No More Learning

Each observation measures the ratio between the consensus forecast made in the same month during the previous year and the actual EPS for the entire year. For example, the data point for January 1999 would express the ratio between the forecast made in January 1998 for 1999 EPS and the actual EPS in 1999.
The figure depicts several clear patterns:
1 Despite the short forecast period, the forecast errors are very large. According to the hype index, the range of errors is 69 per cent - from a maximum overshooting of 43 per cent (hype reading of 1. 43 in May 1991), to a maximum undershooting of 26 per cent (hype reading of 0. 74 in May 1995). The standard deviation of the errors is 17 per cent - three times larger than the average EPS growth rate of 5. 8 per cent.
2 Over time, the errors tend to 'average out'. For the period 1987-2006, the mean value of the hype index is 1. 02 - only marginally highly than a
214 Capitalization
neutral value of 1. In the long run, strategist expectations oscillate around
actual earnings.
3 The oscillations of estimates and errors are anything but random. The
estimates are usually set at the beginning of the year as some positive multiple of current earnings (averaging 1. 08), and are then adjusted over the next 11 months. The ex post errors follow a fairly stylized and pretty long cycle. The peak-to-peak duration of this cycle is four to five years - two to five times longer than the forecast period. The errors are also correlated - albeit inversely - with the direction of earnings. Recall our critique in Chapter 9 of the common belief that good times bring exces- sive exuberance and bad times generate undue dread. It seems that in our case here the opposite is true. The strategists' macro models appear to underestimate earning when they are rising (in 1988, 1993-96 and 2003- 6) and overestimate them when they are stable or falling (1989-92 and 1997-2002).
Part IV
Bringing power back in
12 Accumulation and sabotage
The truly great fortunes are made only by those who grab hold of the nation's nervestrings.
--B. Traven, The White Rose
The categories of power
In the introductory chapter to his Grundrisse (1857: Ch. 1), Marx struggles with the difficulty of picking a theoretical starting point. The choice of cate- gories, he points out, is complicated by considerations of abstraction and specificity, as well by questions of historical progression. The capitalist order, like any other social order, enfolds its preceding histories. Each of its cate- gories, Marx observes, embodies not only contemporaneous relations with other categories, but also deep lineages to a past from which it emerged and which it negates.
Our own story of capital focuses on power. But in order to get to power we first had to critique the existing categories, relations and histories of political economy. Common to these theories and explanations is their unwillingness or inability to deal with the power underpinnings of capital. Our journey to explore this difficulty has taken us through various territories: the social myths of Newtonian mechanics; the bifurcation of 'politics' and 'economics' and the academic splintering of the social sciences; the creed of efficiency and the impossibility of quantifying productivity; the distinction between the 'real' and the 'nominal' and the tortured relationship between tangible wealth and financial markets; and, finally, the history of capitalization from Middle- Age discounting to present-day asset pricing.
Capitalization stands at the centre of contemporary capitalism. The discounting to present value of expected future earnings is now the organizing 'economic' principle that shapes and directs daily life on our planet. But as our journey has repeatedly suggested, capitalization is not merely an 'economic' category. It is an encompassing mode of power.
Until the emergence of capitalism, power was largely separate from and situated above the processes of production and consumption. It was adminis- tered by large doses of force sprinkled with small promises, mostly for after-
218 Bringing power back in
life fulfilment. The new regime of capital introduced a whole new technology of power, one that penetrates and shapes the very souls of its subjects. It invented the concept of 'ideology' and the institution of 'public education'; it developed mass psychology, mass culture and mass consumption; it gave rise to a one-dimensional man; it opened up domains that prior rulers could not even fathom. These inventions have made capital the most invasive, encom- passing and flexible form of organized power ever known to humanity. And since these power processes all bear on profitability and therefore are all discounted into asset prices, to study capitalization is to study the nature and evolution of organized power in contemporary capitalism.
Thus, our starting point in this part of the book is that the capitalization of earnings is not a narrow offshoot of production but a broad representation of power. Pecuniary earnings, we argue, do not have a material 'source', whether counted in utils or labour time. Instead, they are the symbolic representation of a struggle - a conflict between dominant capital groups, acting against opposition, to shape and restructure the course of social reproduction at large. In this struggle, what gets accumulated is not productivity as such, but the ability to subjugate creativity to power.
Theorizing this capitalized struggle, however, is anything but trivial. The immediate problem, again, is the categories themselves. Nowadays, almost every concept that pertains to capital embodies or connotes production and consumption. The notions of 'business' and 'industry', 'investment' and 'private ownership', the 'normal rate of return' and the 'natural rate of unem- ployment', 'commodity pricing' and 'wealth maximizing', 'equity' and 'debt', 'profit' and 'interest', the 'corporation' and its 'material' and 'immaterial' assets, 'accumulation' and 'circulation', and, finally, the so-called 'fractions' of capital - are all articulated, understood and used as economic entities.
This prejudice may serve neoclassical and Marxist arguments, but it under- mines our own: given our focus on power, the 'economic' bias of these concepts makes it impossible for us to use any of them 'as is'. And so, just as Marx had to peer through the voluntary equivalences of liberalism in order to articulate exploitation, we too find ourselves having to tear through the economic language of capital in order to see the real picture of capital as power.
And the task is certainly tricky. On the one hand, we need to translate the existing categories, one by one and in relation to each other, so that slowly, out of the fac? ade of material productivity there can emerge the power nature of capital. On the other hand, we must keep in mind the conventional meaning of these categories, so that we can refer to prevailing explanations and measures. And then there are several ideas that require new categories altogether.
A new language can easily be misunderstood, so we tread as carefully as we can. We articulate our argument at length, in detail and with occasional repetition - and we ask our reader to suspend judgement. You are likely to find the argument easier to assess when you reach the end of our story.
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Perhaps the first attempt to develop a power theory of capital was offered at the turn of the century by Thorstein Veblen. Later, his student and colleague, Lewis Mumford, expanded some of Veblen's themes into a sweeping theory of power civilizations. Both frameworks build on the primal interaction between creativity and power. Veblen, whom we deal with in the present chapter, associated this interaction with a distinction between industry and business. Mumford, to whom we turn in the next chapter, saw this interaction as part of a conflict between democratic and totalitarian tech- nologies. Their profound insights, unduly neglected by political economists, deserve closer scrutiny and offer bases for further development.
Veblen's world
Veblen's view stood in sharp contrast to the utilitarian dogma of his day. While his neoclassical peers preached the gospel of hedonic pleasure and equilibrium as the governing mechanism, or at least the underlying ideal, of all societies, Veblen focused on conflict. Unlike Marx, though, he emphasized not only the conflict between owners and non-owners, but also what he saw as a broader clash between creativity and power. In his opinion, this wider conflict pervades all societies, appearing in different guises at different times. In the modern capitalist order, it takes the form of a fundamental distinction between industry and business.
Industry and business
For Veblen, industry and business are two increasingly distinct spheres of human activity. Industry constitutes the material context of capitalism, although industry is not unique to capitalism. When considered in isolation from contemporary business institutions, the principal goal of industry, its raison d'e^tre according to Veblen, is the efficient production of quality goods and services for the betterment of human life. The hallmark of industry is the so-called 'machine process', a process that Veblen equated not merely with the use of machines, but more broadly with the systematic organization of production and the reasoned application of knowledge. Above all, Veblen accentuated the holistic nature of industry. The neoclassical emphasis on individualism and its Robinson Crusoe analogies of the innovative 'entre- preneur' and single 'consumer' are misleading myths. The machine process is a communal activity; its productivity derives, first and foremost, from cooperation and integration. The reasons are both historical and spatial.
First, modern industrial production is contingent on what Veblen called the 'technological heritage' of society, the general body of 'community knowledge' grounded in the 'accumulated wisdom of the past' (Veblen 1908: 326-29). Second, over time the gradual accumulation of knowledge makes production more spatially interdependent. 'Evidently', writes Veblen 'the state of industrial arts is of the nature of a joint stock, worked out, held,
220 Bringing power back in
carried forward, and made use of by those who live within the sweep of the industrial community. In this bearing the industrial community is a joint going-concern' (1923: 64). Following Werner Sombart, he emphasized the comprehensive and encompassing nature of industry, in that it 'draws into its scope and turns to account all branches of knowledge that have to do with the material sciences, and the whole makes a more or less delicately balanced complex of sub-processes' (1904: 7-8).
Given this growing interdependency of both knowledge and processes, says Veblen, the efficiency of industrial production increasingly hinges on synchronization and standardization of both production and wants (an issue resurrected half a century later by Galbraith with his 'revised sequence' and attack on 'consumer sovereignty'). As a highly integrated system, industry is strongly disposed toward elaborate planning and close cooperation. Ultimately, it calls for 'solidarity in the administration of any group of related industries' and, more generally, 'for solidarity in the management of the entire industrial traffic of the community' (Veblen 1904: 17).
Although Veblen's emphasis on integration and synchronization hardly seems earthshaking, mainstream and to some extent Marxist economists have systematically managed to ignore two of its key implications. One implication of integration and synchronization is that distribution cannot possibly be based on individual factor productivity or atomized labour time. Consequent to this conclusion, the other implication is that distribution should be sought in the realm of power.
This is where business comes into the picture. According to Veblen, busi- ness differs from industry in both methods and goals. Business enterprise means investment for profit. 1 It proceeds through purchase and sale toward the ulterior end of accumulated pecuniary wealth. While industry is a mani- festation of the 'instinct of workmanship', business is a matter of ownership and power; whereas the former requires integration, cooperation and plan- ning throughout society, the latter depends and thrives on conflict and antag- onism among owners and between owners and the underlying population.
The two languages
These profound differences have crystallized into two separate languages. Unlike industrial activity, with its tangible, material categories, business traffic and achievements are counted strictly in pecuniary terms. Economists insist on reducing 'nominal' business magnitudes to 'real', utilitarian units, though that insistence merely attests to their pre-capitalist habit of thinking. As we have seen earlier in the book, this reduction is impossible to achieve. But even if the conversion proved feasible, according to Veblen the capitalists couldn't care less. Under the price system, he pointed out,
? 1 Unless noted otherwise, we use profit loosely to denote capital income in general.
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men have come to the conviction that money-values are more real and substantial than any of the material facts in this transitory world. So much so that the final purpose of any businesslike undertaking is always a sale, by which the seller comes in for the price of his goods; and when a person has sold his goods, and so becomes in effect a creditor by that much, he is said to have 'realized' his wealth, or to have 'realized' his holdings. In the business world the price of things is a more substantial fact than the things themselves.
(Veblen 1923: 88-89, emphases added)
The pecuniary nature of business terminology is not a mere accounting convention; it is the very gist of business enterprise.
At first sight, Veblen's separation between industry and business seems to resemble Marx's distinction between simple reproduction of use value (C? M? C) and expanded reproduction of exchange value (M? C? M? ) - the former representing the life cycle of the workers/creators, the latter of the capitalists/rulers. There is a crucial difference, however. Marx used a single material unit - abstract labour - to measure both processes. By contrast, Veblen began at the outset with two distinct categories: heterogeneous mate- rial units for industry and a universal pecuniary unit for business. This duality enabled him to avoid the Marxist Transformation Problem altogether: prices and accumulation are business magnitudes, and hence their determination cannot be attributed, at least not in any straightforward way, to the complex and largely intractable sphere of industrial interactions.
According to Veblen, unlike industry in the abstract, capitalist industry is subordinated to business ends; its aim is no longer serviceability and liveli- hood, but profit. Simple as it seems, this hierarchy inverts conventional economic reasoning. Being a quest for profit, argues Veblen, business enter- prise is a claim on pecuniary earnings. It is wholly and only an act of distribu- tion. The objects over which profits constitute an effective claim are created elsewhere, in the industrial sphere (as well as in nature). Yet, given that capi- talist industry is carried on for the sake of business, it follows that the primary line of causality runs not from production to distribution, but from distribu- tion to production. And if causality is a guide for analysis, the study of capi- talism should begin with business, not industry.
Indeed, on its own, industry provides no insight into distribution. Anticipating and dismissing the Cambridge Controversy more than half a century before it arose, Veblen pointed out quite bluntly that J. B. Clark's marginal productivity theory was wishful thinking. In order to explain distri- bution by productivity, we must first identify the productivity of each indi- vidual factor of production. Yet this identification, he said, could not be achieved because the so-called economic inputs did not possess any individual productivity to begin with.
222 Bringing power back in
The immaterial equipment
As already noted, Veblen viewed industrial activity as an integrated commu- nity process centred on the 'technological heritage' of society. On the surface, this view may look similar to prevailing convictions, popular since Galbraith (1958; 1967), that emphasize the growing significance of technology vis-a`-vis the traditional factors of production - i. e. land, labour and capital.
That is not what Veblen had in mind, however. In his opinion, technology - or the 'immaterial equipment' of society, as he liked to call it - was not just another 'factor of production', however important. Instead, it was the vital cultural substance that made raw materials, machines and physical human labour useful in the first place: 'To say that these minerals, plants and animals are meaningful - in other words, that they are economic goods - means that they have been brought within the sweep of the community's knowledge of ways and means' (Veblen 1908: 329). Without this 'immaterial equipment', he argued, the physical factors of production were economically meaningless objects.
For instance, the usefulness of any given computer depends crucially on the current state of technology. With the arrival of new software, the hard- ware quickly ends up in the junk heap; the new technology makes it socially obsolete, and although it may have lost none of its operational features, it is no longer a 'capital good'. Or rolling history in reverse, a modern factory producing semiconductors would have been a worthless (and indeed mean- ingless) collection of physical objects during Veblen's time - first, because it could not have been operated; and second, because its output would have had no perceptible use. In these and all other cases, the transformation of a phys- ical object into an economically useful capital good can neither lead nor lag the existing 'state of industrial arts'. The same logic applies to labour power and raw materials. A jungle tribesman would be lost in a modern factory, much as a bank manager would be lost in the Sahara desert. Similarly, ancient stone utensils are as useless today as was petroleum before the invention of modern combustion engines.
Labour, land and capital goods are obviously essential for production, but only because they are part of a comprehensive social and cultural process. It hence 'seems bootless to ask', argued Veblen, although few neoclassicists were listening, 'how much of the products of industry or of its productivity is to be imputed to these brute forces, human and non-human, as contrasted with the specifically human factors that make technological efficiency' (1908: 349-50). In short, as the industrial system grows in complexity, the produc- tivity theory of distribution becomes an oxymoron.
To illustrate the 'holistic' nature of contemporary industry, consider the automobile sector. Its research and development process incorporates knowl- edge from fields as diverse as mathematics, physics, chemistry, biology, metallurgy, economics, demography, sociology and politics. Its production relies on coordinating the interaction of raw materials, labour, assembly facil-
Accumulation and sabotage 223
ities, infrastructure, transportation and distribution systems in numerous countries. Finally, development, production and consumption are all path- dependent. For example, the emergence of large-scale petroleum refining, suburbanization and the highway system accelerated automobile production in the twentieth century, while congestion and environmental limits will likely hinder it in the twenty-first.
In this increasingly complex context, with technology being temporally cumulative, spatially interdependent and intermingled with politics, it is prac- tically impossible as well as theoretically inconceivable to even identify all 'inputs', let alone determine their separate productive contributions. And that is merely the first step.
The hand of power
Our automobile example shows that the industrial process is comprehensive and integrated. But that in itself does not make it 'efficient'. The added diffi- culty emerges because, according to Veblen, industry is subjugated to busi- ness. The compass that directs the production of automobiles in our example is corporate earnings - yet contrary to the various doctrines of political economy, says Veblen, these earnings depend not on efficiency, but on 'sabo- tage'. Most generally, the income of an owner is proportionate not to the specific productive contribution of his or her input, and not even to the exploitation of productive workers - but rather to the overall damage that an owner can inflict on the industrial process at large.
The implication is that every bit of the industrial process is touched by the hand of power. In the case of automobile production, every aspect - from environmental considerations, suburbanization and the highway system, through the global coordination of manufacturing and the conditioning of workers and consumers, to the development process and the basic science - is intermingled with power. And so, even if we were somehow able to miracu- lously conjure up the distinct connections between these many 'inputs' and their automobile 'output', the result would reflect not productivity per se, but the control of productivity for capitalist ends.
From this viewpoint, it is impossible to speak of a depoliticized economy as the liberals do, or of a separation between economic exploitation and polit- ical oppression as the Marxists articulate. The basic distinction, rather, is between power and creativity, and the task is to analytically disentangle their specifically capitalist incarnations of industry and business.
The social hologram
The whole picture
Metaphorically, the interaction of industry and business can be thought of as a social hologram. The concept of the hologram, alluded to earlier in the
224 Bringing power back in
book, was invented in the late 1940s by the Hungarian-British physicist Denis Gabor, an invention for which he later won the Nobel Prize. Technically, the hologram is a photographic method that uses a laser beam to record and then read and project the interference pattern of incidental waves. But it is much more than a mere technical gadget. Seen as a conceptual approach, the holo- gram has immense potential implications that go far beyond photography.
To illustrate the underlying principle, think of a pond into which three pebbles are dropped simultaneously. These three incidental 'events' create a structure of evenly spreading - and intersecting - waves throughout the pond. Now, suppose that we were to freeze the pond instantaneously, pick up the top sheet of ice containing the wave pattern, and then drop it to the ground so that it shatters to pieces. Because of the curvature of the waves, each piece, no matter how small or from which part of the pond, will contain enough infor- mation, a bit fuzzy but nonetheless complete, to trace the three events. All we need to do is to 'extend' the partial arcs on the piece into complete circles and then find their centres. Our ability to do so turns each piece into a holo gramma - the ancient Greek for the 'whole picture'. 2
Since its invention, Gabor's hologramic concept has been extended to the study of physics and neuro-psychology, among other areas. 3 Without implying comparable precision, it seems that Veblen's conception of industry and business could also benefit from the hologramic metaphor. In this meta- phor, society is the pond, and each human pulse - a new idea, a realignment of institutions, people or machines, a particular social transformation of matter and energy - is a drop of a pebble. The resulting social hologram is temporal as well as spatial. In its most generalized conceptualization, it encompasses the whole spectrum of contemporary human activity along with all of its historical lineages.
Now, in this metaphor, every social creation - and therefore every good and service - can be thought of as a slice of this hologram. To the naked eye, these slices may appear as distinct particles. Yet each and every one of them embodies the entire wave-like interaction of all human pulses, past and present, positive or negative.
Seen from this perspective, the conventional input-output ideology becomes a misleading simplification. It focuses on first-order relations between the observed (or rather seemingly observable) quantities of the indi- vidual particles, while ignoring the invisible but far more important multi- layered fusion of social, political and technological impulses without which the individual particles could not be thought of as 'inputs' or 'outputs' in the first place.
2 One of the earliest - and most highly imaginative - extensions of the hologramic model into understanding both consciousness and the cosmos is Itzhak Bentov's Stalking the Wild Pendulum (1977). The pond metaphor is taken from his book.
3 In physics, the innovator was David Bohm (Bohm 1980; Bohm and Peat 1987; Hiley and Peat 1987). In neuro-psychology it was Karl Pribram (1971).
? Accumulation and sabotage 225
Unfortunately, though, the social impulses that make up this hologramic fusion cannot be assigned objective individual weights commensurate with their separate 'contributions', whether productive or counterproductive. Unlike natural events, these impulses are social in nature and inter-subjective in interpretation. Although each of them is 'present' in every social product, the extent of that presence is impossible to quantify objectively. And that impossibility pretty much seals the fate of any theory attempting to root distribution in objective productivity: the quantitative input-output structure of production cannot be mapped because it does not exist, and what does not exist cannot be a basis for theory that purports to measure it.
Resonance and dissonance
The alternative is to think of this hologramic interaction in its totality. A single pulse still means little. A repeated pulse creates a pattern. A repeated pulse coming at a regular interval - i. e. at a given frequency - creates a styl- ized oscillating pattern.
Oscillators pulsing at their so-called natural frequency tend to 'speak' easily with other oscillators that beat at the same or similar frequency. Their co-vibrations are said to 'resonate'. Resonant systems are energy-efficient, requiring minimal energy both to sustain and amplify their vibrations. They are also self-synchronizing, tending to recali- brate and pull in outliers that beat at slightly different frequencies. Finally, they pervade the universe - all the way from the structure of the atom, through living systems, to the movement of celestial bodies.
Metaphorically, we can think of Veblen's industry as a resonant system. Its purpose is to better human life efficiently, and that purpose can best be achieved through reasoned coordination and integration; that is, through a resonant system whose numerous social pulses are organized so that they beat at purposeful and mutually reinforcing frequencies. What constitutes a reso- nant industry - and, indeed, the very 'good life' its resonance tries to achieve - is of course open-ended. It is up to society to decide these things. And such decisions, since they concern society as a whole, become more meaningful as they grow more democratic.
This articulation of industry yields a notion of productivity that is very different from the one used in conventional political economy. Neoclassicists and Marxists think of 'productive efficiency' in terms of objective inputs and outputs. The goal is output, and efficient processes are those that produce a given output with the minimal amount of inputs. This definition, though, cannot be applied to the analytical notion of a resonant industry for two basic reasons.
First, the ends and means of industry do not have objective quanta. When a single person assesses the relationship of a well-defined set of inputs and a single output, the measurement may seem unambiguous. But as we have seen in Chapter 8, the illusion of objectivity quickly dissipates once we start to aggregate, and it disappears completely when we deal with society as whole.
226 Bringing power back in
At that level, the magnitudes can only be measured inter-subjectively. This inter-subjectivity can take various forms. It can be enforced by a dictator or an oligarchy; it can be imposed by capitalist power through the guise of voluntary exchange; or it can be decided openly and democratically, through a broad participatory process in which a resonance-seeking society conscien- tiously assigns quantities to its preferences and methods. The last measure, representing our articulation of industry, obviously is inconsistent with any objective definition of efficiency.
The second reason is that the ends are not necessarily separate from the means. Standard measures of efficiency treat inputs as something to be mini- mized and outputs as something to be maximized - but that approach is meaningful only if the two categories are mutually exclusive. From the view- point of a resonant industry, though, the ends and means are not mutually exclusive: the creativity, joy and comfort of those who produce are as impor- tant as what they produce. And since the very process of bettering human life is part and parcel of that better life, the 'inputs' get mingled with the 'outputs' and the conventional concept of efficiency breaks down. Instead of an objec- tively given ratio of outputs to inputs, productivity becomes what society makes it to be: the democratically articulated 'good life' per person.
With this alternative concept in mind, consider now the realm of business. Although endlessly crisscrossing that of industry, the sphere of business tends to pulse at different frequencies - different from each other and different from that of industry. The main purpose of business is differential return. At the disaggregate level, this goal compels capitalists, as individuals and in groups, to act at cross purposes, such that each tends to beat at a different frequency. The aggregate picture is somewhat different. As we have seen in Part III, at its most general level business has its own super-resonance, so to speak - a reso- nance manifested through the religious adherence of all capitalists to the universal commands of capitalization. But this super-resonance of business conflicts with that of industry. It has to.
Now, it is true - and here we differ from Veblen and side with Marx - that business can and does 'propel' industry. It pushes human beings, organiza- tions and institutions into a state of hyperactivity, constantly shaping and restructuring their interactions. But this propulsion - and here Veblen was right - does not and cannot make industry productive, by definition. If the propulsion resonates with industry - that is, if it serves the inter-subjectively defined 'good life' - it becomes part of industry. But then, since industry is open to all and therefore inherently non-profitable, the propulsion ceases to be a business proposition. The only way to make a profit is through disso- nance. It is only by propelling industry in ways that interfere with and partly hamper its open integration, coordination and the well-being of its partici- pants that business earnings can be appropriated and capital accumulated.
Of course, like all metaphors, this one too shouldn't be taken literally, but as a mental framework to help us imagine alternative explanations. The task
Accumulation and sabotage 227 now is to explore precisely how business undermines industry and the way in
which their interaction can inform a concrete theory of capital as power.
Absentee ownership and strategic sabotage
The natural right of investment
Over the long term, argued Veblen, output depends mostly on the size of the population and the scope of the industrial arts; 'tangible assets' are relatively insignificant. Throughout history, the occasional destruction of material equipment and resources has usually been a relatively minor inconvenience. In Ireland, for example, the encouragement of illiteracy by the British occu- piers hindered development much more effectively than the destruction of the country's infrastructure. Even in the twentieth century, when physical accu- mulation had reached unprecedented levels, it took war-stricken Germany and Japan only a few years to launch their 'economic miracles'.
In the short term, however, tangible equipment is significant, and it is here, according to Veblen, that ownership comes into the picture:
For the transient time being, therefore, any person who has the legal right to withhold any part of the necessary industrial apparatus or materials from current use will be in a position to impose terms and exact obedi- ence, on pain of rendering the community's joint stock of technology inoperative for that extent. Ownership of industrial equipment and natural resources confers such a right legally to enforce unemployment, and so to make the community's workmanship useless to that extent. This is the Natural Right of Investment.
(Veblen 1923: 65-66, emphasis added)
A modern reader may find this definition of investment puzzling, so it is perhaps useful to put the term in historical context. Originally, the meaning of 'investment' had nothing to do with money and even less to do with production. Investment was a matter of power, pure and simple. Investio in Latin means 'to dress', and in Europe of the Middle Ages it was a signifier of feudal property rights. Lords would typically give their vassals a suit of clothing - or vestes - as part of their keep and as a sign of honour. The symbolic ceremony of transferring property rights from the lord to the vassal was known as investiture. The property in question could have been an estate, an office, a monastery, or simply a stipend (feodum de bursa). The ceremony 'vested' the vassal with the fief, conferring on him tenure or seisin - a legal seizure protected against invasion from any quarter (Bloch 1961: 173, 349; Ganshof 1964: 97, 126). According to the Oxford English Dictionary, the word 'investment' entered commercial use only in the early seventeenth century with the East India trade, and its contemporary connotation of
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converting money capital into tangible income-yielding assets appeared only in the middle of the eighteenth century.
In other words, throughout the early history of the term, the causal link ran not from the creation of earnings to the right of ownership, but from vested ownership to the appropriation of earnings. And according to Veblen, the same principle continues to hold in the capitalist epoch. 'Capital goods' yield profit not because of their individual productivity, but because they are privately owned to begin with - that is, owned against others.
Private ownership and institutionalized exclusion
How does private ownership 'generate' earnings? By necessity, every social order is created and sustained through a certain mixture of cooperation and power. In simple egalitarian societies, cooperation was paramount; in capi- talism, power is the governing principle. The power principle of capitalism is rooted in the centrality of private ownership. The word 'private' comes from the Latin privatus, meaning 'restricted', and from privare, which means 'to deprive'. As Jean-Jacques Rousseau tells us, 'The first man, who, after enclosing a piece of ground, took it into his head to say, "This is mine", and found people simple enough to believe him, was the true founder of civil society' (Rousseau 1754: Part III).
The most important feature of private ownership is not that it enables those who own, but that it disables those who do not. Technically, anyone can get into someone else's car and drive away, or give an order to sell all of Warren Buffet's shares in Berkshire Hathaway. The sole purpose of private ownership is to prevent us from doing so. In this sense, private ownership is wholly and only an institution of exclusion, and institutional exclusion is a matter of organized power.
Exclusion does not have to be exercised. What matters is the right to exclude and the ability to exact terms for not exercising that right. This right and ability are the foundation of accumulation. Business enterprise thrives on the implicit threat or explicit exercise of power embedded in ownership, with capitalist income being the 'ransom' for allowing industry to resonate:
Plainly, ownership would be nothing better than an idle gesture without this legal right of sabotage. Without the power of discretionary idleness, without the right to keep the work out of the hands of the workmen and the product out of the market, investment and business enterprise would cease. This is the larger meaning of the Security of Property.
(Veblen 1923: 66-67, emphasis added)
Of course, the role of power is hardly unique to capitalism. According to Veblen, all forms of ownership are based on the same principle of coercive appropriation, which in his view dates back to the early stages of barbarism and the initial emergence of predatory social customs. The differentiating
Accumulation and sabotage 229
factor, he says, is technological: the institutionalization of forceful seizure is intimately linked to the nature of tangible implements and to their relative significance in production. In the earlier stages of social development, forced appropriation was limited because there was little to appropriate and most objects were easily replaceable. But as society's 'immaterial assets' started to accumulate, so did the benefit from controlling its key 'material assets'.
The right to property
The first form of property rights, according to Veblen (1898; 1899a), was the ownership of people, particularly women. Etymologically, the English word 'husband' and the Mesopotamian word 'baal' both share the double meaning of ownership and marriage - and, in the latter case, also sexual exploit and the superior male-god of the west-Semitic pantheon. 4
Subsequently, the focus of ownership shifted (although not necessarily linearly) from slaves, to animals, to land. The specific trajectory depended on the nature of technological development, and it was only recently that it moved primarily to produced means of production. 5 Notably, prior to capi- talism neither slave ownership nor landed wealth were ever justified on grounds of productive contributions; both were institutionalized as a 'right' - by virtue of divine will or sheer force, but never as a consequence of creativity.
Now, clearly, the mere ownership of capital is no more productive than the ownership of slaves or land, so why do economists insist it is?
The answer, according to Veblen, is that economic theory had been unduly influenced by the transitory institutions of handicraft that existed during the transformation from feudalism to capitalism. Common sense suggested that craftsmen, working for themselves with their own material appliances, had a 'natural right' to own what they had made; it also implied that they could dispense with their product as they saw fit - that is, sell it for an income. 6 Handicraft and petty trade thus helped institutionalize pecuniary earnings as a natural extension of ownership-by-creativity. With exchange seen as a 'natural right of ownership', the very earning of income became a proof of productivity.
But this common sense is misleading for two reasons. First, even at the handicraft stage, production was an integrated societal process. Thus, despite
4 This was also the view of the early Marxists. According to Engels' The Origin of the Family, Private Property and the State (1884), classes and the hierarchic state both evolved from private property, which in turn originated in the appropriation of women by men.
5 Early evidence of such shifts is found throughout the many debates over slavery and the parcelling of family estates in the Book of Numbers.
6 As John Locke put it in the seventeenth century: 'The Natural Liberty of Man is to be free from any Superior Power on Earth. . . to have only the Law of Nature for his Rule. . . . The measure of Property, Nature has well set, by the Extent of Mens Labour, and the Conveniency of Life' (1690, ? 22: 324 and ? 36: 334, original emphases).
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the myth of 'individualism', private ownership was at least partly dependent on the dynamics of organized power (with the exclusionary practices of guilds offering a conspicuous illustration). Second, and more significantly, the institutions of handicraft were short-lived. As Veblen pointed out, technical change ushered in by the onset of the industrial revolution meant that produc- tion had to be conducted on a large scale, which in turn implied the progres- sive separation of ownership from production.
The absentee ownership of power
During the earlier stages of capitalism, production and business were still partly interwoven. 7 Indeed, even as late as the nineteenth century, US 'captains of industry' such as Cornelius Vanderbilt and Andrew Carnegie were seen as creative forces, acting as master workmen as well as astute businessmen. This duality did not last for long, however, and as business became increasingly separate from industry, the implication was no less than profound. Gradually, capitalism came to mean not merely the amassment of 'capital goods' under private ownership, but more profoundly a division between business and industry affected through the rise of absentee ownership.
The institution of absentee ownership has altered the very nature and meaning of capital. Not unlike the European lords of the Middle Ages, who gradually withdrew from the direct management of their estates, modern capitalists have become investors of 'funds', absentee owners of pecuniary wealth with no direct industrial dealings.
The complete delinking of capital from 'capital goods' is well illustrated by comical extremes. In the summer of 1928, the world's largest oil companies signed the secret Red Line Agreement, parcelling the Middle East between them for years to come. To celebrate the occasion, the architect of the deal, Calouste Gulbenkian, or 'Mr Five Percent' as he was otherwise known, char- tered a boat to cruise the Mediterranean with his daughter Rita:
Off the coast of Morocco, he caught sight of a type of ship he had never seen before. It looked very strange to him, with its funnel jutting up at the extreme stern of the long hull. He asked what it was. An oil tanker, Rita told him. He was fifty-nine years old, he had just made one of the greatest oil deals of the century, he was the Talleyrand of oil, and he had never before seen an oil tanker.
(Yergin 1991: 206)
This illustration is not an outlier. Currently, roughly half of all capitalist assets are owned indirectly through institutional investors such as pension and mutual funds, hedge and sovereign funds, insurance companies, banks
7 For a literary reflection of this fusion, see for instance the 'The Silent Men', a short story in Camus' Exile and the Kingdom (1958).
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and corporations. The ultimate owners of these assets, whether big or small, exercise little voice in the management of the underlying production pro- cesses. For the most part, they merely buy and sell shares of these assets and collect the flow of dividends. Often, their diversification is so extensive that they don't know exactly what they own. And that characterization is by no means limited to portfolio owners. Many of the largest direct investors - including the capitalist dons whose names populate the Forbes listing of the superrich - are equally removed from any industrial dealings. Most of their energies are spent on the high politics of sabotage and the fine art of cutting and pasting assets through endless deals of divestment and merger - activities that they commonly carry out, just like Gulbenkian, without ever seeing a single 'capital good'.
Whereas most economists continue to view capital as an amalgamation of machines, structures, semi-finished commodities and measure-of-their-igno- rance technology, for the business investor capital has long been stripped of any physical characteristics. In the eyes of modern owners - whatever their gender, colour, religion, sexual inclination, ethnicity, culture, nationality, creed, height, weight or age - capital means one thing and one thing only: a pecuniary capitalization of earning capacity. It consists not of the owned facto- ries, mines, aeroplanes, retail establishments or computer hardware and soft- ware, but of the present value of profits expected to be earned by virtue of such ownership.
Of course, neoclassicists have never had a quarrel with capital as the present value of future earnings. In the long run, they assure us, demand and supply make this present value equal to the cost of producing that capital (assuming competitive markets, perfect foresight and the rest of the hedonic fairy tale). But as Veblen (1908) acutely observed long before the Cambridge Controversy (and as we have seen in Part III), this explanation was logically faulty from the very start. If capital and capital goods were indeed the same 'thing', he asked, how could capital move from one industry to another, while capital goods, the 'abiding entity' of capital, remained locked in their original position? Similarly, how could a business crisis diminish the value of capital when, as a material productive substance, the underlying capital goods remained unaltered? Or how could existing capital be denominated in terms of its productivity, when technological progress seemed to destroy its pecuniary value?
For Veblen, the answer was straightforward: capital simply is not a double-sided entity. It is a pecuniary magnitude, and only a pecuniary magni- tude, and its magnitude depends not on the capacity to produce but the ability to incapacitate. In the final analysis, the modern capitalist is nothing more than an absentee owner of power.
Strategic sabotage
What exactly is this power to incapacitate? Where does it come from, what form does it take, and how does it yield profit? According to Veblen, the
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answer remained obscure partly because the historical consolidation of capi- talist property rights slowly substituted ideological manipulation and legal authority for brute force and religious sanctity.
With the twin emergence of the modern corporation and the modern state, capitalism has acquired a 'civilized' face: absentee ownership has become a legitimate norm; open violence has been replaced by latent threats under- written by hefty advertising budgets, bloated security services and over- flowing jails; and power has solidified into a mystical structure (at least for those subjected to it). In this new order, the power to incapacitate - or 'sabo- tage' as Veblen liked to call it - becomes a fully legitimate convention, carried out routinely and invisibly through the very subordination of industry to business. The blueprints of capitalist production are already programmed for business limitation, its hired managers are schooled in the art of invisible restriction, and its top executives are remunerated in proportion to profit. In order to merely earn the normal rate of return, all the owner has to do is own.
But then where is the 'sabotage'? Is it not true that in order to profit, busi- ness enterprise needs to promote industrial creativity, productive ingenuity and 'best practices'? The answer is not really. Strictly speaking, business cannot 'promote' industry. At most, it can unleash it - and even that it does only up to a point and under very specific conditions. Earnings do depend on output - but not on any type of output and not only on output. Moreover, the dependency is non-linear and sometimes inverted, which is why Veblen referred specifically to strategic sabotage.
Seen as an entire social order, business enterprise certainly is far more 'productive' than any earlier mode of social organization. 8 Yet, in Veblen's opinion, the immense productive vitality of this social order is an industrial, not a business phenomenon. Business enterprise is possible only in conjunc- tion with large-scale industry, though the reverse is not true (as illustrated by socialist industry or giant cooperatives such as Mondragon). The practices of business of course are closely related to industry, but only in point of control, never in terms of production and creativity. From this a priori vantage point, business per se is distinct from industry and therefore cannot boost industry, by definition. Even companies in possession of cutting-edge technology cannot promote industrial creativity; instead, they can merely relax - usually for a hefty fee - some of the constraints that would otherwise limit creativity.
This interpretation of the hyperproductivity of capitalism is quite different from that of Marx. In our view, Marx was correct to stress the dialectical imperative of technical change, an emphasis that the evolutionist Veblen preferred to disregard. Over the longer haul, capitalists indeed find them- selves compelled - and in turn force their society - to constantly revolutionize
8 This statement refers not to 'measured' increases in utility or abstract labour, but to the unprecedented social transformations, massive technical change and neck-breaking pace of energy conversion that came with the capitalist epoch.
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the pattern of social reproduction. They continually 'invest' in having industry develop for them new methods and products and in expanding their capacity to produce them. Yet all of this they do in the expectation of adequate differential returns, and differential returns are possible only through restriction.
'Free is not a business model', explains the representative of eBay China (Dickie 2006). Money spent on having your engineers invent open-source technology or on making your workers create physical capacity that everyone can freely use is money gone down the drain. The only way such spending can become a profit-yielding investment is if others are prohibited from freely utilizing its outcome. In this sense, capitalist investment - regardless of how 'productive' it may appear or how much growth it seems to 'generate' - remains what it always was: an act of limitation.
The direction of industry
The limitation takes two general forms. The more important - but also more elusive and harder to delineate - concerns the very direction of industrial development. This restriction, of course, is hardly unique to capitalism, being inherent to the very development of any system of hierarchical production.
According to the historical evidence marshalled by Stephen Marglin (1974), rulers almost invariably fight to impose techniques that secure and amplify their power - often at the expense of efficiency (conventionally measured). This was true when the Romans forced slaves into brick and pottery 'factories' - just as it was true when European feudal lords imposed water mills and prohibited hand mills, when post-bellum American planters forced a credit-based system of share-cropping on small farmers, and when Stalin collectivized Soviet agriculture. The purpose of these technological impositions, Marglin argues, was 'divide and conquer'. And in his opinion, the same remains true with capitalist production: this is why British capital- ists retained demonstrably inefficient mining techniques, why they introduced the factory system well before the arrival of machines, and why they insisted on a minute division of labour that was debilitating to the point of becoming technically counterproductive.
At first sight, this capitalist imposition of inefficiency may seem surprising, if not counterintuitive. After all, capitalists seek profit, profit increases as cost falls, and cost falls as efficiency rises - so isn't it in capitalists' best interest to adopt the most productive techniques? What exactly is the point of increasing power if the end result is lower profit? The question may sound biting - but it is the wrong one to ask. In fact there is no contradiction at all: in reality, power means not less profit but more profit.
The confusion is easy to sort out. The idea that profit maximization neces- sitates cost minimization and that cost minimization requires efficient production holds only in the fairy tale of perfectly competitive equilibrium. In this fictitious context, where prices and wages are set by mother market to
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equilibrate marginal productivity and utility, it certainly makes sense for the 'representative' capitalist to adopt the most efficient techniques. 9
But once we get rid of the fiction and move to the real world where prices represent not utility and productivity but power, these imperatives immedi- ately break down on their own terms. 'Productive efficiency' (minimum inputs per unit of output) no longer implies 'economic efficiency' (minimum cost per unit of output), and 'economic efficiency' no longer means 'maximum profit'. In this imperfect context, it makes perfect sense for capitalists to impose 'inefficient' techniques: their very inefficiency is the power leverage through which profits are generated.
Let's illustrate this principle with more contemporary examples. Take transportation. On the face of it, a well-designed public transit seems much more conducive to human welfare and the natural environment than private transit. Yet, in the US and elsewhere, capitalist transportation has tended to move away from the public and toward the private. And the reason is not hard to grasp.