Capitalization, Rupture and the future of capitalism

by Jehu

I am reading, “Systemic Fear, Modern Finance and the Future of Capitalism” by Shimshon Bichler and Jonathan Nitzan and my head is exploding as I try to grasp the implications of their argument. I will try to cover this paper in two parts.

In this part I want to show why Bichler and Nitzan are concerned only with a certain sort of capital — superfluous or excess capital. In the next part I will show why this capital, since it has no productive purpose, i.e., because it does not produce surplus value, can only function as capital if it lent to the fascist state. My argument has implication that I will develop in part two.

Capitalization and ‘rupture’

According to Bichler and Nitzan, capital is finance capital and is only concerned with the present value of future stream of profits:

“In its modern incarnation, capital exists as forward-looking capitalization, a universal financial ritual that discounts expected future earnings to a singular present value.”

rupture__by_shutter_shooter-d4xvpw7This perspective ignores the “duality” between real and fictitious capital; between material production and finance. In terms Marx might put it, Bichler and Nitzan proposed that the reality of capital in the 21st century is not M=>C=>P=>C’=M’, but the truncated formulation of fictitious capital, M=>M’. In short, this is the capital that Marx says knows nothing about production; It is a speculative capital that makes its home solely in the sphere of fictitious profits.

For this reason, perhaps, Bichler and Nitzan do not speak of a capitalist mode of production at all, but a ‘capitalist mode of power’.

This mode of power, the writers state, ‘flattens’ the “differences between king and subject, owner and slave, tiller and landlord, field and citadel, village and town.” From the standpoint of capitalization, all such socio-ecological distinctions are irrelevant. What matters is the purely quantitative: the mass of capital that can be mobilized and the rate at which capital is increased.

Capitalization “crystallizes the power of capitalists to shape their world, as well as the resistance of those that oppose this power.” It is both the measure of the power of the capital and the step by step rules that creates the order of the capitalist mode of power — an algorithm that speculates on the present value of as yet unmaterialized future profits.

Since, Bichler and Nitzan, the only real capital is the capital that speculates on the present value of as yet only imaginary future profits, they propose that the signs of capitalist breakdown must begin with this speculation. Unlike Marxists, who, they argue, look for signs of capitalist breakdown in the real sphere of production and consumption, Bichler and Nitzan propose to examine what they say are two periods of ‘rupture’ when speculative capital suffered a crisis: the Great Depression, from 1929-1939, and the present crisis, from 2000.

“In our view, these rare episodes are of great importance for understanding the nature of capitalist confidence and the capitalists’ ability to rule – as well as the possibility that this system of rule will collapse. Our inquiry seeks, first, to characterize key features of these episodes; second, to speculate on their causes; and third, to assess, however speculatively, what they might imply for the future of capitalism.”

Two things about this paper struck me: First, of course, is the writers definition of capital as a mode of power, which necessarily evokes the state as central personification of capital, not the capitalists. This peculiar definition is intriguing since the writers define capitalization as the measure for success in “directing production and consumption, in shaping ideology and culture, in affecting the law, public policy, conflict, war and even the environment.” This argument suggest that the present crisis extends to every sphere of society and should not be thought of as merely economic.

The second thing about this paper that struck me is the periodization of the present crisis: I have yet to read a single Marxist discussion of the present crisis that realizes it began in 2000, not with the collapse of Lehman in 2008. Marxists seem to have a very superficial grasp of the present crisis based on the most superficial categories of economic data. They completely missed when this crisis began and, therefore, have a rather naive view of it based on mostly irrelevant indicators.

But there is a third thing about this paper that is only implied in the definition of capital as essentially finance capital. This definition implies capital, as it is defined in the paper, is the realm of the superfluous — that the writers of the paper are only concerned with capital insofar as this capital takes a form that is superfluous to society and can be abolished with no impact on real, material production and consumption.

Development of the productive forces as a threat to the existing state

In the next section Bichler and Nitzan set forth their assumptions in the form of four propositions that define the specifically capitalist state. Each of the above assumptions is ‘nested’ or premised on the next. Thus the mode of power is premised on confidence the subjugated peoples will continue to obey; this confidence is premised on a shared ideology; the shared ideology is premised on capitalization; and, finally, capitalization is premised on future expectations. What keeps the mode of power in place is the expectation an as yet non-existent stream of future profits will continue to flow.

“Suppose for argument’s sake that capitalists, instead of expecting capitalization to continue indefinitely, believed that the process would cease to exist at some future point. At that point, with capitalization gone, their assets would have a nil value, by definition; and with future prices being zero, current prices would have nowhere to trend but down.”

It follows that deflation, generally falling prices, implies that capital is a historically limited, mode of production of wealth. This might explain the absolute terror that grips the capitalist class at the very prospect deflation might rear its head and it might also explain an obscure speech delivered by then Federal Reserve governor, Ben Bernanke, in November, 2002: “Deflation: Making Sure “It” Doesn’t Happen Here”.

“Now, the fact that capitalists invest shows that they expect the very opposite [of deflation] – i.e., that the value of their assets will grow, not contract – and that expectation means that, consciously or not, they also think that the ritual that valuates their assets will never end.”

Investment signals the confidence of the capitalist class in the continued stability of the existing state and inflationary economic policies, while withdrawal from capitalistic investment symptomatic of a mortal threat to the continued existence of the state. Thus, the argument presented by the writers here is not merely a theory of economic crisis per se, but a theory of a crisis of the fascist state, of political-economy itself. Bichler and Nitzan are not seeking to explain the threat to capitalist exploitation posed by a rebellious working class; instead they are seeking to explain the threat to the state posed by the development of the productive forces themselves. In this argument, the normal operation of the mode of production — the progressive reduction of the labor time embodied in commodities — represents a mortal threat to the continued existence of the state.

Capitalization as superfluity of capital

I think it has to be understood that Bichler and Nitzan are not writing for Marx’s audience, but for the fascist state. Speaking in 2010, the writers suggest the capitalist class has not really regained a sense of confidence in the continued existence of the fascist state. The ‘green shoots’ meme of 2010 was rooted in the contemporaneous reports related to factory orders, raw material prices, consumer credit, etc; but Bichler and Nitzan take exception with this ‘green shoots’ argument: capitalization, they argue, does not reside in past data but in future prospects for the continuation of capitalization.

“The current news may be good or bad, revealing or misleading – but, then, investors aren’t supposed to take their cue from the current news in the first place.”

The realm of capitalization is the realm of fictitious claims on future profits, of speculation on future returns on capital. To base these claims to future profits on data reflecting past performance is inherently contradictory: “Needless to say, such behavior is entirely improper.”

The speculative value of fictional claims to the profits of tomorrow “depends entirely upon what it will earn in the future”, not the past. By its very nature, speculative capital lives in the future and is solely concerned with “Forward- looking securities of every color, size and denomination … floated in ever larger numbers, all promising a future of riches to the daringly prescient”.

Bichler and Nitzan explain that for investors of the late 1800s, the capitalization of today was considered to border on outright fraud and deception. According to the writers, “The whole thing smelled of a racket”; a phrase that calls to mind Marx own description of the fate of capitals no longer able to function profitably. Marx’s description is essential to understanding this paper by Bichler and Nitzan: the world of their capitalization is the world of an ever larger population of capitalists who have been rendered superfluous to the productive employment of capital. The subject of Bichler and Nitzan is not the rational miser of volume 1 of Capital — the personification of capitalist relations of production who increases his capital by abstaining from its consumption — it is the small dispersed capitals of Marx’s volume 3, those who are “driven along the adventurous road of speculation, credit frauds, stock swindles, and crises.”

It would be a mistake to think that Bichler and Nitzan are discussing the sober capitalist of Volume 1 — they are actually discussing a period where even the very biggest private capitals now fit the description of the superfluous capitalists of Volume 3.

Capitalization and the historical trajectory of capital

So what are Bichler and Nitzan’s criticism of Marx?

Their criticism is already implicit in their definition of ‘capital as capitalization’ and ‘capital as a mode of power’, not production, i.e., a capitalism where its personification must be able to mobilize the total capitals of entire nations to function as a capitalist.

While for Marx fictitious capital is merely the outgrowth of real capital — i.e., of labor power, constant capital and money-capital — and not simply an outgrowth, but the expression of a material limit on the mode of production itself; for Bichler and Nitzan, above all, capital is the fictitious capital of the holder of public bonds.

Bichler and Nitzan argue Marx considered fictitious capital only of secondary importance in a larger analysis of capital; in fact, this is not true: Marx’s entire argument on capital is just the opposite. According to Marx, capital “diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary.” The argument Marx makes in the Grundrisse would suggest fictitious capital is not of secondary importance in analyzing capital, but that, essentially, all capital is fictitious, i.e., superfluous.

All new offshoots of capital are superfluous to the existing scale of production and must find their place in productive employment. If capital is characterized by anything, it is characterized by a plethora of capital. According to Marx, this “plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit.”

Thus, for Marx, in the long run, it is not the “‘real’ economy of production”, but “the nominal ‘fiction’ of finance” that counts in the analysis of the historical trajectory of the capitalist mode of production. Like Marxists themselves, Bichler and Nitzan turn Marx’s argument on its head.

Capitalization as the separation of capital from production

If I am correct to argue that for Marx fictitious capital is what counts in the mode of production, what use is there for his Capital? Why can’t we just toss that dusty copy of a mid-1800s book in the bin, since Bichler and Nitzan have already arrived at the same conclusion. Hasn’t Marx effectively rendered himself obsolete as Bohm-Bawerk charged in his “Karl Marx and the Close of His System”?

This is the charge Bichler and Nitzan level against Marx in their “reconstruction” of the neoclassical refutation of Marx. The argument is couched in the words of Irving Fisher who explains that capital produces only use values, while these use-values, when they are exchanged, give economic value to the capital itself.

“The orchard produces the apples; but the value of the apples produces the value of the orchard. . . .  We see, then, that present capital-wealth produces future income-services, but future income-value produces present capital-value.”

The argument is ridiculous, of course, but, according to Bichler and Nitzan, it had enough purchase to argue capitalism was an eternal state of society. The theoretical inconsistencies of Fisher’s argument could be placed aside, since what mattered was its practical use.

In two sections of their paper,  “Capitalization: Marx’s Fiction” and “Capitalization: The Neoclassical Reconstruction”, Bichler and Nitzan develop their conception of capitalism as a ‘mode of power’ as distinct from the classical Marxian conception of capitalism as a ‘mode of production’.

The detachment of capital as a mode of power, (i.e., as a form of state), from capital as a mode of production not coincidentally begins with the question, “Where do profits come from?”.

In Marx’s conception, of course, profit is merely the portion of the labor day during which the worker is not paid for her labor. This surplus labor time produces surplus value, which then appears as profit when calculated on the basis of the total capital — variable and constant — laid out by the capitalist on production. Production thus creates both value and surplus value. But for the latter to operate as capital on an expanded scale is not already given in the new capital; rather this new capital must find its place in production. The same process that creates surplus value produces both a definite mass of excess capital and a definite surplus population of workers displaced from productive employment.

In Marx’s discussion, there is always a plethora of capital trying to find it place in production — a plethora confounded by the fact that the falling rate of profit sets a definite minimum size on the quantity of capital that can function as capital. These smaller capitals are constantly forced out of production and can only find a place if they are placed at the disposal of larger capitals as loaned capital. In the worst case, they are driven out of productive employment altogether and make their living on fascist state bonds. It is this excess capital — the capital turned over to the fascist state — that appear in Bichler and Nitzan’s paper alternately as “’illusionary’ or ‘fictitious’ capital.”

It is this capital that Bichler and Nitzan are referring to when they state at the beginning of their paper,

“Capital, we argue, is finance, and only finance. In its modern incarnation capital exists as forward-looking capitalization, a universal financial ritual that discounts expected future earnings to a singular present value.”

The capital identified as capital in their paper is the excess capital of Marx’s Capital; this capital is not directly engaged in the production of surplus value, but is lent out by its owners to productive capital or altogether separated from any productive employment, i.e., purely speculative. The capital, as it is employed by its owner, is not “real” capital in any direct sense, i.e., the owner does not himself actually employ it for production of surplus value; it is lent out to another, who may indeed employ it as capital; but (as is always the case in capital lent to the fascist state) may not ever be employed, but only consumed unproductively.

Nevertheless, so far as the owner of capital is concerned, his capital leaves him with one value and returns to him with another, hopefully larger, value. The capital thus appears to expand itself without ever becoming employed by its owner for the production of surplus value. The relation between the self-expansion of the capital to surplus labor of the worker is lost completely in the mystery of finance.

Of course, if the capital is to expand itself, surplus value must be produced, but this process no longer appears as the direct result of the employment of the capital by the capitalist. Moreover, there is no direct relation between the expansion of his capital and the production of surplus value.

Capitalization, or the illusion of capitalism without a trajectory

Thus, at the point where Bichler and Nitzan take up the discussion, the relation between the expansion of capital and the production of surplus value is entirely mystified. What replaces this relation is the neoclassical conception of capital as the production of use values that enter circulation without values. Once in circulation, these use values acquire prices and, by this means, gives some definite value to the capital that produced them.

Bichler and Nitzan admit this reasoning by Irving Fisher makes no sense at all; however they argue it doesn’t really have to make sense: Fisher’s great contribution was to allow financiers to reconceptualize their activity as the capitalization (or, in terms that will be comprehensible to our Marxists, ‘commodification’) of everything. Further, Bichler and Nitzan make a critical argument to avoid scrutinizing Fisher’s nonsense:

“From a theoretical standpoint, this articulation is deeply problematic – primarily because neoclassical “capital goods,” much like Marx’s “actual capital,” cannot be measured in universal units, whether we call them utils or abstract labor hours.”

This argument is convenient because the reader might never notice that the writers themselves, having distanced themselves from both Marx and neocliassical theory, offer no third explanation.

What has to be explained is the source of the fictitious capital that, by all accounts, has come to dominate capitalism. Marx proposes it arises from “real” capital; in a surprisingly antisemitic turn, Bichler and Nitzan proposes capitalization actually predates real capital: While real honest industrial capital is the product of the protestant ethic of frugality and hardwork, the vampirism of modern finance capital is a throwback to the money changers:

“This ritual has a very long history. It was first invented in the capitalist bourgs of Europe, probably sometime during the fourteenth century. It overcame religious opposition to usury in the seventeenth century, to become, for the first time, a conventional practice among bankers.”

In this passage, the practice of capitalization is described as a ‘ritual’, that had to overcome ‘religious opposition to usury’. While Marx argues modern financial capital is a product of good old protestant ethic of hard work and frugality, Bichler and Nitzan hint at its alleged mysterious Jewish origins. By dropping Marx’s insistence on the role played by productive capital in the formation of finance capital, we are left with no real explanation for how this capital comes to dominate society.

This not only feeds into the agitation of the worst anti-semites, it also fails to disclose the implications of the process. In Marx’s argument, there is an antithesis between real and fictitious capital: real capital generates fictitious capital and is ultimately displaced by it. There is, in Marx’s argument, an inevitable process whereby the mass of capital that cannot operate productively constantly increases, leading to the cessation of production for profit.

“The rate of profit, i.e., the relative increment of capital, is above all important to all new offshoots of capital seeking to find an independent place for themselves. And as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out.”

The progressive enlargement of the scale of capitalist production chokes off the formation of new capitals and ultimately results in capitalist collapse. It is not as though Marx and Fisher were offering two different explanations for the growing domination of finance capital, they were offering two different trajectories for the mode of production itself. To put it bluntly, these two different trajectories are supposed to be the subject of Bichler and Nitzan’s paper: “The Future of Capitalism”.

If their paper is touted to be addressing “The Future of Capitalism”, how did Bichler and Nitzan manage to miss this point?