Why is
Microsoft
worth $300 billion and not half that much?
Nitzan Bichler - 2012 - Capital as Power
1 Energy User-Producer, Inc.
131
10. 1 General Motors versus Microsoft, 2005 173
10. 2 Tobin's Q in the United States 174
10. 3 The world according to the scriptures 178
10. 4 US capital accumulation: which is the 'real', which the
'fictitious'? 181
11. 1 S&P 500: price and earnings per share 186
11. 2 S&P 500: earnings, earning estimates and hype 213
12. 1 Business and industry 237
12. 2 Business and industry in the United States 238
12. 3 The productivity threat 251
12. 4 Business trust and industrial sabotage in the United States 258
13. 1 Capital's share of income in the United States 274
14. 1 Aggregate concentration in the United States 318
14. 2 Differential capitalization and differential net profit in the
United States 320
14. 3 Accumulation crisis? . . . 323
14. 4 . . . Or a differential accumulation boom? 324
15. 1 US employment, number of firms and size of firms 336
15. 2 US accumulation: internal vs external breadth 338
15. 3 Tobin's Q? 344
15. 4 Ratio of global gross foreign assets to global GDP 353
15. 5 G7 cross-border private investment flows as a per cent of
gross fixed capital formation 355
15. 6 The globalization of US business: ownership vs trade 357
16. 1 Consumer prices in the UK, 1271-2007 367
16. 2 US inflation and capital-labour redistribution 371
16. 3 US inflation and differential accumulation 373
16. 4 United States: inflation and growth, 1809-2007 377
17. 1 Amalgamation and stagflation in the United States 384
xxiv Illustrations
17. 2 Inflation and arms exports 390
17. 3 The two coalitions: share of world market capitalization 393
Tables
10. 1 Fisher's house of mirrors 171
14. 1 US corporate statistics: average number of firms, average
capitalization per firm and average net profit per firm 317
14. 2 Regimes of differential accumulation 329
Acknowledgements
This volume was written in relative isolation, and after reading it you'll see why. The book questions the very foundations of mainstream and Marxist political economy, and it goes further to offer a totally new alternative. Going against the grain is hardly the best way to make friends, and, as the history of science tells us, those who try to innovate often face a wall of silence.
But the silence is never complete. There are always free spirits who look for new directions, and we have been fortunate to cross paths with some of them. Our work has benefited from the friendship of Allen Fenichel, Tom Naylor and Robin Rowley, who helped us stand against the academic church; from the thoughtful interventions of Randy Germain, who helped and encouraged us at various stages of the publication journey; from Jeffrey Harrod, whose grassroots analysis shed light on aspects that our power theory had over- looked; from Doug Henwood and Michael Perelman, whose LBO and PEN-L internet lists we found invaluable; from years of discussions with Gibin Hong, who also translated the early incarnation of this manuscript into Korean; from Bob Jessop, who engaged with and supported our work even when our opinions differed; from Moshe? Machover, whose personal honesty, clarity of thinking and path-breaking politics one cannot but admire; from Ulf Martin, whose sharp observations and penetrating questions always kept us on edge; from many debates with the colourful members of MISS-Q, whose arguments often gave us food for thought; from the unmatched editorial skills of Daniel Moure, who polished our English and compiled our index; from Akiva Orr, whose deep insights into philosophy and science we found enlightening; from Jeffrey Rudolph, who managed to mix accounting with curiosity; from Herman Schwartz, whose brilliance offered an antidote to academic mediocrity; and, last but not least, from Genevieve Thouvenot, whose expertise in ancient languages saved us from drawing silly conclusions, and whose suggestions often helped us find the answer right under our nose.
We also feel indebted to the brave women and men of MATZPEN, the Alternative Information Center and others too numerous to be listed here, whose struggle for freedom and autonomy in the Middle East inspired our early research and continues to influence our thought.
xxvi Acknowledgements
Finally, we wish to thank the three anonymous referees who read the early version of the manuscript; the Social Sciences and Humanities Research Council of Canada for its financial assistance; and our students, whose desire to think for themselves made writing this book worthwhile.
1 Why write a book about capital?
There is no joy more intense than that of coming upon a fact that cannot be understood in terms of currently accepted ideas.
--Cecilia Payne, An Autobiography and other Recollections
Capitalism without capital
We grew up in the 'affluent society' of 1950s and 1960s. As children and then as young adults we rarely heard the word 'capitalism'. It was the Cold War, and speaking about capitalism, although not strictly taboo, was hardly a popular pastime. The term smelled of extremist ideology; it connoted commu- nist rhetoric; it conjured up bygone debates and obsolete ideas.
As a theoretical concept, capitalism seemed hopelessly unscientific. It was a remnant from a different era, from a time when people, haunted by 'scar- city', still viewed society through the hazy spectacles of political economy. The new social sciences - and particularly the science of economics - boasted far better and more precise categories.
These categories were grouped under a new buzzword: 'modernization'. Talk of modernization opened all the right doors. It invited American aid, it paved the road to development and it helped academic promotion. The word 'capitalism' became redundant, if not counterproductive. Gradually, it vanished from the lexicon.
But beginning in the early 1990s a strange thing happened: capitalism staged a remarkable comeback. Suddenly, social scientists and post-scientists alike wanted to talk of nothing else. The capitalist world, capitalist markets, capitalist governance, capitalist culture, capitalist institutions, capitalist wars, capitalism and race, capitalism and gender, capitalism and libido - no matter where you turn, you cannot escape the C-word.
Debate over capitalism is everywhere. The newspapers, radio, television and the internet overflow with talk of neoliberal globalization and crisis, imperialism and post-colonialism, financialization and government inter- vention. Experts preach the gospel of capitalist productivity, while alter- globalization protestors blame the IMF and transnational companies for
2 Why write a book about capital?
many of our social ills. Some view capitalist growth as a magic bullet; for others it spells ecological disaster. Some celebrate the deregulation of the capitalist state and the fall of Keynesianism; others mourn the decline of the welfare state and the rise of zapping labour. Many interpret the new wars of the twenty-first century as serving capitalist interests and the rise of Islamic fundamentalism as a backlash against Western liberalism. For some, capi- talism means the end of history, for others a source of conflict and an engine of change. No aspect of capitalism seems to escape debate.
Or perhaps we should say almost no aspect. Almost, because something really important is missing. In all the commotion, we seem to have lost sight of the concept that matters most: capital itself. Capital is the central institu- tion of capitalism - and yet, surprisingly, we do not have a satisfactory theory to explain it. In fact, we do not know precisely what capital is. And worse still, there is little or no discussion on what this omission means or how it can be rectified.
The issue is crucial. Without a clear concept of capital, we cannot hope to understand how capital operates, why it accumulates or how it drives the capitalist order. Until we understand capital, we are destined to misconceive our political institutions, misjudge our alternatives and have trouble imag- ining the way to a better future. In short, in order to debate capitalism we first need to debate capital itself. 1
This book is not about economics
Many people who are otherwise keenly interested in society get cold feet when confronted with 'economics'. The symbols seem mysterious, the logic baff- ling, the language incomprehensible, even threatening. The dread is real. Ever since Thomas Carlyle, the 'dismal science' has been frightening most people.
But that fear is irrelevant to our book. Our subject is not economics; it is capital. And capital, as we hope to show, is not an economic entity.
It should be noted upfront that economics - or, more precisely, the neoclassical branch of political economy - is not an objective reality. In fact, for the most part it is not even a scientific inquiry into objective reality. Instead, neoclassical political economy is largely an ideology in the service of
1 Of course, not everyone shares this sense of urgency. Quite the contrary. These days, many academics tell us that, in fact, there are no facts (in a conversation or a speech, a speaker will typically use her fingers to encapsulate the word 'facts' with invisible inverted commas, pointing to its obvious ambiguity). In postmodern space, these academics explain, there is nothing much to 'know' (again in inverted commas). Everything - including capital - is merely a 'narrative'. Capital is a 'discourse' that cannot be known, only 'deconstructed'. And who knows, since nobody 'really' knows, maybe that is indeed the best way to conceal capital. This convenient conclusion, though, begets a somewhat embarrassing question: if capital is merely a discursive text, one faith among many, what is the point of talking about - let alone criticizing - capitalism? And if there is no point in such critique, who needs the postmodern critics?
? Why write a book about capital? 3
the powerful. It is the language in which the capitalist ruling class conceives and shapes society. Simultaneously, it is also the tool with which this class conceals its own power and the means with which it persuades others to accept that power.
Our book puts power back in centre stage. Notice the metaphoric equality in the title: 'Capital as Power'. We use not and, but as. We do not speak of capital and power; of capital in the service of power, or vice versa; of capital in relation to state; of capital with or against politics; of capital in contradis- tinction to violence; or of capital and ideology. We refer not to a relation, connection, function, or juxtaposition, but to a figurative identity. Capital does not relate to power. It is, in itself, a mode of power.
The purpose of this book is to explain capital as power. The first step toward understanding our argument, therefore, is to stop thinking of capital and capitalism as 'economic' entities. But that is just the start. The second step is to be willing to take on the dogma that makes capital and capitalism 'economic' entities in the first place.
How and why
Young children are obsessed with the question 'why? ' 'Why do I need to brush my teeth? ' 'Why do birds fly and dogs don't? ' 'Why does mommy have to go to work? ' The quest is universal, but it doesn't last for long. Children quickly learn that grownups dislike the question and often don't know how to answer it, and they realize that one 'why? ' inevitably leads to another, followed by further hassle and endless aggravation. So they grow up. By the age of five or six, they abandon the 'why? ' in favour of the more practical 'how? ' They stop questioning the world and try to fit into it. They become adults, and they usually remain so for the rest of their lives.
But not everyone grows up. As Mark Twain (1881) reminds us, some people stay young no matter how old they become. And the youngest of all are those who never stop asking 'why? ' This book is written for these young people of all ages. We write it for those who feel their future is at stake and wish to do something about it; for those who sense that there is something deeply wrong with the conventional creed but don't know exactly what it is; and, above all, for those who simply dislike dogma and want to think for themselves.
Perhaps the key problem facing young people today is a lack of theoretical alternatives. A new social reality presupposes and implies a new social cosmology. To change the capitalist world, one first needs to re-conceive it; and that re-conception means new ways of thinking, new categories and new measurements. And yet, many contemporary critics of capitalism seem to believe that they can challenge this social order without ever asking how it operates, let alone why.
With some obvious exceptions, present-day leftists prefer to avoid 'the economy', and many are rather proud about it. To prioritize profit and
4 Why write a book about capital?
accumulation, to theorize corporations and the stock market, to empirically research the gyrations of money and prices are all acts of narrow 'econo- mism'. To do these things is to fetishize the world, to conceal the cultural nuances of human consciousness, to prevent the critic from seeing the true political underpinnings of social affairs. Best to leave them to the dismal scientists.
And, so, most self-respecting critics of capitalism remain happily ignorant of its 'economics', neoclassical as well as Marxist. They know little about the respective histories, questions and challenges of these theories, and they are oblivious to their triumphs, contradictions and failures. This innocence is certainly liberating. It allows critics to produce 'critical discourse' littered with cut-and-paste platitudes, ambiguities and often plain nonsense. Seldom do their 'critiques' tell us something important about the forces of contem- porary capitalism, let alone about how these forces should be researched, understood and challenged.
Most importantly, though, this stale context conditions students to stop asking 'why? ' The big questions about capital are pushed under the rug, and as the young generation gets older and becomes established, the questions are forgotten altogether. Occasionally, an untamed spirit, having discovered an old debate in an outdated book, raises a nai? ve 'why? ' But these spontaneous fires are quickly isolated and extinguished. Ridiculed by know-all professors and hushed by acolyte students, the outlier is forced to relinquish or perish. There is no alternative, and the safest thing for an academic is to never wonder why. 2
Our book defies this dogma. We provide a new conceptual framework for capital - along with the context that this framework negates and the means by which it is articulated. 'There is no empirical method without speculative concepts and systems', writes Einstein in the forward to Galileo's Dialogue
2 As a first-year economics student at Tel-Aviv University, one of us (Nitzan) challenged the professor with questions about the assumptions. Economists make plenty of those, so there were many questions to ask. Initially, the professor was happy to engage. But two weeks into the course, the questions became more difficult to answer, the students grew annoyed with my interventions, and the professor began to apply the usual stalling tactic. 'Yours is a very interesting question', she would say, 'but it's too early to deal with it. Please raise it later, when we deal with this topic in greater detail'. This method is popular among economics instructors, and it works particularly well when combined with a heavy dose of 'problem- solving' exercises. The seemingly 'practical' drill forces students to accept the underlying premises, and when the premises are accepted the questions quickly disappear. But I persisted, so the professor had no choice but to shut me off altogether. When I inquired why I was being ignored, her reply was short and informative: 'You don't know how to ask ques- tions'.
Many years later, an undergraduate student in one of my political-economy classes summarized the same dilemma from a different angle: 'Your class makes me sooo nervous. With all my other professors, I can write pretty much what I want as long as I stick to the syllabus and properly cite the readings. But your class doesn't work this way. Not only do I have to do my own research, I also need to invent the research question. And in the end, I can still be wrong! '. . . . What a terrifying thought.
? Why write a book about capital? 5
Concerning the Chief Two World Systems (Galilei 1632). But, also, 'there is no speculative thinking whose concepts do not reveal, on closer investigation, the empirical methods from which they stem' (p. xvii). The two processes are dialectically intertwined. And, so, together with our theoretical schemes, we introduce new research methods; new categories; new ways of thinking about, relating and presenting data; new estimates and measurements; and, finally, the beginnings of a new, disaggregate accounting that reveals the conflictual dynamics of society. We show that there can be many alternatives, provided we never stop asking why. 3
Clearly, we would be happy to convince our readers with our specific argu- ments, but that goal is secondary. The more important goal is to encourage readers to develop their own research. As the book will amply show, social facts are indispensable but never 'self-evident', and since the emperor is so often naked, we shouldn't be afraid to ask why. There is a lot to suspect in the world of the 'obvious', so try to distrust the 'experts' and 'authorities' - be they mainstream or critical. In the final analysis, the only way to develop your own opinion - instead of adopting the opinions of others - is to always ask why and constantly re-search your own answers.
What's wrong with capital theory?
Begin with the monetary magnitude of capital. This magnitude is readily observable. We know how much it costs to buy existing capital on the stock and bond markets, just as we know how much it costs to set up a new company, or to put in place new plant and equipment. But what determines these monetary magnitudes? What are the forces that lie beneath the earthly appearance of capital?
Why is Microsoft worth $300 billion and not half that much? Why does Toyota pay $2 billion rather than $4 billion for a new car factory? Why do these magnitudes tend to grow over time? What sets their pace of growth?
Economists - both liberal and radical - claim to have answered these ques- tions. Capital, most would say, is an economic category anchored in material reality. In the final analysis, the monetary value of capital derives from and reflects the underlying processes of consumption and production.
Mainstream neoclassical economists view this determination from the output side. Capital for them is made of tangible capital goods (and now also of intangible knowledge or technology). The magnitude of capital in money terms is proportionate to its productivity - namely, to its ability to produce goods and services that satisfy human wants and generate happiness. This transmutation is meaningful because both capital and its productivity are
3 On the clash between modern academia and the scientific endeavour, see our unpublish- able manuscript 'The Scientist and the Church' (Nitzan and Bichler 2005). The paper can be downloaded for free from http://bnarchives. yorku. ca/185/.
? 6 Why write a book about capital?
counted in the same universal unit, the elementary particle of economics: the 'util'.
Marxists see things rather differently. Capital for them is not a material substance per se, but a social relation embedded in productive, material enti- ties. In order to understand capital, they argue, we have to look behind the hedonic veneer of liberal ideology and examine the industrial essence of the system. From this viewpoint, the key issue is not the utility that the capital produces, but the social process by which capital itself gets produced. Consequently, the proper way to approach capital is not from the output side, as per the neoclassicists, but from the input side - the side of labour.
Marxists, too, count capital in universal units: the units of 'abstract labour'. This is the elementary particle of Marx's cosmology. Quantitatively, the dollar value of capital in the Marxist scheme is proportionate to its cost of production, and, specifically, to the amount of abstract labour socially neces- sary to produce that capital. 4
Unfortunately, both explanations fail. In the end, neither the neoclassicists nor the Marxists are able to answer the question of what determines the magnitude of capital and its rate of accumulation.
Many reasons conspire to produce this failure, but the most important one concerns the basic units of analysis. As we shall see, utils and abstract labour are deeply problematic categories. They cannot be observed directly with our senses, and they cannot be examined indirectly through intermediation. Their 'quantity' cannot be calculated, even theoretically. In fact, they are not even logically consistent entities. These shortcomings are very serious, and the last one potentially detrimental.
It is of course true - positivism notwithstanding - that a scientific theory does not require all of its elementary particles to be observable, whether directly or indirectly. To mention the obvious, atoms were deemed unobserv- able till the early twentieth century, many subatomic particles are still elusive, and entities such as strings will perhaps stay so forever (or at least for a while longer). Yet the 'invisibility' of these elementary particles has hardly dimin- ished the scientific footing of modern physics. 5 Indeed, one may argue that, since Galileo, the strength of science lies precisely in its ability to explain observed magnitudes by unobserved ones. 6
4 This is the view of classical Marxists, but not of neo-Marxists. Although the latter accept many of Marx's assumptions and analyses, they no longer use abstract labour as a basis for understanding contemporary capitalism and modern accumulation. The difference between the two approaches has significant implications, which we explore in Chapters 4 and 8.
5 On the concept of 'observation' and its intricacies, see Shapere (1982).
6 According to Zev Bechler, one of Galileo's chief contributions to the scientific revolution was the rejection of Aristotle's anti-informativism in favour of informative theories. In his Two New Sciences, Galileo suggested that, 'Since I cannot do more at present, I shall attempt to remove, or at least diminish, one improbability by introducing a similar or a greater one, just as sometimes a wonder is diminished by a miracle' (quoted in Bechler 1991: 131). In other words, modern science advances not by insisting on logically complete and therefore
? Why write a book about capital? 7
The situation is quite different with neoclassical utils and Marxist abstract labour. These units are unlike atoms, electrons, or strings. The latter may be unobservable to us, but that shortcoming - at least in principle - could be attributed to our own limitations. Theoretically, atoms, electrons and strings are logically consistent entities with a definite set of quantities, whether deter- ministic or probabilistic. By contrast, utils and abstract labour are invisible not because of our own shortcomings, but because they do not - and cannot - posses a definite magnitude in the first place. They have pseudo-quanta. Even if we could somehow 'see' them, there would be nothing to measure. And 'quanta' that cannot be measured - no matter how important they might be otherwise - cannot form the basis for quantitative analysis.
The consequence is that neoclassical economics and Marxist political economy lack a basic unit. And without a basic unit, we remain right where we started. We know the price of capital in dollars and cents, but not how many utils or hours of abstract labour this value supposedly represents. We know that capital accumulates, but not why it accumulates or what this accumulation means.
Toward a new theory of capital
The secret to understanding accumulation, this book argues, lies not in the narrow confines of production and consumption, but in the broader processes and institutions of power. Capital, we claim, is neither a material object nor a social relationship embedded in material entities. It is not 'augmented' by power. It is, in itself, a symbolic representation of power.
The starting point is finance. As we shall see, Marx classified finance as 'fictitious' capital - in contrast to the 'actual' capital embedded in the means of production. This classification puts the world on its head. In fact, in the real world the quantum of capital exists as finance, and only as finance. This is the core of the capitalist regime.
empty explanations, but, on the contrary, by solving existing puzzles through the introduc- tion of new puzzles. Werner Heisenberg tells of a conversation he had with Albert Einstein in 1926 on this very inevitability:
I pointed out [to Einstein] that we cannot, in fact, observe such a path [of an electron in an atom]; what we actually record are frequencies of the light radiated by the atom, intensi- ties and transition probabilities, but no actual path. And since it is but rational to intro- duce into a theory only such quantities as can be directly observed, the concept of electron paths ought not, in fact, to figure in the theory. To my astonishment, Einstein was not at all satisfied with this argument. He thought that every theory in fact contains unobserv- able quantities. The principle of employing only observable quantities simply cannot be consistently carried out. And when I objected that in this I had merely been applying the type of philosophy that he, too, had made the basis of his special theory of relativity, he answered simply: 'Perhaps I did use such philosophy earlier, and also wrote it, but it is nonsense all the same'.
? (Quoted in Weinberg 1992: 180)
8 Why write a book about capital?
The modern corporate owner does not view capital as comprising tangible and intangible artefacts such as machines, structures, raw materials, know- ledge and goodwill. Instead, he or she is habituated to think of capital as equivalent to the corporation's equity and debt. The universal creed of capi- talism defines the magnitude of this equity and debt as capitalization: it is equal to the corporation's expected future profit and interest payments, adjusted for risk and discounted to their present value.
Faith in the principle of capitalization now has more followers than all of the world's religions combined. It is accepted everywhere - from New York and London to Beijing and Teheran. In fact, the belief has spread so widely that it is now used regularly to discount not only capitalist income, but also the income of wage earners, governments, and, indeed, society at large.
But as often happens with religion, the greater the belief the fewer the ques- tions. And, indeed, those who obey capitalization are so conditioned that they rarely if ever enquire into its origin and implications. So maybe it isn't too much to stop and ask: What exactly is the meaning of capitalization? Where does it come from and why has it become so dominant? What are the forces that propel it, and how do they shape the broader process of capitalist development?
As this book will show, the elements of corporate capitalization - namely the firm's expected earnings and their associated risk perceptions - represent neither the productivity of the owned artefacts nor the abstract labour socially necessary to produce them, but the power of a corporation's owners. 7 In the capitalist order, it is power that makes the owned artefacts valuable to begin with. Moreover, the power to generate earnings and limit risk goes far beyond the narrow spheres of 'production' and 'markets' to include the entire state structure of corporations and governments.
This perspective is unlike that of conventional political economy. Liberal ideology likes to present capital and state as hostile, while Marxists think of them as complementary. But in both approaches, the two entities - although related - are distinctly instituted and organized.
Our own view is very different. As we see it, the legal-organizational entity of the corporation and the network of institutions and organs that make up government are part and parcel of the same encompassing mode of power. We call this mode of power the state of capital, and it is the ongoing transfor- mation of this state of capital that constitutes the accumulation of capital.
The conventional creed incessantly fractures this encompassing process into a kaleidoscope of multiple interpretations. It conditions us to think of a bank as part of the 'economy', of the army as a component of 'politics' and of a television network as an aspect of 'culture'. We expect the 'sports' section of the newspaper to be separate from the sections that deal with 'international
7 For simplicity, we refer here to corporate capitalization only. Later in the book we treat capitalization more generally.
? Why write a book about capital? 9
news' and 'education'. We split our life into distinct functions such as 'family', 'work', 'consumption' and 'entertainment'. We put each entity in a different realm.
And yet, occasionally, a small miracle happens. Like in the opening of Maurice Ravel's La Valse, where the dissociated, fragmented sounds gradu- ally interlace and fuse into a single musical march-dance, our mind, in a flash of negation, unites the seemingly distinct social regions into a single holo- gram. Although often no more than a fuzzy silhouette, this hologram shows us the whole picture. The fractured human beings, the infinite threads that tie them to one another, the different 'spheres' between which they move - all those converge into one totalizing logic: the logic of capital. 8
The reason that this logic is so totalizing can be sketched as follows. The capitalist mode of power is counted in prices, and capitalization, working through the ever more encompassing price system, is the algorithm that constantly restructures and reshapes this order. Capitalization discounts a particular trajectory of expected future earnings. For any group of capitalists - typically a corporation - the relative level and pattern of earnings denote differential power: the higher and more predictable these earnings are relative to those of other groups of companies, the greater the differential power of the corporation's owners.
Note that this is not 'economic power'. Neither is it 'political power' that somehow 'distorts' the economy. Instead, what we deal with here is organ- ized power at large. Numerous power institutions and processes - from ideology, through culture, to organized violence, religion, the law, ethnicity, gender, international conflict, labour relations, manufacturing techniques
8 The yearning for a totalizing picture in the face of relentless disciplinary fracturing is described in the childhood reminiscences of Arnold Toynbee:
When I was a child I used to stay from time to time in the house of a distinguished professor of one of the physical sciences. There was a study lined with bookshelves, and I remember how, between one visit and another, the books used to change. When first I knew the room, many shelves were filled with general literature, with general scientific works, and with general works on that branch in which my host was an expert. As the years passed, these shelves were invaded, one after another, by the relentless advance of half a dozen specialized periodicals - gaunt volumes in grim bindings, each containing many monographs by different hands. These volumes were not books in the literary sense of the word, for there was no unity in their contents and indeed no relation whatever between one monograph and another beyond the very feeble link of their all having some- thing to do with the branch of science in question. The books retreated as the periodicals advanced. I afterwards rediscovered them in the attic, where the Poems of Shelley and The Origin of Species, thrown together in a common exile, shared shelves of a rougher work- manship with microbes kept in glass bottles. Each time I found the study a less agreeable room to look at and to live in than before. These periodicals were the industrial system 'in book form', with its division of labour and its sustained maximum output of articles manufactured from raw materials mechanically.
? (Toynbee 1972: 30)
10 Why write a book about capital?
and accounting innovations - all bear on the differential level and volatility of earnings. When these earnings and their volatility are discounted into capital values, the power institutions and processes that underlie them become part of capital. And since capital is a vendible commodity, available for purchase and sale on the stock and bond markets, its relative value represents the commodification of power.
From this viewpoint, we can no longer speak of 'economic efficiency' versus 'political power', or distinguish 'economic exploitation' from 'political oppression'. Instead, there is a single process of capital accumulation/state formation, a process of restructuring by which power is accumulated as capital. To study the accumulation of capital is to study the formation and transformation of organized power under capitalism. This is the starting point of our book.
A brief synopsis
The book itself consists of five parts. Part I situates the emergence of capital within the broader development of political economy. Part II dissects the liberal and Marxist conceptions of capital. Part III explains why theorists of capital have been barking up the wrong tree, trying to equate accumulation with machines and production instead of capitalization and finance. Part IV lays the foundations for an alternative theory of accumulation based on power. And Part V articulates our own theory of capital as power.
On the face of it, this layout may seem to separate neatly our 'critique' of existing theories in the first three parts of the book from the 'gist' of our story in the last two. But don't be tempted to take a shortcut and jump over Rhodes. Substantively, there is no split in the book. The early parts of the book are crucial to the dialectical development of our argument, and unless you read them you won't understand what follows.
The sections below highlight the key themes of each of these parts, listing some of the questions we ask and sketching the paths we follow as we re- search the answers. We write them less as a summary and more as an appe- tizer. Hopefully, they will lure you to read the whole book.
Part I: dilemmas of political economy
The first part introduces some of the key dilemmas of political economy. Chapter 2 identifies the two central dualities of political economy: (1) the separation between politics and economics, and (2) the further distinction, within economics, between the real and the nominal. These bifurcations, accepted by both liberals and Marxists, define what political economy does - and what it cannot do. And the most important handicap they impose is the inability to deal with power.
The dualities themselves are hardly accidental. As Chapter 3 explains, they were part and parcel of a triple revolution that swept eighteenth-century
Why write a book about capital? 11
Europe: the ascent of modern science, the emergence of liberal politics and the rise of capital accumulation. This triple revolution undermined the reli- gious-authoritarian cosmos. The hierarchical rule of God and his ordained subcontractors was replaced by a flat law of nature, a secular-universal mechanism that regulated and equilibrated both heaven and earth. This new worldview made the 'economy' a natural process, independent of the 'poli- tics' of king and church; and it made the 'nominal' incomes of the different classes a consequence of 'real' production and consumption rather than naked power and sanctified violence.
But whereas the dualities undermined the power of the ancien re? gime, they were far less effective in concealing (or revealing) the power of capital. Initially, the problem didn't seem serious enough, and most political econo- mists were totally oblivious to its consequences. The liberals were all too happy to emphasize the liberating aspects of the market and its separation from state, and they therefore had no reason to drag capitalist power into the open. By contrast, the Marxists emphasized the exploitative and oppressive nature of the system; but having banked on the economy's historical laws of motion to dialectically implode the system from within, they, too, felt no need to complicate the picture with the voluntarist indeterminacies of power. And so 'politics' remained happily separate from 'economics' and the 'nominal' distinct from the 'real'.
But that situation started to change in the late nineteenth and early twentieth centuries. First, the growth of large units - big business, large government and organized labour - upset the presumed automaticity and self-regulating tendencies of capitalism. Second, there emerged a whole slew of new power processes - from militarization and imperialism, to finance and inflation, to collectivism and fascism, culture and mass psychology, industrial regulation, monopoly and macroeconomic stabilization - developments that no longer fit the equilibrium theories of mechanical liberalism and the histor- ical inevitabilities of dialectical Marxism. And third, political economists started to empirically quantify accumulation - only to find that, in the absence of equilibrium and the presence of power, capital no longer has an 'objective' magnitude.
Chapter 4 examines the different ways in which political economists attempted to tackle the problem. The solutions are very different, but they all have one thing in common: they try to have their cake and eat it too. The liberals do so by elimination. They break their economy into two separate domains: 'micro' and 'macro'. The micro sphere is drained of all power, creating a showcase where the laws of economics function smoothly and automatically. Some of the drained power is classified as 'imperfections' and tacked on to textbooks as better-to-skip chapters. But the bulk of it - particu- larly the power of 'government intervention' - is exported to the macro field, where 'distortions' reign supreme. This solution helps keep the pristine simplicity of liberal theory intact - but at a rapidly mounting cost. Power is now recognized as an unfortunate yet permanent feature of the actual
12 Why write a book about capital?
economy. And as the power-free models start to fail, liberal economists find themselves increasingly reliant on 'extra-economic shocks', 'selfish unions' and 'short-sighted politicians' to explain what their eternal theories cannot.
Unlike the elusive liberals, Marxists try to deal with power head on - yet they too end up with a fractured picture. Unable to fit power into Marx's value analysis, they have split their inquiry into three distinct branches: a neo- Marxian economics that substitutes monopoly for labour values; a cultural analysis whose extreme versions reject the existence of 'economics' altogether (and eventually also the existence of any 'objective' order); and a state theory that oscillates between two opposite positions - one that prioritizes state power by demoting the 'laws' of the economy, and another that endorses the 'laws' of the economy by annulling the autonomy of the state. Gradually, each of these branches has developed its own orthodoxies, academic bureau- cracies and barriers. And as the fractures have deepened, the capitalist totality that Marx was so keen on uncovering has dissipated.
Part II: the enigma of capital
These unsolved dilemmas left accumulation in a no-man's land. The dismal scientists insisted that capital is an 'economic' entity and quickly appropri- ated the exclusive right to theorize, justify and criticize it. But as often happens with uncontested monopolies, the service hasn't been something to write home about. It has now been more than two centuries since economists started to work on capital, and they have yet to figure it out. . . .
Chapter 5 examines the liberal debacle. The key purpose of neoclassical economics is to justify the profit of capital; and it does so by making the income of capitalists equal to the productivity of their capital. This justifica- tion, though, faces two insurmountable obstacles. First, according to its own prerequisites, the theory can work only under the strict conditions of a perfectly competitive economy untainted by politics and power. Ironically, though, this explanation emerged at the end of the nineteenth century, precisely when oligopoly replaced 'competition'; and it gained prominence after the Second World War, exactly when governments started to 'intervene' in earnest. Second, and more importantly, even if pure competition did prevail and there was no government in sight, the theory would still fall flat on it face. In order to explain profit by the productivity of capital, we first need to know the quantity of that capital. Yet it so happens that in order to know the quantity of capital, we first have to know the amount of profit! And since there is no way to tell the chicken from the egg, the neoclassicists continue to run in circles.
Unlike liberals, Marxists do not try to justify profit. On the contrary, their entire effort aims at showing that capitalists can accumulate only by exploiting workers. And yet, since their notion of capital, just like the neoclas- sical one, is anchored in the 'economy', they end up falling into the same materialistic traps. These traps are crucial - so crucial, in fact, that they
Why write a book about capital?
10. 1 General Motors versus Microsoft, 2005 173
10. 2 Tobin's Q in the United States 174
10. 3 The world according to the scriptures 178
10. 4 US capital accumulation: which is the 'real', which the
'fictitious'? 181
11. 1 S&P 500: price and earnings per share 186
11. 2 S&P 500: earnings, earning estimates and hype 213
12. 1 Business and industry 237
12. 2 Business and industry in the United States 238
12. 3 The productivity threat 251
12. 4 Business trust and industrial sabotage in the United States 258
13. 1 Capital's share of income in the United States 274
14. 1 Aggregate concentration in the United States 318
14. 2 Differential capitalization and differential net profit in the
United States 320
14. 3 Accumulation crisis? . . . 323
14. 4 . . . Or a differential accumulation boom? 324
15. 1 US employment, number of firms and size of firms 336
15. 2 US accumulation: internal vs external breadth 338
15. 3 Tobin's Q? 344
15. 4 Ratio of global gross foreign assets to global GDP 353
15. 5 G7 cross-border private investment flows as a per cent of
gross fixed capital formation 355
15. 6 The globalization of US business: ownership vs trade 357
16. 1 Consumer prices in the UK, 1271-2007 367
16. 2 US inflation and capital-labour redistribution 371
16. 3 US inflation and differential accumulation 373
16. 4 United States: inflation and growth, 1809-2007 377
17. 1 Amalgamation and stagflation in the United States 384
xxiv Illustrations
17. 2 Inflation and arms exports 390
17. 3 The two coalitions: share of world market capitalization 393
Tables
10. 1 Fisher's house of mirrors 171
14. 1 US corporate statistics: average number of firms, average
capitalization per firm and average net profit per firm 317
14. 2 Regimes of differential accumulation 329
Acknowledgements
This volume was written in relative isolation, and after reading it you'll see why. The book questions the very foundations of mainstream and Marxist political economy, and it goes further to offer a totally new alternative. Going against the grain is hardly the best way to make friends, and, as the history of science tells us, those who try to innovate often face a wall of silence.
But the silence is never complete. There are always free spirits who look for new directions, and we have been fortunate to cross paths with some of them. Our work has benefited from the friendship of Allen Fenichel, Tom Naylor and Robin Rowley, who helped us stand against the academic church; from the thoughtful interventions of Randy Germain, who helped and encouraged us at various stages of the publication journey; from Jeffrey Harrod, whose grassroots analysis shed light on aspects that our power theory had over- looked; from Doug Henwood and Michael Perelman, whose LBO and PEN-L internet lists we found invaluable; from years of discussions with Gibin Hong, who also translated the early incarnation of this manuscript into Korean; from Bob Jessop, who engaged with and supported our work even when our opinions differed; from Moshe? Machover, whose personal honesty, clarity of thinking and path-breaking politics one cannot but admire; from Ulf Martin, whose sharp observations and penetrating questions always kept us on edge; from many debates with the colourful members of MISS-Q, whose arguments often gave us food for thought; from the unmatched editorial skills of Daniel Moure, who polished our English and compiled our index; from Akiva Orr, whose deep insights into philosophy and science we found enlightening; from Jeffrey Rudolph, who managed to mix accounting with curiosity; from Herman Schwartz, whose brilliance offered an antidote to academic mediocrity; and, last but not least, from Genevieve Thouvenot, whose expertise in ancient languages saved us from drawing silly conclusions, and whose suggestions often helped us find the answer right under our nose.
We also feel indebted to the brave women and men of MATZPEN, the Alternative Information Center and others too numerous to be listed here, whose struggle for freedom and autonomy in the Middle East inspired our early research and continues to influence our thought.
xxvi Acknowledgements
Finally, we wish to thank the three anonymous referees who read the early version of the manuscript; the Social Sciences and Humanities Research Council of Canada for its financial assistance; and our students, whose desire to think for themselves made writing this book worthwhile.
1 Why write a book about capital?
There is no joy more intense than that of coming upon a fact that cannot be understood in terms of currently accepted ideas.
--Cecilia Payne, An Autobiography and other Recollections
Capitalism without capital
We grew up in the 'affluent society' of 1950s and 1960s. As children and then as young adults we rarely heard the word 'capitalism'. It was the Cold War, and speaking about capitalism, although not strictly taboo, was hardly a popular pastime. The term smelled of extremist ideology; it connoted commu- nist rhetoric; it conjured up bygone debates and obsolete ideas.
As a theoretical concept, capitalism seemed hopelessly unscientific. It was a remnant from a different era, from a time when people, haunted by 'scar- city', still viewed society through the hazy spectacles of political economy. The new social sciences - and particularly the science of economics - boasted far better and more precise categories.
These categories were grouped under a new buzzword: 'modernization'. Talk of modernization opened all the right doors. It invited American aid, it paved the road to development and it helped academic promotion. The word 'capitalism' became redundant, if not counterproductive. Gradually, it vanished from the lexicon.
But beginning in the early 1990s a strange thing happened: capitalism staged a remarkable comeback. Suddenly, social scientists and post-scientists alike wanted to talk of nothing else. The capitalist world, capitalist markets, capitalist governance, capitalist culture, capitalist institutions, capitalist wars, capitalism and race, capitalism and gender, capitalism and libido - no matter where you turn, you cannot escape the C-word.
Debate over capitalism is everywhere. The newspapers, radio, television and the internet overflow with talk of neoliberal globalization and crisis, imperialism and post-colonialism, financialization and government inter- vention. Experts preach the gospel of capitalist productivity, while alter- globalization protestors blame the IMF and transnational companies for
2 Why write a book about capital?
many of our social ills. Some view capitalist growth as a magic bullet; for others it spells ecological disaster. Some celebrate the deregulation of the capitalist state and the fall of Keynesianism; others mourn the decline of the welfare state and the rise of zapping labour. Many interpret the new wars of the twenty-first century as serving capitalist interests and the rise of Islamic fundamentalism as a backlash against Western liberalism. For some, capi- talism means the end of history, for others a source of conflict and an engine of change. No aspect of capitalism seems to escape debate.
Or perhaps we should say almost no aspect. Almost, because something really important is missing. In all the commotion, we seem to have lost sight of the concept that matters most: capital itself. Capital is the central institu- tion of capitalism - and yet, surprisingly, we do not have a satisfactory theory to explain it. In fact, we do not know precisely what capital is. And worse still, there is little or no discussion on what this omission means or how it can be rectified.
The issue is crucial. Without a clear concept of capital, we cannot hope to understand how capital operates, why it accumulates or how it drives the capitalist order. Until we understand capital, we are destined to misconceive our political institutions, misjudge our alternatives and have trouble imag- ining the way to a better future. In short, in order to debate capitalism we first need to debate capital itself. 1
This book is not about economics
Many people who are otherwise keenly interested in society get cold feet when confronted with 'economics'. The symbols seem mysterious, the logic baff- ling, the language incomprehensible, even threatening. The dread is real. Ever since Thomas Carlyle, the 'dismal science' has been frightening most people.
But that fear is irrelevant to our book. Our subject is not economics; it is capital. And capital, as we hope to show, is not an economic entity.
It should be noted upfront that economics - or, more precisely, the neoclassical branch of political economy - is not an objective reality. In fact, for the most part it is not even a scientific inquiry into objective reality. Instead, neoclassical political economy is largely an ideology in the service of
1 Of course, not everyone shares this sense of urgency. Quite the contrary. These days, many academics tell us that, in fact, there are no facts (in a conversation or a speech, a speaker will typically use her fingers to encapsulate the word 'facts' with invisible inverted commas, pointing to its obvious ambiguity). In postmodern space, these academics explain, there is nothing much to 'know' (again in inverted commas). Everything - including capital - is merely a 'narrative'. Capital is a 'discourse' that cannot be known, only 'deconstructed'. And who knows, since nobody 'really' knows, maybe that is indeed the best way to conceal capital. This convenient conclusion, though, begets a somewhat embarrassing question: if capital is merely a discursive text, one faith among many, what is the point of talking about - let alone criticizing - capitalism? And if there is no point in such critique, who needs the postmodern critics?
? Why write a book about capital? 3
the powerful. It is the language in which the capitalist ruling class conceives and shapes society. Simultaneously, it is also the tool with which this class conceals its own power and the means with which it persuades others to accept that power.
Our book puts power back in centre stage. Notice the metaphoric equality in the title: 'Capital as Power'. We use not and, but as. We do not speak of capital and power; of capital in the service of power, or vice versa; of capital in relation to state; of capital with or against politics; of capital in contradis- tinction to violence; or of capital and ideology. We refer not to a relation, connection, function, or juxtaposition, but to a figurative identity. Capital does not relate to power. It is, in itself, a mode of power.
The purpose of this book is to explain capital as power. The first step toward understanding our argument, therefore, is to stop thinking of capital and capitalism as 'economic' entities. But that is just the start. The second step is to be willing to take on the dogma that makes capital and capitalism 'economic' entities in the first place.
How and why
Young children are obsessed with the question 'why? ' 'Why do I need to brush my teeth? ' 'Why do birds fly and dogs don't? ' 'Why does mommy have to go to work? ' The quest is universal, but it doesn't last for long. Children quickly learn that grownups dislike the question and often don't know how to answer it, and they realize that one 'why? ' inevitably leads to another, followed by further hassle and endless aggravation. So they grow up. By the age of five or six, they abandon the 'why? ' in favour of the more practical 'how? ' They stop questioning the world and try to fit into it. They become adults, and they usually remain so for the rest of their lives.
But not everyone grows up. As Mark Twain (1881) reminds us, some people stay young no matter how old they become. And the youngest of all are those who never stop asking 'why? ' This book is written for these young people of all ages. We write it for those who feel their future is at stake and wish to do something about it; for those who sense that there is something deeply wrong with the conventional creed but don't know exactly what it is; and, above all, for those who simply dislike dogma and want to think for themselves.
Perhaps the key problem facing young people today is a lack of theoretical alternatives. A new social reality presupposes and implies a new social cosmology. To change the capitalist world, one first needs to re-conceive it; and that re-conception means new ways of thinking, new categories and new measurements. And yet, many contemporary critics of capitalism seem to believe that they can challenge this social order without ever asking how it operates, let alone why.
With some obvious exceptions, present-day leftists prefer to avoid 'the economy', and many are rather proud about it. To prioritize profit and
4 Why write a book about capital?
accumulation, to theorize corporations and the stock market, to empirically research the gyrations of money and prices are all acts of narrow 'econo- mism'. To do these things is to fetishize the world, to conceal the cultural nuances of human consciousness, to prevent the critic from seeing the true political underpinnings of social affairs. Best to leave them to the dismal scientists.
And, so, most self-respecting critics of capitalism remain happily ignorant of its 'economics', neoclassical as well as Marxist. They know little about the respective histories, questions and challenges of these theories, and they are oblivious to their triumphs, contradictions and failures. This innocence is certainly liberating. It allows critics to produce 'critical discourse' littered with cut-and-paste platitudes, ambiguities and often plain nonsense. Seldom do their 'critiques' tell us something important about the forces of contem- porary capitalism, let alone about how these forces should be researched, understood and challenged.
Most importantly, though, this stale context conditions students to stop asking 'why? ' The big questions about capital are pushed under the rug, and as the young generation gets older and becomes established, the questions are forgotten altogether. Occasionally, an untamed spirit, having discovered an old debate in an outdated book, raises a nai? ve 'why? ' But these spontaneous fires are quickly isolated and extinguished. Ridiculed by know-all professors and hushed by acolyte students, the outlier is forced to relinquish or perish. There is no alternative, and the safest thing for an academic is to never wonder why. 2
Our book defies this dogma. We provide a new conceptual framework for capital - along with the context that this framework negates and the means by which it is articulated. 'There is no empirical method without speculative concepts and systems', writes Einstein in the forward to Galileo's Dialogue
2 As a first-year economics student at Tel-Aviv University, one of us (Nitzan) challenged the professor with questions about the assumptions. Economists make plenty of those, so there were many questions to ask. Initially, the professor was happy to engage. But two weeks into the course, the questions became more difficult to answer, the students grew annoyed with my interventions, and the professor began to apply the usual stalling tactic. 'Yours is a very interesting question', she would say, 'but it's too early to deal with it. Please raise it later, when we deal with this topic in greater detail'. This method is popular among economics instructors, and it works particularly well when combined with a heavy dose of 'problem- solving' exercises. The seemingly 'practical' drill forces students to accept the underlying premises, and when the premises are accepted the questions quickly disappear. But I persisted, so the professor had no choice but to shut me off altogether. When I inquired why I was being ignored, her reply was short and informative: 'You don't know how to ask ques- tions'.
Many years later, an undergraduate student in one of my political-economy classes summarized the same dilemma from a different angle: 'Your class makes me sooo nervous. With all my other professors, I can write pretty much what I want as long as I stick to the syllabus and properly cite the readings. But your class doesn't work this way. Not only do I have to do my own research, I also need to invent the research question. And in the end, I can still be wrong! '. . . . What a terrifying thought.
? Why write a book about capital? 5
Concerning the Chief Two World Systems (Galilei 1632). But, also, 'there is no speculative thinking whose concepts do not reveal, on closer investigation, the empirical methods from which they stem' (p. xvii). The two processes are dialectically intertwined. And, so, together with our theoretical schemes, we introduce new research methods; new categories; new ways of thinking about, relating and presenting data; new estimates and measurements; and, finally, the beginnings of a new, disaggregate accounting that reveals the conflictual dynamics of society. We show that there can be many alternatives, provided we never stop asking why. 3
Clearly, we would be happy to convince our readers with our specific argu- ments, but that goal is secondary. The more important goal is to encourage readers to develop their own research. As the book will amply show, social facts are indispensable but never 'self-evident', and since the emperor is so often naked, we shouldn't be afraid to ask why. There is a lot to suspect in the world of the 'obvious', so try to distrust the 'experts' and 'authorities' - be they mainstream or critical. In the final analysis, the only way to develop your own opinion - instead of adopting the opinions of others - is to always ask why and constantly re-search your own answers.
What's wrong with capital theory?
Begin with the monetary magnitude of capital. This magnitude is readily observable. We know how much it costs to buy existing capital on the stock and bond markets, just as we know how much it costs to set up a new company, or to put in place new plant and equipment. But what determines these monetary magnitudes? What are the forces that lie beneath the earthly appearance of capital?
Why is Microsoft worth $300 billion and not half that much? Why does Toyota pay $2 billion rather than $4 billion for a new car factory? Why do these magnitudes tend to grow over time? What sets their pace of growth?
Economists - both liberal and radical - claim to have answered these ques- tions. Capital, most would say, is an economic category anchored in material reality. In the final analysis, the monetary value of capital derives from and reflects the underlying processes of consumption and production.
Mainstream neoclassical economists view this determination from the output side. Capital for them is made of tangible capital goods (and now also of intangible knowledge or technology). The magnitude of capital in money terms is proportionate to its productivity - namely, to its ability to produce goods and services that satisfy human wants and generate happiness. This transmutation is meaningful because both capital and its productivity are
3 On the clash between modern academia and the scientific endeavour, see our unpublish- able manuscript 'The Scientist and the Church' (Nitzan and Bichler 2005). The paper can be downloaded for free from http://bnarchives. yorku. ca/185/.
? 6 Why write a book about capital?
counted in the same universal unit, the elementary particle of economics: the 'util'.
Marxists see things rather differently. Capital for them is not a material substance per se, but a social relation embedded in productive, material enti- ties. In order to understand capital, they argue, we have to look behind the hedonic veneer of liberal ideology and examine the industrial essence of the system. From this viewpoint, the key issue is not the utility that the capital produces, but the social process by which capital itself gets produced. Consequently, the proper way to approach capital is not from the output side, as per the neoclassicists, but from the input side - the side of labour.
Marxists, too, count capital in universal units: the units of 'abstract labour'. This is the elementary particle of Marx's cosmology. Quantitatively, the dollar value of capital in the Marxist scheme is proportionate to its cost of production, and, specifically, to the amount of abstract labour socially neces- sary to produce that capital. 4
Unfortunately, both explanations fail. In the end, neither the neoclassicists nor the Marxists are able to answer the question of what determines the magnitude of capital and its rate of accumulation.
Many reasons conspire to produce this failure, but the most important one concerns the basic units of analysis. As we shall see, utils and abstract labour are deeply problematic categories. They cannot be observed directly with our senses, and they cannot be examined indirectly through intermediation. Their 'quantity' cannot be calculated, even theoretically. In fact, they are not even logically consistent entities. These shortcomings are very serious, and the last one potentially detrimental.
It is of course true - positivism notwithstanding - that a scientific theory does not require all of its elementary particles to be observable, whether directly or indirectly. To mention the obvious, atoms were deemed unobserv- able till the early twentieth century, many subatomic particles are still elusive, and entities such as strings will perhaps stay so forever (or at least for a while longer). Yet the 'invisibility' of these elementary particles has hardly dimin- ished the scientific footing of modern physics. 5 Indeed, one may argue that, since Galileo, the strength of science lies precisely in its ability to explain observed magnitudes by unobserved ones. 6
4 This is the view of classical Marxists, but not of neo-Marxists. Although the latter accept many of Marx's assumptions and analyses, they no longer use abstract labour as a basis for understanding contemporary capitalism and modern accumulation. The difference between the two approaches has significant implications, which we explore in Chapters 4 and 8.
5 On the concept of 'observation' and its intricacies, see Shapere (1982).
6 According to Zev Bechler, one of Galileo's chief contributions to the scientific revolution was the rejection of Aristotle's anti-informativism in favour of informative theories. In his Two New Sciences, Galileo suggested that, 'Since I cannot do more at present, I shall attempt to remove, or at least diminish, one improbability by introducing a similar or a greater one, just as sometimes a wonder is diminished by a miracle' (quoted in Bechler 1991: 131). In other words, modern science advances not by insisting on logically complete and therefore
? Why write a book about capital? 7
The situation is quite different with neoclassical utils and Marxist abstract labour. These units are unlike atoms, electrons, or strings. The latter may be unobservable to us, but that shortcoming - at least in principle - could be attributed to our own limitations. Theoretically, atoms, electrons and strings are logically consistent entities with a definite set of quantities, whether deter- ministic or probabilistic. By contrast, utils and abstract labour are invisible not because of our own shortcomings, but because they do not - and cannot - posses a definite magnitude in the first place. They have pseudo-quanta. Even if we could somehow 'see' them, there would be nothing to measure. And 'quanta' that cannot be measured - no matter how important they might be otherwise - cannot form the basis for quantitative analysis.
The consequence is that neoclassical economics and Marxist political economy lack a basic unit. And without a basic unit, we remain right where we started. We know the price of capital in dollars and cents, but not how many utils or hours of abstract labour this value supposedly represents. We know that capital accumulates, but not why it accumulates or what this accumulation means.
Toward a new theory of capital
The secret to understanding accumulation, this book argues, lies not in the narrow confines of production and consumption, but in the broader processes and institutions of power. Capital, we claim, is neither a material object nor a social relationship embedded in material entities. It is not 'augmented' by power. It is, in itself, a symbolic representation of power.
The starting point is finance. As we shall see, Marx classified finance as 'fictitious' capital - in contrast to the 'actual' capital embedded in the means of production. This classification puts the world on its head. In fact, in the real world the quantum of capital exists as finance, and only as finance. This is the core of the capitalist regime.
empty explanations, but, on the contrary, by solving existing puzzles through the introduc- tion of new puzzles. Werner Heisenberg tells of a conversation he had with Albert Einstein in 1926 on this very inevitability:
I pointed out [to Einstein] that we cannot, in fact, observe such a path [of an electron in an atom]; what we actually record are frequencies of the light radiated by the atom, intensi- ties and transition probabilities, but no actual path. And since it is but rational to intro- duce into a theory only such quantities as can be directly observed, the concept of electron paths ought not, in fact, to figure in the theory. To my astonishment, Einstein was not at all satisfied with this argument. He thought that every theory in fact contains unobserv- able quantities. The principle of employing only observable quantities simply cannot be consistently carried out. And when I objected that in this I had merely been applying the type of philosophy that he, too, had made the basis of his special theory of relativity, he answered simply: 'Perhaps I did use such philosophy earlier, and also wrote it, but it is nonsense all the same'.
? (Quoted in Weinberg 1992: 180)
8 Why write a book about capital?
The modern corporate owner does not view capital as comprising tangible and intangible artefacts such as machines, structures, raw materials, know- ledge and goodwill. Instead, he or she is habituated to think of capital as equivalent to the corporation's equity and debt. The universal creed of capi- talism defines the magnitude of this equity and debt as capitalization: it is equal to the corporation's expected future profit and interest payments, adjusted for risk and discounted to their present value.
Faith in the principle of capitalization now has more followers than all of the world's religions combined. It is accepted everywhere - from New York and London to Beijing and Teheran. In fact, the belief has spread so widely that it is now used regularly to discount not only capitalist income, but also the income of wage earners, governments, and, indeed, society at large.
But as often happens with religion, the greater the belief the fewer the ques- tions. And, indeed, those who obey capitalization are so conditioned that they rarely if ever enquire into its origin and implications. So maybe it isn't too much to stop and ask: What exactly is the meaning of capitalization? Where does it come from and why has it become so dominant? What are the forces that propel it, and how do they shape the broader process of capitalist development?
As this book will show, the elements of corporate capitalization - namely the firm's expected earnings and their associated risk perceptions - represent neither the productivity of the owned artefacts nor the abstract labour socially necessary to produce them, but the power of a corporation's owners. 7 In the capitalist order, it is power that makes the owned artefacts valuable to begin with. Moreover, the power to generate earnings and limit risk goes far beyond the narrow spheres of 'production' and 'markets' to include the entire state structure of corporations and governments.
This perspective is unlike that of conventional political economy. Liberal ideology likes to present capital and state as hostile, while Marxists think of them as complementary. But in both approaches, the two entities - although related - are distinctly instituted and organized.
Our own view is very different. As we see it, the legal-organizational entity of the corporation and the network of institutions and organs that make up government are part and parcel of the same encompassing mode of power. We call this mode of power the state of capital, and it is the ongoing transfor- mation of this state of capital that constitutes the accumulation of capital.
The conventional creed incessantly fractures this encompassing process into a kaleidoscope of multiple interpretations. It conditions us to think of a bank as part of the 'economy', of the army as a component of 'politics' and of a television network as an aspect of 'culture'. We expect the 'sports' section of the newspaper to be separate from the sections that deal with 'international
7 For simplicity, we refer here to corporate capitalization only. Later in the book we treat capitalization more generally.
? Why write a book about capital? 9
news' and 'education'. We split our life into distinct functions such as 'family', 'work', 'consumption' and 'entertainment'. We put each entity in a different realm.
And yet, occasionally, a small miracle happens. Like in the opening of Maurice Ravel's La Valse, where the dissociated, fragmented sounds gradu- ally interlace and fuse into a single musical march-dance, our mind, in a flash of negation, unites the seemingly distinct social regions into a single holo- gram. Although often no more than a fuzzy silhouette, this hologram shows us the whole picture. The fractured human beings, the infinite threads that tie them to one another, the different 'spheres' between which they move - all those converge into one totalizing logic: the logic of capital. 8
The reason that this logic is so totalizing can be sketched as follows. The capitalist mode of power is counted in prices, and capitalization, working through the ever more encompassing price system, is the algorithm that constantly restructures and reshapes this order. Capitalization discounts a particular trajectory of expected future earnings. For any group of capitalists - typically a corporation - the relative level and pattern of earnings denote differential power: the higher and more predictable these earnings are relative to those of other groups of companies, the greater the differential power of the corporation's owners.
Note that this is not 'economic power'. Neither is it 'political power' that somehow 'distorts' the economy. Instead, what we deal with here is organ- ized power at large. Numerous power institutions and processes - from ideology, through culture, to organized violence, religion, the law, ethnicity, gender, international conflict, labour relations, manufacturing techniques
8 The yearning for a totalizing picture in the face of relentless disciplinary fracturing is described in the childhood reminiscences of Arnold Toynbee:
When I was a child I used to stay from time to time in the house of a distinguished professor of one of the physical sciences. There was a study lined with bookshelves, and I remember how, between one visit and another, the books used to change. When first I knew the room, many shelves were filled with general literature, with general scientific works, and with general works on that branch in which my host was an expert. As the years passed, these shelves were invaded, one after another, by the relentless advance of half a dozen specialized periodicals - gaunt volumes in grim bindings, each containing many monographs by different hands. These volumes were not books in the literary sense of the word, for there was no unity in their contents and indeed no relation whatever between one monograph and another beyond the very feeble link of their all having some- thing to do with the branch of science in question. The books retreated as the periodicals advanced. I afterwards rediscovered them in the attic, where the Poems of Shelley and The Origin of Species, thrown together in a common exile, shared shelves of a rougher work- manship with microbes kept in glass bottles. Each time I found the study a less agreeable room to look at and to live in than before. These periodicals were the industrial system 'in book form', with its division of labour and its sustained maximum output of articles manufactured from raw materials mechanically.
? (Toynbee 1972: 30)
10 Why write a book about capital?
and accounting innovations - all bear on the differential level and volatility of earnings. When these earnings and their volatility are discounted into capital values, the power institutions and processes that underlie them become part of capital. And since capital is a vendible commodity, available for purchase and sale on the stock and bond markets, its relative value represents the commodification of power.
From this viewpoint, we can no longer speak of 'economic efficiency' versus 'political power', or distinguish 'economic exploitation' from 'political oppression'. Instead, there is a single process of capital accumulation/state formation, a process of restructuring by which power is accumulated as capital. To study the accumulation of capital is to study the formation and transformation of organized power under capitalism. This is the starting point of our book.
A brief synopsis
The book itself consists of five parts. Part I situates the emergence of capital within the broader development of political economy. Part II dissects the liberal and Marxist conceptions of capital. Part III explains why theorists of capital have been barking up the wrong tree, trying to equate accumulation with machines and production instead of capitalization and finance. Part IV lays the foundations for an alternative theory of accumulation based on power. And Part V articulates our own theory of capital as power.
On the face of it, this layout may seem to separate neatly our 'critique' of existing theories in the first three parts of the book from the 'gist' of our story in the last two. But don't be tempted to take a shortcut and jump over Rhodes. Substantively, there is no split in the book. The early parts of the book are crucial to the dialectical development of our argument, and unless you read them you won't understand what follows.
The sections below highlight the key themes of each of these parts, listing some of the questions we ask and sketching the paths we follow as we re- search the answers. We write them less as a summary and more as an appe- tizer. Hopefully, they will lure you to read the whole book.
Part I: dilemmas of political economy
The first part introduces some of the key dilemmas of political economy. Chapter 2 identifies the two central dualities of political economy: (1) the separation between politics and economics, and (2) the further distinction, within economics, between the real and the nominal. These bifurcations, accepted by both liberals and Marxists, define what political economy does - and what it cannot do. And the most important handicap they impose is the inability to deal with power.
The dualities themselves are hardly accidental. As Chapter 3 explains, they were part and parcel of a triple revolution that swept eighteenth-century
Why write a book about capital? 11
Europe: the ascent of modern science, the emergence of liberal politics and the rise of capital accumulation. This triple revolution undermined the reli- gious-authoritarian cosmos. The hierarchical rule of God and his ordained subcontractors was replaced by a flat law of nature, a secular-universal mechanism that regulated and equilibrated both heaven and earth. This new worldview made the 'economy' a natural process, independent of the 'poli- tics' of king and church; and it made the 'nominal' incomes of the different classes a consequence of 'real' production and consumption rather than naked power and sanctified violence.
But whereas the dualities undermined the power of the ancien re? gime, they were far less effective in concealing (or revealing) the power of capital. Initially, the problem didn't seem serious enough, and most political econo- mists were totally oblivious to its consequences. The liberals were all too happy to emphasize the liberating aspects of the market and its separation from state, and they therefore had no reason to drag capitalist power into the open. By contrast, the Marxists emphasized the exploitative and oppressive nature of the system; but having banked on the economy's historical laws of motion to dialectically implode the system from within, they, too, felt no need to complicate the picture with the voluntarist indeterminacies of power. And so 'politics' remained happily separate from 'economics' and the 'nominal' distinct from the 'real'.
But that situation started to change in the late nineteenth and early twentieth centuries. First, the growth of large units - big business, large government and organized labour - upset the presumed automaticity and self-regulating tendencies of capitalism. Second, there emerged a whole slew of new power processes - from militarization and imperialism, to finance and inflation, to collectivism and fascism, culture and mass psychology, industrial regulation, monopoly and macroeconomic stabilization - developments that no longer fit the equilibrium theories of mechanical liberalism and the histor- ical inevitabilities of dialectical Marxism. And third, political economists started to empirically quantify accumulation - only to find that, in the absence of equilibrium and the presence of power, capital no longer has an 'objective' magnitude.
Chapter 4 examines the different ways in which political economists attempted to tackle the problem. The solutions are very different, but they all have one thing in common: they try to have their cake and eat it too. The liberals do so by elimination. They break their economy into two separate domains: 'micro' and 'macro'. The micro sphere is drained of all power, creating a showcase where the laws of economics function smoothly and automatically. Some of the drained power is classified as 'imperfections' and tacked on to textbooks as better-to-skip chapters. But the bulk of it - particu- larly the power of 'government intervention' - is exported to the macro field, where 'distortions' reign supreme. This solution helps keep the pristine simplicity of liberal theory intact - but at a rapidly mounting cost. Power is now recognized as an unfortunate yet permanent feature of the actual
12 Why write a book about capital?
economy. And as the power-free models start to fail, liberal economists find themselves increasingly reliant on 'extra-economic shocks', 'selfish unions' and 'short-sighted politicians' to explain what their eternal theories cannot.
Unlike the elusive liberals, Marxists try to deal with power head on - yet they too end up with a fractured picture. Unable to fit power into Marx's value analysis, they have split their inquiry into three distinct branches: a neo- Marxian economics that substitutes monopoly for labour values; a cultural analysis whose extreme versions reject the existence of 'economics' altogether (and eventually also the existence of any 'objective' order); and a state theory that oscillates between two opposite positions - one that prioritizes state power by demoting the 'laws' of the economy, and another that endorses the 'laws' of the economy by annulling the autonomy of the state. Gradually, each of these branches has developed its own orthodoxies, academic bureau- cracies and barriers. And as the fractures have deepened, the capitalist totality that Marx was so keen on uncovering has dissipated.
Part II: the enigma of capital
These unsolved dilemmas left accumulation in a no-man's land. The dismal scientists insisted that capital is an 'economic' entity and quickly appropri- ated the exclusive right to theorize, justify and criticize it. But as often happens with uncontested monopolies, the service hasn't been something to write home about. It has now been more than two centuries since economists started to work on capital, and they have yet to figure it out. . . .
Chapter 5 examines the liberal debacle. The key purpose of neoclassical economics is to justify the profit of capital; and it does so by making the income of capitalists equal to the productivity of their capital. This justifica- tion, though, faces two insurmountable obstacles. First, according to its own prerequisites, the theory can work only under the strict conditions of a perfectly competitive economy untainted by politics and power. Ironically, though, this explanation emerged at the end of the nineteenth century, precisely when oligopoly replaced 'competition'; and it gained prominence after the Second World War, exactly when governments started to 'intervene' in earnest. Second, and more importantly, even if pure competition did prevail and there was no government in sight, the theory would still fall flat on it face. In order to explain profit by the productivity of capital, we first need to know the quantity of that capital. Yet it so happens that in order to know the quantity of capital, we first have to know the amount of profit! And since there is no way to tell the chicken from the egg, the neoclassicists continue to run in circles.
Unlike liberals, Marxists do not try to justify profit. On the contrary, their entire effort aims at showing that capitalists can accumulate only by exploiting workers. And yet, since their notion of capital, just like the neoclas- sical one, is anchored in the 'economy', they end up falling into the same materialistic traps. These traps are crucial - so crucial, in fact, that they
Why write a book about capital?
