No More Learning

The foregoing argument does not mean that capitalists do not try to auto- mate their world, only that they cannot afford to completely succeed in doing so. In other words, over and above the conflict between capitalists who seek to objectify labour and workers who resist it, there is the inner contradiction of social mechanization itself: the tendency of mechanization to make power inflexible and therefore vulnerable. As we shall see later in the book, social mechanization in capitalism occurs mostly at the level of ownership, through the capitalization of power, a process which in turn leaves capitalist labour considerable autonomy and qualitative diversity.
Resistance by workers and the richness of their skills are crucial barriers to the measurement of value. Even if a portion of the labour force indeed is 'unskilled' in Marx's sense, few if any commodities are produced solely by such labour. And since most, if not all, labour processes involve some skilled labour, it is obvious that the first condition does not apply. Value cannot be derived simply by counting unskilled hours. 17
Reducing skilled to unskilled labour
The diversity of labour skills leave us with the second requirement, namely, that there must exist a mechanism to 'reduce' the myriad of skilled labour to
If there was hope, it must lie in the proles, because only there, in those swarming disre- garded masses, eighty-five percent of the population of Oceania, could the force to destroy the Party ever be generated. . . . [The] proles, if only they could somehow become conscious of their own strength, would have no need to conspire. They needed only to rise up and shake themselves like a horse shaking off flies. If they chose they could blow the Party to pieces tomorrow morning. Surely, sooner or later it must occur to them to do that. And yet-! . . . . Until they become conscious they will never rebel, and until after they have rebelled they cannot become conscious.
(1948: 69-70, original emphasis)
17 One can sidestep the problem by following Braverman (1975), who distinguished 'manual' labour from 'scientific management' and 'mental work'. The difficulty here is not only in how to draw the line between the two, but also in what to do with the second group (class? ). Unless we continue to consider them as workers, the very emergence and growth of this group imply a built-in counter-tendency in capitalism, one in which labour can be simpli- fied and abstracted only by having some of it transformed into 'management' and 'mental' activity - a sort of 'elimination of labour by labour'. Moreover, since this latter type of 'non-manual' activity, whether labour or not, cannot be counted in abstract terms, how do we account for its productive contribution to value and surplus value?
? 142 The enigma of capital
units of unskilled (abstract) labour. According to Marx, this mechanism is both omnipresent and obvious: 'Experience shows that this reduction is constantly being made. . . established by a social process that goes on behind the backs of the producers. . . . ' (1909, Vol. 1: 51-52). But in fact the process is anything but trivial.
The starting point of the reduction is the assumption that labour skills are created through spending on education and training, on and off the job. In this sense, 'skilled labour power' is a commodity like any other - i. e. a product of labour. It is produced by the study and training time of the worker himself, as well as by the labour of those who educate and train him. The value that the skill assumes in this process is equivalent to the socially necessary abstract labour time required for the subsistence of the worker, his teachers and trainers throughout the skill-creation process.
Now, skilled labour supposedly creates more value than unskilled labour, and the question is how much more? Marxists have devoted far less attention to this question than it deserves, and, as a result, their take on the subject hasn't changed much since the issue was first examined by Marx and Hilferding. 18
Marx answered the question from the output side, by pointing to the greater 'physical productivity' of skilled labour. His solution, though, is both circular and incomplete. It is circular insofar as physical productivity can be compared across different commodities only by resorting to prices and wages. This reverse derivation would have us conclude that, given their wage differ- ential, a Pfizer chemist earning $150,000 a year must create 15 times the value of an Intel assembly-line worker whose wage is only $10,000 - a logic that is reminiscent of Gary Becker's (1964) 'human capital' and that Marx rightly would (or at least should) have rejected. The solution is also incomplete because Marx nowhere explains why the additional value-creating capacity of skilled labour should bear any particular relationship to the labour cost of acquiring the skill. The fact that an engineer trains 10 per cent longer does not mean she will create 10 per cent more value; it could also be 1 per cent, 20 per cent or any other number.
An alternative reduction, drawn from the input side, was offered by Hilferding (1904). Skilled labour, he argued, simply transfers its added production time to the commodity it produces. For instance, if it takes the equivalent of 40,000 hours of unskilled labour to teach and train a brain surgeon who performs 20,000 hours of surgery over her working life, then one hour of her skilled labour is equivalent to 3 hours of unskilled labour ((40,000 + 20,000) / 20,000 = 3).
However, this solution too turns out to be open-ended. For our purpose, the most important problem is that Hilferding counts as skill-creating value not the total number of hours necessary to create the skill, but only those
18 For a critical assessment of the problematic reduction of skilled to unskilled labour, see Harvey (1985).
? Accumulation of what? 143
hours that the worker or his employer end up paying for. And it is here that the bifurcations of political economy and its equilibrium assumptions again come back to haunt us.
Since in reality the 'economy' is neither fully commodified nor separate from 'politics', much of the education and training is free - provided by the household, community and government. Moreover, since the 'economy' - however defined - is rarely if ever in a fully-competitive equilibrium, there is no guarantee that the procured education and training are transacted at value. 19
To complicate things further, note that so far we have taken it as a given that one can actually specify the process of 'producing' the skill. But can we? Although it seems evident that skills are developed through education, on- the-job learning and broader cultural influences, this is a qualitative joint process, and therefore one that suffers from the intractable indeterminacies examined in Chapters 6 and 7. Last but not least, there can be no easy agree- ment on what constitutes unskilled labour at any point in time (should we use as our benchmark a UK high-school graduate, an Indian peasant, or an African bushman? ). And if that basic unit cannot be specified, where do we start from? 20
As a consequence of these difficulties, the Marxists, like the neoclassicists, have ended up without an elementary particle. No one, from Marx onward, has been able to measure the unit of abstract labour, and, with time, fewer and fewer Marxists think it is worth trying. A tiny but dedicated minority continues to work around this handicap, putting much effort and ingenuity into mapping the value structure of capitalist societies without a basic unit of value. But most Marxists, including many who otherwise adhere to the theory's principles, have abandoned this quest. They endorse the liberal methods and data. They use, often without a second thought, the national accounts of growth and inflation, along with their quantitative estimates of the 'capital stock'. They see no problem in deflating nominal values by
19 In the hypothetical situation that the 'true' value of acquiring the skill happens to be paid for in full, we end up with multiple rates of exploitation whose magnitudes are inversely related to the cost of acquiring the respective skills. This result, which goes counter to Marx's assumption of equalizing tendencies, arises because, for Hilferding, the cost of acquiring the skill acts like constant capital: it merely transfers its own value to the commodity.
20 To avoid some of these difficulties, as well as to account for the important role of labour market segmentation, some writers offered to develop a labour theory of value based on heterogeneous rather than abstract labour (see, for instance, Bowles and Gintis 1977; Steedman 1980). This approach, though, merely substitutes one reduction for another, since we now need to 'translate' the value vector into a price scalar. Others, such as Itoh (1987; 1988) suggested moving in the opposite direction by treating an hour of labour uniformly, regardless of its concrete nature. This latter measurement may be justified from the point of view of the worker, though the analytical implication is that we can no longer use labour values to explain capitalist prices and accumulation.
? 144 The enigma of capital
hedonic price indices to obtain 'real' quantities, or in using equilibrium-based econometrics to draw dialectical conclusions. Their voice is still Marx's, but their hands have long been those of the hedonists. 21
The retreat from labour in favour of hedonic accounting serves to dilute and blur the basic concepts of Marxism. Without 'abstract labour', there can be no 'labour values' and therefore no way to define, let alone measure, 'surplus value' and 'exploitation'. And with these basic concepts thrown into question, their negations too become suspect. Neo-Marxists like to highlight the deviations of 'monopoly capitalism' (Sweezy 1942; Baran and Sweezy 1966), 'unequal exchange' (Emmanuel 1972) and the 'smoke and mirrors' of 'accumulation by dispossession' (Harvey 2004) from Marx's 'expanded reproduction' under the 'law of value'. But since this law has no units in which to be denominated (leaving aside its other problems), it isn't clear what exactly these new social formations deviate from.
Needless to say, no amount of neoclassical data on 'real' growth and accu- mulation can undo this gridlock. Marxists cannot hope to save their method by banking on the very logic they try to undo. They will simply sink deeper into the quicksands of utilitarian impossibilities.
A clean slate
Is there a way out of these circularities and contradictions? In our view, the answer is yes - but not within the existing framework of political economy. This framework identifies the quantitative 'essence' of capital with the material sphere of production and consumption, and that assumption makes its problems insoluble. Utils and abstract labour - even if they did exist in some sense - do not have fundamental quantities that can be measured. They therefore have to be derived in reverse, from the very phenomena they try to explain. And even this inverted derivation falls apart, because it is built on assumptions that are patently false if not logically contradictory.
What we need, then, is not a revision, but a radical change. We need to develop a new political economy based on new methods, new categories and new units. Our own notion of capital as power offers such a beginning.
? 21 Even Shaikh and Tonak (1994), who have tried to devise specifically Marxist national accounts, ended up employing a neoclassical price index in order to convert 'nominal' measures of output to their 'real' counterparts (Appendix J).
Part III Capitalization
9 Capitalization
A brief anthropology
It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.
--Karl Marx, Preface to A Contribution to the Critique of Political Economy
The size of my chequebook and the content of my pockets do not determine my social consciousness.
--Tokyo Sexwale, South African political prisoner-cum-business tycoon
Utility, abstract labour, or the nomos?
When Milton Friedman claims that 'there is no such thing as a free lunch', he echoes Antoine Lavoisier, the eighteenth-century French tax-farmer-cum- chemist who invented the Law of Conservation of Matter. Burnt carbon produces a new substance - carbon dioxide - but according to Lavoisier there was nothing miraculous about this transformation. The reaction can be achieved only by adding oxygen to the carbon. And when the combustion takes place in a sealed container, the new substance has a mass equal that of its ingredients. Your lunch always has to come from somewhere.
The theory was not concocted in a vacuum. Lavoisier's patron, Louis XVI, was strapped for cash, and the resourceful chemist was looking for ways to shore up the monarch's finances. His idea: surround Paris with a high wall to create a sealed container in which individual incomes could be partly converted into crown revenues. The plan was only partly successful. The wall certainly was tight enough to trap much of the city's taxable income, to the joy of the vigilant collectors. But it was also loathed enough to have Lavoisier's head lost to the revolutionary guillotine and the wall to the Parisian mob. The underlying principle of conservation, though, remained intact. It soon became the foundation stone of modern science, spreading to other physical entities, most notably energy, as well as to the study of society.
In the spirit of Lavoisier, political economists came to believe that there was 'intrinsic equivalence' in production and exchange. Abstract labour and utility - like all matter and energy - could neither disappear into nor be created out of thin air. Their form may change, but their content cannot. Just
148 Capitalization
as the infinite diversity of natural bodies can be reduced to different combina- tions of universal atoms (or their subatomic particles), so can the endless diversity of commodities be reduced to alternative groupings of identical utils or abstract labour time. As we have seen, for Marx, who approached the process from the input side, the commodity's value was transformed labour: the live abstract labour expended in producing the capital reappeared as dead abstract labour in the newly produced capital. Similarly for the neoclassicists, who view the process from the output side: as the quantity of capital depreci- ates, the lost utils resurface in the goods and services being produced. 1
The answer of both theories to the question 'what is capital? ' lies in this transformation. Since exchange merely transfers the substantive quantities of production and consumption, it follows that underneath every ratio of prices there lies a corresponding ratio of utils or abstract labour. In both cases, the pecuniary appearance of capital is merely the mirror image of its material/ energy substance. The financial liabilities on the right-hand side of the balance sheet derive their value from - and in the final analysis, are equivalent to - the productive assets on the left-hand side.
But there is hair in the soup. Conservation and intrinsic equivalence are rather demanding principles. They can be considered meaningful only if utility and abstract labour can be measured; only if there is an 'economy' that is distinct from 'politics' and free from the 'distortions' of power; and only in so-called perfectly competitive equilibrium. Unfortunately, though, these conditions can never hold. As previous chapters have made clear, no one knows what utility and abstract labour look like, let alone how to measure them; there is no way to distinguish economics from politics and to keep power out of the picture; and capitalism has never experienced even a momen- tary equilibrium, let alone a perfectly competitive one.
So we are back to square one, if not square zero. We still do not know what makes something capital or what determines its magnitude in dollars and cents. Worse still, now we no longer have the principle of intrinsic equivalence to build on.
But, then, isn't this rejection detrimental to the very possibility of political economy? By giving up the material basis of capitalism, are we not cutting the branch we sit on? Indeed, is there anything else - other than utility or labour value - with which we can explain the quantitative order of prices, exchange and distribution?
The short answer is yes. There is an alternative. According to Cornelius Castoriadis (1984), this alternative was articulated some 2,500 years ago, by Aristotle. Equivalence in exchange, Aristotle argued, came not from anything intrinsic to commodities, but from what the Greek called the nomos. It was rooted not in the material sphere of consumption and production, but in the
1 Of course, in each theory input or output are just the starting point, and the conservation continues through subsequent cycles in the input-output chain. For a critical analysis of conservation theories in political economy, see Mirowski (1989).
? A brief anthropology 149
broader social-legal-historical institutions of society. It was not an objective substance, but a human creation.
And when we think about this question without theoretical blinders, this 'loose' determination is not that difficult to fathom. In all pre-capitalist soci- eties, prices - and distribution more generally - were determined through some mixture of social struggles and cooperation. Authoritarian regimes emphasized power and decree, while more egalitarian societies used negotia- tion, volition and even gifts (Polanyi, Arensberg, and Pearson 1957). This same loose determination is also evident in more recent alternatives to capitalism. It characterizes broad regimes such as communism, as well as small-scale formations like the Spanish cooperative Mondragon and the Israeli anarchism of the early Kibbutz.
In all of these cases prices and distribution are creatures of their particular nomos. So why can't the same loose determination happen in capitalism? Consider the ratio between the price of petroleum and the wages of oil rig workers; between the value of Enron's assets and the salaries of accountants; between General Electric's rate of profit and the price of jet engines; between Halliburton's earnings and the cost of 're-building' Iraq; between Viacom's taxes and advertisement rates; between the market capitalization of sub-prime lenders and government bailouts. Why insist that these ratios are somehow determined by - or deviate from - relative utility or relative abstract labour time? Why anchor the logic of capitalism in quanta that cannot be shown to exist, and that no one - not even those who need to know them in order to set prices - has the slightest idea what they are? Isn't it possible that these capitalist ratios are simply the outcome of social struggles and cooperation?
Most political economists prefer to steer clear of such a loose determin- ation. The ideological stakes are simply too high. If prices and distribution are not determined by objective productive contributions, neoclassicists have nothing with which to explain income and justify profit. Similarly for the Marxists: without labour values there is no objective basis to condemn capitalist exploitation.
Unfortunately, and as already noted, this insistence on so-called objective determination is mostly a formality. In practice, political economists are entirely dependent on a very loose determination of prices and distribution. In the neoclassical case, this dependency is evident when economists set up perfectly competitive equilibrium models - and then retrofit them to reality with the generous help of endless shocks and imperfections (in the know-all language of the news agencies: 'oil prices have risen because of excess demand from China'; and a day later, 'despite excess demand from China, oil prices have fallen amid easing security concerns at Ras Tanura'). Marxists do the very same thing when they first articulate the laws of expanded reproduction and then immediately violate them with the endless mischief of force, mani- pulation and accumulation by dispossession.
Now, this mixture of hard and loose determination would be scientifically acceptable if we could somehow draw the line separating the objective laws
150 Capitalization
from their distortions. But neither neclassicists nor Marxists can do so, even on paper. The basic units of utility and abstract labour underlying these laws are pseudo-quantities and, by extension, so are their deviances and distor- tions. Moreover, even if these quantities were real and observable, there is still no obvious reason why human beings would have to obey any 'objective' law based on such units.
This critique does not imply social chaos. Far from it. Society is not a formless mass and its history is not a mere collection of accidents. There are rules, patterns and a certain logic to human affairs. But these socio-historical structures are created, articulated and instituted not from the outside, but by society itself. They are manifested through religion, the law, science, ideology, conviction, habit and force. Although embedded in the physis, they are all creatures of the nomos. Whether imposed by rulers for the sake of power or crafted by the demos for their own happiness, they are all made by human beings.
The above considerations are crucial for our purpose here, for, if we start from the nomos rather than utility or labour value, we end up with a com- pletely different concept of capital, a radically different understanding of accumulation and new ways to interpret capitalist development.
This part of the book begins our exploration of the capitalist nomos. The engine of capitalism, we argue, is the process of capitalization - the discounting into present value of future earnings. When we speak of capital accumulation we speak of the growth of capitalization. The current chapter sketches the anthropology of capitalization from its humble beginnings in fourteenth-century Italy to its all-embracing moment of the present. It shows that capitalization - and therefore the accumulation of capital - has little to do with 'means of production' and everything to do with the multifaceted restructuring of the capitalist order. This encompassing nature of accumula- tion in turn explains why prevailing theories of capitalization, both Marxist and neoclassical, head in the wrong direction. Chapter 10 shows that these theories, anchored in the supposedly productive underpinnings of capital, are inevitably led to view capitalization as a 'distortion'. Chapter 11 negates this view, laying the foundations for an alternative approach. It provides a frame- work that identifies the elementary particles of capitalization, outlines their significance and indicates how they form the basis for our new theory of 'capital as power'.
The unit of capitalist order
Every 'order' - in society, as in nature - is articulated or generated through categories and forms. 2 The most potent of these are numbers. The greater our ability to use numbers, the more accurate and comprehensive our capacity to
? 2 We use 'order' here in the sense of kosmeo, without normative connotations.
A brief anthropology 151
articulate order. In capitalism, the fundamental numerical unit is price. In principle, this unit can be assigned to anything that can be owned. In that sense, everything that can be owned - from natural objects, through produced commodities, to social organizations, ideas and human beings - can also be quantified. Moreover, the quantification is uniform across time and space.
Prices in Europe of the eighteenth century are readily comparable to prices in India of the twenty-first century, just as the price of health care is readily comparable to that of nuclear weapons. This uniformity enables ownership to be intricately interrelated - or ordered - and with great precision.
Historically, the expansion of the capitalist price system progressed along two trajectories - one that incorporated into the process an ever-growing proportion of the population, and another that privatized and priced more and more social activities.
It is perhaps worth noting that the first systematic attempt to explain and justify prices appeared only in the early nineteenth century, long after the first theories of capitalism. John Locke (1690) had anchored private property in productivity in the seventeenth century, and Adam Smith (1776) had analysed the free market in the eighteenth. But it was only with David Ricardo's labour theory of value (1821) that the focus shifted explicitly to prices. And why the long delay? Partly because, until the nineteenth century, there wasn't a pressing need for such a theory: prices simply weren't that important.
It is of course well known that prices already existed in the early civili- zations of the Near East, and that in large ancient metropolises they even fulfilled a significant role. But the extent to which they ordered society remained limited. In Rome, for instance, prices were used in local markets, as well as in transportation and long-distance trade; yet roughly 90 per cent of the Roman population is estimated to have lived off farming, and three fourths of the output is believed to have been consumed by its own producers. Furthermore, even in the city of Rome, the annona food rations, although partly purchased by the authorities, were freely distributed to the popula- tion. 3 After the fall of the Roman Empire prices became even less important. During the feudal era, up to 90 per cent of the European population lived in the countryside, organized in autarkic units with little or no connection to prices. The bourgs in Italy and in the Low Countries used prices extensively, but these city states were small enclaves whose logic was antithetical to the feudal self-sufficiency in which they were embedded.
The first society to become subjugated to the architecture of prices was probably England. Symbolically, this transition happened sometime in the first half of the nineteenth century, as urban dwellers approached 50 per cent of the population. Since the cities depended on the countryside for food and
3 For the debate on the 'economic' nature of antiquity, see for example Finley (1973) and Temin (2001).
? 152 Capitalization
raw materials, the rural population too was gradually drawn into the price system. Other European countries followed in the footsteps of England, and by the late nineteenth century most had become predominantly urban. On a global level, however, the shift from self-sufficient agriculture to urban- dominated, price-denominated societies was much slower and was completed only in the twentieth century. In the 1900s, the worldwide rate of urbaniza- tion was still around 10 per cent, and it was only in the early years of the twenty-first century that it surpassed 50 per cent. 4
If we take capitalist urbanization as a rough proxy for the geographic spread of the price system, we can say that the architecture of prices emerged as a dominant way of organizing society only two centuries ago, and that it was only recently that its logic has come to dominate nearly every corner of the world.
In parallel to this expansion, the price system has also grown increasingly complex. Underlying this complexity is the explosive growth in the number of social activities denominated in prices. To give some sense of the magnitudes involved, consider the North American Industry Classification System (NAICS) and the North American Product Classification System (NAPCS), which together provide the most up-to-date method of categorizing indus- tries, establishments and the products and services they produce. 5 In this clas- sification, each 'industry' (a grouping of physical establishments with the same primary output) is identified by a 6-digit code, while each type of product or services is identified by a 10-digit code. The latter can accommo- date up to 100 billion possible prices (less one). If we assume that only 1/10th of these numbers are in use, we end up with 10 billion prices - the same order of magnitude as the world population. But that is merely the beginning. Typical 10-digit products include relatively broadly defined items such as 'fabricated automobile seat covers and tire covers', 'professional use hair mousse', 'rigid magnetic disk drives' and 'toothbrushes' - each of which comes in numerous shapes and forms. To describe all these shapes and forms, we would probably need an additional two or three digits. And there is more. The NAICS/NAPCS system does not include second-hand commodities, primary commodities or financial assets; it doesn't include future contracts or options that can be applied to every product and service; and it doesn't
4 Trends in the labour force tended to lead those in urbanization. The non-agricultural share of the English labour force surpassed 50 per cent already in the second half of the eighteenth century. By comparison, the US non-agricultural labour force accounted for 20 per cent of the total as late as 1800, and rose to more than 50 per cent only after the Civil War. In China, half of the population is still agricultural, while in India the proportion is two thirds (Cipolla 1980: p. 75, Table 2-6; Sullivan 1995; World Bank Online).
5 The NAICS/NAPCS replaces the earlier Standard Industrial Classification (SIC). For a detailed listing of NAICS/NAPCS manufacturing and mining categories from which the examples in this paragraph are taken see U. S. Department of Commerce. Economics and Statistics Administration (2004).
? A brief anthropology 153
include bundles of products and services. If we added these extra layers, the number of different prices would be much bigger, requiring even more digits.
All in all, then, it seems safe to conclude that the world today has billions and possibly trillions of different commodities, all denominated in universal price units and therefore connected through a single quantitative architecture that cuts across time and space. Marx began his Capital with reference to the 'immense accumulation of commodities' (1909, Vol. 1: 41). Yet even this most prescient observer would probably have found the present complexity of prices baffling. Nothing remotely similar has ever existed in human history.
The comprehensive reach, complexity and uniformity of the price system have made capitalism the most ordered society ever. In no prior epoch have numbers been so extensively and consistently used to describe, organize and shape human behaviour. Prices enable entirely new ways of re-ordering society. What previously required military conquest can now be done through currency devaluation; what once necessitated religious conversion today takes a mere shuffle of a few paper records we call portfolio investment. Furthermore, the highly malleable nature of prices - i. e. their remarkable ability to go up and down - makes capitalism by far the most dynamic of all historical orders. In fact, in capitalism change itself has become the key moment of order.
The pattern of capitalist order
Now, price is merely the unit with which capitalism is ordered. The actual pattern of order - namely, the way in which prices are structured and restruc- tured relative to one another - is governed by capitalization. Capitalization is the algorithm that generates and organizes prices. It is the central institution and key logic of the capitalist nomos. It is the 'generative order', to use David Bohm's term, through which the capitalist order, denominated in prices, is created and re-created, negotiated and imposed. 6
Formulae
What exactly is capitalization? We have mentioned the term several times in the book, and it is now time to examine it more closely. Most generally, capi- talization represents the present value of a future stream of earnings: it tells us how much a capitalist would be prepared to pay now to receive a flow of money later. A simple example: a $1,000 payment due in a year's time (Kt+1) and 'discounted' at a 5 per cent rate of interest (r) would have a present value (Kt) equal of $952. 38.
6 The notion of the 'generative order' is developed in Bohm and Peat (1987). We return to it in Ch. 14.
? 154 Capitalization
To see why this is so, let's back step and look at the process in reverse. Suppose the capitalist invests Kt dollars now (the present value of $952. 38) in order to get back a year from now Kt+1 dollars (the future payment of $1,000). The capitalist engages in this transaction because the future payment is bigger than its present value: it comprises the repayment of the original investment plus additional earnings (Kt+1 = Kt + Et+1). And since in this case the capi- talist knows both the original investment and the future payment, he can compute the rate of return (r):
1. r = Et+1 = Kt+1 - Kt = Kt+1 - 1 = $1000 - 1 = 0. 05 Kt Kt Kt $952. 38
Now, let's rearrange the terms of this equation. If we know the future payment and the going rate of interest, we can easily figure out how much the capitalist believes is appropriate to pay for it now, namely the 'present value':
2. Kt = Kt+1 = $1000 = $952. 38 1+r 1. 05
Given this principle, the computation can be further generalized deep into the exciting future. For instance, an earning flow of a constant or varying mag- nitude (E), paid over n periods, would be discounted by successive com- pounding of the rate of interest:
3. K = Et+1 + Et+2 + . . . + Et+n
t 1+r (1 + r)2 (1 + r)n
If the payments are uniform over time (so Et+1 = Et+2 = . . . = Et+n = E), their capitalized value would be:7
4. K = E * ? 1 - 1 ? t r (1 + r)n
If these equal payments continue in perpetuity (so n ? ? ), the present value becomes:8
5. Kt=Er
7 To obtain Equation (4), replace all Et+i in Equation (3) by E, multiply both sides of the equa- tion by (1+r), subtract the original equation from the new one and rearrange the terms.
8 When the number of payments (n) grows infinitely large, the expression in the brackets of Equation (4) approaches 1.
? ? ? ? ? ? ? ? ? ? ? ? ? A brief anthropology 155 And if the perpetual payments are expected to grow at a rate of g per period,
the present value becomes:9 6. Kt= E
? r- g
First steps
Simple computations in this spirit were used as early as the fourteenth century. 10 Italian merchants allowed customers to pre-pay their bills at a 'discount', applying the rate of interest to the time left until payment was due. Initially, the practice was relatively limited. The Church opposed usury, and the merchants, trying to keep out of trouble, restricted their discounting to foreign bills where the rate of interest could easily be concealed by modifying the exchange rate. Eventually, though, the Church's stranglehold loosened, and in the seventeenth century, with religious tolerance spreading and the Glorious Revolution in the wings, English goldsmiths started to discount domestic bills openly (de Roover 1942: 56; 1944: 402-3; 1974: 210-11).
Although the practice of discounting spread rapidly, its underlying ideology remained largely undeveloped. There was no formal theory and there were no textbooks. Instead, there were rules of thumbs and plenty of confusion. As late as the mid-eighteenth century, financiers and traders still used what twentieth-century economists retrospectively describe as 'incor- rect' calculations, 'erroneous' tables and 'inefficient' discounting. Sometimes, the practitioners even committed the cardinal sin of failing to compound interest (Faulhaber and Baumol 1988: 583).
Coming of age
Capitalization came of age only in the twentieth century. It was only with the rise of the modern corporation and the spread of large-scale financial markets that discounting turned from a loose practice to a full-fledged ideology, complete with detailed bureaucratic procedures, a rigid ethical code and trained professional cadres - and even then, the going proved tough.
It turns out that the first systematic rules of discounting were laid down already in the mid-nineteenth century, by a group of German foresters (Faustmann 1849). The foresters tried to figure out how they should value
9 To derive Equation (6), substitute E (1+g)i for Et+i (with i = 1, 2, 3, . . . n) in Equation (3), multiply both sides of the new equation by (1+r)/(1+g), and follow the remaining steps of footnotes 7 and 8.
10 For a succinct overview of the origin and evolution of capital budgeting and net present value, see Faulhaber and Baumol (1988: 583-85). Part of our account here is informed by their summary.
? 156 Capitalization
wooded land and the associated activities of planting and harvesting, and in the process developed many of the mathematical formulae of present value. But with business organizations still largely unincorporated, these formulae had limited use and remained obscure. It took another half-century for them to be reinvented by economists, who, incidentally, never suspected that they were moving in already well-charted territory.
The most famous of these economists is Irving Fisher. In The Rate of Interest (1907), he developed the logic and ethics of discounting in great detail. His key contribution was the emphasis on universality. Capitalization through discounting, he argued, was a general principle. It should be applied not only to the pricing of debt, but to every income-generating asset:
It is evident that not bonds and notes alone, but all securities, imply in their price and their expected returns a rate of interest. There is thus an implicit rate of interest in stocks as well as in bonds. . . . It is, to be sure, often difficult to work out this rate definitely, on account of the elusive element of chance; but it has an existence in all capital. . . . It is not because the orchard is worth $20,000 that the annual crop will be worth $1000, but it is because the annual crop is worth $1000 that the orchard will be worth $20,000. The $20,000 is the discounted value of the expected income of $1000 per annum; and in the process of discounting, a rate of interest of 5 per cent. is implied.
(Fisher 1907: 10-11, 13, original emphasis)
In other words, a pecuniary asset, taken in its most general form, is merely a claim on earnings. In this sense, bonds, corporate shares, preferred stocks, mortgages, bank accounts, personal loans, or the registered ownership of an apartment block are simply different incarnations of the same thing: they are all income-generating entities. As such, their price is nothing but the present value of the earnings they are expected to generate.
Frank Fetter, another early advocate of capitalization, argued that the discounting process applies not only to all assets, but also to all times:
The primitive economy in its choice of enjoyable goods of different epochs of maturity, in its wars for the possession of hunting grounds and pastures, in its slow accumulation of a store of valuable durable tools, weapons, houses, boats, ornaments, flocks and herds, first appropriated from nature, and then carefully guarded and added to by patient effort - in all this and in much else the primitive economy, even though it were quite patriarchal and communistic, without money, without formal trade, without definite arithmetic calculations, was nevertheless capital- izing, and therefore embodying in its economic environment a rate of premium and discount as between present and future.
(Fetter 1914b: 77, original emphasis)
A brief anthropology 157
In short, if human beings were indeed made in the image of God, the Almighty must have been a bond trader.
Despite their forceful elegance and claim for universality, Fetter and Fisher's generalizations hardly echoed for another half-century. There was some discussion of capitalization in American economic journals, and discounting procedures occasionally surfaced in textbooks. But for the most part, the enthusiasts were outnumbered by the sceptics. 11
The sceptics had good reason to be suspicious. The early twentieth century marked the dawn of a new capitalism. Central to this new formation was the modern corporation. It was an entirely new way of organizing business, both inside and outside the firm. Moreover, it spread rapidly, carried by a tidal wave of public offerings. Securities of every colour, size and denomination were being floated in ever larger numbers. It was all very novel, and the sheer magnitude and exponential growth of the process left economists baffled and public officials gasping for air.
There were very few theoretical tools and scarcely any data to make sense of this new development. There was no 'transparency' to speak of (as politi- cally correct investors now demand); the paucity of historical time series meant that there was little 'prior knowledge' to build models on (and there- fore no 'parameters' to estimate); there was no ground on which to form 'rational expectations' (and hence no way to evaluate the rosy earning projec- tions of the financiers); and it was unclear which interest rate to use in discounting and how to account for 'risk' (Fisher's 'elusive element of chance'). To make matters worse, the newspapers were only too happy to amplify the exploits of corporate promoters. The owners and their bankers were blamed, not without cause, for 'overcapitalizing' their assets and 'watering' their stocks relative to their 'actual' investments - all in order to rip off the innocent public. 12
The whole thing smelled of a racket: 'the principle that capitalization should be based on earning capacity rather than on actual cost', declared one disgruntled reviewer, 'is not only unsound in theory but is also vicious in its practical application' (Bonbright 1921: 482). Under these conditions, officials and theorists were unsure how to reconcile the new practice of discounted earnings with the familiar 'par value'. It seemed much easier to stick to the conservative principles of 'historical cost' accounting.
11 For early textbook sections, see Fetter (1904: Division C) and Lough (1917: Ch. VIII). A sample of journal articles include Swayze et al. (1908), Davenport (1908), Scott (1910), Brown (1914), Fetter (1914a; 1914b), Bonbright (1921) and Machlup (1935). Reading the simple language and clear arguments put forth in this early debate, one is struck by how obscure mainstream economics has become since then. A comparable debate today would be entirely indecipherable to the uninitiated.
12 This early financial history is told with great insight and much fanfare by Matthew Josephson's classic tale of The Robber Barons (1934).
? 158 Capitalization
But these proved to be no more than minor pains of adjustment. The encompassing tendencies of capitalization were too powerful to resist, the historical data started to accumulate, and the economists eventually adjusted their theories. By the 1950s, capitalization was finally established as the heart of the capitalist nomos, engraved on both sides of the balance sheet. On the asset side, net present value became the practice of choice in capital budgeting to allocate corporate resources. Meanwhile, on the liabilities side, the inven- tion of portfolio selection theory by Harry Markowitz (1952) and of the capital asset pricing model (CAPM) by William Sharpe (1964) and John Lintner (1965) bureaucratized the concept of risk and in so doing helped formalize the calculus of financial investment. Finally, both developments were facilitated greatly by the spread of electronic computing, which enabled capitalization formulae to be applied easily and universally to every possible asset under the sun.
The capitalization of every thing
And, so, finally the floodgates were open. Nowadays, every expected income stream is a fair candidate for capitalization. And since income streams are generated by social entities, processes, organizations and institutions, we end up with the 'capitalization of every thing'. Capitalists routinely discount human life, including its genetic code and social habits; they discount orga- nized institutions from education and entertainment to religion and the law; they discount voluntary social networks; they discount urban violence, civil war and international conflict; they even discount the environmental future of humanity. Nothing seems to escape the piercing eye of capitalization: if it generates earning expectations it must have a price, and the algorithm that gives future earnings a price is capitalization.
This encompassing mechanism of social ordering and reordering lies at the heart of our theory of capital, so it is worthwhile to flesh it out with some examples.
Human beings
Begin with people's lives. These of course had already been commodified in the early power civilizations, starting with the institution of the 'working day'. But it was only since the spread of bourgeois accounting and the devel- opment of probability and statistics that the process assumed the forward- looking form of discounted future income.
The first steps in this direction were taken by the eighteenth-century math- ematician Daniel Bernoulli (1738).