Fictitious capital is a type of capital that is not a means of production, but at the same time brings income. It includes various financial instruments: stocks, bonds, bank deposits and derivative securities. Despite some inconsistency, its use for personal enrichment is not something illegal or immoral. Many people use it without even realizing it.
What it is?
Fictitious capital is a contract giving its holder the right to demand in exchange a certain part of the property or a share of the income. It may have material security in the form of a part of property, precious metal or may not have any material security. Transactions with this kind of capital are based on trust and the law. For example, today money does not have gold security as before, but it is still used as a means of payment. The value of money does not lie in the cost of the paper on which it is printed, but in a social contract. According to this social contract, bills should be accepted by everyone: other people, shops, markets, banks, etc., located in a particular state. This obligation is enshrined in law. Only the Central Bank of the country has the right to print money.
Money in the wallet gives its owner the right to purchase certain goods, but at the same time they are not a value in themselves. They acquire value only by exchanging them for goods and services, and for this the other side must be sure that it can exchange this money for other goods and services or even for banknotes of other states. The more confidence there is in a currency, the higher its rate and the more items it can be purchased. Money is the equivalent of value. One of the main problems of using fictitious capital is that it can quickly depreciate, since physically its amount can be unlimited.
What objects relate to such capital
This is not only money, but also stocks, bonds and derivatives thereof. Everything that gives the right to income. Fictitious capital and the securities market are interconnected, since this type of capital is the main commodity on the stock exchange. It can be expressed in the form of equity and debt securities, as well as in the form of contracts.
Debt securities
These include bonds and bonds. They are also fictitious capital, since their purchase does not mean the acquisition of a real asset. These are just documents proving that this or that organization will have to buy back its securities or return the debt at the agreed price, including interest, for a certain time. In the case of debts and debt securities, the obtained fictitious capital is the difference between the amount paid and received.
Equity securities
Equity securities are shares of open and closed joint-stock companies. Shares alone do not produce anything. They are issued in order to attract investor funds to expand production or to cover debts. They give their owner the right to demand part of the profit in the form of a dividend, as well as participate in the management.
Income from the sale of securities at an enterprise is accounted for separately from income from core activities. Although formally they give the investor the right to receive part of the assets in case of bankruptcy of the enterprise, in reality depreciation of shares means a complete or almost complete loss of capital for the investor.
The peculiarity of shares as fictitious capital is that their value does not always reflect the actual financial situation of the enterprise. For example, the company's shares are growing, but at the same time, according to the financial statements, it has been losing for the last two or three years. There is a distortion of financial information, its separation from the actual state of affairs. After the stock entered the stock market, market factors begin to influence it. There is a demand - stocks rise, if it does not - fall in price. In the history of mankind, there have been times when the difference between the market value of shares and the book value of the company reached a double-digit figure, and then fell sharply, leaving investors without investment and with a lot of debt. Fictitious capital, in contrast to real, expressed in buildings, structures, machine tools, materials, has always been dependent on the behavior of people who often acted irrationally on the stock exchange.
Contracts
Another form of fictitious capital is various derivatives - contracts. Such instruments include: futures, options, forward contracts, bill of lading. The difference between them is what conditions for the transfer of assets are registered in them. By and large, they do not give their owner the right to demand income in the form of interest or dividends, but they give the opportunity to earn money by selling a profitable contract or its implementation.
How did fictitious capital appear?
The concept itself is inextricably linked with the concept of loan capital and surplus value. This term was introduced by Karl Marx in his work Capital. In it, he talked about how loan and interest capital affect the incomes of manufacturers, prices, and the growth of labor intensity.
In his book, Karl Marx gives a definition: fictitious capital is money that was spent in the past, and income is expected only in the future. That is, either it is already used up, or it does not exist yet. Moreover, it is taken into account at once at several enterprises, which leads to numbers several times overblown. For example, a bank issued a loan to an enterprise in the amount of one million rubles. This amount is taken into account both in the enterprise and in the bank as actually available. That is, the same million rubles on the bank balance sheet and on the balance sheet of the enterprise, which is already two million rubles. A loan can be spent a long time, but according to the documents this money exists. The situation is exactly the same with stocks and bonds and securities derivative from them. Formally, their owner is a rich man, but what will happen when the price drops? After all, by and large, she holds on to promises or high demand for them.
Criticism
Throughout its history of existence (and it exists much longer than the concept itself), fictitious capital has been constantly criticized. Usury and stock trading were considered ignoble pursuits. With the development of capitalist relations and industrial production, in which loan and fictitious capital played a special role, criticism only intensified. Credit has led to such phenomena in the economy as cyclicality and crises, and it has also become one of the reasons for the growth of property inequality. This has led industrialists and professional speculators to grow rich faster than the rest of the population. The distortion in the distribution of wealth in society has led to increased social instability, despite the improvements that progress has brought.
Signs
The main features of fictitious capital by which it can be distinguished from other types of capital are:
- Intangible form. It is a document that confirms the right to own or receive an asset.
- The receipt or return of cash or assets is not in the present tense. If an investor purchased a bond for a period of three years, then he can return the invested money with interest only after three years. He may sell the bond earlier than this period, but in this case, the investor risks losing part of the income.
- Lack of warranties. The creditor cannot be completely sure that the debtor will pay off the debt. Just like an investor who invested in a share, one cannot be sure that he will receive dividends on it or that it will not depreciate.
- Actual value is less than nominal. Paper money alone does not cost much, but if the denomination is one thousand rubles, then it can be exchanged for goods worth up to one thousand rubles.
Fictitious capital always takes the form of a contract. It must be documented for a specific person. For one side, it is an obligation, and for the other, a right to demand the fulfillment of this obligation.
The difference between loan and fictitious capital
Loan capital, in fact, is fictitious. Karl Marx also wrote about this when he investigated the nature of real and fictitious capital. This is one of the earliest forms of capital, which, with the development of economic relations, did not disappear, but became even more widespread. Today, loans and credits are used not only for the purchase of means of production, but also for expanding the sale of expensive goods.
Fictitious capital has a broader meaning and application than loan capital. Unlike a loan, objects such as stocks, bonds, contracts can be sold and resold to others several times. And although a loan agreement can be sold, only certain companies have the right to acquire it and only in certain cases.
The difference between fictitious and real capital
What are the main differences easier to present in the table.
Fictitious capital | Real capital |
It has no material form. | It has only material form (machines, equipment, buildings). |
Refers to liabilities. The share of fictitious capital of enterprises in the asset structure is small. It is mainly expressed as receivables. | Refers to assets. |
Not involved in production. | It is a means of production. |
Drawn in the financial market. | Drawn on the commodity market. |
Used to raise money. | Used for the production of goods, services and their further sale. |
Income in the form of a percentage of the invested amount or due to the difference between the purchase and sale prices. | Income in the form of the difference between costs and revenue from sales. |
Despite the fact that there is a big difference between them, both types of capital are used in the work of the enterprise. For loans received at the bank, an entrepreneur acquires real capital, which he uses to generate income and repay it. Fictitious capital helps in the creation of production capacities, expansion of production and in technological progress. According to Marx, the expansion of production led to increased exploitation of workers by factory owners. Such a one-sided attitude to fictitious capital and to human labor, as history has shown, is not correct. The expansion of production and the purchase of new equipment make it possible to produce more, cheaper and require less labor.