Department of Commerce through Global Insight (series codes: INTNETAMISC for interest; ZBECON for profit; YN for
national
income; RUC for the rate of unemployment).
Nitzan Bichler - 2012 - Capital as Power
But taken together, these examples nonetheless suggest that a significant proportion of business-driven 'growth' is wasteful if not destructive, and that the sabotage underlying these socially negative trajecto- ries is exactly what makes them so profitable.
The pace of industry
The other limitation - perhaps less important but easier to approximate - concerns the growth of industrial capacity and output, whatever their purpose. The conventional view, both popular and academic, is that business loves growth. The more utilized the capacity and the faster its expansion, the greater the profit - or at least that's what we are told. The facts, though, tell a very different story. In reality, business can tolerate neither full-capacity utili- zation nor maximum growth. And why the aversion? Because otherwise profit would collapse to zero.
Consider again the automobile sector. Were the large car companies to decide to produce as much as possible rather than as much as the 'traffic can bear', their output could probably double on fairly short notice. And this potential is hardly unique to automobiles. Almost every modern industrial undertaking - from petroleum, through electronics, to clothing, machine tools, telecommunication, pharmaceuticals, construction, food processing and film, to name a few - tends to operate far below its full technological capacity (not to be confused with full business capacity). 11 If all industrial
11 The difference is fundamental. Conventional capacity measures consider what is feasible under the existing social order of business enterprise and production for profit, and usually estimate normal utilization to be in the 70-90 per cent range. Alternative conjectures based
? 236 Bringing power back in
undertakings were to follow the reckless example of automobiles, the relent- less pressure of oncoming goods and services would undermine tacit agree- ments and open cooperation among dominant firms and government agencies, trigger massive downward price spirals, and sooner or later end up in a Great Depression and a threat of political disintegration.
Speculating in a similar vein, Veblen (1923: 373) concluded that it was therefore hardly surprising that 'such a free run of production has not been had nor aimed at; nor is it at all expedient, as a business proposition, that anything of the kind should be allowed'. 12 Profits are inconceivable without production, but they are also impossible under a 'free run' of production. For profits to exist, business enterprise needs not only to control the direction of industrial activity, but also to restrict its pace below its full potential.
Business as usual
Conceptually, we would expect there to exist a non-linear relationship between the income share of capitalists on the one hand and their limitation of the pace of industry on the other. 13 This relationship is illustrated hypo- thetically in Figure 12. 1. The chart depicts the utilization of industrial capacity on the horizontal axis against the capitalist share of income on the vertical axis. Up to a point, the two move together. After that point, the rela- tionship becomes negative.
The reason is easy to explain by looking at extremes. If industry came to a complete standstill, capitalist earnings would be nil (bottom left point in Figure 12. 1). But capitalist earnings would also be zero if industry always and everywhere operated at full socio-technological capacity (bottom right point). Under this latter scenario, industrial considerations rather than business decisions would be paramount, production would no longer need the consent
on a material/technological limit, however, are likely to suggest far lower capacity utiliza- tion. Veblen, for one, estimated this utilization to fall short of 25 per cent (Veblen 1919: 81), a figure not much different from later estimates reported in Blair (1972: 474) and Foster (1986: Ch. 5). Interestingly, though not surprisingly, US military contractors, engaged in the most destructive form of business enterprise, sometime operate at as little as 10 per cent of their capacity - while earning superior rates of return (U. S. Congress 1991: 38).
12 A glimpse into what such a 'free run' might look like is offered by the recent experience of Japan: 'The underlying problem facing many Japanese companies', writes the Financial Times, 'is that they have misallocated capital over a long period. Instead of regarding it as a scarce resource to be used as efficiently as possible, they have pursued engineering excellence. . . . Japanese production lines are often models of automated efficiency, but less attention has been paid to whether the goods on them should be produced at all. Many companies have poured cash into projects that will never generate a return above the cost of capital' (Abrahams and Harney 1999).
13 Business limitations on the direction of industry are much more difficult to delineate and shall not be examined here.
? Accumulation and sabotage 237
? www. bnarchives. net
"Business As Usual" = Stategic Limitation of Industry
? ? ? Maximum "INDUSTRY" Minimum Sabotage (capacity utilization) Sabotage
Figure 12. 1 Business and industry
of owners, and these owners would then be unable to extract their tribute earnings. 14
In a capitalist society, 'business as usual' means oscillating between these two hypothetical extremes, with absentee owners limiting industrial activity to a greater or lesser extent. When business sabotage becomes excessive, pushing output toward the zero mark, the result is recession and low capi- talist earnings. When sabotage grows too loose, industry expands toward its societal potential, but that too is not good for business, since loss of control means 'glut' and falling capitalist earnings. For owners of capital the ideal condition, indicated by the top arc segment in Figure 12. 1, lies somewhere in between: with high capitalist earnings being received in return for letting industry operate - though only at less than full potential. Achieving this 'optimal' point requires Goldilocks tactics - neither too warm nor too cold - or what Veblen sardonically called the 'conscious withdrawal of efficiency'.
This theoretical relationship receives an astounding empirical confirma- tion from the recent history of the United States, depicted in Figure 12. 2. The
14 This hypothetical possibility was contemplated with great horror more than a century ago by The Spectator of London. In discussing workers' cooperatives, the newspaper concluded: 'They showed that associations of workmen could manage shops, mills, and all forms of industry with success, and they immensely improved the conditions of the men, but they did not leave a clear place for the masters (May 26, 1866, quoted in Marglin 1974: 73, emphasis added).
? "BUSINESS" (capital income share)
238 Bringing power back in 20
18
16
14
12
10
8
Figure 12. 2 Business and industry in the United States Note: Series are shown as 5-year moving averages.
? ? ? ? 1987
1943
2007
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 1933
1948
? ? ? ? ? ? ? ? www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 26 24 22 20 18 16 14 12 10 8 6 Unemployment (%)
4 2 0
Source: U. S.
Department of Commerce through Global Insight (series codes: INTNETAMISC for interest; ZBECON for profit; YN for national income; RUC for the rate of unemployment).
chart contrasts the success of business on the vertical scale with the limitation of industry on the horizontal. The former is measured by the income share of capitalists (profit and interest), the latter by the rate of unemployment (inverted from right to left). 15 The data clearly show the negative effect on business - both of excessive industrial sabotage until the early 1940s and of insufficient sabotage during the Second World War. 'Business as usual' was restored only after the war, with growing industrial limitations helping
15 In their empirical work, many radical political economists consider as capitalist all non- labour income - including profit, interest, proprietors' income and rent. We find this encompassing perspective deeply misleading for two reasons. The first is technical. Many proprietors work for a living, while a significant proportion of rent is imputed to owners' occupied dwellings. As a result, it is never quite clear what part of these incomes is 'capi- talist'. The second and perhaps more important reason is that the bulk of profits and interest is earned by large capitalist organizations, while most proprietors' income and rent is earned by individual owners. The former exercise enormous power, while the latter have little or none.
? Profit and Interest / National Income (%)
Accumulation and sabotage 239 capitalists move up and to the left on the chart, toward their 'optimal' income
share. 16
Taking stock and looking ahead
Building on Veblen, our discussion so far has illustrated how business and industry could be thought of as fused yet distinct spheres of capitalism. According to this framework, industry is an integrated creative process whose productivity derives from the totality of its purposefully resonating pulses. By contrast, business is a power process carried out through the prerogatives of ownership. Owning per se is an idle act. It has no productivity and therefore no bearing on industry, either positive or negative. Owners of course can impact industry indirectly. But for this impact to be profitable it has to be negative. It is only by stirring the development of industry in directions that are wasteful and harmful yet easier to control, or by strategically limiting its pace so that their own discretion doesn't become redundant, that profit can be earned. It is this threat of dissonance that enables absentee owners to lay claim to a process to which they do not directly contribute. That is how capi- talist earnings are generated.
In what follows, we concentrate specifically on the way in which business limits the pace of industry. Extending Veblen, we identify two types of sabo- tage: (1) universal business-as-usual limitations that are carried out routinely and uniformly by all firms; and (2) limitations that are unique to a single company or group of companies. Corresponding to these two types of limita- tions are two rates of return: (1) a normal rate of return that all capitalists believe they deserve; and (2) a differential rate of return that capitalists seek over and above the normal.
Pricing for power
Begin with the universal methods of sabotage. To the uninitiated, these are practically invisible. They involve no violence and force, no fire and blood, no hunger and deprivation. They do not even seem to restrict industry. For the most part, their path is clean and detached. And the reason is simple: they operate not directly, but indirectly, through the fundamental unit of the capi- talist order: price.
From price taking to price making
According to received liberal dogma, firms are 'price takers': they accept whatever price mother market gives them. The reality, though, seems to
16 A similar non-linear pattern emerges if we substitute the official rate of 'economic growth' for the rate of unemployment (on an inverted scale). However, given our mistrust of 'real' measurements, we forgo this illustration.
? 240 Bringing power back in
suggest the exact opposite. The standard practice, documented extensively and repeatedly since the 1930s, shows that most modern firms are 'price makers': they set their own price and then sell as much as possible at that price.
Neoclassicists have fought tooth and nail to deny this inverted reality. They had no other choice: to recognize price making would have pulled the rug from under conventional price theory and brought down the rest of economics. Substantively, their counterattack was a failure. Although led by some of the heaviest guns, it hardly dented the facts: price making was here to stay. Pedagogically, though, the attack was highly successful. It managed to expunge the whole debate from introductory economics textbooks, with the result that today's students know little or nothing about the controversy. A brief outline therefore seems appropriate. 17
The first to question seriously the competitive price-taking model and to emphasize the tendency toward oligopoly and monopoly was Veblen. 18 During the roaring twenties his interventions were duly ignored; but by the 1930s, with the Great Depression having opened the door to intellectual dissent, his insights began to echo. Within a few years, the neoclassicists found themselves confronted with two sets of challenges. The first were the theories of 'imperfect competition' (by Robinson 1933) and 'monopolistic competition' (by Chamberlin 1933). Many neoclassicists considered these deviations scandalous, but in due course they managed to domesticate and absorb them into their creed. Their task, though, wasn't nearly as easy with the second set of challenges. These were empirical, and they proved impos- sible to tame.
The debate opened with Gardiner Means' path-breaking work on indus- trial prices in the United States (1935a; 1935b). Means showed that there were in fact not one but two types of prices. The first were the familiar 'market prices': relatively flexible, moving up and down with supply and demand and prevalent in competitive industries. But there was also a second and hereto- fore unfamiliar type of 'administered prices': relatively inflexible, changing only infrequently, responding slowly to market conditions and typical of concentrated industries.
This duality had two far-reaching implications. The first was that prices were intimately connected to crisis - and in more than one way. Means showed that during the Great Depression, competitive industries saw massive declines in their market prices, but only moderate drops in their output and employment. The situation in concentrated industries, though, was exactly
17 For critical reviews of the pricing debate, see Blair (1972: Part IV), Lee (1984), Nitzan (1990) and Lee and Irvin-Lessmann (1992).
18 '[I]t is very doubtful if there are any successful business ventures within the range of the modern industries from which the monopoly element is wholly absent. They are, at any rate, few and not of great magnitude. And the endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be' (Veblen 1904: 54).
? Accumulation and sabotage 241
the opposite: prices declined slightly, while production and payroll collapsed, sometimes by as much as 80 per cent. In other words, the Great Depression occurred mostly in concentrated industries whose prices proved relatively inflexible. Seen from a Veblenian perspective, administered prices were nothing but a mechanism of industrial sabotage.
The second implication was theoretical and general. Profit maximization requires that firms make the best out of the circumstances they face. Administered prices, though, respond only partly or not at all to market conditions. This discrepancy means that companies that set such prices do not make the best out of the circumstances, and, therefore, that they do not maxi- mize their profit. The conclusion was simple and painful: the more prevalent administered prices become, the greater the irrelevance of standard price dogma. And since, according to study after study, most prices are adminis- tered, the agony must be considerable. 19
The markup and the target rate of return
The first explicit confirmation of this painful conclusion came a few years later, with the publication of Hall and Hitch's work on business behaviour (1939). Whereas Means focused on the pattern of prices, Hall and Hitch investigated those who set them. They interviewed company officials in Britain, asking them to explain how they determined prices. And their conclu- sions were stunning, at least by neoclassical standards. It turned out that firms did not follow the neoclassical recipe of equating marginal revenues and cost; that they did not know what these marginal magnitudes meant; and, most embarrassingly, that they did not care about profit maximization to begin with. The process that firms did follow was totally different: they started by calculating what they considered to be 'normal' unit cost (namely the cost at 'normal' levels of output); they tacked onto this cost a 'conven- tional' markup; and they kept the resulting price stable in the face of cyclical variations in demand.
Later on, these findings were augmented by the notion of a 'target rate of return'. According to the empirical research of Kaplan, Dirlam and Lanzillotti (1958), modern firms, particularly the leading ones, begin with a long-term target rate of profit, and then back-calculate the markup necessary to realize this rate of return over the longer haul. 20
This method seems straightforward - and it probably is for the price- setting firm. But not so for the theorist. Whereas the former merely has to act,
19 For up-to-date surveys of the evidence, see Blinder et al. (1998) and Fabiani et al. (2006).
20 For instance, a firm that wants to achieve an average 20 per cent return on an investment of $1 billion needs to earn an average of $200 million in profit. If the 'normal' volume is 100 million units and the 'normal' unit cost is $20, the firm needs to add a 10 per cent markup and set its unit price at $22. With these assumptions, keeping the price fixed while letting
? sales fluctuate with demand will yield the target rate of return over the longer term.
242 Bringing power back in
the latter has to reason. And as it turns out, the pricing formula cannot be 'explained' easily. The main problem is the 'target rate of return' and the asso- ciated 'conventional' markup: since these no longer obey the rules of profit maximization, there is no way to find their unique values. In theoretical parlance, they become 'indeterminate'. Hall and Hitch (1939: 28) tried to solve the problem by making the markup a reflection of the 'community of outlook' of businessmen, while others, such as Eichner (1976), anchored the target rate of return in the firms' 'investment plans'. However, conventional economic theory does not know how to theorize airy concepts such as the 'community of outlook' and 'investment plans', as a result of which 'economic science has not yet solved its first problem - what determines the price of a commodity? ' (Robinson 1966: 79).
A possible way out of this puzzle was pointed out by Michal Kalecki (1943a), whom we have mentioned in Chapter 4. For Kalecki, the markup was not simply a vague social convention, but a measure of power: he called it the 'degree of monopoly'. 21 Monopoly power, like every other form of power, can be known only by its consequences. And for Kalecki, that consequence was the markup: the higher the markup and its associated rate of return, the greater the implied power of those who set it, and vice versa.
Pricing and incapacitating
And so the circle closes and sabotage becomes invisible. The vast majority of modern capitalists (or their managers) are 'price makers': they fix the price of their product and then let 'market forces' do the rest for them. To the naked eye they all seem keen on producing and selling as much as possible, but beyond the fac? ade the picture is very different. The specific level at which they set the price already embodies the power to incapacitate. On the one hand, the profit target and markup built into the price reflect the firm's power, while, on the other hand, that power, exercised by the high price, serves to restrict industry below its full capacity. The sabotage and the power to inflict it remain concealed, but their consequences are very real.
Is free competition free of power?
Now, up to this point, our discussion has been limited to the mainstream of administered prices. It should be added, however, that even in those isolated cases where 'free competition' is said to reign, the power to incapacitate is not at all absent. To see why this is so, consider a neoclassical 'perfectly com- petitive' firm - but instead of focusing on what it does, think of what it is unwilling to do. For illustration, take the case of mining, where prices are presumably set by global supply and demand. A reader schooled in
? 21 The precise definition was a bit more involved, but that should not detract us here.
Accumulation and sabotage 243
neoclassical theory may be tempted to conclude that, at least in such cases, the presence of market prices excludes sabotage. But it ain't necessarily so.
Mining output, much like any other output, is controlled by business. The actual production of a single firm and the number of firms in operation there- fore are bounded not by the state of industrial arts, but by what can be sold at a 'reasonable' profit. In fact, this is exactly what standard neoclassical manuals tell the owner of a perfectly competitive firm: in the long-run, have your company produce only if you expect to earn at least the normal rate of return. Otherwise, shut down.
For neoclassicists who insist on equating the normal rate of return with the marginal revenue product of capital, this stipulation simply assures efficient resource allocation. From a Veblenian standpoint, though, this unwillingness to produce for less than some conventional rate of return is the very mani- festation of industrial sabotage. Thus, although 'perfectly competitive' firms may not set prices, their productive activity - individually and in the aggre- gate - nevertheless is limited by the imperative of earning a normal rate of return.
The capitalist norm
The normal rate of return and the natural rate of unemployment
The normal rate of return of course is a fuzzy magnitude, a convention that varies among business owners and over time. The important point, however, is that this normal rate exists in the first place. With the gradual penetration of capitalist institutions, owners have come to believe that the flow of profit is a natural, orderly phenomenon. As such, profit is seen as having a more or less predetermined mean growth rate and a dispersion that varies with circumstances (expressed by the standard deviation from this mean).
According to Veblen, this development is hardly trivial. Until a few hundred years ago, profit was seen more as a coincidence than a regular feature of ownership. The main goal was to retain property, and owners of land, slaves or gold rarely expected their assets to grow 'on their own'. But under capitalism, where the business limitation of industry grows increasingly universal, the consequent profit is regarded as natural and its rate of expan- sion as normal. In this way, the strategic limitation of industry can prevail even in the absence of explicit binding arrangements.
The normality of profit has been so thoroughly accepted that the industrial limitation from which it derives is no longer self-evident. Consider the fact that since 1890, the first year for which aggregate data are available, the official US rate of unemployment averaged 7 per cent (5. 7 per cent without the 1930s). Economists, however, remain unimpressed by this fact. Indeed, that is exactly what they expect. Given that this average rate has been associ- ated with 'business as usual', most now take it to represent 'the natural rate of unemployment'. In an unconscious Orwellian bent, modern textbooks
244 Bringing power back in
casually talk about the 'full employment unemployment rate', 'unemploy- ment equilibrium' and 'over-full employment' - generally without quotation marks (see for example Parkin and Bade 1986: 282-83; and Branson 1989: 188). Even Carlyle could not have foreseen the dismal state of a society subju- gated to the economic science.
Antecedents: return and sabotage in antiquity
The power features of the capitalist normal rate of return are not without precedent. Their origins can be traced to the early emergence of the rate of interest in the Middle East some 4,500 years ago. The ancient interest rate, just like today's normal rate of return, was a matter of power and sabotage. But its institutional and societal underpinnings were radically different and are worth exploring so as to put our discussion in context. 22
The roots of the pecuniary standard are inherently negative. In almost every language, the concept of debt is associated with guilt and sin. Originally, proto-money was used for the settling of obligations, including reparations ('pay' and 'pacify' share the same root in both English and Hebrew), marriage debts, communal fines, religious offerings and, eventually, royal taxes. The ma? s? - the Sumerian term for interest - means 'kid' and 'calf', a term that developed from the earlier religious proto-tax of the ma? s? -fee. Mikneh in Hebrew means 'herd' narrowly and 'moveable property' more broadly. Similarly, the words 'pecuniary', 'fee' and 'feudal' all derive from the Latin pecus - a concept that later came to denote 'cattle', but that originally referred more broadly to 'personal chattels' and 'moveable wealth'.
Livestock etymologies and growth metaphors have led neoclassicists to conclude that ancient interest payments on debt were natural returns on productive agricultural yield. This is an erroneous interpretation for two reasons. First, although debt (along with many other concepts) was often counted in 'pastoral' units, it was considered barren throughout antiquity. Second and more straightforwardly, most lending in antiquity had nothing to do with 'investment' and therefore had no 'return' from which to deduct interest.
The institution of interest was first invented in Sumer during the third millennium BCE, from where it later spread to the Eastern Mediterranean, Greece and Rome. From their very inception, debt, credit and interest were matters of organized power. The Sumerian proto-monetary architecture was fundamentally statist. 23 It developed as a royal method of administration and accounting, a system with which the palace and temple allocated material
22 Our account of the origin of interest in this subsection draws on the work of Michael Hudson (1992; 2000a; 2004).
23 A proper, coin-denominated 'monetary system' appeared much later, in Lydia of the seventh century BCE. The term 'money' is even more recent, coming from the Roman temple of Juno Moneta, where silver and gold coins were minted during the Punic Wars.
? Accumulation and sabotage 245
provisions, organized production and collected taxes. Commercial and long- term trade accounting, wherever they existed, were part and parcel of this statist architecture.
The Sumerian debt system was very different from the capitalist one. Capitalist borrowers are usually thought of positively, as entrepreneurs who leverage their own money in order to make more money. By contrast, most Sumerian borrowers were farmers in distress, on-the-brink subjects whose dire circumstances forced them to 'mortgage' (or death-pledge) their cattle and even family members just to make ends meet. These peasants did not 'invest' their loans; they used them simply to stay alive. And since the borrowers made no productive advances, there was no reason for the interest they paid to bear any relationship to the 'efficiency' of their chattel or the 'yield' of their fields. 24
And, indeed, contrary to the ever-fluctuating capitalist normal rate of return, the standard Sumerian rate of interest never changed. It was fixed at 1/60 per month, or 20 per cent annually, and did not budge for more than a millennium. The Greek interest rate of 1/10 per annum and the Roman rate of 1/12 - although not nearly as durable as the Sumerian - were also set for long periods of time. The stability of these ancient rates reflected the pattern of agricultural seasons, a system of mathematical fractions and a set of reli- gious myths - a combination that the ruling elites gradually synthesized and locked into an inflexible architecture of pecuniary rules.
This pre-capitalist architecture, just like the capitalist one, was rooted in organized power and inflicted plenty of damage. Exorbitant interest rates dispossessed and enslaved numerous borrowers. In fact, the sabotage was so severe that ancient rulers had to announce periodic debt moratoriums, or Clean Slates, to avoid social disintegration. But this is where the similarity ends.
Pecuniary power: ancient versus capitalist
In antiquity organized power was enforced directly by royal decree and increased by the open use of force. Wealth was a subset of power, an entity whose magnitude depended on the whim of gods and the dose of violence. It had no predetermined pace of growth, positive or negative, natural or reli- gious. And whatever its erratic rate of expansion, it obviously could not have depended on a fixed rate of the interest. The latter was seen primarily as an administrative device. The ancients even forbade its compounding.
24 It seems that many poor farmers are still unable to internalize the neoclassical entrepre- neurial spirit. In India, small peasants, squeezed between high input prices and low output prices, continue to borrow simply to make ends meet. Just like their Sumerian predeces- sors, they do not invest their loans 'properly'. And since that makes them unable to meet their interest payments, many thousands end up killing themselves every year (Meeta and Rajivolochan 2006).
? 246 Bringing power back in
The capitalist order puts this logic on its head. On the surface, organized power seems to have vanished. With autonomous, growth-seeking agents engaged in voluntary transactions, the normal rate of return no longer connotes destitution and enslavement. But this is no more than an optical illusion. Paraphrasing Anatole France, the main novelty is that now 'every- one is free to sleep under the bridge'. Organized power is still very much there, albeit in a totally different form. Instead of open violence administered by state rulers, we have administered prices openly imposed by private absentee owners. On the consensual surface of the market, no one seems to hold that power. But the unshaken belief in the normal rate of return and its associated natural rate of unemployment attests to the omnipresence of power.
The pace of industry
The other limitation - perhaps less important but easier to approximate - concerns the growth of industrial capacity and output, whatever their purpose. The conventional view, both popular and academic, is that business loves growth. The more utilized the capacity and the faster its expansion, the greater the profit - or at least that's what we are told. The facts, though, tell a very different story. In reality, business can tolerate neither full-capacity utili- zation nor maximum growth. And why the aversion? Because otherwise profit would collapse to zero.
Consider again the automobile sector. Were the large car companies to decide to produce as much as possible rather than as much as the 'traffic can bear', their output could probably double on fairly short notice. And this potential is hardly unique to automobiles. Almost every modern industrial undertaking - from petroleum, through electronics, to clothing, machine tools, telecommunication, pharmaceuticals, construction, food processing and film, to name a few - tends to operate far below its full technological capacity (not to be confused with full business capacity). 11 If all industrial
11 The difference is fundamental. Conventional capacity measures consider what is feasible under the existing social order of business enterprise and production for profit, and usually estimate normal utilization to be in the 70-90 per cent range. Alternative conjectures based
? 236 Bringing power back in
undertakings were to follow the reckless example of automobiles, the relent- less pressure of oncoming goods and services would undermine tacit agree- ments and open cooperation among dominant firms and government agencies, trigger massive downward price spirals, and sooner or later end up in a Great Depression and a threat of political disintegration.
Speculating in a similar vein, Veblen (1923: 373) concluded that it was therefore hardly surprising that 'such a free run of production has not been had nor aimed at; nor is it at all expedient, as a business proposition, that anything of the kind should be allowed'. 12 Profits are inconceivable without production, but they are also impossible under a 'free run' of production. For profits to exist, business enterprise needs not only to control the direction of industrial activity, but also to restrict its pace below its full potential.
Business as usual
Conceptually, we would expect there to exist a non-linear relationship between the income share of capitalists on the one hand and their limitation of the pace of industry on the other. 13 This relationship is illustrated hypo- thetically in Figure 12. 1. The chart depicts the utilization of industrial capacity on the horizontal axis against the capitalist share of income on the vertical axis. Up to a point, the two move together. After that point, the rela- tionship becomes negative.
The reason is easy to explain by looking at extremes. If industry came to a complete standstill, capitalist earnings would be nil (bottom left point in Figure 12. 1). But capitalist earnings would also be zero if industry always and everywhere operated at full socio-technological capacity (bottom right point). Under this latter scenario, industrial considerations rather than business decisions would be paramount, production would no longer need the consent
on a material/technological limit, however, are likely to suggest far lower capacity utiliza- tion. Veblen, for one, estimated this utilization to fall short of 25 per cent (Veblen 1919: 81), a figure not much different from later estimates reported in Blair (1972: 474) and Foster (1986: Ch. 5). Interestingly, though not surprisingly, US military contractors, engaged in the most destructive form of business enterprise, sometime operate at as little as 10 per cent of their capacity - while earning superior rates of return (U. S. Congress 1991: 38).
12 A glimpse into what such a 'free run' might look like is offered by the recent experience of Japan: 'The underlying problem facing many Japanese companies', writes the Financial Times, 'is that they have misallocated capital over a long period. Instead of regarding it as a scarce resource to be used as efficiently as possible, they have pursued engineering excellence. . . . Japanese production lines are often models of automated efficiency, but less attention has been paid to whether the goods on them should be produced at all. Many companies have poured cash into projects that will never generate a return above the cost of capital' (Abrahams and Harney 1999).
13 Business limitations on the direction of industry are much more difficult to delineate and shall not be examined here.
? Accumulation and sabotage 237
? www. bnarchives. net
"Business As Usual" = Stategic Limitation of Industry
? ? ? Maximum "INDUSTRY" Minimum Sabotage (capacity utilization) Sabotage
Figure 12. 1 Business and industry
of owners, and these owners would then be unable to extract their tribute earnings. 14
In a capitalist society, 'business as usual' means oscillating between these two hypothetical extremes, with absentee owners limiting industrial activity to a greater or lesser extent. When business sabotage becomes excessive, pushing output toward the zero mark, the result is recession and low capi- talist earnings. When sabotage grows too loose, industry expands toward its societal potential, but that too is not good for business, since loss of control means 'glut' and falling capitalist earnings. For owners of capital the ideal condition, indicated by the top arc segment in Figure 12. 1, lies somewhere in between: with high capitalist earnings being received in return for letting industry operate - though only at less than full potential. Achieving this 'optimal' point requires Goldilocks tactics - neither too warm nor too cold - or what Veblen sardonically called the 'conscious withdrawal of efficiency'.
This theoretical relationship receives an astounding empirical confirma- tion from the recent history of the United States, depicted in Figure 12. 2. The
14 This hypothetical possibility was contemplated with great horror more than a century ago by The Spectator of London. In discussing workers' cooperatives, the newspaper concluded: 'They showed that associations of workmen could manage shops, mills, and all forms of industry with success, and they immensely improved the conditions of the men, but they did not leave a clear place for the masters (May 26, 1866, quoted in Marglin 1974: 73, emphasis added).
? "BUSINESS" (capital income share)
238 Bringing power back in 20
18
16
14
12
10
8
Figure 12. 2 Business and industry in the United States Note: Series are shown as 5-year moving averages.
? ? ? ? 1987
1943
2007
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 1933
1948
? ? ? ? ? ? ? ? www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 26 24 22 20 18 16 14 12 10 8 6 Unemployment (%)
4 2 0
Source: U. S.
Department of Commerce through Global Insight (series codes: INTNETAMISC for interest; ZBECON for profit; YN for national income; RUC for the rate of unemployment).
chart contrasts the success of business on the vertical scale with the limitation of industry on the horizontal. The former is measured by the income share of capitalists (profit and interest), the latter by the rate of unemployment (inverted from right to left). 15 The data clearly show the negative effect on business - both of excessive industrial sabotage until the early 1940s and of insufficient sabotage during the Second World War. 'Business as usual' was restored only after the war, with growing industrial limitations helping
15 In their empirical work, many radical political economists consider as capitalist all non- labour income - including profit, interest, proprietors' income and rent. We find this encompassing perspective deeply misleading for two reasons. The first is technical. Many proprietors work for a living, while a significant proportion of rent is imputed to owners' occupied dwellings. As a result, it is never quite clear what part of these incomes is 'capi- talist'. The second and perhaps more important reason is that the bulk of profits and interest is earned by large capitalist organizations, while most proprietors' income and rent is earned by individual owners. The former exercise enormous power, while the latter have little or none.
? Profit and Interest / National Income (%)
Accumulation and sabotage 239 capitalists move up and to the left on the chart, toward their 'optimal' income
share. 16
Taking stock and looking ahead
Building on Veblen, our discussion so far has illustrated how business and industry could be thought of as fused yet distinct spheres of capitalism. According to this framework, industry is an integrated creative process whose productivity derives from the totality of its purposefully resonating pulses. By contrast, business is a power process carried out through the prerogatives of ownership. Owning per se is an idle act. It has no productivity and therefore no bearing on industry, either positive or negative. Owners of course can impact industry indirectly. But for this impact to be profitable it has to be negative. It is only by stirring the development of industry in directions that are wasteful and harmful yet easier to control, or by strategically limiting its pace so that their own discretion doesn't become redundant, that profit can be earned. It is this threat of dissonance that enables absentee owners to lay claim to a process to which they do not directly contribute. That is how capi- talist earnings are generated.
In what follows, we concentrate specifically on the way in which business limits the pace of industry. Extending Veblen, we identify two types of sabo- tage: (1) universal business-as-usual limitations that are carried out routinely and uniformly by all firms; and (2) limitations that are unique to a single company or group of companies. Corresponding to these two types of limita- tions are two rates of return: (1) a normal rate of return that all capitalists believe they deserve; and (2) a differential rate of return that capitalists seek over and above the normal.
Pricing for power
Begin with the universal methods of sabotage. To the uninitiated, these are practically invisible. They involve no violence and force, no fire and blood, no hunger and deprivation. They do not even seem to restrict industry. For the most part, their path is clean and detached. And the reason is simple: they operate not directly, but indirectly, through the fundamental unit of the capi- talist order: price.
From price taking to price making
According to received liberal dogma, firms are 'price takers': they accept whatever price mother market gives them. The reality, though, seems to
16 A similar non-linear pattern emerges if we substitute the official rate of 'economic growth' for the rate of unemployment (on an inverted scale). However, given our mistrust of 'real' measurements, we forgo this illustration.
? 240 Bringing power back in
suggest the exact opposite. The standard practice, documented extensively and repeatedly since the 1930s, shows that most modern firms are 'price makers': they set their own price and then sell as much as possible at that price.
Neoclassicists have fought tooth and nail to deny this inverted reality. They had no other choice: to recognize price making would have pulled the rug from under conventional price theory and brought down the rest of economics. Substantively, their counterattack was a failure. Although led by some of the heaviest guns, it hardly dented the facts: price making was here to stay. Pedagogically, though, the attack was highly successful. It managed to expunge the whole debate from introductory economics textbooks, with the result that today's students know little or nothing about the controversy. A brief outline therefore seems appropriate. 17
The first to question seriously the competitive price-taking model and to emphasize the tendency toward oligopoly and monopoly was Veblen. 18 During the roaring twenties his interventions were duly ignored; but by the 1930s, with the Great Depression having opened the door to intellectual dissent, his insights began to echo. Within a few years, the neoclassicists found themselves confronted with two sets of challenges. The first were the theories of 'imperfect competition' (by Robinson 1933) and 'monopolistic competition' (by Chamberlin 1933). Many neoclassicists considered these deviations scandalous, but in due course they managed to domesticate and absorb them into their creed. Their task, though, wasn't nearly as easy with the second set of challenges. These were empirical, and they proved impos- sible to tame.
The debate opened with Gardiner Means' path-breaking work on indus- trial prices in the United States (1935a; 1935b). Means showed that there were in fact not one but two types of prices. The first were the familiar 'market prices': relatively flexible, moving up and down with supply and demand and prevalent in competitive industries. But there was also a second and hereto- fore unfamiliar type of 'administered prices': relatively inflexible, changing only infrequently, responding slowly to market conditions and typical of concentrated industries.
This duality had two far-reaching implications. The first was that prices were intimately connected to crisis - and in more than one way. Means showed that during the Great Depression, competitive industries saw massive declines in their market prices, but only moderate drops in their output and employment. The situation in concentrated industries, though, was exactly
17 For critical reviews of the pricing debate, see Blair (1972: Part IV), Lee (1984), Nitzan (1990) and Lee and Irvin-Lessmann (1992).
18 '[I]t is very doubtful if there are any successful business ventures within the range of the modern industries from which the monopoly element is wholly absent. They are, at any rate, few and not of great magnitude. And the endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be' (Veblen 1904: 54).
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the opposite: prices declined slightly, while production and payroll collapsed, sometimes by as much as 80 per cent. In other words, the Great Depression occurred mostly in concentrated industries whose prices proved relatively inflexible. Seen from a Veblenian perspective, administered prices were nothing but a mechanism of industrial sabotage.
The second implication was theoretical and general. Profit maximization requires that firms make the best out of the circumstances they face. Administered prices, though, respond only partly or not at all to market conditions. This discrepancy means that companies that set such prices do not make the best out of the circumstances, and, therefore, that they do not maxi- mize their profit. The conclusion was simple and painful: the more prevalent administered prices become, the greater the irrelevance of standard price dogma. And since, according to study after study, most prices are adminis- tered, the agony must be considerable. 19
The markup and the target rate of return
The first explicit confirmation of this painful conclusion came a few years later, with the publication of Hall and Hitch's work on business behaviour (1939). Whereas Means focused on the pattern of prices, Hall and Hitch investigated those who set them. They interviewed company officials in Britain, asking them to explain how they determined prices. And their conclu- sions were stunning, at least by neoclassical standards. It turned out that firms did not follow the neoclassical recipe of equating marginal revenues and cost; that they did not know what these marginal magnitudes meant; and, most embarrassingly, that they did not care about profit maximization to begin with. The process that firms did follow was totally different: they started by calculating what they considered to be 'normal' unit cost (namely the cost at 'normal' levels of output); they tacked onto this cost a 'conven- tional' markup; and they kept the resulting price stable in the face of cyclical variations in demand.
Later on, these findings were augmented by the notion of a 'target rate of return'. According to the empirical research of Kaplan, Dirlam and Lanzillotti (1958), modern firms, particularly the leading ones, begin with a long-term target rate of profit, and then back-calculate the markup necessary to realize this rate of return over the longer haul. 20
This method seems straightforward - and it probably is for the price- setting firm. But not so for the theorist. Whereas the former merely has to act,
19 For up-to-date surveys of the evidence, see Blinder et al. (1998) and Fabiani et al. (2006).
20 For instance, a firm that wants to achieve an average 20 per cent return on an investment of $1 billion needs to earn an average of $200 million in profit. If the 'normal' volume is 100 million units and the 'normal' unit cost is $20, the firm needs to add a 10 per cent markup and set its unit price at $22. With these assumptions, keeping the price fixed while letting
? sales fluctuate with demand will yield the target rate of return over the longer term.
242 Bringing power back in
the latter has to reason. And as it turns out, the pricing formula cannot be 'explained' easily. The main problem is the 'target rate of return' and the asso- ciated 'conventional' markup: since these no longer obey the rules of profit maximization, there is no way to find their unique values. In theoretical parlance, they become 'indeterminate'. Hall and Hitch (1939: 28) tried to solve the problem by making the markup a reflection of the 'community of outlook' of businessmen, while others, such as Eichner (1976), anchored the target rate of return in the firms' 'investment plans'. However, conventional economic theory does not know how to theorize airy concepts such as the 'community of outlook' and 'investment plans', as a result of which 'economic science has not yet solved its first problem - what determines the price of a commodity? ' (Robinson 1966: 79).
A possible way out of this puzzle was pointed out by Michal Kalecki (1943a), whom we have mentioned in Chapter 4. For Kalecki, the markup was not simply a vague social convention, but a measure of power: he called it the 'degree of monopoly'. 21 Monopoly power, like every other form of power, can be known only by its consequences. And for Kalecki, that consequence was the markup: the higher the markup and its associated rate of return, the greater the implied power of those who set it, and vice versa.
Pricing and incapacitating
And so the circle closes and sabotage becomes invisible. The vast majority of modern capitalists (or their managers) are 'price makers': they fix the price of their product and then let 'market forces' do the rest for them. To the naked eye they all seem keen on producing and selling as much as possible, but beyond the fac? ade the picture is very different. The specific level at which they set the price already embodies the power to incapacitate. On the one hand, the profit target and markup built into the price reflect the firm's power, while, on the other hand, that power, exercised by the high price, serves to restrict industry below its full capacity. The sabotage and the power to inflict it remain concealed, but their consequences are very real.
Is free competition free of power?
Now, up to this point, our discussion has been limited to the mainstream of administered prices. It should be added, however, that even in those isolated cases where 'free competition' is said to reign, the power to incapacitate is not at all absent. To see why this is so, consider a neoclassical 'perfectly com- petitive' firm - but instead of focusing on what it does, think of what it is unwilling to do. For illustration, take the case of mining, where prices are presumably set by global supply and demand. A reader schooled in
? 21 The precise definition was a bit more involved, but that should not detract us here.
Accumulation and sabotage 243
neoclassical theory may be tempted to conclude that, at least in such cases, the presence of market prices excludes sabotage. But it ain't necessarily so.
Mining output, much like any other output, is controlled by business. The actual production of a single firm and the number of firms in operation there- fore are bounded not by the state of industrial arts, but by what can be sold at a 'reasonable' profit. In fact, this is exactly what standard neoclassical manuals tell the owner of a perfectly competitive firm: in the long-run, have your company produce only if you expect to earn at least the normal rate of return. Otherwise, shut down.
For neoclassicists who insist on equating the normal rate of return with the marginal revenue product of capital, this stipulation simply assures efficient resource allocation. From a Veblenian standpoint, though, this unwillingness to produce for less than some conventional rate of return is the very mani- festation of industrial sabotage. Thus, although 'perfectly competitive' firms may not set prices, their productive activity - individually and in the aggre- gate - nevertheless is limited by the imperative of earning a normal rate of return.
The capitalist norm
The normal rate of return and the natural rate of unemployment
The normal rate of return of course is a fuzzy magnitude, a convention that varies among business owners and over time. The important point, however, is that this normal rate exists in the first place. With the gradual penetration of capitalist institutions, owners have come to believe that the flow of profit is a natural, orderly phenomenon. As such, profit is seen as having a more or less predetermined mean growth rate and a dispersion that varies with circumstances (expressed by the standard deviation from this mean).
According to Veblen, this development is hardly trivial. Until a few hundred years ago, profit was seen more as a coincidence than a regular feature of ownership. The main goal was to retain property, and owners of land, slaves or gold rarely expected their assets to grow 'on their own'. But under capitalism, where the business limitation of industry grows increasingly universal, the consequent profit is regarded as natural and its rate of expan- sion as normal. In this way, the strategic limitation of industry can prevail even in the absence of explicit binding arrangements.
The normality of profit has been so thoroughly accepted that the industrial limitation from which it derives is no longer self-evident. Consider the fact that since 1890, the first year for which aggregate data are available, the official US rate of unemployment averaged 7 per cent (5. 7 per cent without the 1930s). Economists, however, remain unimpressed by this fact. Indeed, that is exactly what they expect. Given that this average rate has been associ- ated with 'business as usual', most now take it to represent 'the natural rate of unemployment'. In an unconscious Orwellian bent, modern textbooks
244 Bringing power back in
casually talk about the 'full employment unemployment rate', 'unemploy- ment equilibrium' and 'over-full employment' - generally without quotation marks (see for example Parkin and Bade 1986: 282-83; and Branson 1989: 188). Even Carlyle could not have foreseen the dismal state of a society subju- gated to the economic science.
Antecedents: return and sabotage in antiquity
The power features of the capitalist normal rate of return are not without precedent. Their origins can be traced to the early emergence of the rate of interest in the Middle East some 4,500 years ago. The ancient interest rate, just like today's normal rate of return, was a matter of power and sabotage. But its institutional and societal underpinnings were radically different and are worth exploring so as to put our discussion in context. 22
The roots of the pecuniary standard are inherently negative. In almost every language, the concept of debt is associated with guilt and sin. Originally, proto-money was used for the settling of obligations, including reparations ('pay' and 'pacify' share the same root in both English and Hebrew), marriage debts, communal fines, religious offerings and, eventually, royal taxes. The ma? s? - the Sumerian term for interest - means 'kid' and 'calf', a term that developed from the earlier religious proto-tax of the ma? s? -fee. Mikneh in Hebrew means 'herd' narrowly and 'moveable property' more broadly. Similarly, the words 'pecuniary', 'fee' and 'feudal' all derive from the Latin pecus - a concept that later came to denote 'cattle', but that originally referred more broadly to 'personal chattels' and 'moveable wealth'.
Livestock etymologies and growth metaphors have led neoclassicists to conclude that ancient interest payments on debt were natural returns on productive agricultural yield. This is an erroneous interpretation for two reasons. First, although debt (along with many other concepts) was often counted in 'pastoral' units, it was considered barren throughout antiquity. Second and more straightforwardly, most lending in antiquity had nothing to do with 'investment' and therefore had no 'return' from which to deduct interest.
The institution of interest was first invented in Sumer during the third millennium BCE, from where it later spread to the Eastern Mediterranean, Greece and Rome. From their very inception, debt, credit and interest were matters of organized power. The Sumerian proto-monetary architecture was fundamentally statist. 23 It developed as a royal method of administration and accounting, a system with which the palace and temple allocated material
22 Our account of the origin of interest in this subsection draws on the work of Michael Hudson (1992; 2000a; 2004).
23 A proper, coin-denominated 'monetary system' appeared much later, in Lydia of the seventh century BCE. The term 'money' is even more recent, coming from the Roman temple of Juno Moneta, where silver and gold coins were minted during the Punic Wars.
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provisions, organized production and collected taxes. Commercial and long- term trade accounting, wherever they existed, were part and parcel of this statist architecture.
The Sumerian debt system was very different from the capitalist one. Capitalist borrowers are usually thought of positively, as entrepreneurs who leverage their own money in order to make more money. By contrast, most Sumerian borrowers were farmers in distress, on-the-brink subjects whose dire circumstances forced them to 'mortgage' (or death-pledge) their cattle and even family members just to make ends meet. These peasants did not 'invest' their loans; they used them simply to stay alive. And since the borrowers made no productive advances, there was no reason for the interest they paid to bear any relationship to the 'efficiency' of their chattel or the 'yield' of their fields. 24
And, indeed, contrary to the ever-fluctuating capitalist normal rate of return, the standard Sumerian rate of interest never changed. It was fixed at 1/60 per month, or 20 per cent annually, and did not budge for more than a millennium. The Greek interest rate of 1/10 per annum and the Roman rate of 1/12 - although not nearly as durable as the Sumerian - were also set for long periods of time. The stability of these ancient rates reflected the pattern of agricultural seasons, a system of mathematical fractions and a set of reli- gious myths - a combination that the ruling elites gradually synthesized and locked into an inflexible architecture of pecuniary rules.
This pre-capitalist architecture, just like the capitalist one, was rooted in organized power and inflicted plenty of damage. Exorbitant interest rates dispossessed and enslaved numerous borrowers. In fact, the sabotage was so severe that ancient rulers had to announce periodic debt moratoriums, or Clean Slates, to avoid social disintegration. But this is where the similarity ends.
Pecuniary power: ancient versus capitalist
In antiquity organized power was enforced directly by royal decree and increased by the open use of force. Wealth was a subset of power, an entity whose magnitude depended on the whim of gods and the dose of violence. It had no predetermined pace of growth, positive or negative, natural or reli- gious. And whatever its erratic rate of expansion, it obviously could not have depended on a fixed rate of the interest. The latter was seen primarily as an administrative device. The ancients even forbade its compounding.
24 It seems that many poor farmers are still unable to internalize the neoclassical entrepre- neurial spirit. In India, small peasants, squeezed between high input prices and low output prices, continue to borrow simply to make ends meet. Just like their Sumerian predeces- sors, they do not invest their loans 'properly'. And since that makes them unable to meet their interest payments, many thousands end up killing themselves every year (Meeta and Rajivolochan 2006).
? 246 Bringing power back in
The capitalist order puts this logic on its head. On the surface, organized power seems to have vanished. With autonomous, growth-seeking agents engaged in voluntary transactions, the normal rate of return no longer connotes destitution and enslavement. But this is no more than an optical illusion. Paraphrasing Anatole France, the main novelty is that now 'every- one is free to sleep under the bridge'. Organized power is still very much there, albeit in a totally different form. Instead of open violence administered by state rulers, we have administered prices openly imposed by private absentee owners. On the consensual surface of the market, no one seems to hold that power. But the unshaken belief in the normal rate of return and its associated natural rate of unemployment attests to the omnipresence of power.
