[OPE-L:1489] Duncan's point

Alan Freeman (100042.617@compuserve.com)
Wed, 13 Mar 1996 14:57:03 -0800

[ show plain text ]

I made a mistake in sending this to Duncan and not
copying it to OPE:

I have been remiss in not replying to Duncan's [OPE-1356] where
he writes

"I'm a little nervous about this way of putting the
conservation of value. Value is conserved in the exchange of
newly produced products, but not necessarily in the values
imputed to assets, as the example of fictitious capital

"Likewise, technical change may wipe out part of the value
imputed to existing stocks of assets, without consumption or
production taking place. This is one reason why it is safer to
focus on value added (representing new value produced) in
thinking about the conservation of value in exchange and the
creation of new values in production."

For me the question 'over what aggregate of goods is value
conserved' is more or less equivalent to the question 'over
what aggregate of goods is the nominal value of money
calculated'? And this I accept is a substantive debate that
will not be settled quickly. But I think it is a very problem
in political economy.

I have tried to restrict myself to explaining how my position
is derived, rather than justifying it, and so I don't ask for
anything more than forbearance, although the discussion seems
to be extending beyond a mere statement of position.

I tend to think a working basis for discussion is to recognise
the connection between two ideas

(a) that money represents a claim over an aliquot portion
of a certain aggregate of goods, measured in labour-time [a
definite amount of money represents a definite amount of
labour-time in exchange]

(b) that because of this, a change in money prices cannot
alter the amount of value that this money represents in

I think we share the idea that if at one point the total price
of the aggregate (whatever it may be) is $1,000 and this
contains 1000 hours, then the value of money is 1 hour per
dollar; whereas if this total price rises to $2,000 then the
value of money is 1/2 hour per dollar.

I find this connection, which I think was established by the
'New Approach' concept of the Value of Money - and which I
think is also implicit in the Roberts'-Wolff-Callari approach -
very fruitful.

The question then is, over what aggregate these identities hold
true. This question makes me 'nervous' because of its
implications for the very basic idea that value can only be
created by living labour. I am wary of any formalisation in
which new value can arise without the intervention of living

It may seem that this does not arise if value is destroyed,
instead of created. However if one takes assumptions that lead
to value being destroyed without consumption, and reverses some
of them, the same reasoning leads to the conclusion that value
can be created without living labour.

Thus, a devaluation can apparently wipe out value without
contradicting the idea that only labour can create value. But
if we apply the same reasoning where stocks are revalued
upwards, for example due to a harvest failure (which Marx
discusses) we find that this creates value out of nothing. That
is the root of my own concerns which might otherwise appear

Productive stocks

Productive stocks figure at a higher level of abstraction than
the complex question of fictitious capital. My response to Paul
concentrated on productive assets. This in effect constitutes
my reply to the second part of your question.

Fictitious capital

Turning to fictitious capital I think a tentative response
would be something on the following lines: Marx distinguishes
secured from unsecured loans. Secured loans are an additional
claim on real assets and behave like tokens of real assets.
Therefore the sum of the prices of the commodities in society
is not increased by this means (e.g. if a bank has a reserve
ratio of 1 and I give it gold in exchange for a promissory
note, then the bank cannot sell the gold - that is, it cannot
function in circulation - hence the promissory note takes the
place of the gold in circulation and the total of the prices of
all goods in circulation remains the same)

Unsecured loans represent an inflationary increase because they
raise the total price of all commodities in circulation -
including the loans themselves, which function as commodities -
without increasing their value.

Therefore the value of money falls pro tanto. If the gold and
the promissory note both begin circulating as money, then the
price of all goods including money rises because it now
includes both the gold and the note; the value of money sinks
because no new labour has been discharged and so the labour
content of the goods in circulation is unchanged. Thus a larger
total price represents the same labour.

Fictitious capital arises when a loan whether secured or
unsecured provides a guarantee of a fixed income stream,
because the capitalised value of the income stream becomes the
nominal price of the paper representing the loan, independent
of the capital against which it was secured.

A bond is, I think, effectively unsecured. It cannot be
redeemed for real assets even in bankruptcy. Bondholders have
almost no stake and are the last creditors in line if the
company fails. I think of bond issues as purely inflationary.

If before the bond issue there was corn worth $10,000 and after
the bond issue there is corn worth $10,000 plus bonds with face-
value $10,000 then the total price of all commodities is now
$20,000 where before it was $10,000, but the value it
represents is the same; hence the value of money halves.

Consequently any rise or fall in the nominal price of the bond
due to interest rate fluctuations will lower or raise the value
of money without changing the total value in society.

There are intermediate cases such as fixed-rate mortgages whose
nominal value, if sold as a financial asset by the mortgagees,
is determined by the capitalisation of an income stream but
nevertheless secured on a property that can be reclaimed in the
event of default. But I think on examination these turn out to
be an admixture of the two basic types analysed by Marx.

If, as a result of interest rate fluctuations, we have a rise
or a fall in the money valuation of financial assets, this acts
as if new unsecured loans have been created or destroyed. If my
house is mortgaged for $1000 per year the mortgage considered
as the mortgagee's asset will rise and fall inversely with the
general interest rate. But my house itself will not. If a
mortgage covered by a house worth $100,000 gets a nominal value
(price) of $200,000 because of an exceptionally low interest
rate 9=large interest spread) then it is as if an unsecured
loan of $100,000 had been created on my house.

In a financial crash, these fictitious prices are sharply
brought back into line with underlying real asset values; a
mortgage whose leveraged price is $200,000, should the morgagor
default, can only be traded for a commodity whose real value is

But this is a partial response to a big question.