z course economics

the answers from prof. bond from my online course:

me:

Hello everyone, I am a preemie with this stuff, as my following questions will demonstrate. Attempting to stay afloat, but enjoying the readings nonetheless.

“One indicator of the super-profitability of the financial sector is that while profits in the US manufacturing sector came to one percent of US gross domestic product (GDP), profits in the financial sector came to two percent.” What constitutes the other 97 percent?

PB: Hi, it's just a measure, e.g., how much do I weigh in proportion to,say, all the things in my apartment: about 2%, I'm guessing. And my 14 year old son? His weight is closer to 1%. The other 97% is the furniture, the appliances, the books in the little study, etc. Most of the 97% of the GDP that you refer to is the input cost of production; a typical surplus in the 10% range is divided into all the various economic sectors. (I'm surprised its so low for finance, insurance and real estate, and maybe can get around to looking at that again).

ME: Bello talks about bubbles and that the profits are only made by selling before ‘reality sets in’ - is there any such thing as ‘real values’? If someone is willing to pay x amount for a house, why isn’t it worth that much? If the loans could not have been restructured would things have turned out any different?

PB: An underlying value in the marxian sense is the potential for maintaining a decent rate of return by extracting surplus value. That's the ultimate 'real sector' productive value we would look for, to see if an investment can be sustained. We would look for that, but capitalists don't, they look for profit. So if a company like GM makes much more money from GMAC financial gimmicks than from making cars, GM will still get investments in the stock market from gullible brokers and consumers who believe they're buying 'value'. When the bubble bursts and GM goes under, it is all revealed as speculation, with so little production that the company can be trashed. In the case of mortgages, the real estate bubble was fueled by easy credit (not just subprime but more generally). Once the credit ends, as we're seeing, prices crash.


ME: What exactly is speculation – and its connection with fictitious capital. It seems that speculation is referred to not how much something could be worth, but rather how much people can be tricked into thinking its worth.

PB: These are great questions, and I should have backed up long ago on this to try making these links. Let me append the section from my book Uneven Zimbabwe which covers all this, ok? Again, I'll apologise in advance for jargon, but I hope you will see where financial speculation, financial control and financial crisis are all rooted.