Marx on Credit, Agency Problems, and Crises

Please cite the paper as:
Laurence A. Krause, (2018), Marx on Credit, Agency Problems, and Crises, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018


As a journalist in the 1850s, Marx studied and wrote on recessions associated with financial crises, focusing on the panics of 1847 and 1857. In later work, Marx pursed the topic. First, in the three volumes of Capital and part II of Theories of Surplus Value, Marx used his circuits to analyze the role of credit in the accumulation process and crisis. Then in part V of volume 3 of Capital, Marx added a novel approach to analyzing credit crises. Marx argued that a banking system “subordinated” to capital accumulation would produce more robust, though fragile, expansions, by exacerbating the problems of “over-speculation” and “credit swindles.” The reasons for the “purest and most colossal form of gambling and swindling” found in a modern credit system were the agency problems between rentiers and bankers, and bankers and capitalists. These agency problems arose because a “large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner.” In the recession phase of the cycle, these agency problems can erupt, causing runs on the banking system by panicked rentiers, credit stops by nervous bankers, and a scramble for liquidity by those with debts coming due.

Recent comments


4 comment

  • mariaalejandramadi says:

    Hi Laurence,

    Indeed, the relation between Individuals(agency) and structure has been one of the more relevant questions in the history of marxist thought, as Perry Anderson clearly shows in some of his books.

    Regardin you sentence: These agency problems arose because a “large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner.”

    I would like you to clarify which is the relation that you establish between agency and structure in a marxian perspective.

    • Laurence Krause says:

      I did not see there was a comment, so apologize for not answering sooner. The sentence is a quote from Marx, and not from me. In part five of volume three of Capital, Marx introduces financial circuits, among other things, into his analysis. I believe he assumes that capitalists self finance their accumulation in volumes I and II. This idea can easily be seen in his M-C-M’ circuit of capital. In it a capitalist starts with money capital (M) and uses it to purchase commodities (C) which are used to produce surplus value/profits. This yields a return revenue (M’) which is greater than the money capital advanced at the beginning of the circuit (M’>M). That revenue can then be used to continue the circuit on an expanded scale (M’-C-M”, etc).
      In this circuit there can be no agency problems because the same person is investing the money capital, financing the operations, the wholesaler, and the retailer. In volume three, Marx introduces a lending system “subordinated” to capitalists. This means lenders provide a cheap and elastic supply of money capital for capitalists to use to expand their circuits. This introduces two new social classes (?)–the rentiers, who supply the savings and lenders who borrow the savings of rentiers to lend to capitalists. With these new social grouping, Marx argues, agency prop up–because a “large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner.”
      I argue that there are two principal agency problems that emerge–the rentier-banker agency problem and the banker-capitalist agency problem, and that these agency problems can erupt into crises. Marx seems to ignore the first, which I argue is the basis for understanding runs on the banking system, but has some interesting comments on the second.

  • Edoardo Pizzoli says:

    There is further social group in this agency problem: organized crime. As Marx also says ‘ criminal appears as one of those natural “balancing forces” that establish a fair balance and open the door to several so-called “useful” occupations’ and acts as a pro-cyclical force lending money to bankruptcy activities.

  • Laurence Krause says:

    I think a more interesting issue is swindle and fraud in financial markets. In an early article Marx wrote as a journalist, he wondered how it was possible that rentiers periodically parted with their money by financing obvious scams. I think the answer he came up with is in part five of the third volume of Capital. It was that the complexity of a sophisticated financial system hides fraudulent activity from the rentiers until events conspire to reveal it. Thus, ex ante the investments appear sound and reasonable, but seem foolish ex post.

    Another interesting issue is: how big of a role does fraud play in financial crises? Walter Bagehot, a contemporary of Marx, and an interesting thinker on these matters, argued that in most financial debacles, mistakes are much more important than fraud. The reason is that it is hard to hide fraud, but mistakes are difficult to uncover, and, therefore, can go on longer and be more dangerous. I’m not sure that he was right. I think that most financial frauds start out as mistakes.