[lbo-talk] What is the Crisis About? Fictitious Capital or the Destruction of Wealth?

[Rudy Fichtenbaum]

By and large the destruction of fictitious capital just represents a 
redistribution to the claims on real wealth and not the destruction of 
wealth itself. However, when the collapse of these claims begins to 
affect the real economy then there can be a destruction of real wealth. 
A good example is the mortgage crisis leading to foreclosures. If it 
were just a mortgage crisis it would only be about who actually owns the 
property. The problem is when you have foreclosures and houses are 
abandoned they are vandalized or pipes break and real wealth, the house 
itself is effectively destroyed. This has become a big problem is cities 
like Cleveland.

However, I think the point you were trying to make is generally true 
which is the decline in the value of financial assets in an of itself 
does not represent the destruction of real wealth.

Rudy

michael perelman wrote:
> This short essay briefly describes the financial side of my 
> interpretation that the crash reflected a disconnect between the 
> underlying investment in the economy and its financial representation 
> -- what Marx called fictitious capital.  The stock market people call 
> this realignment, "destruction of wealth," even though what is 
> destroyed is the illusion of wealth.  The illusion may have been 
> capable of purchasing valuable things so long as other people accept 
> that illusion.
>
> Long ago people accepted the illusion as an illusion and went on with 
> their business.  Here is what a former governor of Illinois wrote:
>
> Ford, Thomas. 1854. History of Illinois (Chicago: S. C. Griggs and Co.).
>
> 227: "Our Whig friends contended that the continual and violent 
> opposition of the democrats to the banks destroyed confidence; which, 
> by-the-bye, could only exist when the bulk of the people were under a 
> delusion.  According to their views, if the banks owed five times as 
> much as they were able to pay and yet if the whole people could be 
> persuaded to believe this incredible falsehood that all were able to 
> pay, this was 'confidence'."
>
> Ordinary people understood what was happening.  Here is an incident 
> from Chicago about the same time.
>
> More at:
>
> http://michaelperelman.wordpress.com/2009/03/11/what-is-the-crisis-about-fictitious-capital-or-the-destruction-of-wealth/ 
>
>

-- 
Rudy Fichtenbaum
Professor of Economics
Chief Negotiator AAUP-WSU
Wright State University
Dayton, OH 45435-0001
937-775-3085