Thoughts on Fictitious Capital
Karl Marx’s concept of fictitious capital is very useful in understanding modern crises. I have explored this in an earlier book, entitled Marx’s Crises Theory: Scarcity, Labor, and Finance.
For Marx, capitalism uses markets to distribute labor into productive activities, but it does so very imperfectly. Part of the problem is that lack of knowledge about the future causes imperfect investments. These imperfections magnify as the economy seems to prosper making people become giddy about their chances of success.
Crises are a way of eliminating unproductive investments, which eventually makes the economy stronger, unless the crisis becomes so severe that it shatters the foundation of capitalism.
The crises will become more violent if the distribution of income becomes too lopsided, leaving investors flush with money, while consumers are relatively strapped. Massive amounts of money will flow into speculative ventures, creating bubbles. In effect, a market which is supposed to be a wonderful feedback system to inform capitalists about the needs of society, takes on logic of its own.
Eventually, the bubble pops and there is hell to pay. The question today is our how extreme shock will be. Capitalism has shown quite a bit of resilience in the past. What is happening now could turn out to be relatively mild or could be severe.
I use San Francisco as an analogy for my students. There will eventually be a serious earthquake that will do enormous damage. Nobody can predict what will happen. Even when the earth begins to tremble, the severity of the event may be in doubt.