Saturday, 25 October 2008

Nosedives in fictitious and productive capitals Oct 24-25

Recession fears manifested in plunging markets on Friday. Stock markets in Asia, Europe and finally the Dow Jones in the U.S. fell to five year lows. The Wall Street Journal fears there are no safe havens in the global economy left to hedge with.

Following Marx, I would argue that market falls and crashes are not destructions of value but rather are redistributions of value. What is destroyed is the title of ownership, which Marx called fictitious capital. If I own a $50 stock in a company, and the stock collapses to zero, I have simply transfered $50 to the company and received nothing. That is to say, stockholder ruin does not necessarily imply the destruction of real societal wealth. We can say there has been destruction of value only if the collapse generates the abandonment or depreciation of plants, machinery or other fixed investments.

The fallacy is thinking that a debt is a commodity with real value (despite the fact that it is traded on the market). Marx, in Volume III of Capital wrote that "unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital."

Of course, stoppages of production and traffic in the real economy have indeed been appearing across the globe. Data published on Friday revealed a significant drop in third quarter British output, the sharpest decline since 1990. Though a single quarter decline does not meet the technical definition of recession, there is virtual consensus that the country is in one. The Industrial and Commercial Bank of China announced a significant decline in third quarter profit growth. In expectations of declining demand, Chinese steel and aluminum industries have cut production by 20 and 18 per cent, respectively. Chinese car sales are expected to flatten. Despite Opec's production cut on Friday, oil prices continue to decline as fears of slowing demand growth mount.

In the US, amidst a 25 per cent drop in annual sales, Chrysler announced that by the year end it will lay off 25 per cent of its white collar workforce. Meanwhile merger talks with GM escalate.


Bruce said...

I think this is a very interesting post. If it is correct, it shows the division between the financial sector and the real economy and would provide a basis for a concrete analysis of current crisis. Who wrote the piece, David Calnitsky?

Bruce Parry

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