The distinction between financial and real capital

With money, one can potentially trade all objects, products and relations of an economy as commodities, as purchasable objects, while conversely commodities are produced exclusively in order to turn them into money. Because of this ubiquitous function of money alone, and especially because of monetary profit as a goal of action for companies, it seems to make little sense to divide the economy into a „real“ sphere on the one hand and a nominal-symbolic/monetary/financial sphere on the other. If one understands economic reality as a coded, unstable consistency milieu or as a crisis-consistent system, then one must rather speak of a financialised, monetary reality economy. One quickly falls into the trap of the ontology in which the economic sciences largely find themselves when the word „real“ (or reality) is used in the sense of an allegedly all-founding real economy, for example in the neoclassical variant, which speaks of a „real economy“ generated by subjective utility as opposed to the airy financial economy, of real as opposed to financial assets, of real as opposed to nominal prices. (Cf. Bichler/Nitzan 2015) „Subtract everything that appears as a price, then you find the real price, which only needs to be adjusted for inflation“, that is roughly the motto.
Today, when neoclassical economists and labour value Marxists claim in unison that there is an imbalance between financial and real capital, both schools are essentially following three propositions: first, that these are two different entities; second, that these entities should correspond to each other; and third, that they do not in the current world. For neoclassical economics, the „real economy“ includes the field of economic scarcity, which is at odds with unlimited needs, and fields in which supply and demand allocate limited resources with respect to unlimited needs. (Ibid.) Under these conditions, production and consumption take place, the factors of production mix with those of technology, capitalists invest and make profits and workers work for wages, conflict meets cooperation and the anonymous forces of the market meet Smith’s invisible hand, exploitation takes place and capital is accumulated. The „nominal economy“, on the other hand, merely reflects the „real economy“. Contrary to the „real economy“ with its productive efforts, concrete products and useful services, the nominal sphere is purely symbolic. Its various entities – fiat money and prices, credit and debt, equities and collateral – are denominated in euros and cents or other currencies, counted in coins and notes, and nowadays mostly accounted for in electronic bits and bytes. The „nominal“ is considered a parallel universe, a world of mirrors and echoes, a mere image of real things.

This real-nominal duality cuts across the entire economy, including that of capital. For neoclassical economists, of course, capital sui generis also has two domains: real capital (general wealth) and financial capital (capitalisation). Real capital is derived from capital goods or factors of production, including factories and their equipment, infrastructure, labour and knowledge. Financial capital (or capitalisation) represents the symbolic claims on real capital. Financial quantities, expressed in the basic formula of capitalisation, represent the present calculation and calculation of the value of expected income, which, however, has yet to be produced by the underlying capital goods in the future. Both the neoclassical economists and the labour value Marxists accept exactly this bifurcation of the economy into real and nominal. So they also accept that there are two types of capital, real and financial. And believe that today there is an imbalance between the two.

Even in accounting, there is equivalence between real capital, which is recorded on the asset side of balance sheets, and financial capital, which is recorded on the liability side of accounts payable. The machines and structures, the innovations and the knowledge, factors that are summarised as aggregate variables, are equivalent to the sum of equity and debt capital. Nomos and physis are set identically, the nominal merely reflects the real. What remains decisive is that the correct „benchmark“ is always the value of the real or current capital. This is the measure, the underlying quality so to speak, with which the size of financial capital matches or does not match. But „real capital“, because of the impossibility of making useful aggregations, cannot be measured exactly even by prices and money. Although „real capital“ as a productive economic entity is fictionalised in theory as a price, real capital still consists of completely different objects: Tractors are to be distinguished from trucks, ships are not aeroplanes, automobile companies are not oil companies, factories do not equal knowledge. The heterogeneity of factors explains why the heterodox economists of the Cambridge School claim that there is no natural economic unit. One can say that there is at least no simple way to add up these components and this makes it difficult to decide how big or how small „real capital“ really is.

Economists therefore have to invent basic quantities and eventually price forms. For neoclassical economists, this quantity is utility, a measure of the hedonistic pleasure generated by commodities. Like each commodity, each capital good has its own utility-generating capacity, and if we add up the individual utility-generating capacities of the various capital goods, we get just the aggregate measure of „real capital“.(Ibid).

Ricardo, on the other hand, conceives of labour as the basic „physical“ unit with which one can measure, for example, the level of employment and variations in output – even independently of income distribution and economic growth. More advanced labour value Marxists use the concept of socially necessary, abstract labour time. Here, quantities of value can be measured at the level of individual capital as well as total capital qua socially necessary abstract labour time, which is produced and realised in complex compensatory movements on the markets (money stands as an external measure for the immanent measure „abstract labour“). But neither has a neoclassical economist ever observed or measured a unit of utility, nor has a labour value Marxist identified and measured a unit of abstract labour. These „real quantities“ are in fact to be assessed as purely fictitious.

Without ever having become independent, financial capital today dominates industrial or „real capital“. Financial capital, or what is commonly called finance, is by no means to be classified as hypertrophic, dysfunctional or imaginary in relation to „real capital“; rather, the latter, if one still wants to engage in such an attribution at all, is closely coupled to that financial capital. (The derivatives circulating on the financial markets are forms of money capital, structural instruments and at the same time ideological representations of the relations of capital and its power). Financial capital here has the dual function of effectively organising the various economic agencies through specific technologies of power and at the same time promoting a new form of speculative money capital.

Against the obvious results (and ways of reading) of his own calculations (and statistics), Stephan Krüger, in the course of his classical-productivist Marx interpretation, continues to insist on the allegedly determinant value structures of productive/industrial capital in Germany, while his statistics on accumulation in the FRG, at least for the period from the mid-1970s onwards, show higher dispositions for interest than for new investments in fixed capital with regard to the use of profits. However, an interest rate that exceeds the accumulation ratio does not necessarily have to be an expression of the misallocation of capital (in relation to total capital) in favour of unproductive investments, as Krüger writes (cf. Krüger 2015: 67), but conversely indicates precisely the changed conditions of utilisation of capital under the dominance of financial capital. And if the interest rate, which has fallen sharply since the 1990s, does not lead to increased investment (companies constantly match profit and interest rates with regard to their investment activity), then this cannot be attributed solely to the lack of effective demand (for capital and consumer goods), but rather indicates that money capital is increasingly involved in global derivatives due to certain economic dispositions, which concern the over-accumulation of money capital in particular, the lack of devaluation processes, productivity dynamics, the existence of financial Keynesianism, the dominance of the dollar on the world markets, etc., and the fact that the dollar has become the most important currency in the world. have increasingly flowed into the global derivatives industry. Krüger’s reference to the price-earnings ratio on the German stock markets also confirms the dominance of financial capital. Only during the New Economy bubble in 2001 did the rise in share prices not lead to a correlating rise in the profits of industrial companies, while the subsequent price rises and peaks, according to Krüger, reflect the „actual profit movement(s) of the stock corporations and the price-earnings ratio remains at around ten“. (Ibid.: 72) However, Krüger also limits this insight effect when he points out that the share price does not refer to realised, but to expected profits, or already capitalises these in the present, and that the ratio should therefore be treated with caution. But it is precisely this reference of monetary capital to the future that expresses the essence of capitalisation! By calculating or discounting the present value of an economic unit sui generis, it refers to future, expected profits (in relation to the current long-term interest rate), whereby future profits should at best already be realised in the present (overtrading).

The „momentum effect“ here consists in the fact that the statistical evaluations of past returns as well as other economic variables are naturally included in the expectations, which, however, is shown as a secondary effect compared to the profit production designed for the future. By primarily managing the future, financial capital at the same time disciplines the present, or, to put it another way, the financial markets represent the future as a risk and base the utilisation of capital in the present time on this representation. It is always important to bear in mind that the „value“ of a financial investment or asset (value of money capital) is not subordinate to the capitalist production process, but logically precedes it, i.e. it does not exist because either surplus value has been produced or another type of income or wealth has been realised in the markets, but because financial capital is confident to a certain extent that the realisation of returns within the production/circulation of capital will take place in the future and will also be repeated according to the standards of extended reproduction. (Cf. Sotiropoulos/Milios/Lapatsioras 2013 a: 155ff.)

Let us now look at some more or less well-known figures on the scale of derivatives. They sound quite impressive at first: the total nominal value of derivatives at the end of 2012 was $694.4 trillion, while the value of global GDP was $71.1 trillion. The „off-exchange derivatives markets“ accounted for a total of 642.1 trillion dollars. (Bank of International Statements 2013) Immediately, some limitations must be made in the assessment and significance of the statistical quantities, because the sums of money shown represent the nominal trading of derivatives on the corresponding markets, but precisely not what would have had to be estimated if every market participant had been paid out on every deal. Thus, in 2012, the „gross market value“ in derivatives markets based on the latter phenomenon was estimated at $24.7 trillion, roughly equal to the combined GDP of the two major economies, the US and China. Moreover, the derivatives contracts cancel each other out qua hedging, so that the net credit volume of OCT derivatives was estimated at $3.6 trillion at the end of 2012, a sum roughly comparable to the GDP of Germany. (Ibid.) In nominal terms, however, it can still be assumed that one billion „real loans“ are covered by CDS insurance to the tune of around six billion. However, the absolute magnitude is not the only decisive factor in examining the structures of interpenetration between the different sectors of national and international economies; rather, a whole series of factors play a role here, all of which show that financial capital currently not only penetrates all other economic sectors, but also determines them in the final instance.

Factors such as profitability, size, globalisation, homogenisation and degree of interconnectedness are crucial in order to be able to determine the hegemony or determination of financial capital more precisely. Of course, these factors also include the highest possible returns, state protection of banks‘ profits in the event of crises (bank bailouts), the strong action potential of financial capital in the context of national and international competition, which Bichler/Nitzan have defined in essence as the potency of companies to beat other companies (Bichler/Nitzan 2009), the strength of capital power, the existence of largely uncontrolled shadow banking systems and the high network intensity of financial capital. After all, in the financial industry there is still the dominance of shareholder value, above-average returns on capital, bonuses and extremely high salaries for management, and on the other hand the socialisation of losses and the increasing involvement of wage earners in the financial markets. While the centralisation of private money capital has continued to increase after the 2008 financial crisis, at the same time the shadow banking system has remained untouched. The share of profits of financial service providers in total profits rose in the USA from 15% in 1970 to 40% in 2005.6 (Cf. Bischoff 2014: 54) The rhizomatically networked spaces of financial capital, whose conglomerates are composed of big banks, investment banks, hedge funds, rating agencies and large private speculators, today permanently open up strategic fields for global interventions, and this partly independent of the place where the intervening agency of financial capital is currently located. And even multinational companies (of all sectors) that maintain large financial departments are to be understood as forms of financial capital, whereby the divergence between their book and stock market values must be taken into account.

The aspect of connectivity or the degree of interconnectedness of financial capital needs to be addressed. According to a study carried out by researchers at the ETH Zurich, the liberalisation of the financial markets from the 1970s onwards has led to an excessive expansion of certain major banks which, by virtue of their international transactions, constitute important nodes, not only in terms of the scale of their transactions and bonds, but also in terms of the links they maintain throughout the context of the international financial system. Thus, according to this study, 147 corporations (75% of these transnational corporations are financial institutions) today control 40% of the world’s monetary turnover through „a complicated web of ownership relationships“, holding the majority of shares among themselves. (Cf. Rötzer 2012) We have commented on this in detail in Capitalisation vol. 2 (Szepanski 2014b: 219f.). These network-like structures of parent companies, subsidiaries, shareholdings and participations in shareholdings roughly indicate what Bichler/Nitzan call dominant capital power, in which it is precisely not only the size and profitability of the companies that matter, but also the relations and linkages between the companies, the degree of their interconnectedness. The practices of networking serve to increase the value of capital and portfolios as well as the attention of investors, who are supposed to consider a company particularly creditworthy, taking into account specific ratings and rankings. The companies realise exactly what Alexander Galloway has called „practised network fundamentalism“, and in this context the responses to flawed and crisis-ridden network structures consist in realising the imperative, namely to build and establish even more networks, whereby the heterogeneous interconnection effects of integrations and mergers within the networks mostly prove to be an increase in power of certain corporations, but can also vent themselves explosively in crises. (Cf. Galloway 2015) Strangely, the quasi-tautology of money circulation (G-G`) corresponds with the tautology of presentism, which today declares everything to be a network, because everything is defined as a network from the outset.

In such networks, banks imitate the strategies of other banks. Thus, the misconduct of one bank may well correlate positively with the misconduct of other banks. On the other hand, the misconduct of one bank can also have a deterrent effect on the strategies of other banks, which then try to hoard cash in the short term by withholding loans. But especially for non-financial companies it might be difficult to copy such strategies of banks and other financial institutions so easily. Factors such as private equity, P2P lending, crowdfunding and similar operations are not sufficient substitutes for bank loans that are not granted. Moreover, the insolvency of a bank does not have the same quality as that of a retail chain such as Woolworth. Precisely because of the high connectivity, the insolvency of a large bank leads to massive macroeconomic and microeconomic effects. The failure of a hub/node in a network weighs more heavily than the failure of a rung on a ladder. The eminent degree of interconnectedness may require the establishment of transnational organisations and new legislative and regulatory conditions for modern finance.

Last but not least, one should assume that the rhizomatically networked, synthetic financial assets have a much higher impact power compared to the classical financial instruments (credit) as well as the classical commodities, because here the impact power proves to be primarily a dependent variable of the relations, the gradual connections between the economic objects and their density. Behind this is a geniun Leibnizian thought. For Leibniz, the optimisation of objects resulted from a certain combinatorial play between them that a) realises the largest number of possibilities and b) realises the highest density of relations and the highest binding force among comparable components. (Cf. Vogl 2015: 44)

In many respects, then, finance today, and always taking into account the crucial role of money capital within a monetary theory of value, constitutes the constitutive and operational determinant of any current reorganisation of capital-power. Suhail Malik even speaks of an apriori with regard to the „financiality of capitalisation“, and this refers not only to the differential price movements on the derivatives markets themselves, on which prices are permanently set and traded as so-called markers (spread and/or size) against other prices, but it also concerns the relations of the derivatives markets to conventional securities (shares, bonds, etc.), to the credit economy and precisely also to the so-called real economy. (Cf. Malik 2014) For Malik, financiality represents the transcendental condition of capitalisation and its power-rationality, while we continue to speak of the quasi-transcendentality of capital as a total complexion or determination by total capital in the last instance, within which the various sectors and fractions of modern finance „merely“ represent the dominant fraction of capital.

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