The
institution
of the mortgage - originally a bypass of the Church opposition to interest - gave rise to an urban market that traded in rents and sold asset-backed securities.
Nitzan Bichler - 2012 - Capital as Power
These services took various forms, but gradually they converged on the basic particle of feudal power: the fully-equipped knight.
In order for vassals to produce, train and supply knights on a permanent basis, they needed access to agricultural land and tillers, organized through the autarkic manorial system. And so, gradually, the homage between the lord and the vassal came together with the granting of a benefice, usually in the form of a landed fief, or 'feodum' - hence the term 'feudalism'.
The cost of reproducing a single knight and his accessories was pretty hefty, requiring roughly 150 hectares of land according to some estimates. Based on this ratio, a fair-size fief of a count, made up of 200-250 agricultural communities, could supply no more than 150-200 mounted warriors. These modest numbers had an important implication: they meant that a larger army could be assembled only by networking the separate commitments of many different vassals (Le Goff 1965: 54-55).
This networking formed the basis of the 'feudal state'. The arrangement first emerged in the eighth century, when the Carolingian rulers, seeking to consolidate their power and increase obedience, sowed confiscated church lands as well as their allodial territories with royal vassals. The vassals, who in turn wished to reduce their own uncertainty and if possible leverage their power, further parcelled their fiefs to subordinate vassals, and so on. The end result was a dense network of mutual military obligations tied to agricultural manorial production, a standardized pattern of power that later spread throughout much of Europe.
It is not difficult to see here the principle that later informed both Hobbes's Leviathan and Locke's 'social contract': the individual being (vassal or bour- geois), torn between his desire for freedom (independence) and quest for secu- rity (to annul his fear of death), finds the compromise in merging himself with a larger mode of power (the feudal network or the sovereign state).
because he must do nothing to injure the rights of justice of his lord or such other preroga- tives as belong to his well-being. Useful because he must do no wrong to the possessions of his lord. Easy and possible, because he must not make difficult for his lord anything which the latter may wish to do, and because he must not make impossible to his lord that which the lord might otherwise accomplish. It is only right that the vassal should abstain from injuring his lord in any of these ways.
(Quoted in Ganshof 1964: 83, emphases added)
Even the 'positive' vow of protection was inherently negative, in that it was directed against everyone else. A French document from the thirteenth century recommends the following declaration by the vassal:
I promise this because you have granted to me and to my heirs such and such a prop- erty, as long as we shall remain your vassals, and also because you have promised to defend me and mine against every man.
? (Quoted in Ganshof 1964: 154, emphases added)
The capitalist mode of power 285
During the Middle Ages, royal power, although often existing de jure, usually was conditional on and subsidiary to feudal obligations. In some places, such as France of the twelfth century, power was so diffused that the king, although claiming 'sovereignty', was no more than a glorified lord whose authority hardly extended beyond his own feudal domain. In other places, such as England after the Norman conquest of the eleventh century, power was highly centralized in the hands of the king. But that centralization was still feudal insofar as the entire country was the property of the king and every feudal agreement was supplemented by allegiance to the monarch (a duality that perhaps hastened the development of British capitalism).
There was an important novelty in this arrangement. In imperial struc- tures, power could expand in two ways: conquest and marriage. The 'feudal state' introduced a third alternative: voluntary military contract. Of course, because of their larger number, individual feudal lords could not match the power of emperors. But their added ability to cut and paste slices of power in a quasi-amicable way - a precursor for the capitalist buying and selling of vendible corporate 'shares' - made the structure of power more flexible, easier to realign, and perhaps less vulnerable to external blows. 17
The limits of feudal power
Feudal flexibility, though, had three hard limits. First, the feudal bond was personal and deeply religious. Its material aspects were merely instrumental. The primary purpose was the establishment of direct loyalty and mutual obli- gation between two people. Second, the bond was total. The lord exercised something akin to sovereignty over the very person of the vassal. And third, the contract was permanent. Save for instances in which the no-harm clauses were violated, the feudal link could not be unilaterally terminated. It ended only with the death of one of the sides.
Over time, these features started to strain the structure of feudal power. One problem was that the chain of personal commitments was highly unreliable.
17 Feudal remnants occasionally crop up in flattering reports on the amalgamating victories of present-day magnates. The following account of Woodbridge, the family investment arm of the Thomson family, is typical:
As president of Woodbridge . . . Mr Beattie, 48, is often described as the consigliere or e? minence grise of the family. . . . 'Woodbridge exists for one reason - to create value for its shareholders, who are all descendants of Roy Thomson. ' In the 30 years to 2005, he says, that value grew from $300m to $30bn.
But even when the unit of power is still clannish, in capitalism its methods of expansion are detached and impersonal:
. . . Thomson family members have been unsentimental traders of assets. . . having an uncanny sense of when an industry is on the turn.
? (Edgecliffe-Johnson 2008, emphases added)
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As a contract between two people, the feudal bond gave the lord direct power over his own vassals, but not over his vassals' vassals. Unlike a capitalist owner who has legal right and effective power over the corporation's entire chain of subsidiaries, the leverage of a feudal lord depended on the good will of his vassals, who, when called on for a military operation, might or might not bring along their own subcontractors. In places where the feudal links were complicated, the task of quickly assembling a large army became a real headache. In some cases, the large lords and kings found themselves at a significant disadvantage - for instance, against the easy-to-organize popular militias of the bourgs, or relative to the centralized and partly monetized armies of the English king.
Another difficulty was how to prioritize different commitments. The vassals, seeking to leverage their power and security, often allied themselves with more than one lord. These multiple commitments, though, were inher- ently contradictory. Unlike the capitalist limited-liability contract - which has a definite magnitude denominated in dollars and cents, and hence a pro-rated structure depending on the relative magnitude of the priced pledges - the feudal contact was total. The vassal was obliged to serve his lord completely and without reservation. Those with overlapping obligations could therefore face multiple claims from different lords, each demanding the very same services. As a result, there emerged various systems of 'rating' - some based on the size of the fief, others on the time it was granted, and still others on the relative position of the lord - all designed to somehow reconcile the overlapping obligations.
The most serious limit, though, was the non-alienated nature of the fief. The fief was the property of the lord. It was a unit of power 'granted' to the vassal so that he could serve his master personally. But given the personal nature of the service, the transfer was always 'temporary' and was annulled by death. In this sense, any attempt to parcel, transfer or sell the fief was a direct challenge to the very purpose of the feudal contract. Over time, though, the pressure to alienate the fief mounted - coming initially from vassals who sought to pass it on to their heirs, and subsequently from lords who were both lured by and forced into the new pecuniary logic of the bourg. The solution was found in the form of 'relief' - a sort of ransom paid by the heir to the lord for giving up the property. In the beginning the relief was arbitrary. But around the twelfth century in France there emerged something like a 'normal rate', whereby the lord would alienate the fief in return for a sum equal to the property's annual revenue (Ganshof 1964: 136-39).
The capitalization of feudal power
The weakening of the feudal mode of power was marked by the colours of capitalism. One important change was the inversion of the feudal contract. Originally, the fief was a means to an end. The vassal made an oath of fealty to the person of the lord, who in return gave him the fief so that he could fulfil
The capitalist mode of power 287
that oath. But toward the second part of the Middle Ages, the order had changed, with the fealty and service becoming preconditioned on the granting of the fief. The fief was now increasingly a matter of 'real estate', and feudal relations gradually shifted from a personal to proprietary footing.
A parallel change was the increasing monetization of both sides of the feudal contract. In many cases, the fief itself took the form of a stipend, or feodum de bursa, whereby the vassal received a payment for his keep rather than a direct allocation of land. The same happened to the services. Although these assumed a variety of forms from the very start, initially the key service was military. However, from the eleventh century onward in England and somewhat later on the Continent, the significance of military services declined, giving way to pecuniary payments. In England, many of the lower vassals paid their services in scutage, or monetary substitute, while in four- teenth-century Flanders less than 20 per cent of the vassals of the count in the cha^tellenie of Bruges were required to perform military services (Ganshof 1964: 90-92).
Faubourg, bourg, bourgeoisie
The power architecture of capitalism was gradually penetrating and trans- forming the feudal mode of power. The beginning was rather humble. The process started during the eleventh and twelfth centuries with the twin expan- sion of the bourgs and the periodic 'fairs'. The original bourg was a feudal fortification, built by serfs for military purposes. By contrast, the fair was an extra-territorial 'free-trade zone'. Granted by the prince as a source of royal- ties, it was exempt from feudal law and was endowed with 'franchises' and 'liberties' available nowhere else. In due course, the periodic fair gave way to the faubourg, a permanent settlement of merchants that was physically attached but socially alien to the bourg. Gradually, the merchants began to fortify their own suburb and in many cases ended up absorbing the old feudal fortification. The logic of the new bourg - commercial, industrial and above all monetized and capitalized - was every bit different from the one it had swallowed.
The dual economy
The capitalist bourg introduced a totally novel mode of power. Its manufac- turing sector, having developed as early as the eleventh and twelfth centuries, had many structural features we now take for granted. One of these was a prototype of the 'dual economy', (a term coined centuries later by Averitt 1968 to describe the bifurcated structure of the modern US business sector). On the one hand, there was the 'small economy', comprising associations of masters, apprentices and hired workers that supplied mainly the local market. On the other hand, there was the 'big economy' of large merchants and producers who controlled the long-term trade. The latter constituted a closely knit oligarchy, and it colluded heavily - both inside the bourg and with the
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oligarchies of other bourgs (with the most conspicuous example of the latter collusion being the Hanseatic League of London).
In parallel, there developed in the bourgs a proto-proletariat of unskilled workers, made mostly of propertyless incomers from the countryside, often known as the 'blue nails'. The oligarchy treated the workers and artisans with indifference - that is, as long as they remained docile. When they revolted (the first known strikes took place in Flanders during the thirteenth century) the retaliation - often coordinated within and between the bourgs - was usually swift and violent. In England of the fourteenth century, more than four hundred years before the Speenhamland Act, the King and Parliament were already passing decrees and legislation that made labour mandatory and idle- ness illegal (Pirenne 1937: 178-91; Lopez 1967: 278-80; Tuchman 1978: 120). In this sense, the capitalist class struggle, from its very inception, was never merely an 'industrial dispute'. It was a broad power conflict embedded in a newly emergent form of state.
Private and public
Another important innovation was the bourgeois link between the 'public' and the 'private'. This institutional structure, like many others, developed almost unintentionally. The new dwellers of the bourg needed to defend and fortify their private warehouses and workshops against the external hazard of the feudal space. The protection itself, though, was inherently public. By fusing the two, the bourgeoisie invented 'public finance' - a concerted effort to advance their coinciding private interests through proportional taxation.
The resulting fiscal system was completely antithetical to the feudal logic. First, contrary to feudal taxes that were inherently penal and served the indi- vidual lord only, bourgeois taxes were directly linked to the 'public interest' - that is, to the collective interest of capitalists. Second, since the public consisted of the private taxpayers, it made sense to make payment propor- tionate to the individual's interest - i. e. to his income. Finally, taxation presumed and implied representation - and indeed, in the bourgs of the elev- enth century there emerged, along with public works, bodies of elected or representative councils (Pirenne 1937: 178-91). In other words, from the very beginning, private capitalist bodies and capitalist government assumed one another and were symbiotically intertwined.
Liberty as differential power
Beyond these innovations, though, the bourgeoisie, at least initially, tended to view its project not as a comprehensive alternative to the feudal state, but rather as an exception to that state. Inside the bourg there was 'democracy of the privileged' - a close correspondence, if not an identity, between 'political administration' and 'economic management', both controlled by the moneyed aristocracy. The space outside the bourg, though, was accepted as a different
The capitalist mode of power 289
mode of power. Although this space was generally hostile to the bourg, the bourgeoisie neither denied nor challenged it.
Matters of jurisprudence and religion, as well as the acts of peace and war, were fully accepted as the prerogatives of church, king and lord. Indeed, the bourgeoisie was usually more than keen on emulating the authority and privi- lege of the territorial princes - by seeking noble status, by giving gifts to the clergy and by lending money to the duke in need. All in all, the 'state' was viewed as an external moral-legal entity, distinct from and superior to the city, which was merely an 'economic' body (Lopez 1967: 267-68). This was the basic duality that Hegel identified in his Philosophy of Right (1821) - a duality that Marx rightly criticized but could 'solve' only by turning it into an inherent contradiction between 'political universality' and 'economic alienation'.
At the beginning of its journey, then, the bourgeoisie merely tried to fit into and advance within the structure of feudal power. Its tactics were simple. The nobility benefited from forceful confiscation through territorial sabotage - hazards that the bourgeoisie sought to bypass through exemptions and immunities. 18 These exceptions and immunities, though, were always in the plural. They represented particular 'liberties' and 'franchises', and therefore advantages held relative to and against others.
There was nothing exceptional about this differential quest. The notion of universal liberty was totally foreign to the feudal world. In the Middle Ages liberty meant sovereignty, and therefore force and authority over others. Only God was totally free. Everyone else, including the king, was a vassal, and therefore partly dominated. Even the term 'knight', a symbol of power, comes from the German knecht, meaning 'subjugated', a connotation that can also be found in the words Samurai (servant) and Mamluk (slave soldier). All were merely extensions, or 'arms', of a ruler - hence the term 'army'.
For this reason, 'liberty' at that period - whether bourgeois or feudal - could only be understood as a status of power. (1) It denoted negation: it was the right not to pay, not to work, not to obey. (2) It was dynamic and relative: it changed over time in relation to other people. And (3) it was anchored in sabotage: it marked one's place in the hierarchy of damage, with the right to inflict it on some and the obligation to accept it from others. In this sense, the expansion of bourgeois liberties was synonymous, both conceptually and historically, with the growth of the bourgeoisie's differential power.
War and inflation
As the leverage of the bourgeoisie increased, its own mode of power started to penetrate and gradually replace the feudal state. The bourgs were able to wrestle increasing territorial and legal independence from feudal institutions,
18 The extent of territorial sabotage is illustrated by the fact that even as late as the end of the fifteenth century, there were still 64 feudal tolls on the Rhine, 35 on the Elbe and 77 on the Danube in lower Austria (Pirenne 1937: 88).
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forcing the Church and lords to sign 'peace accords' for prolonged periods. In France during the eleventh century, many of the new bourgs were labelled communia pro paca, or 'communes for peace' (Le Goff 1965: 66). Yet much of the headway of the bourgeoisie was achieved directly and indirectly through war.
The indirect impact of war was to devastate the nobility, with more than a little help from the bourgeoisie. Changes in the nature of warfare, particularly since the thirteenth century, undermined the advantages of feudal military subcontracting. Improved fortifications, new and highly lethal arching tech- nologies and the growing efficiency of infantry relative to mounted knights presented feudal armies with serious challenges. Moreover, lacking the accounting and logistical skills of the bourgs, the lords found it difficult to organize, feed and discipline large forces of heterogeneous knights. But the most serious challenge was soaring cost. In the five years between the English invasions of 1346 and 1351, the French King witnessed the price of hiring knights and their accessories practically double (Tuchman 1978: compare pages 84 and 128). War had become so expensive that even the richest of kings found it difficult to finance it. Consequently, observed Robert Lopez, '[f]ortunate indeed were those kings who succeeded in maintaining the peace' (1967: 333).
Underlying the mounting cost of war was a new weapon of mass destruc- tion: inflation. The expansion of the bourgs and their growing consumption of agricultural produce were accompanied by the spread of the monetary standard and the penetration of prices into the feudal heartland. This process marked the beginning of an invisible revolution - a transformation that shifted the emphasis from the bartered knight of the manor to the cash-paid soldier of the bourg, bankrupted the lords and altered the very nature and form of social power.
The nobility and clergy, locked into an antiquated system of barter and fixed income, found themselves at the greatest disadvantage. Most did not grasp the pricing mechanism and were utterly clueless about inflation. Abbot Gille li Muisis of Tourna summed the bewilderment in a famous fourteenth- century verse:
Money and currency are very strange things.
They keep on going up and down and no one knows why; If you want to win, you lose, however hard you try.
(Quoted in Tuchman 1978: 130)
Feudal rents were fixed by custom and habit, but the prices the nobility had to pay - particularly for luxuries and weaponry - soared. The consequences were devastating. From the thirteenth century onward, lords were forced into borrowing, then into mortgaging their property, and eventually into 'releasing' their serfs and selling their lands altogether (Pirenne 1937: Ch. III, Section II; Le Goff 1965: 167).
The capitalist mode of power 291
The monarchs were generally more astute. Some of them understood, instinctively if not theoretically, that money represented a new order of power and that any shock to that order could be leveraged for differential ends. And the brightest of the lot went on to invent various techniques of sabotage to serve their own ends. One of the more sophisticated methods was to threaten debasement - and then blackmail those who stood to lose the most from such an act in return for putting it on hold (Lopez 1967: 333). Centuries later, the financiers of the Weimar Republic would use a variant of this technique with their foreign creditors - threatening to inflate the currency in order to avoid having to pay war reparations.
But the biggest winner was the bourgeoisie. Situated at the epicentre of the price mechanism, it not only set most of the prices but also understood the inflationary mechanism better than everyone else. This strategic position enabled the early bourgeoisie to profit from the process relative to others and to amass huge fortunes. 19 And that was merely the beginning. As we shall see in Part V, the techniques that were developed during that period, perfected and extended by subsequent generations of capitalists, turned inflation into one of the principal axes of the capitalist mode of power.
War and credit
By the fourteenth century, the European social landscape was in the midst of a massive transformation from a feudal to a capitalist mode of power. This transformation entailed many different developments and innovations, but there was one invention that literally encompassed them all: credit. From its very beginning, credit was a matter of organized power. Its inception was intimately connected to war: it emerged as a negation of feudal sabotage, and it eventually developed to engulf and internalize that sabotage and more.
Bypassing power: private instruments
As noted, the bourgeoisie sought to negate the territorial barriers of feudal sabotage by seeking direct territorial exemptions, immunities and liberties. But the most effective means of bypassing feudal power was trans-territorial: the virtual financial instrument. In its attempt to evade feudal violence, the bourgeoisie went on to develop the letter of credit, bill of exchange and
19 To put the magnitudes of these fortunes in context, consider that in 1348, Pope Clement VI paid 80,000 florins to buy Avignon from the Queen of Naples, and that a year later the King of France purchased Monpellier for 133,000 florins. By comparison, the annual turnover of the Bardi company of Florence stood at 875,000 florins. Similarly, when Riniero Zeon, Doge of Venice, died in 1268, his estate was estimated at 50,000 Venetian pounds. This sum was equivalent to a mere one year's worth of output coming from the alum mines of Benetetto Zaccaria, a Genoese merchant whose portfolio included many such lucrative properties (Lopez 1967: 297).
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maritime insurance, along with the proto-corporate commenda and com- pagnia that were already mentioned in Chapter 12.
These developments came hand in hand with the growth of urban educa- tion - an alternative to the feudal monastery and a precursor of public schooling. By the thirteenth century, most Italian merchants were literate, knew some mathematics, used bookkeeping and often spoke foreign languages (Pirenne 1937: 122-25). This education enabled the bourgeoisie to further improve its credit institutions and organizations, putting the illiterate nobility at an ever-growing disadvantage.
Gradually, as the financial instruments diversified and the transactions multiplied, each type became associated with its own 'benchmark' and 'normal rate of return'. Ironically, the most vibrant private market was real estate, the original source of feudal power. The rising merchants were busy buying the dwindling territorial properties of their increasingly indebted enemies, and by so doing further hastened their demise.
The institution of the mortgage - originally a bypass of the Church opposition to interest - gave rise to an urban market that traded in rents and sold asset-backed securities. The bougs started raising money by selling perpetuities backed by the real- estate collaterals. In the thirteenth century, Genoa recognized the vendibility of such contracts, leading to the creation the Bank of St. George, a precursor of the modern mortgage bank (Pirenne 1937: 137-39).
Absorbing power: state finance
But the magnitude of private credit paled in comparison to the size of state finance. Wars, whose cost soared in tandem with their material scope and unit price, were the most financially demanding expenses. Changing military technologies, beginning with the crusades and continuing with the Hundred Years War, made it increasingly necessary to rely on hired armies that needed to be paid in cash. There were two ways to raise the money - taxes and borrowing - but it was their combination that proved the most effective.
The first to brave this new form of war finance were the Lombardian city states. They issued tax-backed bonds, using the proceeds to pay for soldiers and weapons that waged increasingly successful campaigns against barter- backed knights. The territorial princes and kings were initially hostile to this new arrangement. But having witnessed the lethal force of the new pecuniary militias unleashed on their increasingly expensive knights, they found the temptation of fight-now-pay-later difficult to resist. Gradually, they began to borrow the methods and money of the bourgeoisie, with the result being a growing interdependency - and eventually a bondage - between the territo- rial sovereign and the exterritorial capitalists. In due course, this alliance would develop into a new mode of power, a social space we now call the 'capitalist nation-state'.
Let's examine this process a bit more closely, beginning with taxation. The collection of ad hoc levies and duties was not only unpopular, but also grossly
The capitalist mode of power 293
inefficient and extremely time consuming. Therefore, in the interest of expe- diency, the kings often took a shortcut, announcing a convenient 'state of emergency':
The monarchy, when it took over the reins of national life, ought to have resurrected a regular income tax system, the fundamental basis of both Roman and modern finance. . . . But the 13th century was not ripe for such radical reform. The King would merely ask his subjects for 'help' in times of crisis. Philip 'the Fair' acted in such a way as to keep a 'crisis' going, almost without interruption, and his successors improved even more on these methods.
(Lopez 1967: 334)
The bourgeoisie was forced to foot a growing part of the bill; but by now it was already too powerful to give something for nothing. In return for taxa- tion it demanded representation - this time on a 'national' scale.
Government taxes, though, constituted only one aspect of the new deal. The other aspect was private credit, and the two got inextricably bound up. Facing the prospect of war, the king, even if fiscally solvent, was often finan- cially illiquid. Taxes could be collected in the future, but the need for cash was immediate. His solution was to turn to haute finance with its easily accessible stash of money. For the financier, the request offered a huge investment opportunity: a royal promise to augment his capital with future taxes.
Initially, the arrangement was fraught with peril, and although both sides resorted to it with much enthusiasm and growing frequency, often they got burned. During the Hundred Years War, for example, Kind Edward of England financed his invasion of France with an estimated 1 to 1. 5 million gold florins borrowed from the Florentine banks of Bardi and Peruzzi and backed by an expected wool tax. The tax revenues, though, proved disappointing, and the two banks, unable to collect their loans, crashed, creating a chain reaction of bankruptcies throughout Northern Italy (Tuchman 1978: 81).
But time heals, and by the early nineteenth century war finance had already been perfected into business as usual. A typical illustration follows. During the Napoleonic Wars, an English expeditionary force, headed by the Duke of Wellington, got stuck in Portugal, besieged by a 'terrible need of funds'. Wellington borrowed money from shabby continental banks against massively discounted British government bonds, but the money was like a drop in the bucket. Unpaid soldiers resorted to looting; wounded officers had to sell their clothes to secure medical attention; and with its wallet empty, the army's attempt to have the local population turn against French rule was going nowhere.
Wellington was ready to give up the fight, but then, just as all seemed lost, the Rothschilds came to the rescue. Earlier on they had collected many of Wellington's discounted British government bills at a fraction of their book
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value, and they now cashed them at an enormous profit in London. In addi- tion, they also bought some ? 800,000 worth of gold at bargain prices from the East India Company - bullion that they were more than willing to sell back at 'fair value' to the needy British government. The Rothschilds also took it upon themselves, again for a proper fee, to transfer this money from England to the Continent, and they continued to do so for a number of years, funnel- ling as much as ? 20 million to the British troops. The transfers were even encouraged by the French authorities, who were misled to believe that the money represented private capital flight in expectation of British devalua- tion. . . . (Elon 1996: 166-71).
And so, almost seamlessly, war and organized violence - nominally the archenemies of the 'free market' - had been absorbed into capital. On the one hand the capitalists used inflation to destroy the military power of the nobility, while on the other hand they financed 'national' wars to multiply their capitalization many times over. And war was merely the beginning of this public-private bondage. In due course, capital has been able to inter- nalize not only organized violence, but every systematic aspect of government power.
The genesis of capital as power
Let's take stock of some of our claims so far. In Chapters 9 to 11, we have seen that, by discounting risk-adjusted expected earnings, capitalization has gradually come to encompass and commodify our social world, creating a unified quantitative architecture of historically unprecedented complexity. Then in Chapter 12, we have demonstrated that both the level and pattern of capitalist earnings are a matter of strategic sabotage, and therefore that the capitalization of earnings represents the commodification of power. Finally, in this chapter we argue that the commodified power of capital has increas- ingly taken over and absorbed other forms of organized power; that over time this takeover and absorption have come to define the mode of power of society, gradually turning capital itself into a state; and that this Leibnitzian transformation is not a recent phenomenon, but one that started with the very inception of bourgeois discounting in Italy of the fourteenth century.
The government bond
Symbolically, the earliest manifestation of the state of capital is the govern- ment bond. This financial instrument marks the first systematic capitalization of power, namely, the power of government to tax. And since this power is backed by institutionalized force, the government bond represents a share in the organized violence of society.
In and of themselves, taxation and the organized violence behind it are of course ancient, dating back to the early use of armies to collect agricultural
The capitalist mode of power 295
tribute. 20 Subsequently, taxation was legitimized in custom and law, so that the use of naked force became less necessary. But it was only with the emer- gence of capitalism that this power was routinely packaged as a 'financial asset', discounted as vendible bonds on the open market.
This capitalization of power marked the beginning of the end of the feudal mode of power. Instead of a rigid structure of multiple personal 'protections' and endless 'exceptions', there emerged the anonymous and highly flexible capitalist 'bond' of private owners and public governments. For the first time in history, organized power, although still qualitatively multifaceted, assumed a universal quantity.
Primitive accumulation?
Interestingly, the first to suggest that the state was integral to capital was no other than Karl Marx. Recall that, analytically, Marx emphasized the primacy of production and surplus in the emergence and development of capitalism. However, toward the end of the first volume of Capital, in a section titled 'Genesis of the Industrial Capitalist', we find a strikingly different interpretation. In contrast to his otherwise bottom-up view, whereby the bourgeois state emerges to give an already-developed capitalism its universal form, here he offers a top-down 'structural' explanation, with accu- mulation seen as emerging from within the state.
The genesis of capitalism, Marx writes in this section, is primitive accumu- lation, and primitive accumulation is largely the working of the state:
The different momenta of primitive accumulation distribute themselves now, more or less in chronological order, particularly over Spain, Portugal, Holland, France, and England. In England at end of the 17th century, they arrive at a systematic combination, embracing the colonies, the national debt, the modern mode of taxation, and the protectionist system. These methods depend in part on brute force, e. g. the colonial system. But they all employ the power of the State, the concentrated and organized force of society, to hasten, hothouse fashion, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition. Force is the midwife of every old society pregnant with a new one. It is itself economic power.
(Marx 1909, Vol. 1: 823-24, emphases added)
Within this constellation, Marx further identifies the formative role of credit, particularly public debt:
20 Although state revenues are no longer collected in kind, the fiscal year still starts in April, to remind us of springtime tax expeditions in antiquity.
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National debts, i. e. the alienation of the state - whether despotic, consti- tutional or republican - marked with its stamp the capitalist era. . . . Public credit becomes the credo of capital.
(Ibid. : 827)
In fact, according to Marx, the public debt is not only 'one of the most powerful levers of primitive accumulation', but also the basis of modern finance more broadly, having 'given rise to joint stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy' (ibid. ).
Leaving aside differences in the meaning of 'state', this view seems similar to our own. The capitalist state, Marx argues, is neither a historical latecomer nor an added complication to an otherwise 'economic' notion of capital. Instead, it is an integral aspect of accumulation, and it was so from the very start.
But the similarity is only superficial. Note that Marx's view here relies crucially on the concept of 'primitive accumulation'. This is the mechanism through which state violence and power penetrate the inner workings of accu- mulation. Primitive accumulation, though, is an exception to the rule. During the normal course of 'expanded reproduction', whereby 'real' capital expands through the legitimate production and appropriation of surplus value, the state acts on capital only from the outside, as an external regulator.
The problem with this distinction is that the two types of accumulation - normal and abnormal - negate and therefore presuppose each other. In order to know what constitutes primitive accumulation (the forceful exception), we first have to know what expanded reproduction is (the sans-force rule). Yet, as we have seen, that cannot be done. Since productive labour, abstract labour and surplus value cannot be identified theoretically or empirically, there is no way to delineate expanded reproduction; and since the boundaries of expanded reproduction are forever unknown, there is no way to know what constitutes primitive accumulation. The two concepts rise and fall together.
For this reason, the endless debates from Luxemburg (1913) to Harvey (2004) - controversies over what constitutes 'real' accumulation, on how to differentiate it from 'rent seeking' and 'accumulation by dispossession', and on whether 'primitive accumulation' is necessary merely to kick-start capi- talism or in order to sustain it throughout - are much ado about nothing. These questions cannot be settled for the simple reason that accumulation does not have two faces. It has only one, and it is called capitalization. This process, although deeply intertwined with production, is a manifestation of power and only of power. And since we are dealing with power, the capitalist government (Marx's state) is embedded not only in the so-called 'primitive' forms of accumulation, but potentially in every single bit of it.
Government capitalized
And so, what began as a tentative and limited penetration of bourgeois principles into the feudal state ended up destroying that state to emerge, several centuries and numerous struggles later, as a full-fledged state of capital. And as capital grew into a state, the interaction between its organi- zational bodies of corporations and governments multiplied and intensified.
Over the past century, the government bond market has become the heart of modern finance. It provides the biggest and most liquid security market; it offers a vehicle for both fiscal and monetary policy; and it reflects, through its benchmark yield, the universal normal rate of return.
And that is just the start. Governments are engaged in numerous activities other than taxation - including military spending, subsidies, education, industrial policies, war making, tariffs, protection of private property, patents and copyrights, propaganda, labour laws, macroeconomic policies and policing, to name a few - and these activities all bear on the differential level and temporal pattern of capitalist income. In fact, it is hard to think of a single aspect of modern government that does not bear on the distribution of income in general and of capitalist income in particular, just as it is difficult to find a single corporation whose differential earnings are not affected by government power.
Given that these power features of government all influence differential capitalist earnings and risk, they are discounted, if only implicitly, into corpo- rate stock and bond prices. In other words, a significant proportion of all private property is, in fact, capitalized government power. Of course, the precise magnitude of this impact isn't written in the company books or declared in stock-market filings. But it can be illustrated easily with simple thought experiments.
Consider Microsoft once more. As we have seen, it doesn't matter whether Microsoft engineers 'produce' its software from scratch or 'borrow' it entirely from others, gratis. The owners of Microsoft can profit differentially from this software only insofar as they can prevent others from using it without pay. And this prevention depends crucially on the existence and enforcement of intellectual property rights - that is, on the extent to which Microsoft can harness the government apparatus to its own end. Now negate this ability and assume that the government no longer protects Microsoft's software. The most likely result is that Microsoft's earnings and capitalization will drop sharply if not collapse altogether. The magnitude of the drop represents the extent to which Microsoft capitalizes the government. 21
21 Not surprisingly, Microsoft earns most of its profits from sales in developed countries such as the United States, where software piracy can cost the trespasser up to five years in jail. Most developing countries have not yet perfected the penal system for such acts, and until they 'develop' in that direction, their governments' contribution to Microsoft's bottom line is likely to remain negligible.
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Similarly with so-called financial 'intermediaries' such as Deutsche Bank. The differential earnings of this group depend, among other things, on interest rate differentials and credit volumes - both of which emerge from a complex power interplay of government policy, cooperation and conflict among the leading financial intermediaries, the relative power of borrowers and the ebb and flow of risk perceptions. The government is deeply 'discounted' at every step of the way, and the extent of its capitalization can be readily if hypothetically assessed by contemplating what would happen if we were to obey the market fundamentalists and eliminate its involvement from any of those steps. . . .
Or consider DaimlerChrysler. The level and pattern of its differential earn- ings depend on its tacit and open collusion with the other seven auto titans. They also depend on the highway system provided by governments and the availability of alternative public transportation; they depend on environ- mental regulation or lack thereof; they depend on the ups and downs in the price of oil and hence on the global political economy of the Middle East; they depend on tax arrangements with various governments and on the use of transfer pricing; they depend on a sophisticated propaganda war that creates wants and shapes desires; they depend on the relative strength of DaimlerChrysler's labour unions; and so on. DaimlerChrysler's profits also hinge on its huge credit operations, and therefore on monetary policy; and they depend on the company's military business, and therefore on the global politics of armament budgets and the threat of inter- and intra-state conflict. Where exactly the government role begins and ends in this complex process of capitalization is difficult to tell, but the magnitude of this role would become immediately apparent if we removed or curtailed it.
A final example - the oil companies. Over the past four decades, the rela- tive profits of these companies have had little to do with variations in the production of oil - and almost everything to do with oil's relative price. 22 And the relative price of oil in turn has had little to do with 'supply and demand' or 'abstract labour' and everything to do with the global political economy in general and the political economy of the Middle East in particular. So here, too, profit and capitalization are matters of politics at large, which means that oil assets partly capitalize government power.
The conclusion then is pretty clear. If capital is a material-economic substance, then the most we can say is that the government does or does not 'affect' its accumulation. But if assets represent capitalized power, then capital must be seen as incorporating government power. In that sense, the government has become part of capital.
22 There is a very tight correlation between the global profit share of the oil companies on the one hand and the dollar price of crude oil deflated by the US CPI on the other. The correlation coefficient, using monthly series, measures 0. 8 out of 1 since 1974, and 0. 92 since 1979 (Nitzan and Bichler 2006b: 72). There is virtually no correlation between oil profit and the volume of oil output.
? The state of capital
Now, so far we have dealt with the degree to which the government has been capitalized by corporations. But that is only part of the process through which capital becomes a state. The other part concerns the extent to which the various organs of government have been conditioned, habituated and shaped by the logic of capital. We flesh out this question with a series of illus- trations.
Who are the regulators?
By the late 2000s, the changing ecology finally made the headline news and 'environmental friendliness' became a prerequisite for making money, so Wal-Mart decided to go green. Given the company's reputation as an indif- ferent if not predatory giant, this publicized shift toward 'social responsi- bility' has taken many leftists and environmentalists by surprise. But the move also revealed another aspect that few paid attention to: it illustrated how Wal-Mart has become a de facto regulator:
Because of Wal-Mart's sheer size and market share, most of its rivals have no choice but to follow its lead - and the company has found itself setting standards beyond those that regulators require. 'They have so much market power that they could drive environmental change through 50,000 companies, something that Congress and the Bush administra- tion has refused to do', says Michael Marx of Corporate Ethics International. . . .
(Bichall 2007)
And since Wal-Mart now acts as a government, so to speak, it seems only appropriate that it should also be lobbied:
Wal-Mart says it consults with suppliers on standards. But its efforts to set higher environmental goals than those legally required mean that the retailer is attracting the kind of lobbying that would have previously been directed at central government, from both environmentalists and from industry.
(Ibid. )
This example of private regulation is by no means exceptional. It keeps popping up in many different areas - from the setting of accounting standards and the determination of monetary policy, to military spending and the waging of war, to the commercialization of legal arbitration and the choice of pharmaceutical practices - all instances in which corporations act as regula- tors of the capitalist environment in which they operate.
The capitalist mode of power 299
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Sovereign owners?
The second example concerns the modus operandi of government finance. Traditionally, capitalist governments treated their foreign reserves as a buffer for securing imports and protecting the currency. Consequently, the extra money was usually 'parked' in liquid foreign government bonds. This situa- tion started to change in the 1980s. Massive shifts in the global distribution of income gave rise to a significant concentration of foreign currency assets - first in the hands of oil-producing countries, and more recently also in the coffers of Asian governments. These piles of cash made the lure of capital too difficult to resist, as a result of which many governments started to invest their holdings through a new institution: the 'sovereign wealth fund'.
By 2006, sovereign wealth funds had amassed assets estimated at $2. 5 tril- lion - representing 10 per cent of all institutionally held investments in the world and nearly 1. 5 per cent of all global financial assets. The size of these funds has been growing in leaps and bounds, and at current growth rates it is expected to reach $12 trillion in 2015 - exceeding the sum total of global reserves by as much as 50 per cent (Farrell et al. 2007: 11; Jen 2007; Farrell et al. 2008: 10).
So far, much of the discourse surrounding this growth has focused on its threat to 'free markets' and the 'national interest' (particularly that of the United States, the world's largest importer of capital). The sovereign owners of these funds, the pundits explain, are inherently anti-market (the liberal fear) and potentially hostile (the realist unease), so thwarting this new form of 'government intervention' must be good for both freedom and country.
But this logic can easily be turned on its head. By setting up and managing sovereign wealth funds, governments are further integrating, if not locking themselves, into the larger architecture of capitalist power. This submission is succinctly summarized, however unintentionally, by Yousef al Otaiba, director of international affairs for the government of Abu Dhabi:
The success in generating and wisely applying financial returns for the public good is directly linked to a clear set of principles that has guided Abu Dhabi's investment organizations. Most basic are the focus on maximizing risk-adjusted returns, relative to well-established market indices; taking a long-term view; avoiding leverage; and investing in a well-diversified portfolio across asset classes, geographies and sectors. Furthermore, the leading investment organization, the Abu Dhabi Investment Authority (ADIA), has operated predominately as a passive investor, with the overwhelming share of its portfolio consisting of minority stakes in companies that have included no control rights, no board seats and no involvement in the management or direction of the receiving companies. . . . It is important to be absolutely clear that the Abu Dhabi government has never and will never use its investment organi- zations or individual investments as a foreign-policy tool.
(al Otaiba 2008, emphases added)
The capitalist mode of power 301
The last promise in this quote should be taken with a grain of salt. As things stand, there is (still) no means of preventing governments from using their assets in line with their policy goals.
In order for vassals to produce, train and supply knights on a permanent basis, they needed access to agricultural land and tillers, organized through the autarkic manorial system. And so, gradually, the homage between the lord and the vassal came together with the granting of a benefice, usually in the form of a landed fief, or 'feodum' - hence the term 'feudalism'.
The cost of reproducing a single knight and his accessories was pretty hefty, requiring roughly 150 hectares of land according to some estimates. Based on this ratio, a fair-size fief of a count, made up of 200-250 agricultural communities, could supply no more than 150-200 mounted warriors. These modest numbers had an important implication: they meant that a larger army could be assembled only by networking the separate commitments of many different vassals (Le Goff 1965: 54-55).
This networking formed the basis of the 'feudal state'. The arrangement first emerged in the eighth century, when the Carolingian rulers, seeking to consolidate their power and increase obedience, sowed confiscated church lands as well as their allodial territories with royal vassals. The vassals, who in turn wished to reduce their own uncertainty and if possible leverage their power, further parcelled their fiefs to subordinate vassals, and so on. The end result was a dense network of mutual military obligations tied to agricultural manorial production, a standardized pattern of power that later spread throughout much of Europe.
It is not difficult to see here the principle that later informed both Hobbes's Leviathan and Locke's 'social contract': the individual being (vassal or bour- geois), torn between his desire for freedom (independence) and quest for secu- rity (to annul his fear of death), finds the compromise in merging himself with a larger mode of power (the feudal network or the sovereign state).
because he must do nothing to injure the rights of justice of his lord or such other preroga- tives as belong to his well-being. Useful because he must do no wrong to the possessions of his lord. Easy and possible, because he must not make difficult for his lord anything which the latter may wish to do, and because he must not make impossible to his lord that which the lord might otherwise accomplish. It is only right that the vassal should abstain from injuring his lord in any of these ways.
(Quoted in Ganshof 1964: 83, emphases added)
Even the 'positive' vow of protection was inherently negative, in that it was directed against everyone else. A French document from the thirteenth century recommends the following declaration by the vassal:
I promise this because you have granted to me and to my heirs such and such a prop- erty, as long as we shall remain your vassals, and also because you have promised to defend me and mine against every man.
? (Quoted in Ganshof 1964: 154, emphases added)
The capitalist mode of power 285
During the Middle Ages, royal power, although often existing de jure, usually was conditional on and subsidiary to feudal obligations. In some places, such as France of the twelfth century, power was so diffused that the king, although claiming 'sovereignty', was no more than a glorified lord whose authority hardly extended beyond his own feudal domain. In other places, such as England after the Norman conquest of the eleventh century, power was highly centralized in the hands of the king. But that centralization was still feudal insofar as the entire country was the property of the king and every feudal agreement was supplemented by allegiance to the monarch (a duality that perhaps hastened the development of British capitalism).
There was an important novelty in this arrangement. In imperial struc- tures, power could expand in two ways: conquest and marriage. The 'feudal state' introduced a third alternative: voluntary military contract. Of course, because of their larger number, individual feudal lords could not match the power of emperors. But their added ability to cut and paste slices of power in a quasi-amicable way - a precursor for the capitalist buying and selling of vendible corporate 'shares' - made the structure of power more flexible, easier to realign, and perhaps less vulnerable to external blows. 17
The limits of feudal power
Feudal flexibility, though, had three hard limits. First, the feudal bond was personal and deeply religious. Its material aspects were merely instrumental. The primary purpose was the establishment of direct loyalty and mutual obli- gation between two people. Second, the bond was total. The lord exercised something akin to sovereignty over the very person of the vassal. And third, the contract was permanent. Save for instances in which the no-harm clauses were violated, the feudal link could not be unilaterally terminated. It ended only with the death of one of the sides.
Over time, these features started to strain the structure of feudal power. One problem was that the chain of personal commitments was highly unreliable.
17 Feudal remnants occasionally crop up in flattering reports on the amalgamating victories of present-day magnates. The following account of Woodbridge, the family investment arm of the Thomson family, is typical:
As president of Woodbridge . . . Mr Beattie, 48, is often described as the consigliere or e? minence grise of the family. . . . 'Woodbridge exists for one reason - to create value for its shareholders, who are all descendants of Roy Thomson. ' In the 30 years to 2005, he says, that value grew from $300m to $30bn.
But even when the unit of power is still clannish, in capitalism its methods of expansion are detached and impersonal:
. . . Thomson family members have been unsentimental traders of assets. . . having an uncanny sense of when an industry is on the turn.
? (Edgecliffe-Johnson 2008, emphases added)
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As a contract between two people, the feudal bond gave the lord direct power over his own vassals, but not over his vassals' vassals. Unlike a capitalist owner who has legal right and effective power over the corporation's entire chain of subsidiaries, the leverage of a feudal lord depended on the good will of his vassals, who, when called on for a military operation, might or might not bring along their own subcontractors. In places where the feudal links were complicated, the task of quickly assembling a large army became a real headache. In some cases, the large lords and kings found themselves at a significant disadvantage - for instance, against the easy-to-organize popular militias of the bourgs, or relative to the centralized and partly monetized armies of the English king.
Another difficulty was how to prioritize different commitments. The vassals, seeking to leverage their power and security, often allied themselves with more than one lord. These multiple commitments, though, were inher- ently contradictory. Unlike the capitalist limited-liability contract - which has a definite magnitude denominated in dollars and cents, and hence a pro-rated structure depending on the relative magnitude of the priced pledges - the feudal contact was total. The vassal was obliged to serve his lord completely and without reservation. Those with overlapping obligations could therefore face multiple claims from different lords, each demanding the very same services. As a result, there emerged various systems of 'rating' - some based on the size of the fief, others on the time it was granted, and still others on the relative position of the lord - all designed to somehow reconcile the overlapping obligations.
The most serious limit, though, was the non-alienated nature of the fief. The fief was the property of the lord. It was a unit of power 'granted' to the vassal so that he could serve his master personally. But given the personal nature of the service, the transfer was always 'temporary' and was annulled by death. In this sense, any attempt to parcel, transfer or sell the fief was a direct challenge to the very purpose of the feudal contract. Over time, though, the pressure to alienate the fief mounted - coming initially from vassals who sought to pass it on to their heirs, and subsequently from lords who were both lured by and forced into the new pecuniary logic of the bourg. The solution was found in the form of 'relief' - a sort of ransom paid by the heir to the lord for giving up the property. In the beginning the relief was arbitrary. But around the twelfth century in France there emerged something like a 'normal rate', whereby the lord would alienate the fief in return for a sum equal to the property's annual revenue (Ganshof 1964: 136-39).
The capitalization of feudal power
The weakening of the feudal mode of power was marked by the colours of capitalism. One important change was the inversion of the feudal contract. Originally, the fief was a means to an end. The vassal made an oath of fealty to the person of the lord, who in return gave him the fief so that he could fulfil
The capitalist mode of power 287
that oath. But toward the second part of the Middle Ages, the order had changed, with the fealty and service becoming preconditioned on the granting of the fief. The fief was now increasingly a matter of 'real estate', and feudal relations gradually shifted from a personal to proprietary footing.
A parallel change was the increasing monetization of both sides of the feudal contract. In many cases, the fief itself took the form of a stipend, or feodum de bursa, whereby the vassal received a payment for his keep rather than a direct allocation of land. The same happened to the services. Although these assumed a variety of forms from the very start, initially the key service was military. However, from the eleventh century onward in England and somewhat later on the Continent, the significance of military services declined, giving way to pecuniary payments. In England, many of the lower vassals paid their services in scutage, or monetary substitute, while in four- teenth-century Flanders less than 20 per cent of the vassals of the count in the cha^tellenie of Bruges were required to perform military services (Ganshof 1964: 90-92).
Faubourg, bourg, bourgeoisie
The power architecture of capitalism was gradually penetrating and trans- forming the feudal mode of power. The beginning was rather humble. The process started during the eleventh and twelfth centuries with the twin expan- sion of the bourgs and the periodic 'fairs'. The original bourg was a feudal fortification, built by serfs for military purposes. By contrast, the fair was an extra-territorial 'free-trade zone'. Granted by the prince as a source of royal- ties, it was exempt from feudal law and was endowed with 'franchises' and 'liberties' available nowhere else. In due course, the periodic fair gave way to the faubourg, a permanent settlement of merchants that was physically attached but socially alien to the bourg. Gradually, the merchants began to fortify their own suburb and in many cases ended up absorbing the old feudal fortification. The logic of the new bourg - commercial, industrial and above all monetized and capitalized - was every bit different from the one it had swallowed.
The dual economy
The capitalist bourg introduced a totally novel mode of power. Its manufac- turing sector, having developed as early as the eleventh and twelfth centuries, had many structural features we now take for granted. One of these was a prototype of the 'dual economy', (a term coined centuries later by Averitt 1968 to describe the bifurcated structure of the modern US business sector). On the one hand, there was the 'small economy', comprising associations of masters, apprentices and hired workers that supplied mainly the local market. On the other hand, there was the 'big economy' of large merchants and producers who controlled the long-term trade. The latter constituted a closely knit oligarchy, and it colluded heavily - both inside the bourg and with the
288 Bringing power back in
oligarchies of other bourgs (with the most conspicuous example of the latter collusion being the Hanseatic League of London).
In parallel, there developed in the bourgs a proto-proletariat of unskilled workers, made mostly of propertyless incomers from the countryside, often known as the 'blue nails'. The oligarchy treated the workers and artisans with indifference - that is, as long as they remained docile. When they revolted (the first known strikes took place in Flanders during the thirteenth century) the retaliation - often coordinated within and between the bourgs - was usually swift and violent. In England of the fourteenth century, more than four hundred years before the Speenhamland Act, the King and Parliament were already passing decrees and legislation that made labour mandatory and idle- ness illegal (Pirenne 1937: 178-91; Lopez 1967: 278-80; Tuchman 1978: 120). In this sense, the capitalist class struggle, from its very inception, was never merely an 'industrial dispute'. It was a broad power conflict embedded in a newly emergent form of state.
Private and public
Another important innovation was the bourgeois link between the 'public' and the 'private'. This institutional structure, like many others, developed almost unintentionally. The new dwellers of the bourg needed to defend and fortify their private warehouses and workshops against the external hazard of the feudal space. The protection itself, though, was inherently public. By fusing the two, the bourgeoisie invented 'public finance' - a concerted effort to advance their coinciding private interests through proportional taxation.
The resulting fiscal system was completely antithetical to the feudal logic. First, contrary to feudal taxes that were inherently penal and served the indi- vidual lord only, bourgeois taxes were directly linked to the 'public interest' - that is, to the collective interest of capitalists. Second, since the public consisted of the private taxpayers, it made sense to make payment propor- tionate to the individual's interest - i. e. to his income. Finally, taxation presumed and implied representation - and indeed, in the bourgs of the elev- enth century there emerged, along with public works, bodies of elected or representative councils (Pirenne 1937: 178-91). In other words, from the very beginning, private capitalist bodies and capitalist government assumed one another and were symbiotically intertwined.
Liberty as differential power
Beyond these innovations, though, the bourgeoisie, at least initially, tended to view its project not as a comprehensive alternative to the feudal state, but rather as an exception to that state. Inside the bourg there was 'democracy of the privileged' - a close correspondence, if not an identity, between 'political administration' and 'economic management', both controlled by the moneyed aristocracy. The space outside the bourg, though, was accepted as a different
The capitalist mode of power 289
mode of power. Although this space was generally hostile to the bourg, the bourgeoisie neither denied nor challenged it.
Matters of jurisprudence and religion, as well as the acts of peace and war, were fully accepted as the prerogatives of church, king and lord. Indeed, the bourgeoisie was usually more than keen on emulating the authority and privi- lege of the territorial princes - by seeking noble status, by giving gifts to the clergy and by lending money to the duke in need. All in all, the 'state' was viewed as an external moral-legal entity, distinct from and superior to the city, which was merely an 'economic' body (Lopez 1967: 267-68). This was the basic duality that Hegel identified in his Philosophy of Right (1821) - a duality that Marx rightly criticized but could 'solve' only by turning it into an inherent contradiction between 'political universality' and 'economic alienation'.
At the beginning of its journey, then, the bourgeoisie merely tried to fit into and advance within the structure of feudal power. Its tactics were simple. The nobility benefited from forceful confiscation through territorial sabotage - hazards that the bourgeoisie sought to bypass through exemptions and immunities. 18 These exceptions and immunities, though, were always in the plural. They represented particular 'liberties' and 'franchises', and therefore advantages held relative to and against others.
There was nothing exceptional about this differential quest. The notion of universal liberty was totally foreign to the feudal world. In the Middle Ages liberty meant sovereignty, and therefore force and authority over others. Only God was totally free. Everyone else, including the king, was a vassal, and therefore partly dominated. Even the term 'knight', a symbol of power, comes from the German knecht, meaning 'subjugated', a connotation that can also be found in the words Samurai (servant) and Mamluk (slave soldier). All were merely extensions, or 'arms', of a ruler - hence the term 'army'.
For this reason, 'liberty' at that period - whether bourgeois or feudal - could only be understood as a status of power. (1) It denoted negation: it was the right not to pay, not to work, not to obey. (2) It was dynamic and relative: it changed over time in relation to other people. And (3) it was anchored in sabotage: it marked one's place in the hierarchy of damage, with the right to inflict it on some and the obligation to accept it from others. In this sense, the expansion of bourgeois liberties was synonymous, both conceptually and historically, with the growth of the bourgeoisie's differential power.
War and inflation
As the leverage of the bourgeoisie increased, its own mode of power started to penetrate and gradually replace the feudal state. The bourgs were able to wrestle increasing territorial and legal independence from feudal institutions,
18 The extent of territorial sabotage is illustrated by the fact that even as late as the end of the fifteenth century, there were still 64 feudal tolls on the Rhine, 35 on the Elbe and 77 on the Danube in lower Austria (Pirenne 1937: 88).
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forcing the Church and lords to sign 'peace accords' for prolonged periods. In France during the eleventh century, many of the new bourgs were labelled communia pro paca, or 'communes for peace' (Le Goff 1965: 66). Yet much of the headway of the bourgeoisie was achieved directly and indirectly through war.
The indirect impact of war was to devastate the nobility, with more than a little help from the bourgeoisie. Changes in the nature of warfare, particularly since the thirteenth century, undermined the advantages of feudal military subcontracting. Improved fortifications, new and highly lethal arching tech- nologies and the growing efficiency of infantry relative to mounted knights presented feudal armies with serious challenges. Moreover, lacking the accounting and logistical skills of the bourgs, the lords found it difficult to organize, feed and discipline large forces of heterogeneous knights. But the most serious challenge was soaring cost. In the five years between the English invasions of 1346 and 1351, the French King witnessed the price of hiring knights and their accessories practically double (Tuchman 1978: compare pages 84 and 128). War had become so expensive that even the richest of kings found it difficult to finance it. Consequently, observed Robert Lopez, '[f]ortunate indeed were those kings who succeeded in maintaining the peace' (1967: 333).
Underlying the mounting cost of war was a new weapon of mass destruc- tion: inflation. The expansion of the bourgs and their growing consumption of agricultural produce were accompanied by the spread of the monetary standard and the penetration of prices into the feudal heartland. This process marked the beginning of an invisible revolution - a transformation that shifted the emphasis from the bartered knight of the manor to the cash-paid soldier of the bourg, bankrupted the lords and altered the very nature and form of social power.
The nobility and clergy, locked into an antiquated system of barter and fixed income, found themselves at the greatest disadvantage. Most did not grasp the pricing mechanism and were utterly clueless about inflation. Abbot Gille li Muisis of Tourna summed the bewilderment in a famous fourteenth- century verse:
Money and currency are very strange things.
They keep on going up and down and no one knows why; If you want to win, you lose, however hard you try.
(Quoted in Tuchman 1978: 130)
Feudal rents were fixed by custom and habit, but the prices the nobility had to pay - particularly for luxuries and weaponry - soared. The consequences were devastating. From the thirteenth century onward, lords were forced into borrowing, then into mortgaging their property, and eventually into 'releasing' their serfs and selling their lands altogether (Pirenne 1937: Ch. III, Section II; Le Goff 1965: 167).
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The monarchs were generally more astute. Some of them understood, instinctively if not theoretically, that money represented a new order of power and that any shock to that order could be leveraged for differential ends. And the brightest of the lot went on to invent various techniques of sabotage to serve their own ends. One of the more sophisticated methods was to threaten debasement - and then blackmail those who stood to lose the most from such an act in return for putting it on hold (Lopez 1967: 333). Centuries later, the financiers of the Weimar Republic would use a variant of this technique with their foreign creditors - threatening to inflate the currency in order to avoid having to pay war reparations.
But the biggest winner was the bourgeoisie. Situated at the epicentre of the price mechanism, it not only set most of the prices but also understood the inflationary mechanism better than everyone else. This strategic position enabled the early bourgeoisie to profit from the process relative to others and to amass huge fortunes. 19 And that was merely the beginning. As we shall see in Part V, the techniques that were developed during that period, perfected and extended by subsequent generations of capitalists, turned inflation into one of the principal axes of the capitalist mode of power.
War and credit
By the fourteenth century, the European social landscape was in the midst of a massive transformation from a feudal to a capitalist mode of power. This transformation entailed many different developments and innovations, but there was one invention that literally encompassed them all: credit. From its very beginning, credit was a matter of organized power. Its inception was intimately connected to war: it emerged as a negation of feudal sabotage, and it eventually developed to engulf and internalize that sabotage and more.
Bypassing power: private instruments
As noted, the bourgeoisie sought to negate the territorial barriers of feudal sabotage by seeking direct territorial exemptions, immunities and liberties. But the most effective means of bypassing feudal power was trans-territorial: the virtual financial instrument. In its attempt to evade feudal violence, the bourgeoisie went on to develop the letter of credit, bill of exchange and
19 To put the magnitudes of these fortunes in context, consider that in 1348, Pope Clement VI paid 80,000 florins to buy Avignon from the Queen of Naples, and that a year later the King of France purchased Monpellier for 133,000 florins. By comparison, the annual turnover of the Bardi company of Florence stood at 875,000 florins. Similarly, when Riniero Zeon, Doge of Venice, died in 1268, his estate was estimated at 50,000 Venetian pounds. This sum was equivalent to a mere one year's worth of output coming from the alum mines of Benetetto Zaccaria, a Genoese merchant whose portfolio included many such lucrative properties (Lopez 1967: 297).
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maritime insurance, along with the proto-corporate commenda and com- pagnia that were already mentioned in Chapter 12.
These developments came hand in hand with the growth of urban educa- tion - an alternative to the feudal monastery and a precursor of public schooling. By the thirteenth century, most Italian merchants were literate, knew some mathematics, used bookkeeping and often spoke foreign languages (Pirenne 1937: 122-25). This education enabled the bourgeoisie to further improve its credit institutions and organizations, putting the illiterate nobility at an ever-growing disadvantage.
Gradually, as the financial instruments diversified and the transactions multiplied, each type became associated with its own 'benchmark' and 'normal rate of return'. Ironically, the most vibrant private market was real estate, the original source of feudal power. The rising merchants were busy buying the dwindling territorial properties of their increasingly indebted enemies, and by so doing further hastened their demise.
The institution of the mortgage - originally a bypass of the Church opposition to interest - gave rise to an urban market that traded in rents and sold asset-backed securities. The bougs started raising money by selling perpetuities backed by the real- estate collaterals. In the thirteenth century, Genoa recognized the vendibility of such contracts, leading to the creation the Bank of St. George, a precursor of the modern mortgage bank (Pirenne 1937: 137-39).
Absorbing power: state finance
But the magnitude of private credit paled in comparison to the size of state finance. Wars, whose cost soared in tandem with their material scope and unit price, were the most financially demanding expenses. Changing military technologies, beginning with the crusades and continuing with the Hundred Years War, made it increasingly necessary to rely on hired armies that needed to be paid in cash. There were two ways to raise the money - taxes and borrowing - but it was their combination that proved the most effective.
The first to brave this new form of war finance were the Lombardian city states. They issued tax-backed bonds, using the proceeds to pay for soldiers and weapons that waged increasingly successful campaigns against barter- backed knights. The territorial princes and kings were initially hostile to this new arrangement. But having witnessed the lethal force of the new pecuniary militias unleashed on their increasingly expensive knights, they found the temptation of fight-now-pay-later difficult to resist. Gradually, they began to borrow the methods and money of the bourgeoisie, with the result being a growing interdependency - and eventually a bondage - between the territo- rial sovereign and the exterritorial capitalists. In due course, this alliance would develop into a new mode of power, a social space we now call the 'capitalist nation-state'.
Let's examine this process a bit more closely, beginning with taxation. The collection of ad hoc levies and duties was not only unpopular, but also grossly
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inefficient and extremely time consuming. Therefore, in the interest of expe- diency, the kings often took a shortcut, announcing a convenient 'state of emergency':
The monarchy, when it took over the reins of national life, ought to have resurrected a regular income tax system, the fundamental basis of both Roman and modern finance. . . . But the 13th century was not ripe for such radical reform. The King would merely ask his subjects for 'help' in times of crisis. Philip 'the Fair' acted in such a way as to keep a 'crisis' going, almost without interruption, and his successors improved even more on these methods.
(Lopez 1967: 334)
The bourgeoisie was forced to foot a growing part of the bill; but by now it was already too powerful to give something for nothing. In return for taxa- tion it demanded representation - this time on a 'national' scale.
Government taxes, though, constituted only one aspect of the new deal. The other aspect was private credit, and the two got inextricably bound up. Facing the prospect of war, the king, even if fiscally solvent, was often finan- cially illiquid. Taxes could be collected in the future, but the need for cash was immediate. His solution was to turn to haute finance with its easily accessible stash of money. For the financier, the request offered a huge investment opportunity: a royal promise to augment his capital with future taxes.
Initially, the arrangement was fraught with peril, and although both sides resorted to it with much enthusiasm and growing frequency, often they got burned. During the Hundred Years War, for example, Kind Edward of England financed his invasion of France with an estimated 1 to 1. 5 million gold florins borrowed from the Florentine banks of Bardi and Peruzzi and backed by an expected wool tax. The tax revenues, though, proved disappointing, and the two banks, unable to collect their loans, crashed, creating a chain reaction of bankruptcies throughout Northern Italy (Tuchman 1978: 81).
But time heals, and by the early nineteenth century war finance had already been perfected into business as usual. A typical illustration follows. During the Napoleonic Wars, an English expeditionary force, headed by the Duke of Wellington, got stuck in Portugal, besieged by a 'terrible need of funds'. Wellington borrowed money from shabby continental banks against massively discounted British government bonds, but the money was like a drop in the bucket. Unpaid soldiers resorted to looting; wounded officers had to sell their clothes to secure medical attention; and with its wallet empty, the army's attempt to have the local population turn against French rule was going nowhere.
Wellington was ready to give up the fight, but then, just as all seemed lost, the Rothschilds came to the rescue. Earlier on they had collected many of Wellington's discounted British government bills at a fraction of their book
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value, and they now cashed them at an enormous profit in London. In addi- tion, they also bought some ? 800,000 worth of gold at bargain prices from the East India Company - bullion that they were more than willing to sell back at 'fair value' to the needy British government. The Rothschilds also took it upon themselves, again for a proper fee, to transfer this money from England to the Continent, and they continued to do so for a number of years, funnel- ling as much as ? 20 million to the British troops. The transfers were even encouraged by the French authorities, who were misled to believe that the money represented private capital flight in expectation of British devalua- tion. . . . (Elon 1996: 166-71).
And so, almost seamlessly, war and organized violence - nominally the archenemies of the 'free market' - had been absorbed into capital. On the one hand the capitalists used inflation to destroy the military power of the nobility, while on the other hand they financed 'national' wars to multiply their capitalization many times over. And war was merely the beginning of this public-private bondage. In due course, capital has been able to inter- nalize not only organized violence, but every systematic aspect of government power.
The genesis of capital as power
Let's take stock of some of our claims so far. In Chapters 9 to 11, we have seen that, by discounting risk-adjusted expected earnings, capitalization has gradually come to encompass and commodify our social world, creating a unified quantitative architecture of historically unprecedented complexity. Then in Chapter 12, we have demonstrated that both the level and pattern of capitalist earnings are a matter of strategic sabotage, and therefore that the capitalization of earnings represents the commodification of power. Finally, in this chapter we argue that the commodified power of capital has increas- ingly taken over and absorbed other forms of organized power; that over time this takeover and absorption have come to define the mode of power of society, gradually turning capital itself into a state; and that this Leibnitzian transformation is not a recent phenomenon, but one that started with the very inception of bourgeois discounting in Italy of the fourteenth century.
The government bond
Symbolically, the earliest manifestation of the state of capital is the govern- ment bond. This financial instrument marks the first systematic capitalization of power, namely, the power of government to tax. And since this power is backed by institutionalized force, the government bond represents a share in the organized violence of society.
In and of themselves, taxation and the organized violence behind it are of course ancient, dating back to the early use of armies to collect agricultural
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tribute. 20 Subsequently, taxation was legitimized in custom and law, so that the use of naked force became less necessary. But it was only with the emer- gence of capitalism that this power was routinely packaged as a 'financial asset', discounted as vendible bonds on the open market.
This capitalization of power marked the beginning of the end of the feudal mode of power. Instead of a rigid structure of multiple personal 'protections' and endless 'exceptions', there emerged the anonymous and highly flexible capitalist 'bond' of private owners and public governments. For the first time in history, organized power, although still qualitatively multifaceted, assumed a universal quantity.
Primitive accumulation?
Interestingly, the first to suggest that the state was integral to capital was no other than Karl Marx. Recall that, analytically, Marx emphasized the primacy of production and surplus in the emergence and development of capitalism. However, toward the end of the first volume of Capital, in a section titled 'Genesis of the Industrial Capitalist', we find a strikingly different interpretation. In contrast to his otherwise bottom-up view, whereby the bourgeois state emerges to give an already-developed capitalism its universal form, here he offers a top-down 'structural' explanation, with accu- mulation seen as emerging from within the state.
The genesis of capitalism, Marx writes in this section, is primitive accumu- lation, and primitive accumulation is largely the working of the state:
The different momenta of primitive accumulation distribute themselves now, more or less in chronological order, particularly over Spain, Portugal, Holland, France, and England. In England at end of the 17th century, they arrive at a systematic combination, embracing the colonies, the national debt, the modern mode of taxation, and the protectionist system. These methods depend in part on brute force, e. g. the colonial system. But they all employ the power of the State, the concentrated and organized force of society, to hasten, hothouse fashion, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition. Force is the midwife of every old society pregnant with a new one. It is itself economic power.
(Marx 1909, Vol. 1: 823-24, emphases added)
Within this constellation, Marx further identifies the formative role of credit, particularly public debt:
20 Although state revenues are no longer collected in kind, the fiscal year still starts in April, to remind us of springtime tax expeditions in antiquity.
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National debts, i. e. the alienation of the state - whether despotic, consti- tutional or republican - marked with its stamp the capitalist era. . . . Public credit becomes the credo of capital.
(Ibid. : 827)
In fact, according to Marx, the public debt is not only 'one of the most powerful levers of primitive accumulation', but also the basis of modern finance more broadly, having 'given rise to joint stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy' (ibid. ).
Leaving aside differences in the meaning of 'state', this view seems similar to our own. The capitalist state, Marx argues, is neither a historical latecomer nor an added complication to an otherwise 'economic' notion of capital. Instead, it is an integral aspect of accumulation, and it was so from the very start.
But the similarity is only superficial. Note that Marx's view here relies crucially on the concept of 'primitive accumulation'. This is the mechanism through which state violence and power penetrate the inner workings of accu- mulation. Primitive accumulation, though, is an exception to the rule. During the normal course of 'expanded reproduction', whereby 'real' capital expands through the legitimate production and appropriation of surplus value, the state acts on capital only from the outside, as an external regulator.
The problem with this distinction is that the two types of accumulation - normal and abnormal - negate and therefore presuppose each other. In order to know what constitutes primitive accumulation (the forceful exception), we first have to know what expanded reproduction is (the sans-force rule). Yet, as we have seen, that cannot be done. Since productive labour, abstract labour and surplus value cannot be identified theoretically or empirically, there is no way to delineate expanded reproduction; and since the boundaries of expanded reproduction are forever unknown, there is no way to know what constitutes primitive accumulation. The two concepts rise and fall together.
For this reason, the endless debates from Luxemburg (1913) to Harvey (2004) - controversies over what constitutes 'real' accumulation, on how to differentiate it from 'rent seeking' and 'accumulation by dispossession', and on whether 'primitive accumulation' is necessary merely to kick-start capi- talism or in order to sustain it throughout - are much ado about nothing. These questions cannot be settled for the simple reason that accumulation does not have two faces. It has only one, and it is called capitalization. This process, although deeply intertwined with production, is a manifestation of power and only of power. And since we are dealing with power, the capitalist government (Marx's state) is embedded not only in the so-called 'primitive' forms of accumulation, but potentially in every single bit of it.
Government capitalized
And so, what began as a tentative and limited penetration of bourgeois principles into the feudal state ended up destroying that state to emerge, several centuries and numerous struggles later, as a full-fledged state of capital. And as capital grew into a state, the interaction between its organi- zational bodies of corporations and governments multiplied and intensified.
Over the past century, the government bond market has become the heart of modern finance. It provides the biggest and most liquid security market; it offers a vehicle for both fiscal and monetary policy; and it reflects, through its benchmark yield, the universal normal rate of return.
And that is just the start. Governments are engaged in numerous activities other than taxation - including military spending, subsidies, education, industrial policies, war making, tariffs, protection of private property, patents and copyrights, propaganda, labour laws, macroeconomic policies and policing, to name a few - and these activities all bear on the differential level and temporal pattern of capitalist income. In fact, it is hard to think of a single aspect of modern government that does not bear on the distribution of income in general and of capitalist income in particular, just as it is difficult to find a single corporation whose differential earnings are not affected by government power.
Given that these power features of government all influence differential capitalist earnings and risk, they are discounted, if only implicitly, into corpo- rate stock and bond prices. In other words, a significant proportion of all private property is, in fact, capitalized government power. Of course, the precise magnitude of this impact isn't written in the company books or declared in stock-market filings. But it can be illustrated easily with simple thought experiments.
Consider Microsoft once more. As we have seen, it doesn't matter whether Microsoft engineers 'produce' its software from scratch or 'borrow' it entirely from others, gratis. The owners of Microsoft can profit differentially from this software only insofar as they can prevent others from using it without pay. And this prevention depends crucially on the existence and enforcement of intellectual property rights - that is, on the extent to which Microsoft can harness the government apparatus to its own end. Now negate this ability and assume that the government no longer protects Microsoft's software. The most likely result is that Microsoft's earnings and capitalization will drop sharply if not collapse altogether. The magnitude of the drop represents the extent to which Microsoft capitalizes the government. 21
21 Not surprisingly, Microsoft earns most of its profits from sales in developed countries such as the United States, where software piracy can cost the trespasser up to five years in jail. Most developing countries have not yet perfected the penal system for such acts, and until they 'develop' in that direction, their governments' contribution to Microsoft's bottom line is likely to remain negligible.
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Similarly with so-called financial 'intermediaries' such as Deutsche Bank. The differential earnings of this group depend, among other things, on interest rate differentials and credit volumes - both of which emerge from a complex power interplay of government policy, cooperation and conflict among the leading financial intermediaries, the relative power of borrowers and the ebb and flow of risk perceptions. The government is deeply 'discounted' at every step of the way, and the extent of its capitalization can be readily if hypothetically assessed by contemplating what would happen if we were to obey the market fundamentalists and eliminate its involvement from any of those steps. . . .
Or consider DaimlerChrysler. The level and pattern of its differential earn- ings depend on its tacit and open collusion with the other seven auto titans. They also depend on the highway system provided by governments and the availability of alternative public transportation; they depend on environ- mental regulation or lack thereof; they depend on the ups and downs in the price of oil and hence on the global political economy of the Middle East; they depend on tax arrangements with various governments and on the use of transfer pricing; they depend on a sophisticated propaganda war that creates wants and shapes desires; they depend on the relative strength of DaimlerChrysler's labour unions; and so on. DaimlerChrysler's profits also hinge on its huge credit operations, and therefore on monetary policy; and they depend on the company's military business, and therefore on the global politics of armament budgets and the threat of inter- and intra-state conflict. Where exactly the government role begins and ends in this complex process of capitalization is difficult to tell, but the magnitude of this role would become immediately apparent if we removed or curtailed it.
A final example - the oil companies. Over the past four decades, the rela- tive profits of these companies have had little to do with variations in the production of oil - and almost everything to do with oil's relative price. 22 And the relative price of oil in turn has had little to do with 'supply and demand' or 'abstract labour' and everything to do with the global political economy in general and the political economy of the Middle East in particular. So here, too, profit and capitalization are matters of politics at large, which means that oil assets partly capitalize government power.
The conclusion then is pretty clear. If capital is a material-economic substance, then the most we can say is that the government does or does not 'affect' its accumulation. But if assets represent capitalized power, then capital must be seen as incorporating government power. In that sense, the government has become part of capital.
22 There is a very tight correlation between the global profit share of the oil companies on the one hand and the dollar price of crude oil deflated by the US CPI on the other. The correlation coefficient, using monthly series, measures 0. 8 out of 1 since 1974, and 0. 92 since 1979 (Nitzan and Bichler 2006b: 72). There is virtually no correlation between oil profit and the volume of oil output.
? The state of capital
Now, so far we have dealt with the degree to which the government has been capitalized by corporations. But that is only part of the process through which capital becomes a state. The other part concerns the extent to which the various organs of government have been conditioned, habituated and shaped by the logic of capital. We flesh out this question with a series of illus- trations.
Who are the regulators?
By the late 2000s, the changing ecology finally made the headline news and 'environmental friendliness' became a prerequisite for making money, so Wal-Mart decided to go green. Given the company's reputation as an indif- ferent if not predatory giant, this publicized shift toward 'social responsi- bility' has taken many leftists and environmentalists by surprise. But the move also revealed another aspect that few paid attention to: it illustrated how Wal-Mart has become a de facto regulator:
Because of Wal-Mart's sheer size and market share, most of its rivals have no choice but to follow its lead - and the company has found itself setting standards beyond those that regulators require. 'They have so much market power that they could drive environmental change through 50,000 companies, something that Congress and the Bush administra- tion has refused to do', says Michael Marx of Corporate Ethics International. . . .
(Bichall 2007)
And since Wal-Mart now acts as a government, so to speak, it seems only appropriate that it should also be lobbied:
Wal-Mart says it consults with suppliers on standards. But its efforts to set higher environmental goals than those legally required mean that the retailer is attracting the kind of lobbying that would have previously been directed at central government, from both environmentalists and from industry.
(Ibid. )
This example of private regulation is by no means exceptional. It keeps popping up in many different areas - from the setting of accounting standards and the determination of monetary policy, to military spending and the waging of war, to the commercialization of legal arbitration and the choice of pharmaceutical practices - all instances in which corporations act as regula- tors of the capitalist environment in which they operate.
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Sovereign owners?
The second example concerns the modus operandi of government finance. Traditionally, capitalist governments treated their foreign reserves as a buffer for securing imports and protecting the currency. Consequently, the extra money was usually 'parked' in liquid foreign government bonds. This situa- tion started to change in the 1980s. Massive shifts in the global distribution of income gave rise to a significant concentration of foreign currency assets - first in the hands of oil-producing countries, and more recently also in the coffers of Asian governments. These piles of cash made the lure of capital too difficult to resist, as a result of which many governments started to invest their holdings through a new institution: the 'sovereign wealth fund'.
By 2006, sovereign wealth funds had amassed assets estimated at $2. 5 tril- lion - representing 10 per cent of all institutionally held investments in the world and nearly 1. 5 per cent of all global financial assets. The size of these funds has been growing in leaps and bounds, and at current growth rates it is expected to reach $12 trillion in 2015 - exceeding the sum total of global reserves by as much as 50 per cent (Farrell et al. 2007: 11; Jen 2007; Farrell et al. 2008: 10).
So far, much of the discourse surrounding this growth has focused on its threat to 'free markets' and the 'national interest' (particularly that of the United States, the world's largest importer of capital). The sovereign owners of these funds, the pundits explain, are inherently anti-market (the liberal fear) and potentially hostile (the realist unease), so thwarting this new form of 'government intervention' must be good for both freedom and country.
But this logic can easily be turned on its head. By setting up and managing sovereign wealth funds, governments are further integrating, if not locking themselves, into the larger architecture of capitalist power. This submission is succinctly summarized, however unintentionally, by Yousef al Otaiba, director of international affairs for the government of Abu Dhabi:
The success in generating and wisely applying financial returns for the public good is directly linked to a clear set of principles that has guided Abu Dhabi's investment organizations. Most basic are the focus on maximizing risk-adjusted returns, relative to well-established market indices; taking a long-term view; avoiding leverage; and investing in a well-diversified portfolio across asset classes, geographies and sectors. Furthermore, the leading investment organization, the Abu Dhabi Investment Authority (ADIA), has operated predominately as a passive investor, with the overwhelming share of its portfolio consisting of minority stakes in companies that have included no control rights, no board seats and no involvement in the management or direction of the receiving companies. . . . It is important to be absolutely clear that the Abu Dhabi government has never and will never use its investment organi- zations or individual investments as a foreign-policy tool.
(al Otaiba 2008, emphases added)
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The last promise in this quote should be taken with a grain of salt. As things stand, there is (still) no means of preventing governments from using their assets in line with their policy goals.
