2.1 Specters of Keynes and Veblen

We shall shortly look at Marx’s analytical problematic of finance. For the moment, however, we want to focus on what we see as the kernel of the Keynes– Veblen framework. This can be expressed in the following Figure 7.1.²

In the “material world” (of the so-called “real” economy), the quantity of capital can only be measured/interpreted in terms of heterogeneous capital goods (or, so as not to dissatisfy the proponents of the (classical) labor theory of value, we may add: material capital can only be measured in terms of labor time units). This capital produces income streams in the future measured also in “material” (or labor value) terms. In Figure 7.1, this process is depicted by transformation step 1. This “material” world also has its unique duplicate: the world of values (i.e., prices). As long as we are in the latter, future income streams in price terms (profits) are translated by step 3 into present capital value. This step presupposes a proper capitalization based on some rate of interest. Economic variables in this second world are all expressed in value terms: namely in money. These two co-existing universes are connected by step 2, in which future material incomes are matched to the corresponding prices.

It is not very difficult to summarize Keynes’ and Veblen’s common problematic in light of the above descriptions (based on our reasoning in Chapter 1). The spontaneous tendency of capitalism is to make the dimension of values totally autonomous (detached) from the dimension of the “real” economy. This outcome is also associated with the rise of the absentee owner who receives a parasitic rent. From this point of view, the dimension of values is self-standing, self-reinforcing, and systematically represses the world of material quantities. This theoretical speculation has always been very strong in the relevant discussions and can be found in different forms and under different conditions. In the Keynesian analysis, it is the demand prices of capital goods (as capitalized

expectations of future incomes) that drive supply prices (the “material” supply of capital). Since stage 2 in Figure 7.1 is loose, the absence of proper state intervention will always have (as a result) economic instability and underemployment of “material” resources.³ Completely in line with this theory, Veblen would argue that the domination of capitalization and finance leads to absolute dissociation between the two above-mentioned levels. This shift radically transforms business life, embedding in it an economic spirit that deprives society of the fullest development of its productive capacities. In this sense, the rise of finance makes capitalism dysfunctional. It comes with the dominance of the parasitical absentee owner (Veblen) or rentier (Keynes) and sabotages the “real” creation of use values.

We shall give a further example, one that does not come from the field of heterodox economics. That is why it is more representative of what tends to become dominant within the social movements. In a recent pamphlet, which was inspired by the Occupy Movement, Noam Chomsky made the following point:

This rather long passage summarizes very well the spirit of the above-mentioned analysis; it is also a very neat formulation of a narrative that tends to dominate heterodox theory and politics. The ideal capitalism of the 1950s and 1960s was based on control of finance. The unleashing of the latter after 1970s harmed the “real” economy (“de-industrialization” and “off-shoring”) and society to the benefit of the financial sector, which is totally detached from production. This theoretical schema can only be analytically justified in the light of Figure 7.1: namely, the domination of the dimension of values over the “real” economy.

2.2 Heterodox (Marxist) discussions on financialization: a brief summary

Financial engineering remains a mystery for the majority of heterodox analyses. The train of reasoning may be slightly different in each case, but the general problematic remains the same: finance in our contemporary societies has become dysfunctional (purely speculative) to a proper accumulation of capital. And of course, there is an important straightforward corollary: if financialization is a distortion, the causes of recent extraordinary financial innovation cannot be attached to the general dynamics of capitalist production.

Finance is usually approached in terms of quantity. Its rise has, therefore, the character of a monodimensional extension: over-indebtedness and/or over-spending. From this point of view, a relevant definition of financialization is the one offered by Ingham (2008: 169): “the increasing dominance of financial practices and the fusion of business enterprise with ‘financial engineering.’” Finance is considered as something extraneous to business enterprise that can only contaminate the latter. Therefore the rise of finance is connected with the growth of something (debt, speculation etc.), which further penetrates and distorts different domains of the economy. This idea, based on “curious processualism” (the expression belongs to Martin (2009: 116–117)), is characteristic of a significant part of the discussions. But if the rise of finance is not a permanent tendency within capitalism, what explains its sudden ascendance? In brief, there are two general answers to this question. The following comments attempt to sketch the outline of the literature debates and not to provide a thorough account of them.

The first one has already been analyzed. It is the train of thought that draws upon Keynes’ and Veblen’s approaches. The rise of finance is linked to the hegemony of the absentee owner. This is rather the outcome of a conflict between the productive and the parasitic parts of the society, to the benefit of the second. The victory of the one sets the basic pattern of capitalist development as pertaining to its own agendas, targets, and economic priorities. Thus, it is not just a simple victory. It is a hegemonic predominance along with the rise of a new historic bloc (to use Gramsci’s famous term), which amounts to a particular institutional setting of the society. The very same message can be arrived at via different types of reasoning. For instance, as we argued in Chapter 2, Hilferding’s approach sees finance as a predatory social process and can be easily placed within the same categorization.⁴

The second school understands financialization as a mere byproduct of capitalism’s inability to absorb the final product. This type of explanation can be found in two alternative versions. Both are revivals or sophisticated reformulations of the old underconsumptionist ideas and related debates.⁵

In a nutshell, the classical underconsumption theories, as they were developed by Sismonde de Sismondi and Robert Malthus, can be reduced to the following propositions. Within the capitalist economy there is an inherent tendency towards economic crises of generalized overproduction, due to the inability of effective demand to keep pace with production. When supply exceeds aggregate demand there is no endogenous dynamic tendency towards full employment equilibrium, because demand has priority over supply; it is demand that triggers and regulates production and not the opposite, as assumed by Say’s Law. This general insight can be used as the departure for two different interpretations of contemporary capitalism. Many recent approaches to financialization explicitly or implicitly draw upon them.

On the one hand, the Malthusian argument attributes crises (and unemployment) first and foremost to over-saving by capitalists. This is equal to saying that underconsumption results from high capitalist profitability: if wages are relatively low compared to the level of profits, which are mostly saved, then the potential productive output cannot be absorbed unless there is an equal increase in final consumption. Capitalists encounter a prospective lack of investment outlets and capital becomes excessive and surplus. Following this line of thought, one can see finance as an unstable remedy, which, moreover, favors capitalist over-savers. Surplus capital can be recycled to low paid workers in the form of debt and/or stagnate in speculation. This is an undoubted benefit for the capitalist class as a whole because it solves the problem of surplus capital. The only shortcoming is that financial recycling cannot be considered as a permanent solution. Different versions of this idea can be found in Husson (2012), Resnick and Wolff (2010), and Mohun (2012). Of course, all these authors do not share exactly the same reasoning. Nevertheless, they do link financialization or related crises to a reading of Marx in line with the Malthusian version of underconsumption (capitalist over-saving due to high profitability in relation to wages).⁶

On the other hand, the alternative approach of Sismondi offers “low profit-ability” as an explanation of the same underconsumptionist problem. Output cannot be absorbed and profits cannot be realized because demand is insufficient due to low wages. Poor profitability makes capital stagnant and surplus since it can be channeled to production only in a declining pattern. In the absence of other welfare solutions to boost demand, financial recycling can become a crucial intermediation in decongesting the build-up of surplus capital. The argument is pretty much the same as the previous one. Finance and credit bubbles are the most favorable way for capital to curtail repression in output expansion and profitability without incurring major costs. In this sense, financialization is the unstable result of underconsumption based on poor capital profitability. Some authors, without abandoning the spirit of this reasoning, connect low profitability not just with low wage incomes (demand) but also with the high value of the already invested constant capital (overcapacity). In this sense demand always falls behind productive capacity. This explanation is just another facet of the very same idea. As profit falls there will still be some investment, which adds to the overall amount of capital and its productive capacity to exceed demand. This type of reasoning emphasizes the over-investment of capital relative to realized profitability. It describes one more channel of the downward pressure on the profit rate: it is not just the numerator (decrease in realized profit) of the ratio that counts but also the denominator (the increase in the amount of constant capital: overcapacity relative to poor demand). Many contemporary approaches can be included in this theoretical tradition where a long-term crisis of profit-ability is followed by a “growing reliance on credit bubbles to sustain economic expansion” (Callinicos 2010: 50). We can mention the following interventions: Callinicos (2010), Brenner (2002), Harvey (2010), Foster and Magdoff (2009), McNally (2009), Kliman (2012), and Lazzarato (2012).⁷

The proposed categorization of this section does not fully reflect the analytical wealth of all the relevant approaches. It is a general sketching that helps us to advance our point. Neither does it exhaust all current viewpoints about financialization. For instance, Arrighi (1999) sees the modern neoliberal organization of capitalism as a subversion of the hegemonic position of the USA, in a similar cyclical pattern to that experienced in the past by Genoa, Holland, and Britain. Faced with a setback in commodity markets, with profit opportunities for its capitals beginning to decline, a hegemonic power switches to financialization: financial capital flows elsewhere in search of profits (Krippner (2005) elaborates on this idea).

Our reading of Marx radically departs from all the above insights. To some extent, this must have become clear to those who have been reading the book from the start. Our point will be further clarified in the following chapters. Capital and finance are not just quantities that can be extended through space and time. They are social processes, which overlap with each other in many different ways. But primarily, finance is the everyday mask of capital: it is capital’s form of existence. The rise of finance has followed the dynamics of capital on the background of class struggles from the very beginning of capitalism. This summarizes Marx’s own major analytical contribution, which has been left unacknowledged in the relevant discussions and debates. Changes in the trend of the profit rate may have consequences for the development of finance, but these consequences cannot be one-directional and straightforward; nor do they transform the character of finance. Finance, in its modern sophisticated version, is something much more than accumulated liabilities and increased indebtedness. It presupposes a great amount of investment in mainstream research and financial innovation and it is based on major institutional developments, economic strategies, and state regulations within capitalist societies, which all have their own unique history, institutional pace, and temporality. In this sense, the history of finance can by no means be reduced to a mere reflection of the historical pattern of the profit rate. The authors, who see finance as so “flexible” that it can nicely and immediately fill the gaps caused by underconsumption if and when they arise, fail, in fact, to understand the true nature of finance in capitalism. The fact that developments in finance are not contemporaneous and symmetrical with the trend in profit rate⁸ is the true Achilles heel of all the above-mentioned Marxist traditions.

There are some striking exceptions in the heterodox analyses. We refer to the interventions of Bryan and Rafferty (2006; 2009), Martin (2002; 2007, 2009), and Bryan et al. (2009). Our argumentation has much in common with the latter. It is also influenced and motivated by them. Some differences have already been addressed; others will become clear in the following chapters (see also Sotiropoulos and Lapatsioras 2012 and 2014).⁹

2.3 Specters of Marx

Let’s return to Figure 7.1. The critical step for the Keynesian type of reasoning is step 2: the meeting point between the “real” economy and the “world” of nominal values (or alternatively, where the labor theory of value meets the capitalization (pricing) of capital). This step generates expectations (E_t) of future income flows (D_t+1, D_t+2, D_t+3, …) that will return to the owner of capital. In the elementary case of a common stock (D now stands for dividends), and if we accept, for reasons of simplicity, constant expected return equal to R¹⁰ (which of course embodies the assessment of the overall involved risk), then the expected future income flow can be capitalized (priced) according to the following expression:¹¹

The message of the above (trivial in financial textbooks) mathematical expression is straightforward. Capitalization translates into a financial security with price P_t the expected value of a future income stream. In fact this is a process of securitization. By and large, it captures the workings of the financial sphere (the dimension of values): it is a permanent capitalization on the basis of existing “information” about future events in order to price different types of financial assets. Capitalization is captured by step 2 in the above-mentioned Figure 7.1. The liquidity of these markets indicates the ever-lasting process of present value assessment.

Nevertheless, from a Marxian point of view there are two fundamental misconceptions in Figure 7.1. Both concern step 2, which, interrelates the two distinct levels. On the one hand, the true materiality of capitalism regards the complex articulation of social power relations, which organize and reproduce capitalist exploitation. The material and technical specification of the means of

production is irrelevant from this point of view. In Figure 7.2, the social nature of the upper level has been changed. The world of values is not something discrete from the “real” economy. As was implied in Part I of this book, capitalist relations necessarily exist under the commodity form; they are not visible as such in ordinary life. They exist in their results under particular phenomelogical conditions.¹² The pure form of capital takes the shape of a financial security as sui generis commodity. In this sense, the dimension of values (prices) is as real as the capitalist power relations that are expressed through it. It is the form through which social power relations cannot but be represented.

The process of valuation, which takes place in the lower levels of Figures 7.1 and 7.2, is associated with the appearance of capital and cannot thus be understood without the process of fetishism. This is the key point that allows the understanding of Marx’s reasoning and clarifies the differences from other mainstream and heterodox interpretations of the same process.

The appearance of capital under the commodity form (reification) is a representation of capitalist reality, comprising images, ideas, and perceptions which do not originate arbitrarily in our minds (i.e., in the mind of every economic agent) but arise from, and are held in place by, social and economic relations themselves (Montag 2003: 62). In other words, fetishism is not a subjective phenomenon based on illusions and superstitious beliefs. It refers to a socially functioning (mis)interpretation of economic reality. In this sense, the latter is made by objects (commodities), which are always already given in the form of a representation (Balibar 1995: 67). Therefore, step 2 carries out an intermediation, which is absolutely crucial to the organization of capitalist power. It translates into quantitative data (we mean the magnitudes of E_t[D_t+i] and R) the dynamics of social power relations. This process can only be properly perceived on the basis of the Marxian concept of fetishism. Here fetishism does not simply mean the mystification of capitalist reality but also the embeddedness of social behaviors and strategies proper to the reproduction of class exploitation. This standpoint sets forth a radical new groundwork for the analysis of the financial system and is in line with Marx’s argumentation in Capital. Marxist discussions so far have failed to highlight this aspect of Marx’s reasoning. In the rest of this chapter we shall try to further explain Marx’s point.

3.1 Discussions on EMH: the backbone of mainstream financial theory and practice

The Efficient Market Hypothesis (EMH) is a benchmark in debates on modern finance. This hypothesis has a central role in shaping contemporary financial markets and mainstream financial theory. There have been many pages written on EMH and many more devoted to its empirical testing.¹³ As mentioned by Shiller (2000: 171–172), “the literature on the evidence for this theory is well developed and includes work of the highest quality.” Nevertheless, the conclusions of the empirical research are divided and as a whole favor neither full acceptance of the EMH nor its total rejection.

For those who come from a background in political economy or social theory it is not difficult to understand this result. In fact, despite the sheer volume of empirical research, EMH is a theoretical argument that cannot be rejected; this point is made by Campbell et al. (2007: 24). Even well-established empirical testing (something that cannot always be taken for granted) usually assumes an equilibrium model that defines normal asset returns. If the evidence runs against efficiency, this could mean either that the market is inefficient or that the accepted equilibrium model is incorrect and must be replaced by a more accurate one that does not contradict the spirit of EMH. In the rest of this section we shall focus on what we take to be the core theoretical issue of EMH.

At its “most general level, the theory of efficient capital markets is just the theory of competitive equilibrium applied to asset markets” (LeRoy 1989: 1583). This idea resembles the Ricardian idea of comparative advantage:

As a result, efficient markets based on agents’ interaction must generate fair asset prices in a double sense: these must be prices that are close to economic fundamentals and that leave no room for “free lunch.” Any other outcome would not be acceptable in the mainstream economic context of efficiency.

We can understand this theoretical statement as follows. At any point in time there is some fundamental information with regard to the underlying entities of financial securities (capitalist firms, capitalist states, etc.). This information concerns their present economic conditions (based on events that have already occurred) and their future prospects (based on events which are expected to take place in the future). If this information is not publicly available to all market participants in the sense that it has not been discounted in the market prices, then those who have the comparative information advantage at their disposal will act rationally to exploit market mispricing to their own benefit. Nevertheless, what is “generally known” is not very far from actual fundamentals (in other words, the amount of information which is publicly known is extensive); hence the profit-seeking behavior of rational investors will almost instantaneously incorporate the missing information into financial asset prices, thus eliminating the (relative) informational advantage. At the limit of this speculation, financial prices are always correct given what is actually known about economic fundamental: “in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value” (Fama 1965: 56). They cannot predict the future with absolute certainty, but at least they reflect what can be possibly known today about fundamentals.

Note that this line of reasoning does not rule out discrepancies between actual prices and intrinsic values based on economic fundamentals. In efficient markets the action of rational profit-seeking agents will make these discrepancies not systematic but random in character. Any systematic discrepancy would be a comparative advantage to someone and thus quickly lead to price corrections towards intrinsic values. It is not difficult to see why the idea of market efficiency was, from the very beginning, linked to the random walk hypothesis. The feature of “instantaneous adjustment” implies that:

The conception of randomness originates from probability analysis and has also been used extensively in natural and physical sciences. In financial markets this condition is met under the rational behavior assumption, which neutralizes prices discrepancies as mentioned above. The basic intuition of the random walk is very old. Gerolamo Gardano (1501–1576), the famous Italian Renaissance mathematician whose love for gambling led him to formulate the first elements of probability theory, wrote in his 1565 manuscript (entitled The Book of Games of Chance):

The point of this argument is not to compare finance to gambling, but on the contrary, to a fair interplay between participants without any strategic advantage over each other. This is the essential idea of the so-called martingale stochastic process given by the following expression:¹⁴

In the above expression P_t represents cumulative winnings with respect to a sequence of information set Φ_t (which for simplicity contains all past values). This formula captures the meaning of a fair game, since it says that the expected incremental winning at any time is zero conditioned on the history of the game. If this formula is applied to financial markets, then its message fits nicely into the above analysis. In an efficient market:

In this sense, the market can deliver no-free-lunch only when the best forecast of tomorrow’s price is today’s price: past data cannot be a good guide for successful investment action.

However interesting it would be, we don’t have the space here to embark on a detailed analysis of the numerous mainstream debates on the issue of the random walk. As mentioned many times in the literature, this line of thought results in an uncomfortable corollary when it is pushed to its limits: if the market efficiently reflected fundamentals or instantaneously adjusted prices to them there would be no incentive for someone to act rationally. Why do financial investors care about costly information gathering, which will be soon incorporated in prices? In fact:

This was the point to be emphasized by the seminal intervention of Grossman and Stiglitz (1976, 1980). Prices cannot perfectly reflect all the available information because otherwise it would not make sense for someone to spend real money on its costly acquisition without getting any compensation. Hence, either the random walk hypothesis does not hold or it would irrationalize economic agents to the point of total passivity.

A random walker would understand this paradox from the very beginning and thus make room for some non-instantaneous adjustment. Of course, there are many other problems with the martingale model. The most important, with respect to economic reasoning, is to be found in the difficulty it has in accounting for risk. In plain terms, it cannot allow for risk aversion (the fact that there is some trade-off between expected return and assumed risk), which is the cornerstone of financial theory. The Capital Asset Pricing Model (CAPM) was an attempt to generalize the random walk thesis in order to include risk-averse behavior (with very poor empirical results).¹⁵

Nevertheless, we must emphasize another point that is dominant among both followers and critics of this idea. Our argument is summarized in Figure 7.3.

There are four key concepts involved in the above-mentioned discussion about EMH: (1) the nature of competitive equilibrium in markets (in the Ricardian sense of comparative advantage theory); (2) the conception of the economic rationality of agents along with the way they form expectations; (3) the random walk hypothesis (in the martingale form, as described above); and, (4) the latent conception of information in an economic world, which is supposed to be transparent. Point (1) is not challenged. Most critiques rejected point (3) and along with it they put forward different versions of economic rationality in point (2). For instance, this is clear in LeRoy’s (1989: 1616) conclusion, which welcomes behavioral finance:

Premise (4), the empiricist conception of information and knowledge, has never been actually contested by any school of thought. It has never been explicitly addressed, even by the most severe critics, and yet it is this presumption that holds together the whole analytical edifice. Below we shall challenge this analytical precondition in the light of the Marxian analysis.

3.2 Behavioral departures

Rejection of the “instantaneous adjustment” thesis along with the random walk hypothesis is identical to throwing away the idea that prices reflect economic fundamentals. This development leaves room for many different research programs which, focusing on financial instability, challenge the idea of randomness. To do so, they usually come up with different versions of rationality reshaping point (2). Since many of these versions draw upon psychological assumptions, they are usually perceived by mainstream economists as research programs that argue for economic irrationality. Nevertheless, this is not the case. Both the mainstream approaches to economic behavior and the alternative versions which challenge it, attempt to put forward particular models of economic rationality (different versions of economic anthropology). In what follows we will emphasize that even the most critical Keynesian insights do not challenge the empiricist conception of information suggested by point (4).

We shall start with Herbert Simon. Decades before the success of so-called behavioral finance, he had argued that individuals are characterized by “this type of goal-oriented but cognitively restricted behavior” described as Bounded Rationality. The economic agent “has become a pragmatic information processor with limited aspirations to achieving efficiency or optimality” (Foley 2004: 92). Individuals confront a complex social reality without the luxury of having “unlimited time and brain power to devote to decision making” (Fox 2009: 179). They have no other choice than to use heuristic shortcuts and useful rules of thumb. They behave rationally in a bounded way. Society is transparent to them but they cannot deal with the enormous amount of information they face.

The existence of heuristic rules of behavior, common to all or to a significant number of economic agents, runs against the random walk hypothesis because it can be associated with pre-specified patterns in pricing. An investor may discover and take advantage of the latter. In this sense, the absence of randomness is identical to mispricing fundamentals. Individual judgments about future and uncertain events are based on heuristic rules that sometimes lead to severe and systematic errors. This line of thought was the leading idea of the intervention of the well-known behavioral psychologists Tversky and Kahneman. In their seminal 1974 paper on judgment under uncertainty, they put forward the following argument:

Economic researchers who were dissatisfied with the empirical evidence of the EMH turned to this type of argumentation. For instance, Shiller (2012) along with Akerlof (see Akerlof and Shiller 2009) end up flirting with the Keynesian concept of animal spirits. They use the latter in the above context of a psychological theory of human nature to deal with the complexity of contemporary capitalism. They argue that investment actions:

As we have already discussed in Chapter 1, the extreme version of the behavioral type of critique of mainstream finance came very early in the interventions of Keynes and Veblen. Paul Davidson (2002: 174; emphasis added) provides a lucid summary of it:

This is what remains common to all the above arguments, which challenge the EMH in the light of the reasoning we developed in Chapter 1. Finance has become complex and can only guide investment action through the pattern of second-order-observation (or other heuristic rules). Hence, the linkage between financial prices and fundamentals becomes loose and arbitrary, heavily based on psychological factors. When the market is left to itself, speculation (second-order-observation) becomes the dominant practice, leading to a deranged financial instability and sub-optimal resource utilization. Trends in prices are potential sources of capital gains without any direct relation to underlying real investments and production capacity.¹⁶ In the context of Figure 7.3, points (2) and (3) are disputed; nevertheless, points (1) and (4) remain intact.

3.3 Society is a complex setting of non-transparent social relations: the origin of Marx’s framework

Every systematic approach to Marx’s theory of finance in relation to the above-mentioned analytical debates must begin by fully challenging presumption (4) (see Figure 7.3). Every other alternative would just squeeze Marx into an inferior position within the presented context. In other words, Marx’s problematic challenges the only element that was implicitly adopted by all interventions discussed so far. He thus breaks new ground in a radical rupture with the dominant empiricist framework.¹⁷

The common idea in the above discussions concerns the concept of information. The capitalist world is thought of as transparent and the financial process as a relationship between a given object (the capitalist reality) and a given rational subject (the market participant). At this general level the status of the object (discontinuous or continuous capitalist reality, mobile or fixed, fundamentally uncertain or not) and of the subject (rational, psychological etc.) is not very important. Full knowledge of economic fundamentals presupposes gathering full information, which is not given to any individual. The world is transparent. Information is already there. But its distribution is uneven, asymmetrical, and more importantly its acquisition is extremely costly. Random walkers accept that all existing information is by and large incorporated in prices, allowing for some delay due to the adjustment process. In this sense, future prices are truly unpredictable. Individuals face prices that closely embody all relevant existing information. They do not “know” everything, but this is not the point. They take action on the basis of prices that incorporate all available knowledge. The world is transparent to investors through the signals given by prices; it is as if investors know everything (or almost everything) when they take decisions. However, as already mentioned, this is not a commonplace in discussions. Given the complexity of the world or given the structural uncertainty that governs future trends, it is argued by the critiques that economic agents resort to shortcut psychological rules to guide their economic actions. This results in the loosening of the connection between information and pricing. Information about fundamentals is out there, the true knowledge of society already exists, but this knowledge cannot easily be embodied in asset prices, giving rise to unstable financial results.

In Marx’s universe, the notion of information is vague. Capitalist reality is not transparent. It is formed as a complex setting of social power relations, which are not revealed in everyday experience as such. These power relations exist in the form of a particular representation. The latter mystifies their social nature, calling forth proper norms of individual behavior that are accepted (lived) by economic agents as the truth of their reality. From this point of view, information and pricing are already immersed in the context of capitalist ideology. Certainly, prices may be perfect, imperfect, or totally misleading with regard to information about fundamentals. But economic fundamentals themselves along with their reflection in prices (economic models) are already defined within the inescapable field of capitalist ideology. Financial prices reflect, efficiently or not, the ideological setting of capitalist society. In this way, their role might be very active in the organization of capitalist exploitation.

We believe that this approach to finance is dominant in Marx’s theoretical system and we shall elaborate upon it. As has already been mentioned, our analysis is inspired by the writings of Althusser (and his followers). The latter theorized the Marxian understanding of the emergence of socially necessary misrecognitions (socially necessary in the sense that they underwrite those practices that reproduce capitalist relations of production) and integrated it into a broader theory of ideology (and so of ideological state apparatuses).¹⁸ The starting point must be a view of ideology as a totality of social practices, which are openly reproduced, taught and implemented in ideological institutions or tacitly linked to the state and operating in such a way as to reproduce the social capitalist order. The main element is not that ideology is associated with various forms of indirect coercion but that the ideas in which it is codified are organic, i.e., they contribute to the reproduction of capitalist relations. They thus not only become “acceptable” to members of society, but are experienced by them as expressions of the truth of social life. In this sense they are the foundations of a necessary relation between subjects and the conditions of their existence.

The most important element in this approach is the link between ideology and the subject (and their subordination), which Marx conceptualizes in a way that is entirely different from anything in previous philosophical traditions and, of course, in the form of a total rupture with the above-mentioned empiricist context. Capitalist society is not transparent and the organic representations that are linked to it are not external to the existence of individuals. As it emerges from Marx’s analysis, reality is not only the “thing,” the “entity,” the real “sensible thing,” but also the illusion, the “supersensible thing.”¹⁹ These constitute the necessary components of reality, even though they amount to a misapprehension of it and a naturalized projection of historical constructs. Just as real are the non-transparent and ideologically coerced behaviors, which emerge from this reality. In this way, Marx’s theory transcends the classical distinction between the society and the individual-subject, revealing that there are no subjects outside of society but rather practices which constitute subjective identities on the basis of historical elements. The subject does not constitute the world, as asserted by idealism, but the world gives birth to the subjectivity of the individual.

4.1 The theoretical argument

When Marx introduces the circuit of interest bearing capital: Μ – [Μ – C – M′] – M′′ and the role of the money capitalist in the third volume of Capital, he does not speak of a specific fraction of capital but he analyzes the more concrete form of the circuit of capital itself (see Chapter 3).²⁰ The circuit of interest bearing capital cannot be thoroughly grasped without reference to the concept of fictitious capital. In other words, the pure appearance form of capital is necessarily the fictitious form. The latter can only be understood in the context of the Marxian theory of fetishism. This is how we should understand Marx’s analysis in the third volume of Capital.

As we have already discussed, interest bearing capital is fictitious capital; that is to say, it is a financial security priced on the basis of the income it is expected to yield in the future. Interest bearing capital is the concrete form of capital in the shape of a sui generis commodity. The process of capitalization also maintains a central role in the works of other heterodox thinkers, such as Keynes and Veblen, who wrote many years after Marx.²¹ From our point of view, Marx’s major theoretical contribution to the analysis of finance is the association of capitalization with fetishism. On the basis of the analysis that accompanied Figure 7.2, it is easy to understand that the pure (and most developed) form of appearance of capital is its fictitious form.²² It is “fictitious,” not in the sense of imaginary detachment from real conditions of production, as is usually suggested, but “fictitious” in the sense that it reifies the capitalist production relations. Surprisingly enough, a great many of the Marxist analyses of the third volume of Capital have failed to pay due attention to this fact. Nevertheless, Marx’s message is clear and indisputable:

Marx’s formulations leave no room for ambiguities. They should be read in light of his elaborations on the issue of commodity fetishism in part 1 of the first volume of Capital (Marx 1990).²³ To sum up, capitalist exploitation appears as a “thing,” as a sui generis commodity, as a financial security. As we analyzed it above, this appearance is a representation of the capitalist reality comprising ideas, perceptions, and theoretical schemes which do not originate in agents’ minds but arise from, and are held in place by, social and economic relations (Montag 2003: 62). In other words, fetishism is not a subjective phenomenon based on illusions and superstitious beliefs. It refers to an economic reality mediated by objects (commodities), which are always already given in the form of a representation (Balibar 1995: 67).

Marx introduces the concept of fictitious capital, and speaks of fetishism, when he gives an account of the social nature of financial markets. He wants to underline the fact that capital assets are the reified forms of the appearance of the social relation of capital, and so their valuation is associated with a particular organic representation of capitalist relations. They are objectified perceptions, which obscure the class nature of capitalist societies and call forth the proper mode of behavior required for the effective reproduction of capitalist power relations. It is in this spirit that we articulate our main suggestion: that financial markets have an active role to play in the organization of social power relations. The so-called dysfunctionalities that are attached to them comprise unavoidable moments within a power technology that shapes and organizes different forms of class exploitation. In other words, capitalization has to do with valuation as a result of a particular representation on the basis of risk and the way this valuation reinforces and strengthens the implementation of the “laws” of capital. This is the fundamental lesson to be addressed by Marx’s text.

If security S as a sui generis commodity is a reification of the capital relation, its valuation (that is, its very existence as an exchange value) necessarily relies on a particular representation and a quantification of the sociopolitical and economic conditions of capitalist production. Quite independently of the efficiency of the markets in disseminating information about fundamentals, these fundamentals have already been shaped under the conditions of capitalist ideological norms. The multiple economic-technical-political “events” (that is, every event of capital valorization and resistance to it) that might either emerge within the capitalist enterprise or concern it are, in this way, converted into “objective perceptions” and quantitative signs within capital markets. And since the latter tend to encompass different aspects of daily life, the above security S does not have to be property over capital. The financial system provides a representation and quantifications of different power and social relations in general.²⁴

We shall repeat that this framework must not be confused with debates regarding the EMH. In these debates the point of tension is about the effectiveness of information gathering: Are market participants capable of grasping the essential part of observed reality, and properly assessing fundamentals, or does the latter remain buried in an impenetrably complex economic universe? Yet, both sides share the same perspective about the nature of the relationship between the observing subject (the market participant) and the observed object (capitalist reality). The former is presented as external to the latter, and the latter is apprehended as totally transparent. Hence, the disagreement concerns the ability of market participants to gather useful information and the way in which this affects their decision making. Marx’s argument of fetishism breaks with this empiricist problematic. In his perspective, the observing subject is always already captured within and dominated by the “supersensible” but objective forms of appearance of the existing complex of capitalist power relations quite irrelevant from the quality of available information.²⁵ Regardless of the status of their observations, regardless of the status of the information gathered, regardless of the way one assesses it, this is how the observing agents are constituted and motivated, thus becoming part of capitalist objectivity alongside observed social relations and in a proper relation to them.²⁶

We shall try to further clarify our point with the illustration that follows. It is based on a trivial example from the theory of corporate finance, namely: the market for corporate control.

4.2 An illustration²⁷

The general framework of the Marxian argument has a number of less visible, but more fundamental, implications for the analysis and comprehension of present-day capitalism. Financial markets contribute to the intensification of competition and the mobility of individual capitals (strengthening the tendency towards the establishment of a uniform rate of profit). This process in itself secures more favorable conditions for the valorization (labor exploitation) of individual capitals. It also channels savings into investments (with the latter having the causal priority). But, most importantly, the analysis outlined in the preceding sections suggests that finance (especially in its neoliberal commoditized version) becomes a site for the evaluation and monitoring of the effectiveness of individual capitals. This process does not rely on the quality of gathered information.

Finance originates an overseeing process of the effectiveness of individual capitals. It is actually a type of supervision of the circuit of capital. Economic “fundamentals” do not have an objective status prior to their “knowledge.” They always exist in the form of a particular interpretation of capitalist reality. In other words, fundamentals are already defined within the domain of fetishism. From this non-empiricist point of view, the distinction between “fundamentals” and related “information” ceases to be so clear. We shall not elaborate on this issue here. To illustrate our point we shall take into consideration two different, but extreme, cases in financial markets of the kind that can be found in non-Marxian debates (in the knowledge that these examples are just simplifications).

In the ideal case of market efficiency, security prices issued by a capitalist firm capture the dynamic of exploitation as it is expressed in economic fundamentals. Firms that fail to create a set of conditions favorable to exploitation will soon find market confidence evaporating. This will be translated into a reduction in the value of the firm’s liabilities. In the mainstream argumentation this correction is necessary to compensate capitalist investors (money capitalists) for the increased “risk,” which is in turn due to the decline of the economic prospects of the firm. In this context, the term “risk” is not a well-defined term. For the moment, we shall accept a first naïve definition that can be found in Hilferding’s approach. According to this, risk can be seen as a “degree of certainty” (Hilferding 1981: 157), or alternatively the “degree of confidence” (if we borrow a similar term from Nitzan’s and Bichler’s analysis; 2009: 208), that capitalists have in their own prediction about future profitability.

But what if the asset prices of this particular firm have become totally detached from fundamentals? Of course there will be important consequences at the concrete level of analysis, but from a strategic point of view the result will not be radically different, since the markets have not ceased to oversee the firm within the above-mentioned framework of fetishistic representations. The firm price is not fixed, and the valuation can be easily changed. Whatever the pricing result, permanent market overseeing means permanent interpretation of capitalist dynamics under certain ideological criteria that reinforce particular exploitation strategies. Quite independently (at an abstract level of analysis) of the market’s informational efficiency, this process embeds certain behavioral criteria and puts pressure on individual capitals (enterprises) for more intensive and more effective exploitation of labor, for greater profitability. This pressure is transmitted practically by means of a variety of different channels.

To give one example, when a big company is dependent on the financial markets for its funding, every suspicion of inadequate valorization (even if it is totally unreasonable) increases the cost of funding (increased risk), reduces the possibility that funding will be available and depresses share and bond prices. Confronted with such a climate, the forces of labor within the highly conflicting environment of the enterprise face the dilemma of deciding whether to accept the employers’ unfavorable terms, implying loss of their own bargaining position, or whether to contribute through their “inflexible” militant stance to the likelihood of the enterprise being required to close (the transfer of capital to other spheres of production and/or other countries) or to be taken over. The latter option is equally unfavorable to workers since it will be accompanied by a violent restructuring of working conditions. Evidently, the dilemma is not only hypothetical but is formulated preemptively: accept the “laws of capital” or live with more insecurity and unemployment. This dilemma is immanent in the nature of fictitious capital and its implementation does not rely so much on the quality of information or the efficiency of the market.

This pressure affects the whole organization of the production process, the specific form of the collective worker, and the income correlation between capital and labor. It ultimately necessitates the total reconstruction of capitalist production, more layoffs and weaker wage demands on part of the workers. The restructuring of the enterprise means, above all, the restructuring of a set of social relations with a view to increasing the rate of exploitation. It is thus a process that presupposes, on the one hand, the increasing power of the capitalist class over the production process itself, and, on the other, the liquidation of all inadequately valorized capital (downsizing and liquidating enterprises) and thus economizing on the utilization of constant capital (which is assured by take-overs). Hence, “market discipline” must be conceived as synonymous with “capital discipline.”