By RENILDO SOUZA*

The crucial role of science and technology in the capitalist economy of the 21st century favors the valorization of knowledge-commodities, generating so-called knowledge-income

In this article, focusing on the category of fictitious capital and banks, we return to discuss the possible clues, the beginnings of elaboration, about finance as developed by Karl Marx in Section V of Book III of The capital.

In his definition, Marx explained: “The formation of fictitious capital is called capitalization. To capitalize each income that is regularly repeated, what is done is to calculate it on the basis of the average rate of interest as the return that a capital, lent at that rate of interest, would provide.”[I]

In a sense, the interest-bearing capital form, as effectively transferred value, is a distinct form of fictitious capital. The latter is an illusory duplication of capital value, but it has a real impact on the behavior of financial markets, affecting production and employment. To prove this, one need only take a look at the 2008 crisis.

The interest-bearing form of capital is the basis for the emergence of fictitious capital, because: “The interest-bearing form of capital is responsible for the fact that every determined and regular income in money appears as interest on some capital, whether it comes from a capital or not”.[ii]

Government bonds, shares, and mortgages, for example, are not real capital, but appear to their owners as rights to receive part of the tax revenue, dividends, land income, and derivatives of future surplus value. With financialization, prioritizing liquidity and the short term, there are opportunities to transfer the securities and immediately redeem the value for their owners.

The boundaries between the forms of “interest-bearing capital” and “fictitious capital” are being blurred by financialized capitalism. It is in this sense that the so-called innovations and the integration of the markets of the most distinct forms of intersecting capital operate, in addition to the financial escalation of productive corporations. In its own autonomous movement, detached from the effective cycle of capital, fictitious capital is increased. Fictitious profits are generated through the appreciation of these securities, above their nominal value, in their secondary markets.

In a bullish economic climate, with growing financial speculation and bubbles, fictitious profits are an irresistible attraction and an unmissable opportunity for all capitalists. However, regardless of the gains and losses of individual transactions, the overall and effective profit in society is limited by the total surplus value. In crises, securities become toxic products, junk, unsaleable. Prices collapse and a large stock of fictitious capital evaporates, “the illusory appearance of this capital is undone”, although the crisis also results in an acute “centralization of fortunes in money”.

The persistent centrality of banks

Karl Marx characterized banks as “the most artificial and refined product” of capitalism. He noted “the enormous power of an institution like the Bank of England over commerce and industry.” He argued that banks and credit were “the most powerful means” both of developing capitalist production beyond its limits, including as one of the elements in the systemic transition of society, and of fomenting crises and fraud.[iii] Of course, over time, much has changed in banking, but its nature of social centralization of money in capitalism persists.

In Marx's time, the banks concentrated the reserve funds of active capitalists, the savings of society in general, consumer income, money collection and disbursement operations, and money trade. The banks centralized transactions between lenders and borrowers of loanable monetary capital. For the banks, the set of deposits served as a basis for the multiplication of interest-bearing capital. This is how monetary power came into the hands of the bankers.

Bank notes, that is, credit money that were still issued legally and directly by a few banks in Marx's time, instead of by the issuing monopoly of a central bank, constituted “a kind of peculiar combination of public and private banks and, as such, are in reality backed by public credit”.[iv] Discounts on bills of exchange, the main basis for commercial transactions, were “a privilege of money creation” for banks.

Karl Marx quotes James William Gilbart, in his book History and principles of banks: “The purpose of banks is to facilitate business, and anything that facilitates business also facilitates speculation. Business and speculation are in many cases so closely linked that it is impossible to say where business ends and speculation begins […]”.[v] Thus easy advances were made on unsold goods, credit for the stock fever in railroads in 1846 and 1847, etc.

With the opening of the Chinese market due to the Opium War, there was talk of mass production, which in the end turned out to be nothing more than a mechanism for extracting successive advances on bank credit. If credit is cheap and stock market prices have soared, “what reason would there be to waste such a wonderful opportunity?” Overproduction and speculation have led to crises, devaluation of government bonds and shares, payment freezes, and bankruptcies of major companies.

The crises were further aggravated by the stupidity of the Banking Act of 1844, which restricted the issuance of currency, to a certain extent, to the gold backing of the Bank of England. Marx incessantly lashed out at Lord Overstone, the main leader of the bankers and the inspiration behind the 1844 Act. He ridiculed his maneuvers in his testimony in Parliament to justify the restriction of the means of circulation, wrongly equated with productive capital, in order to achieve his unspeakable objectives, that is, high interest rates, like all bankers. 

In fact, in a crisis, when interest rates rise, industrial capitalists demand money to pay off overdue bills, without any thought of capital for productive expansion. On the contrary, in a crisis, there is an abundance of idle, unoccupied capital. It is not, as Overstone tried to justify, high interest rates due to a shortage of productive capital. This banking law of 1844 is the ancestor, so to speak, of the contemporary monetarism of Milton Friedman and his disciples, according to the false quantity theory of money in which the prices of goods are determined by the volume of currency in circulation.

In the process of financialization, there was a major movement of bank disintermediation in the 1980s. Direct access of corporations to financial markets increased in an environment of deregulation and globalization of the financial sphere. However, banks became universal banks, incorporating the specialized functions, previously segmented, of investment banks, insurance companies, and various financial funds.

Corporations continue to issue bonds on the financial markets, but the placement of bonds is done by banks and depends on the financial centralization of society, which is also operated mainly by banks. They have a decisive influence on the evaluation and pricing of financial securities. Banks have increased their revenues from commissions, fees, premiums, etc. from their multiple tentacles in society.

Contradictory effects of banks

Karl Marx explained that the advancement of productive forces and the establishment of the world market were accelerated by credit. Several functions of credit contribute to this. Credit leverages competition and capital mobility in the process of equalizing the rate of profit. It drives the increase in the speed of the metamorphosis of goods. It favors the creation of joint-stock companies. It encourages the acceleration of the reproduction process in general.

The financial market in Marx's time was still restrictively what he called a credit system. There was basically bank credit, apart from reciprocal commercial credit between industrial and commercial capitalists, mainly through bills of exchange, not to mention public debt. Apart from the traditional stock and commodity brokers, there were bill-brokers, who were brokers of bills of exchange and money.

Os bill-brokers represented a kind of primitive combination of what in current financialization is organized as shadow banking and some forward operations. Marx says that they were “in reality, half bankers”. They took loans from banks in exchange for bills of exchange, which they had already discounted and were redeemable daily or at various times, with strong fluctuations in interest rates on the same day. In this context, there were bills drawn on goods that did not yet exist, which could represent “only wind”.

At certain times, banks would discharge their available and idle balances with the bill-brokers, their money brokers, influencing the volume of credit and the fluctuation of the interest rate, remembering the off-balance sheet operations of the shadow banking of today.

The possibilities of gigantic collapses were ready: “The bill-brokers of London […] carried out their enormous transactions without any reserve of cash, trusting to the receipts from the bills which successively matured, or if necessary, to their power to obtain advances from the Bank of England, guaranteed by the deposit of the bills already discounted by them”. [vi] In other words: everything to do with the leverage of the Ponzi schemes of the funds managed by Bear Stearns, Lehman Brothers, BNP Paribas, Stanford International Bank, Northern Bank, Bernard Madoff's fund, etc., unmasked in the 2007-2009 crisis.

Bank credit in the 19th century, as we have seen, also favored speculation and fraud. The very emergence of joint-stock companies brought with it “an entire system of speculation and fraud” and “a new financial aristocracy.” Thus, shares, which represent property, have their movement as “purely the result of a game in which the sharks of the Stock Exchange devour the small fish […].”[vii] There is a continuous decrease in the “number of few individuals who exploit social wealth”.

Marx saw the impulses of credit and joint-stock companies as increasing wealth, industrial advancement and the world market, on the one hand, and as the violent intensification and exhaustion of the narrow historical limits of the capitalist mode of production, on the other. “Credit at the same time accelerates the violent eruptions of this contradiction, the crises, and with them the elements of the dissolution of the old mode of production.” [viii]

From this point of view, financialization, infinitely more powerful than the so-called credit system of Marx's time, is in keeping with today's gigantic wealth and industrial development. It is also in keeping with the extreme contradictions of labor, the environment, democracy, etc. It imposes a kind of barbarism on the majority of the population.

Indispensable Marxist categories in light of financialization

Surplus capital is a central constituent of financialization. Already in Marx's time, public debt and then the establishment of large corporations, which required a lot of capital, became necessary to anchor and drain England's surplus and idle wealth. In the same sense, the so-called capital exports fueled British imperialism.

Of course, the forms of money and finance today are far from and very different from those of the 19th century. For example, gold is not “true money,” confirmed on the world market, as Marx said. But this author’s elaborations on signs of value, credit money, and fictitious capital have become economic categories of immense scientific depth and material relevance in contemporary capitalism, without prejudice to the idea of ​​money as a general equivalent and the validity of the labor theory of value.

Today, with financialization, the securitization of the most diverse debts is rampant. This involves the universalization of the creation of securities, as a mass of assets, the counterparty of debts. Complex instruments, with different risks and financed with leveraged credits, are packaged and traded. Mountains of contracts, such as derivatives, accumulate. Financial wealth, therefore, grows much faster than real wealth.

There is an important branch of financialization that consists of the so-called knowledge commodities, which are the object of the so-called “new enclosures”, that is, the monopolization of patents and intellectual property rights, generating a new type of rentierism. The crucial role of science and technology in the capitalist economy of the 21st century favors this valorization of knowledge commodities in order to generate the so-called knowledge rent.[ix]

Here, in this article, we sought to rescue Marx's contribution, within the limits of the famous section V of book III of The capital. These were clues, “beginnings of elaboration”, bequeathed by the author, about finance, with the permanence of the labor theory of value. The theoretical relevance of his basic formulations about money, credit, interest-bearing capital and fictitious capital was confirmed. With this rescue, as a starting point, one can seek to characterize contemporary capitalism. This is a new phase, built in the last two decades of the 20th century and deepened in this 21st century, with profound transformations in production, finance and the role of the State.

The recreation and transplantation of the economic, financial, political and social conditions of post-World War II capitalism is a component that is not part of the perspective of capital at this stage today. Instead of regulatory policies and social commitment, financialization systematically imposes the subordination of the State, including its budget and debt, to the designs of the pure and exclusive valorization of capital. The punishment of labor also systematically leads to the denial of labor and social security rights, with an increase in labor exploitation.

The overaccumulation of capital, which arose due to difficulties in its valorization in the 1970s, demanded an exit through financialization. The changes in contemporary capitalism are not an anomaly. They are organic, inherent and necessary developments, from the point of view of capital, in response to the new conditions of accumulation and crisis. They are motivated by multiple factors, especially the course of profits.

Finally, it is worth noting that financialization would not have succeeded without the bourgeois ideological domination that is so overwhelming today. As Marx said about paper, as credit money, “[…] it is faith that saves. Faith in monetary value as the immanent spirit of commodities, faith in the mode of production and its predestined order, faith in the individual agents of production as mere personifications of capital that values ​​itself.” [X] Financialization, with its insane and fetishistic forms, has become the center and the dominant pole. Financial processes have become omnipresent, invasive, normal and general in the economy and society.

The expression “financialized capitalism” was adopted here to designate the dominant logic and the general state of the capitalist system in the 21st century. The adjective, through the verb in the participle, resulting in financialized, instead of the simple adjective financial, seemed more appropriate.

Capitalism, which is the noun, is not only financial; it continues to be a mode of production, dependent on the exploitation of the labor of others. It continues to be the same system, but now it is unfolding in the financialization of all life in society. Hence, “financialized capitalism.”[xi]

*Renildo Souza He is a professor of economics and international relations at the Federal University of Bahia (UFBA). Author, among other books, of A China de Mao and Xi Jinping (UFBA Publisher).

To read the first article in the series, click https://dpp.cce.myftpupload.com/marx-e-a-financeirizacao/

To read the second article in the series, click https://dpp.cce.myftpupload.com/karl-marx-e-a-financeirizacao-a-categoria-juros-como-fenomeno-geral/

Notes

[I] MARX, K. Chapter 29, Book III, Kindle version.

[ii] Idem.

[iii] MARX, K. Chapter 36, Book III, Kindle version.

[iv] MARX, K. Chapter 25, Book III, Kindle version.

[v] Idem.

[vi] Report of the Parliamentary Commission on Banking Legislation, 1857-1858, p. 5, § 8, apud MARX, K. Chapter 29, Book III, Kindle version.

[vii] MARX, K. Chapter 27, Book III, Kindle version.

[viii] MARX, K. Chapter 25, Book III, Kindle version.

[ix] TEIXEIRA, Rodrigo Alves Teixeira and ROTTA, Tomas Nielsen. Modern rent-bearing capital: new enclosures, knowledge-rent and financialization of monopoly rights. Available in: https://www.peri.umass.edu/fileadmin/pdf/UM-NS_Workshop/NewSchool2008/Teixeira.pdf

[X] MARX, K. Chapter 35, Book III, Kindle version.

[xi] This article is a modified version of a chapter from the book Karl Marx: pioneering a new world in the XNUMXst century, a collection organized by Adalberto Monteiro and Augusto Buonicore, published by Anita Garibaldi, in 2018.

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