Debt has received a lot of attention during the global financial crisis. Occupy sites abounded with theories about “debt slavery.” Governments, and international financial institutions, justify harsh austerity measures by pointing to government debt.
We must examine debt closer: what is its purpose? Who does it benefit? Is it necessary?
Fictitious capital: Necessary evil for capitalism
Debt is a form of “fictitious capital,” capital not generated by production. Mainstream economists define fictitious capital as the value of “future cash flow.” Given the present financial crisis, triggered by the collapse of loans that could not be paid back, defining debt as “future cash flow” seems a little optimistic.
Marxists argue rather that fictitious capital is a claim to property ownership, by the lender. A mortgage is a claim on property, and until it is paid back the bank owns the house. In The Limits to Capital, Marxist political economist David Harvey notes the strange importance and universality of fictitious capital:
The money capitalist is indifferent (presumably) to the ultimate source of revenue and invests in government debt, mortgages, stocks and shares, commodity futures or whatever… [Marx] wishes to alert us to the insanity of a society in which investment in appropriation (rents, government debts, etc) appears just as important as investment in production (The Limits to Capital, David Harvey, p269).
However, Harvey also warns against drawing a simplistic line between finance and “real” production. While some (often anti-semitic) conspiracy theories suggest that bankers are perverting the natural course of capitalism, profitable financial institutions are necessary to generalised capitalist production. Banks centralise the means of exchange, and lend out the initial capital for private production:
When the system of exchange is relatively simple, the personal knowledge and trust of individual capitalists may guarantee the quality of debts incurred, but in a complex market system this cannot form an adequate foundation for the credit system. The bank seeks to institutionalize what was before a matter of personal trust and credibility (ibid, p247).
Banks and financial institutions must also make a profit – which means interest, predatory lending, speculation, incentives to gamble with workers’ savings as poker chips. Although they can be regulated or stabilised, predatory financial institutions are a necessary evil for capitalism. [Read more...]