Financial value theory

Image: Marcos Felipe


It is necessary to develop a theory of financial value for a good analytical interpretation of contemporary capitalism, far from the strawman fallacy of those denouncing “financialization”.

Karl Marx, in Capital: critique of political economy, makes a constructive critique of the classical political economy of Adam Smith and David Ricardo, among others, presenting an alternative in its place. Your understanding is completed by reading three books.

Book I, The capital production process, was the only one in the series published by Marx during his lifetime, in 1867. Book II, The process of capital circulation (1885), and Book III, The global process of capitalist productiona (1894) were published posthumously by his faithful companion Friedrich Engels from manuscripts and notes by Karl Marx.

In general, only the first volume is read by most Marxists. Too lazy to face 1700 pages of prose from the XNUMXth century, they are unaware of the entire structure from the abstract to the concrete and the methodology of capital in general for the competition/cooperation of capitals, in particular of the three volumes of The capital.

Marx, in Book I, starts from the labor theory of value to eventually reach the beginning of capitalism, presenting the preconditions for its existence in the primitive accumulation of capital-money and the liberation of the workforce from slavery or servitude. The meeting of both, in a contract for salaried work, especially after the Industrial Revolution, would define their production relationship, typical on a given technical basis.

In Book I, Marx starts with the commodity, analyzing the relationship between use value and exchange value. He then explores the form of value and the fetishization of the commodity. Afterwards, he develops the theory of labor value, surplus value and the exploitation of work in the capitalist system. He then goes on to address capital accumulation, crises and the economic cycle. It examines the history of theories of value and the transition from commodity to money and concludes with the transformation of money into capital and the transformation of surplus value into profit.

Marx uses the dialectical method, analyzing the internal contradictions and transformations of the capitalist system as a whole – and not just productive ones. It employs a historical and critical analysis of economic categories to reveal underlying social relations.

In Book II, it begins with the transformation of money into variable capital and the circulation of capital. He then examines the simple and expanded reproduction of capital. It explores the metamorphosis of capital and the global circuit of capital. It concludes with the specific forms of capital and their laws.

This volume is often considered more technical, focusing on the economic categories introduced in the first volume. Marx deepens the analysis of the capital reproduction cycle, connecting production to consumption. Marxists skip it…

Book III begins with the transformation of surplus value into rate of profit. It covers the law of the average rate of profit, land rent, commercial capital and capital income. Explores the division of profit into interest and businessman's profit. It concludes with the global process of capital accumulation, in a more realistic way, although it was written in the mid-19th century, when the banking system had not yet spread into branch networks – and few Central Banks existed. Few Marxists read it…

To understand contemporary capitalism without preconceptions against rentiers and/or usurers, as medieval Christians had, Marxists should read Book III with the greatest attention. Marx exposes the role of credit in capitalist production and the division of profit into interest and business gain. It highlights the constituent parts of bank capital. He distinguishes income into labor, products, money and rent, distinguishing between relations of production and relations of distribution. Engels adds a topic on the stock market. “Fictitious capital” (sic) is not opposed to the real economy…

Karl Marx's labor theory of value seeks to explain the origin of economic value in a capitalist society. The value of a commodity would be determined by the average time needed to produce it, using the socially predominant level of skill and productivity. It is known as socially necessary work.

Marx distinguishes between use value and exchange value of a commodity. The first refers to the practical utility of a commodity, while the second represents the exchange relationship of that commodity with other commodities on the market.

In the sphere of exchange value, human labor becomes abstract labor. This means that when determining value, the specific type of work performed is irrelevant. The important thing is the amount of socially necessary working time.

Marx relates the labor theory of value to capitalist exploitation. Workers would sell their labor power for a wage equivalent to the value needed to reproduce that labor power (food, housing, etc.). However, during the production process, workers create more value (surplus value) given the value of their labor power. This surplus value is the source of profits for capitalists.

It highlights the contradictions inherent in capitalist production, including the tendency for the rate of profit to fall, due to pressure to increase productivity with technology and the greater exploitation of workers. For Marx, these contradictions would eventually lead to crises and the need for social transformation.

This labor theory of value by Marx was subject to different criticisms and interpretations. Orthodox economists disagree with it due to the methodological individualism prevalent in neoclassical economics: the value would be subjective, attributed by the use value by consumers in negotiation with suppliers in the market.

The theory of subjective value highlights the value of a commodity being determined by the subjective utility, attributed by individuals to it, based on their individual preferences, needs and circumstances. Therefore, the value of a commodity would be derived from the marginal utility, that is, the additional satisfaction or utility obtained by an individual by consuming an additional unit of that commodity. If consumption increases, marginal utility becomes decreasing.

In the context of a voluntary exchange market, prices would be determined by the interaction between supply and demand. They would reflect the subjective preferences of consumers and the pricing of producers. Voluntary exchanges occur when both parties perceive that they are obtaining a benefit (utility) from the transaction.

Proponents of subjective value theory argue that it provides a more solid basis for explaining the efficient allocation of resources in a market economy. Prices, derived from subjective utility, would transmit important information about scarcity and demand, guiding the decisions of economic agents.

Today, it is necessary to develop a theory of financial value for a good analytical interpretation of contemporary capitalism, far from the strawman fallacy of those denouncing “financialization”. They present in a caricatured way the argument of experts in banking economics, with the aim of attacking this false idea instead of the argument itself of those who explain the economic-financial system as a whole.

The theory of financial value is not yet a consolidated economic theory with the same status classical or neoclassical theories of value. However, it is possible to approach the concept by exploring how value is perceived, evaluated and accumulated in the financial context.

Financial value is expressed in monetary terms as money capital. In the economic context, money serves as a common unit of measurement by facilitating the comparison and exchange of different goods and assets, that is, it functions as a unit of account, means of payments and store of value.

In portfolio theory, the value of an asset is related to the search for a balance between risk and return. Investors evaluate assets based on expectations of future returns and tolerance for the risk of correlating movements in their values.

The financial value of an asset (way of maintaining wealth) is linked to its future cash flows. Whether in investments, debt securities or stocks, investors evaluate the present value of expected benefits over time in the future.

This subjective and uncertain perception plays a crucial role in the theory of financial value. Asset valuation is influenced by the conflicting sums of individual preferences, expectations and specific circumstances of all investors.

The financial value of bonds and stocks is established in financial markets, where prices are determined by supply and demand in secondary markets such as the stock exchange. These prices reflect market participants' collective assessments of the value of various assets.

Financial value theory also focuses on the efficient allocation of capital. Financial resources must be allocated in a way that maximizes overall value to the economy.

The secret of capitalist business is financial leverage with third-party resources. Adding third-party capital to own capital provides an increase in economies of scale and greater operating profit, even considering the financial expenses with loans. Increases the equity profitability of capital in ventures.

The creation of new financial instruments and products influences financial perception and value. Financial innovations such as derivatives offer new ways to manage risk, access investments or optimize financial strategies.

Regulation and governance also play a role in determining financial value. Trust in financial institutions, transparency and regulatory compliance impact the perception of the value of an entity or financial asset.

This theory outlined here is an attempt to explore the concept of value in the financial context of contemporary capitalism. The complexity and dynamics of the financial system, where all economic agents are customers and/or participants, make financial value variable, multifaceted and subject to a variety of interactive influences.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). []

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