Fictitious capital and real compacts
By Anitra Nelson
October 15, 2008 -- Radical Notes -- Perhaps we need a Marxian to sort out the world's financial woes. The insights of Karl Marx on capitalist crises, especially speculation and financial crises, were sophisticated for his time. Indeed, this nineteenth century communist revolutionary called financial assets and loans 'fictitious capital' or 'imaginary wealth' as distinct from 'real capital' -- industrial or productive capital -- such as factories and commodity stocks.
The first part of this article discusses Marx's concepts of crises and fictitious capital in the current international financial climate. It relies on my doctoral study, which was published in 1999, Marx's Concept of Money: the god of commodities (Routledge, London). Many contemporary commentators focus on what might be done to remedy the situation. Instead the second part starts from the premise that the current crisis illustrates the very destructive and inhumane nature of capitalism and argues for instituting a humane and ecologically sustainable world without money. This second part draws from my site, Money Free Zone.
Marx stressed that stocks and shares are often exchanged at 'prices' at variance with the value of the real assets that they represent. In other words, financial capital circulates relatively autonomously of the productive process from which it arises and on which it depends, an endless tango, contributing to capitalist cycles and financial crises.
The current speculative boom in the USA has focused on housing investments. A pass-the-parcel style of lending evolved. Lenders were so cocky that borrowers would repay unabated, successive interests enthusiastically bought in down the line through mortgage-backed securities. This has led to a domino-like fall of credit once repayments seized up and as defaults rose. Hyman Minsky (1) has elaborated on this model of lending and its role in capitalist crises.
Repayments were jeopardised by wild lending practices, which meant that home loans were provided to many borrowers who had little hope of repaying. In a neo-conservative policy climate, it was assumed that the market, lending institutions, would price such loans for risk (through insurance). Though less severe than in the USA, in Australia lending was characterised by greater quantities and varieties of household credit (see Steve Keen's Oz Debtwatch site ). This kind of lending has strongly contributed to the current international financial crisis, in terms of over-speculation.
In Capital III Marx writes that when a sufficient proportion of capitalists invest, i.e. lend, without receiving repayments plus interest or profits, a generalised crisis will evolve of the dimensions we are now experiencing:
"If the reproduction process has reached the flourishing stage that precedes that of overexertion, commercial credit undergoes a very great expansion... the point when jobbers first enter the picture on a notable scale, operating without reserve capital or even without capital at all, i.e. completely on money credit… Interest now rises... It reaches its maximum again as soon as the new crisis breaks out, credit suddenly dries up, payments congeal, the reproduction process is paralysed and... there is an almost absolute lack of loan capital...(2)
With mortgage-backed securities both borrower and lender rely on the houses' maintaining their value. Everything is inclined to tumble if either house prices fall or borrowers' incomes are threatened enough to compromise their ability to keep making loan repayments. In fact, defaults and falling prices tend to stimulate one another, setting up a negative dynamic. This has happened in New Zealand, Australia, the USA and the UK.
Capital: money begetting more money
Basically, all investment lays bets on future returns. Investment is always a gamble. Indeed the rationale for capitalists' making profits is embedded in return for risk. If the risk doesn't pay off, they lose their money. So be it. Of course, this accepted reward for risk is turned on its head if those responsible for over-lending are 'bailed-out' by the US and so many other, including Australian, governments.
In Marx's time similar dilemmas raised the same quibbles:
"...where the entire interconnection of the reproduction process rests on credit, a crisis must evidently break out if credit is suddenly withdrawn and only cash payment is accepted, in the form of a violent scramble for means of payment. At first glance, therefore, the entire crisis presents itself as simply a credit and monetary crisis... On top of this, however, a tremendous number of... purely fraudulent deals, which now come to light and explode; as well as unsuccessful speculations conducted with borrowed capital... It is clear that this entire artificial system of forced expansion of the reproduction process cannot be cured by now allowing one bank, e.g. the Bank of England, to give all the swindlers the capital they lack in paper money... Moreover, everything here appears upside down, since in this paper world the real price and its real elements are nowhere to be seen... This distortion is particularly evident in centres such as London, where the monetary business of an entire country is concentrated...".(3)
Today, of course, we have an international economy and one of the prime financial centres in question is Wall Street, New York.
However, as Marx stressed, the irony of the ideal of the individual in capitalism is in the omnipotence of the economic system over capitalists and workers and the dependence of our whole society and politics on growth. Thus we cannot afford to let the swindlers go to hell, because they will drag us there with them (while we cling to capitalism).
Material bases for crises
For Marx, economic crises were endemic and exogenous features of capitalism, which occurred at any time of substantial or widespread interruption to the production or circulation of commodities. Because capitalists act independently, indeed competitively, the result is a constant tendency to crises. Demand and supply is unorganised at every level (individual firms, particular sectors and national capital) and there is the constant necessity for generalised growth, based on profits (invested capital), which might not eventuate.
Thus the precarious material bases of capitalism sensitised the system to crises resulting from imbalances of demand and supply between different sectors of production, overproduction or underconsumption (workers not being paid enough to buy the products they create) and speculation. Speculation or unwise investment appears after the fact in all these cases. At the same time, overinvestment - too many people wanting to invest and gain returns from the available capitalist activities - also leads to bubbles or boom. Then they burst or bust. So, while poor regulation or lack of regulation of lending institutions might exaggerate a crisis, no specific regulation of banks could avert the general and constant phenomenon of capitalist crises.
Today, too, many commentators are arguing that throwing money at Wall Street and lenders not only means throwing proverbial good money after bad but might not solve the problem because it is not simply a credit crisis. One argument has been that the 'bail out' must provide 'little' people with mortgage repayment support, not for reasons of social justice but because such support is critical in material terms to overcome the basis of the crisis. Home purchasers must be supported so they can keep repaying their mortgages and keep the lenders solvent. This way the crisis finds some floor, or safety net.
These arguments accord with Marx's materialist analysis, which was based on the exploitation of workers by investors, entrepreneurs and managers. Marx's materialism was centred in human behaviour; the economic categories of profits and growth were social creations dependent on slave-like deliverance of commodity and service-producing labour to capitalists. This system requires the constant ritual of work for monetary pay, money in a sense circulating effort, assets standing for past labour.
Rising house prices
The last decade of burgeoning household debt in Australia has been accompanied by rising residential house prices. A mainstream analysis suggests too few houses and apartments, the need for government to open up and service more land and high-rise buildings in cities. This analysis fails to refer to inequities within our country, namely rising numbers of households that have two houses, such as families with holiday houses and a second house inhabited by student children.
Current mainstream analyses also tend to deflect attention from the most interesting aspect of the current lending boom - pushing up house prices, in effect incorporating speculation within ordinary households. In Australia, as house prices have risen to levels which have alarmed the International Monetary Fund, rents have increased strongly too.
Today, in Australia, paying for a home and superannuation complicates worker-employer relations. You could say that each worker has become a bit of a capitalist. Or, you could reason that workers not only get paid less than the value of the result of their work but also pay substantial proportions of their wages back to capitalists in the form of borrowing for larger and more expensive homes and by mandatory investments in superannuation.
Thus, workers are even more exploited in invisible or contradictory ways. Tenants link into the same structure -- there is no escape. However, Marx was not the first to recognise that the game is one of mutual hostages. Around half of the finance lent by Australian banks today goes to, and comes from, mortgagors. If they were alive now, the authors of the Communist Manifesto, Marx and Engels, might well rally: 'Borrowers of all countries unite...'(4)
Real compacts (v. fictitious capital)
Part of the reason that I chose Marx's concept of money as the subject of a doctoral study related to my experiences as an activist, especially in the women's liberation and environmental movements, and reflection that the basic building block of the capitalist system is money. By the end of that study, which involved reading many people's ideas about what money was - and how it 'worked'! - I decided that the only way forward was to dispense with money altogether. Some of those thoughts were expressed in an article published in 2001 - 'The poverty of money: Marxian insights for ecological economists' (Ecological Economics 36, 499-511). Late last year I brought together my thoughts about experiences in cooperatives and with permaculture, and from reading and discussions on utopian and other literature at a site -- Money Free Zone.
The Compact site calls for a 'compact' society. Compact means both 'an agreement' and 'small and efficient'. The argument is that money-free social relations, a 'compact society', will enable, embody and reproduce fairness, equity and sustainability. In a compact society our everyday practices will be modest and effective, minimising resource and energy use to meet simple and basic needs. We need to even out the inequalities between people within regions and between regions.
The idea is that formal collective agreements, compacts, will enable us to act in concert, to avoid some people's activities undermining other people's efforts. Networks of compacts will form the basis of compact neighbourhoods, compact communities, compact regions and a planetary compact society.
Visions and strategies for establishing sustainable practices proliferate but are in conflict with economic prerogatives that still dominate decision-making and actions. Capitalist practices are based on trade, exchanging goods and services for money, and producing goods and services for trade. The whole production process and decisions about how and what to produce are centred on the market.
This market logic uses monetary calculations. It is as if money is our common god, our central value, and provides the principles for all our main relationships and activities. Within this mainstream perspective, even sustainability initiatives must be 'economic', an example being the dominance of 'triple bottom line' approaches. Thus the world is still seen through capitalist eyes: fragmented in units in accordance with economic criteria and credentials, i.e. profitability.
Current sustainability initiatives are failing because really sustainable practices require that non-monetary values, principles and relations rule our decision-making and activities. To be sustainable we need to treat everything according to their use-value and use-value efficiencies, i.e. minimising needs and environmental impacts, and use-values must include ecological values.
Thus we must dispense with the market requirement of monetary values and calculations, i.e. capitalist determinations and complications, structuring business around assets and flows, credits and debits. Ecological processes and dynamics are hard enough to understand and manage without overlaying needs to make production and exchange sensible in terms of markets.
The concept of 'compact' is akin to 'contract' but involves none of the monetary values and financial risks common in contracts. Compacts have the potential to provide the political and economic building blocks of a world without monetary relations and values. Compacts would commonly involve at least two parties that agree, for instance, to share the use-rights and responsibilities of a resource base or to provide one another with goods and or services. In other words compacts would express agreements over the use and management of resources necessary to enable people to exist modestly and to share responsibilities as stewards of the earth and all its natural communities.
Compacts and networks offer viable forms for people to take and share direct power. Compacts would encompass all kinds of activities, including collective production and spheres of exchange, organised locally and in local-to-local networks. Thus we refer to a 'compact movement' as networks of socially fair compacts between groups and individuals, compacts that respect environmental sustainability and that will merge to form a dynamic path to rational, humane and sustainable livelihoods.
Many people have some relationships and practices consistent with a vision of compact communities. A 'compact movement' is already apparent in individual acts and voluntary associations as people place humane and environmental principles and values above monetary, capitalist ones. Generalising such values and formalising them in compacts will create alternative forms of governance, ultimately a global compact society.
This vision is not wholly new: many liberation philosophies point in the direction of a planetary compact society. Anarchism, permaculture, humanism and communism give priority to equity and fairness between people along with living in modest and sustainable ways, respecting nature. Associated principles and values have been expressed in the writings and actions of many philosophers and activists. However, a key distinction of the compact vision from numerous others is that production and exchange on the basis of people's and planetary (ecological) needs will take place without using money, or monetary values, principles and relationships.
Networks refer to the internal communications and relations between members within compacts as well as external connections comprising further compacts and other kinds of relations supporting compacts. For instance, a household would be organised by way of a compact which, in turn, would be a member of other compacts specifically formed to sustain the household and to help its members to sustain other people within their neighbourhood comprising people and the local natural and built environment.
Current capitalist practices contradict universal human rights to basic needs such as food, clothing, shelter, safety and care. Every activity involves monetary considerations at some level, shackling direct and sensible responses to human and environmental needs. Non-monetary compacts and networks would work directly with available human skills and effort, and energy and materials assessed in terms of their use-values.
Every human being would have a right to basic needs and would be a member of compacts designed to fulfil those needs at the same time as belonging to networks that would make them responsible for fulfilling other people's basic needs and care for the local environment. Planning and distribution formalised in compacts would be facilitated using electronic communication, which would link households with neighbourhood precincts and broader, sub-bioregional communities and bioregional networks.
Compacts and networks would be diverse, fulfilling a variety of purposes for numerous members. As basic ways of organising, formal compacts would offer robust and stable forms for local to global organisation of all kinds of activities, from those directed at fulfilling basic needs and wants to cultural and recreational ones. Permaculture and alternative, appropriate, technologies for generating energy and extracting and processing resources offer ready-made ways to proceed.
Some people would need to resettle according to the natural opportunities and limits of local and regional environments. Even so, place-based living would allow for mobility outside local groups, especially for members with skills and knowledge to share. Non-monetary exchange has always relied on customary rights and responsibilities with local and personal variations associated with social and environmental circumstances and developments. Non-monetary exchange will involve compacts and networks that allow groups to have access to basic needs and wants from outside the local area when necessary.
The deficiencies of local collective self-sufficiency and production for direct use-values can be overcome through low levels of exchange enabled by e-communication, negotiated on terms specific to the potential and limits of the people and landscape in question. Thus spheres of exchange would be minimal and formal and either of mutual advantage to two exchanging individuals or communities or involve multilateral benefits to many individuals or communities.
The transition to a world without money -- which is only to say that the conditions are laid for humans to establish communities based on social justice and environmental sustainability -- would be created by, on the one hand, diminishing production and exchange based on a monetary, capitalist rationale and, on the other hand, progressively taking over production and exchange using non-monetary compacts. Collectively, our actions would weaken a reliance on capitalist practices and strengthen networks of compacts as alternative forms of governance, production and exchange.
Permaculture (permanent, sustainable agricultural practices and principles of designing sustainable livelihoods) offers ways to think about, plan, strategise and act to create a world that is socially just as well as environmentally sustainable. Permaculture emphasises self-reliance, production for direct use, minimising exchanges and concentrating them in the local area, working collectively and with nature rather than competitively and to control nature.
Monetary exchanges and production for the market must be re-modelled into exchanges that focus not only on the use-values of the produced and exchanged goods and services but also on the parties to such exchanges. Thus production and exchanges would be formally planned, centre on collective sufficiency based on bioregions managed for environmental sustainability and would involve production and exchange only marginally for identified, specific, external groups and environments.
Sustainability requires the end of the market, production for trade, and trade. Instead, we must care for the earth, care for people, and share the surplus.
[This article first appeared at Radical Notes, and has been posted with the permission of the author and of Radical Notes. Dr Anitra Nelson is a writer, researcher and filmmaker who lives in the Blue Mountains, New South Wales, Australia. Currently she is a senior research associate at RMIT University, Melbourne, researching mortgage default in Australia. Since her PhD, Marx's Concept of Money: the god of commodities, was published in 1999 by Routledge, London, she has contributed a chapter to Marx's Theory of Money: Modern Appraisals, Palgrave Macmillan, 2005, edited by Fred Moseley, and concentrated her studies on ecological sustainability. Most recently she has jointly authored, with Frans Timmerman, `2020', a review of Australia's options for cutting carbon emissions (D!ssent, #27, Spring 2008: 47-52) and edited and contributed chapters to Steering Sustainability in an Urbanizing World: policy, practice and performance, Ashgate, London, 2007.]
(1) For more on Minsky and his financial instability hypothesis, see http://cepa.newschool.edu/het/profiles/minsky.htm
(2) K. Marx (1981, orig. 1894) Capital: A Critique of Political Economy Volume III [David Fernbach translation] Penguin Books Harmondsworth: 619-20. [Chapter 30, if reading another edition.]
(3) Ibid: 621-22.
(4) Following the final paragraph of K. Marx & F. Engels (1847-48) The Manifesto of the Communist Party, often referred to as The Communist Manifesto. In a recent Australian edition published by Ivy Press (Wingfield, South Australia) in their Manifesto Series with an introductory critique by David Boyle, this paragraph (70) reads:
"The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win. WORKERS OF ALL COUNTRIES, UNITE!"