Norbert & Kurz, Robert (ND) ”Fiktives kapital”; http://www.exit-online.org/textanz1.php?tabelle=schwerpunkte&index=6&posnr=130&backtext1=text1.php
* However, there are others who, inspired by Negri, have attempted to bring together financial capital and the concept of immaterial labour. Arvidsson & Colleoni (2012), for instance, see Facebook as a clearinghouse bridging the "affective economy" of its users and financial markets. The data it gathers on the affective distance between users and a variety of potential consumer goods enables Facebook to introduce principles of valuation that operate according to a logic analogous to financial derivates, i.e. that function even in the absence of "fundamentals" like labour time. While this is suggestive, one might object that the analogy between financial derivates and Facebook isn't exact. In the case of Facebook, the ultimate point of reference remains the potential consumer - in other words "valuation" still rests on accurate referencing to a real objective world where an actual commodity can be sold. The example of Facebook, then, hardly justifies abandoning the distinction between real and ficitious capital.