Productive wealth and corporate finance
Equity versus debt
With the corporation seen as a means of limiting industrial activity for busi- ness gain, accumulation can no longer be understood in terms of the under- lying productive apparatus of the firm.
Equity versus debt
With the corporation seen as a means of limiting industrial activity for busi- ness gain, accumulation can no longer be understood in terms of the under- lying productive apparatus of the firm.
Nitzan Bichler - 2012 - Capital as Power
But the unshaken belief in the normal rate of return and its associated natural rate of unemployment attests to the omnipresence of power.
Unlike its ancient predecessor, the normal rate of return is no longer a mere administrative device. Whereas in antiquity the rate of interest was a subsidiary of state power, under the system of business enterprise the capi- talist state itself is gradually subsumed by the logic of the normal rate of return. Government deliberations and decisions are constantly under the long shadow of the bond market, and even central bankers, who ostensibly 'deter- mine' the short-term 'risk-free' rate of interest, in fact take their cue from the 'market'. 25 The normal rate becomes a central feature of the capitalist nomos. It is the yardstick on which capitalization is based and the principal evidence that not only the level of organized power, but also its augmentation, is natural, inherent and just.
The differential underpinnings of universal sabotage
Where does the capitalist normal rate of return come from? Paradoxically, the universality of profit and the regularity of its expansion are based on the specific institutions of differential sabotage. Indeed, a normal rate of return can exist only because owners are never satisfied with it. What owners believe they are entitled to under normal circumstances is not what they seek in prac- tice. The primal drive of modern business enterprise is not to meet but to beat the average. Business performance is denominated in relative, not absolute terms, and it is 'getting ahead of the competition' that constitutes the final aim of all business undertakings. This compelling desire to outperform - to earn more, to grow larger, to expand faster than others - is perhaps the most fundamental urge of contemporary business. In that sense, even members of the tightest oligopolistic coalition are fiercely competitive.
Paul Johnson (1983: Ch. 1) associates this relativism with the twentieth- century vulgarization of Einstein's theory. In his view, the misplaced social-
25 This subjugation is illustrated by the fact that, since the 1980s, the fund rate set by the U. S. Federal Reserve Board and the three-month rate on government T-bills have both followed rather than led the 'market-determined' yield on long-term bonds.
? Accumulation and sabotage 247
ization of physics ushered in a total meltdown of the absolute values, both religious and ethical, that characterized the nineteenth century. But such cultural emphasis, however appealing, misses the structural imperative of accumulation. Understood as a power institution, capital is inherently differ- ential, a crucial aspect to which we turn below. For the moment, though, our focus is on how the differential limitation of industry forms the basis for the normal rate of return.
Differential returns mean above-average profit growth. Such returns usually require raising one's own profit growth - though that in itself is rarely feasible without also limiting the average growth of profit. The problem is simple. Profit is a product of sales and the profit share in sales. Individual firms can try to raise their sales volume faster than the average; but that alone will not guarantee differential profit growth, since sales and the profit share are not independent. If all firms push their sales up, the consequence is an overall loss of business control over industry and a resulting drop in the overall profit share of income. The conclusion - well known since antiquity but broadly institutionalized only since the late nineteenth century - is the imperative of restricted access: for the profits of one owner (or a coalition of owners) to beat the average, others must be prevented from accessing the same earnings. Whereas the conventional logic of profit maximization focuses only on the capitalist's own lot, the quest for differential profit also involves the lot of other capitalists.
The means of achieving this differential end are numerous, transcending both business and politics and spanning the societal spectrum from the indi- vidual to the global. These means include direct limitations, such as predatory pricing, formal and informal collusion, advertising and exclusive contracts. They also include broader strategies like targeted education, patent and copyright laws, industrial policies, financial regulations, preferential tax treatment, legal monopolies, labour legislation, trade and investment pacts and barriers and, of course, the use of force, including military, for differen- tial business ends.
The negative industrial impact here is often indirect. For the benefiting owner, the differential gain accrues because the necessary industrial limi- tation is borne by other owners. For instance, historically the large petroleum companies have gained from expanding world demand at least partly because they have been politically able to keep smaller 'independent' companies largely out of the loop (Blair 1976). On the other hand, when exclusion cannot be ensured, like in the case of software development or the manufacturing of microchips, soaring production often overshoots into excess capacity and falling profits. In general, then, the negative impact of business on industry is both indirect and non-linear: while profits usually correlate posi- tively with one's owned industrial activity, beyond a certain point this corre- lation is maintained only insofar as the production controlled by others is contained.
248 Bringing power back in In sum
Business profits are possible because absentee owners can strategically limit industry to their own ends. Such control is carried out routinely, either by pricing products toward earning a target rate of return at some standard capacity utilization, or by making industrial activity conditional on earning a normal rate of return. Underlying these universal business principles are numerous differential practices, with owners, individually or in groups, trying to redistribute income via institutional and organizational change. The specific aim of most (though not all) differential tactics is to restrict the indus- trial activity controlled by existing or potential rivals. Their aggregate conse- quence is dissonance that undermines the industrial community at large, yielding a natural rate of unemployment on the one hand and a corre- sponding normal rate of return on the other.
The link between differential and universal industrial sabotage is closely related to the twin conflicts pervading the regime of business enterprise - one between absentee owners and the industrial community, the other between absentee owners themselves. These two conflicts resemble Marx's distinction between the class struggle and intra-capitalist competition - but with a big difference. Whereas for Marx the class struggle was conceptually prior to the intra-class relationship among capitalists, in our view they are two sides of the same process: the dominance of capital over society depends on a pecking order among capitalists themselves, and vice versa. On a disaggregate level, the distribution of profit among absentee owners is roughly related to the balance of business damage they can inflict on each other. And on the aggre- gate level, the overall industrial sabotage arising from their internal business warfare determines their overall profit share (although not in any linear way and along with other factors). In other words, the goals of business owners revolve around the distribution of profit, while the methods of business sabo- tage ensure that such profit is made available in the first place.
Capital and the corporation
Capital as negation
One reason why Veblen's analysis never became too popular is that it made business capital a negative industrial magnitude. This view of the business- industry nexus is alien to both neoclassical and Marxian thinking. For neoclassicists, who emphasize harmony and equilibrium, the positive social value of capital is hardly in doubt. Contrary to this view, Marx accentuated the antagonistic social basis of capital, linking accumulation to exploitation. However, just like his liberal counterparts, he too stressed the relentless pres- sure to improve productivity - pressure that stems not from the lure of monopoly and imperative of power, but from the discipline of competition. And so despite the antagonism - or perhaps because of it - capitalists according to Marx must use their capital in the most productive way possible.
Even British contributors to the Cambridge Controversy were still
Accumulation and sabotage 249
ambiguous on the industrial footing of capital. As Joan Robinson (1971) pointed out, Sraffa broke the 'conspiracy of silence' by destroying the presumption that the profit rate measured the contribution of investment to national income, let alone to human welfare; by calling into question the positive connotation of both accumulation and growth; and by refocusing attention on distribution. But although Robinson later realized that Veblen had anticipated much of this critique, she never took the next step to explore the possibility that distributive power and industrial production were not simply uncorrelated, but negatively correlated (1967: 60; 1975: 115-16).
The difference is subtle but crucial: while the Cambridge Controversy raised the possibility that capital could be unproductive, Veblen contended that, from an industrial point of view, it was necessarily counterproductive.
This claim is not easy to dismiss. Business, like other power institutions throughout history, can force people to act, but it cannot make them pro- ductive. Moreover, productivity as such, being socially hologramic and there- fore open and unrestricted, cannot generate a profit. The only way for capitalists to profit from productivity is by subjugating and limiting it. And since business earnings hinge on strategic sabotage, their capitalization repre- sents nothing but incapacitation. In this particular sense, capital, by its very construction, is a negative industrial magnitude.
The rise of the modern corporation
The emergence of capital as a business limitation of industry was greatly facilitated by the rise of the modern corporation and the larger use of credit as ownership. Now, on the face of it, this claim sounds counterintuitive. In fact, most readers would probably expect the exact opposite to be true - namely, that the corporation emerged precisely because of its productivity. But as with many other productivist categories, there is more here than meets the eye.
Perhaps the first to contemplate the broad social significance of incorpor- ation was Karl Marx. Prescient as usual, he suggested that the corporation may mark the dawn of a new capitalist regime: 'The capitalist stock compa- nies as well as the co-operative factories', he wrote, 'may be considered as forms of transition from the capitalist mode of production to the associated one' (Marx 1909, Vol. 3: 521). Yet, in his opinion, this transition was driven by the imperative of efficiency. The corporation helped concentrate the means of production and in so doing enabled capitalists to further increase productivity and hasten accumulation.
The liberal view is different, but not by much. According to mainstream economics, the corporation is the most effective way for society - not just its capitalists - to reap the benefits of large-scale production. The following pronouncement by Samuelson Inc. is typical:
Large-scale production is technically efficient, and a large corporation is an advantageous way for investors to pool the irreducible risks of
250 Bringing power back in
business life. Without limited liability and the corporation, a market economy simply could not reap the benefit that comes when large supplies of capital need to be attracted to efficient-sized corporations. . . .
(Samuelson, Nordhaus, and McCallum 1988: 453)
From a Veblenian standpoint, though, this productivist logic makes no sense. The corporation is a business institution, not an industrial unit, and so the reason for its emergence and continuous success must go beyond econo- mies of scale and scope.
First, although incorporation certainly reduces risk, as we have argued in Chapter 11 and will show further in Chapter 13, risk reduction has more to do with power than with efficiency. In fact, the focus on power was there from the very start. The purpose of the proto-corporations that first emerged in Italy of the tenth century was to bypass or at least mitigate feudal sabotage and the dangers of piracy. These early 'investment brotherhoods' had two basic structures - one maritime, the other landed. The maritime organization, known as the commenda, was a short-lived joint venture between an 'investor' (commendator) and an operator. Its whole terminology connotes power: the voyage itself was called taxedion, meaning a 'military expedition'; the task of the leader was called procertari, meaning 'to engage in struggle'; and the investments were called iactare, meaning 'rolling the dice'. The comparable landed organization was the compagnia, meaning 'sharing of bread'. In contrast to the one-time commenda, here the investment was locked for a number of years and ostensibly was less risky. But many compagnia owners, such as the Perruzis of Florence, were pulled into the lucrative business of princely war finance, a highly unproductive enterprise whose business conse- quences often proved far more disastrous than the hazards of the sea (Pirenne 1937: 122-23; Lopez 1967: 141-42, 295-98).
The second difficulty with the common rationale is that large-scale produc- tion is a sound business practice only if it serves to raise profits - yet contrary to popular conviction one does not necessarily imply the other. Since the 1890s, the modern corporation has outgrown its largest industrial unit, suggesting that economies of scale are no longer the paramount determinant of business size, if they ever were (Scherer 1975: 334-36; Edwards 1979: 217- 18). A typical modern firm now owns numerous, in some cases hundreds of industrial establishments, often in unrelated industries. And while the corpo- ration continues to grow in size, its industrial units do not. 26 The fact that
26 According to the Statistics of U. S. Business program (SUSB), the size of establishments (defined as production locations) does not differ much between super-large firms (with over 10,000 employees) and medium-sized ones (with 100-999 employees): in 2005, both groups had an average establishment size of 52 employees. The real difference was in the number of establishments: in that year, a typical large firm owned an average of 658 establish- ments, whereas its medium-sized counterpart had only 4. 6 (U. S. Department of Commerce. Bureau of the Census).
? Accumulation and sabotage 251
industrial size is not a necessity for business success has been demonstrated forcefully with the growing significance of outsourcing. Many of today's corporate giants have successfully reinstated the putting out system of the industrial revolution, with the typical result being rising profit coupled with falling payroll.
The rise of the corporation of course is related to the emergence of large- scale industry, but causality may well run opposite to what mainstream economics argues: the corporation emerged not to enable large-scale industry, but rather to prevent it from becoming 'excessively' productive.
In the case of the United States, this rationale is illustrated by the two prin- cipal processes charted in Figure 12. 3. Between 1790 and the Civil War, population growth averaged 3 per cent annually. With the conquering of the western frontier, this rate fell to 2. 2 per cent between the Civil War and the turn of the twentieth century, and further down to 1. 6 per cent between the turn of the century and the onset of the Great Depression. The second significant development occurring at the same time was a rapid acceleration
5
4
3
2
1
0
1860s 1870s 1880s 1890s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s
Figure 12. 3 The productivity threat
* Measured labour productivity in manufacturing, based on the Frickey Index spliced with the FRB index and divided by the number of manufacturing production workers. The average productivity growth during the 1910s was zero per cent.
Source: U. S. Department of Commerce.
? ? ? ? US Productivity * US Population
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? www. bnarchives. net www. bnarchives. net
? ? ? Annual % Change
252 Bringing power back in
in (officially measured) labour productivity. In manufacturing, the growth of output per employee rose from less than 1/2 per cent in the 1860s to over 3 per cent by the turn of the century. 27
The crucial intersection of these two opposing trends occurred during the last decade of the nineteenth century. Until then, with population expanding faster than productivity, the main concern for individual firms was how to satisfy soaring demand. Sales could therefore grow at maximum potential without threatening markups and profitability. This was the golden age of 'free competition'. But then things began to change. After the Civil War, the state of the industrial arts benefited from improved transportation and communication, an unprecedented increase in the use of new raw materials, the development and assimilation of numerous innovations, new production techniques and growing product diversity. The net result was a marked acceleration in the growth of productive capacity. Given that this process coincided with slowing population growth, the threat was that sooner or later the industrial system would become 'inordinately productive', as Veblen would have put it. If the earlier pattern of competitive production were to continue, industry would tend to generate much more output than could be profitably sold, bringing pricing down and business enterprise to a halt.
It was at this point that the modern business corporation as we know it came into its own. Until then, business combination largely took the form of pools and trusts whose primary purpose was to constrain aggregate output to 'what the traffic could bear' at profitable prices. Yet as Olson (1965; 1982) convincingly argues, collaboration is usually difficult and often impossible in large groups, and an excessive number of firms was indeed a primary reason for the relative fragility of these early combinations (Cochran and Miller 1961: 140-46; Chandler 1977: 317-18). There was a pressing need to reduce the number of firms, and the most effective method was merger. Mergers, however, were not only structural transformations, but also financial transac- tions. They involved buying and selling capital, which in turn meant that firms had to have a pecuniary value. In short, capital itself had to be made vendible.
The developments that followed were quick and swift. During the 1890s, the United States saw the widespread incorporation of business firms, the rapid growth of stock and bond markets and the expanding use of credit as a form of ownership. It was during that period that the separation of business from industry was finally completed. Firms were turned into corporations and investors into absentee owners of discounted future earnings. From then on, the predicament of excess capacity remained a more or less permanent feature of US capitalism. As Figure 12. 3 shows, official productivity growth continued to run ahead of population growth. Industrial limitation therefore
27 The precise productivity growth figures are dubious for the reasons outlined in Chapter 8, but the quantum technological leaps that underlay them were very real.
? Accumulation and sabotage 253 remained a business necessity, carried out by progressive corporate central-
ization and the relentless restructuring of broader power institutions.
Productive wealth and corporate finance
Equity versus debt
With the corporation seen as a means of limiting industrial activity for busi- ness gain, accumulation can no longer be understood in terms of the under- lying productive apparatus of the firm. We have already seen the temporal dimension of this rupture. As a forward-looking entity, capital accumulates upfront - that is, before the profit is earned and usually before any material equipment is created. But the rupture persists even without the timing issue. Simply put, rising capacity brings more industrial production - but then too much industrial production is bad for business and disastrous for accumu- lation.
This 'twisted' link between accumulation and production becomes evident from a closer examination of equity and debt. For the archaic 'captain of industry', capital meant equity; debt did not provide the direct control neces- sary to run industry. For the modern 'captain of solvency', however, the difference is no longer clear cut. As an absentee owner, the contemporary investor views both equity and debt as undifferentiated, self-expanding claims on the asset side of the balance sheet, universal capitals qualified only by their risk/reward profiles.
Although entries on the liabilities side of the balance sheet do not stand against specific entries on the assets side, it is generally accepted that equity capitalizes mostly the corporation's 'immaterial assets', whereas debt discounts mainly its 'material assets'. The conventional accounting creed is that both assets are valuable because of their productivity. The former repre- sents the company's unique knowledge, client loyalty and other aspects of its supposed industrial superiority; the latter denotes its undifferentiated plant and equipment. We shall now see that these accounting conventions hold little water, even on their own terms.
Immaterial assets
Consider first the 'immaterial assets'. The popular conception is that these represent the unique productivity of the firm's own industrial apparatus. But do they? Take inventions and innovations. Both are deemed productive - though given the hologramic nature of knowledge, it isn't easy to sort out how much of this productivity 'originates' in the firm that owns them. 28
Think of a Microsoft software package. This package - essentially a coded
28 For the sake of simplicity we treat here the firm and its employees as synonymous. Insofar as they are not, the 'origin' of knowledge becomes even fuzzier.
? 254 Bringing power back in
set of ideas - could not have been developed without similar codes having been written by others - or indeed without computer languages, the micro- chip, semi-conductivity, binary logic, mathematical functions or human language for that matter. Such knowledge owes its existence to society at large; much of it was invented for its own sake, often with no immediate 'applications'; and all of it is available free of charge. In this sense, most of Microsoft's inventions and innovations are not really Microsoft's - and this delinking means that the 'productivity' of these innovations, whatever it may be, isn't Microsoft's either and therefore cannot account for its 'immaterial assets'. In fact, had Microsoft followed the productivity doctrine of distribu- tion to the letter, paying royalties on the use of such knowledge, it would probably have no 'immaterial assets' whatsoever and an infinitely large debt.
In practice, though, none of this matters. The real issue is not whether Microsoft's knowledge 'originates' inside or outside the company, but whether that knowledge - whatever its source - can be protected. Note that on its books, Microsoft - like any other corporation - capitalizes not the invention itself, but the patent or copyright that defends it. And by now the reason shouldn't be surprising: unless the innovation is protected, everyone can use it, and what everyone can use nobody can profit from. Conclusion: a corporation - no matter how 'innovative' it claims to be - can only capitalize the protection of knowledge, never the knowledge itself. 29
Moving from legally sanctioned intellectual property rights to unsanc- tioned items, the alleged productivity of 'immaterial assets' becomes even more dubious. Unsanctioned items are commonly classified under 'goodwill'. The accounting meaning of 'goodwill', though, is quite different from its
29 Much like in Budd Schulberg's classic tale of modern America, What Makes Sammy Run? (1941), the success of many techno-entrepreneurs often owes more to their ruthless power than creative acumen. Their common strategy is known as 'fast following': being the first to spot new ideas created by others, to wrestle them away from their creators and to quickly turn them into the fast follower's own property.
Bill Gates' MS-DOS operating system, for instance, is surprisingly similar to a previous system named QDOS, a system written by one Tim Peterson, to whom Gates paid $50,000 so that he would give up any future claims to it. Likewise, the idea for Gates' Windows system was reputably taken, this time gratis, from Steven Jobs of Apple, who tried in vain to block it in court, after himself having 'borrowed' it, along with the computer mouse, from developers at Xerox. Even Jim Clark, the legendary Silicon Valley innovator, owes almost his entire fortune to simple, back-of-the-envelope ideas - the idea to use the Mosaic browser developed by Marc Andreessen as a basis for Netscape, and the idea to use the internet as a basis for Healtheon's integration of the US health-care industry. The actual development and implementation of both ideas were done entirely by others.
According to Michael Lewis (2000: xvii), many of Silicon Valley's greatest innova- tions - including its so-called 'new-new things' - are rarely earth shattering or even novel. Rather, they are notions 'poised to be taken seriously in the marketplace', ideas that have been worked out almost entirely, and are only 'a tiny push away from general acceptance' - that is, a tiny push away from being legally packaged so that others cannot use them unless they pay.
? Accumulation and sabotage 255
original connotation of customer loyalty based on intimate knowledge in a small community. On the company books, 'goodwill' is usually used (or abused) as a catch-all term for the unsanctioned power to strategically limit industry for differential business gains.
A good case in point is corporate merger, a business transaction that has the occult ability to make the whole grow bigger than its parts. When two companies amalgamate, their post-merger capitalization almost always exceeds their separate pre-merger capitalizations put together. Some attribute this miracle to productive synergy: when fused, the two companies suppos- edly complement and boost each other's efficiency. As we shall see in Chapter 15, though, this explanation is very thin on evidence. Worse still, it is largely irrelevant for the common practice of conglomerate amalgamation, and it is totally undermined by the widespread practice of post-merger 'downsizing' to shed excess capacity.
The real cause is very different. In the final analysis, what makes the combined capitalization greater than the sum of its parts is the additional social power generated by the merger: the power to increase differential earn- ings, raise differential hype and reduce differential uncertainty. Of course, the power underpinnings of this 'added value' cannot be admitted in public. So, instead, the extra capitalization is minted on the balance sheet as fresh 'goodwill'.
In conclusion, equity accumulation capitalizes not differential productivity but differential power. In this sense, any institutional arrangement leading to higher profit expectations and lower risk perceptions - be it favourable polit- ical rearrangements, the creation of new consumer 'wants', the re-organiza- tion of collusion, or the weakening of competitors - will sooner or later lead to higher equity values backed by new 'goodwill'.
Material assets
But then what about debt? Is it not true that, unlike equity, debt is commonly backed by a material apparatus whose productive essence can hardly be denied? And doesn't this fact suggest that capital income, at least partly, is a function of productivity? The answer, again, is negative. Plant and equipment are productive in the hologramic context of 'industry at large'. And it is only because of that broader context that the ownership of machines yields the ability to threaten industry and the right to appropriate part of society's income. Only under these circumstances can machines be capitalized.
To illustrate, consider a tanker vessel. Its ability to transfer crude petro- leum changes very gradually and predictably over time. By contrast, its dollar value as a 'capital good' tends to vary dramatically with the price of oil. This latter price is affected by very broad social circumstances, including the rela- tive cohesion of OPEC and the large petroleum companies, Middle East wars, the ups and downs of global production and changes in energy efficiency. When these circumstances change, so does the price of oil; when the price of
256 Bringing power back in
oil goes up or down, a greater or smaller share of global income goes to the vessel's owner; and as the profit from the vessel fluctuates, so does the vessel's capitalized value - and yet this entire sequence occurs without there being any perceptible change in the vessel's productivity! 30
This example is by no means unique. The very same principle applies to aircraft, factories, office space and every other piece of 'capital equipment' on earth. Their capitalized value depends not on their intrinsic productivity, but on the general political, institutional and business circumstances within which they operate.
Now, on the company books, physical assets are recorded not at current market value, but at cost. This is what accountants call 'book value'. Consciously or not, there is an attempt here to separate the portion attribut- able to social power from the so-called 'true' value of the asset as measured by its historical cost. As it turns out, though, even this presumably 'objective' convention is unable to expunge power from prices.
The reason is that, at any point in time, the very cost of producing plant and equipment is already a manifestation of systemic conflict and struggle. Consider again our example of tanker vessels. If ownership of such tankers confers large profits, some of these will likely be appropriated by the compa- nies producing them (as well as by their workers, depending on their own bargaining position). The acquiring shipping line will record the book value of the vessel as an undifferentiated quantum, a 'cost' item stripped of any power consideration. But this cost already reflects a redistributional power struggle that enabled the shipyard to up the price of the newly launched vessel to begin with. Moreover, even in the unlikely absence of differential earning capacity, the cost of producing tangible equipment already embodies the normal rate of return and therefore the average limitation of industry by business.
To sum up, the distinction between stocks and bonds is rooted in power considerations, not industrial circumstances. Both forms of capital rest on power, though the nature of power is different in each case. Most generally, equity capitalizes the firm's differential ability to restrict industry for its own benefit, whereas debt capitalizes the average ability of all owners to limit industry at large.
The maturity of capitalism
The power distinction between debt and equity can also be viewed by contrasting their respective returns and the industrial limitations from which
30 The list of assets affected by oil prices can easily be extended. The efficiency of oil traders, for instance, does not change much faster than that of sea vessels; their 'human capital', though, measured by their sign-on fees, fluctuates, as if by magic, with the price of oil and the Baltic Dirty Tanker Index (Morrison 2006). Similarly for the governments of oil- producing countries: their oil-drilling expertise changes only gradually, while the value of
? Accumulation and sabotage 257
they derive: interest on debt represents average sabotage, while profit on equity denotes differential sabotage. From this viewpoint, long-term swings in the ratio of interest to profit can be interpreted as a proxy for the 'maturity' of capitalism.
Our notion of maturity here refers loosely to the strength and solidity of existing power institutions; and this strength and solidity, we argue, is inti- mately linked to the nature of earning expectations and their associated forms of capitalization. Frankel (1980) sees the basic difference between equity and debt as a question of trust: the former represents an expected return, the latter a promise of return. But then, under business enterprise, the degree of trust among owners depends on the 'normalization' of their power. 31
For this reason, we can expect that as capitalism matures and industrial control increasingly petrifies into accepted institutions, perceptions of risk decline, trust rises and debt becomes an increasingly acceptable form of accu- mulation. Conversely, when changing circumstances work to loosen the previous grip of existing conventions and understandings (and in that sense 'invigorate' capitalism), debt becomes relatively more difficult to issue and the more risky equity investment again is used as the primary vehicle of capi- talization. Seen in this light, the maturity of capitalism does not develop linearly, and in fact has no preset direction. It may increase as well as decrease, depending on the trajectory of it power institutions, organizations and processes.
Following this logic, we expect the maturity of capitalism, approximated by the ratio of interest to profit, to be positively correlated with the extent of industrial sabotage. And, indeed, as illustrated in Figure 12. 4, this correlation seems to exist in the United States. Since the 1930s, our index of maturity has been closely correlated with the unemployment rate, a readily available (albeit imperfect and partial) proxy for industrial limitation.
At first sight, the relationship may seem intuitive and not particularly significant. After all, economic fluctuations affect profit more than interest, so when unemployment rises so should the ratio of interest to profit. How- ever, this triviality holds only in the short term. In the longer haul, interest payments are much more flexible, so there is no technical reason for the interest-to-profit ratio to correlate positively with unemployment. Note that Figure 12. 4 smoothes the two series as 5-year moving averages. In this light, the fact that their long-term gyrations are so similar is highly significant.
their sovereign wealth funds swells and contracts with the ups and downs of petroleum
prices (Farrell and Lund 2008).
31 It is perhaps worth noting here that the terms 'commitment' and 'trust' have rather violent
origins. The anarchy of private warfare during the early period of Medieval feudalism left little public space and eliminated any semblance of personal security. This context gave rise to armed gangs of inge? nue in obsequio - free men under the protection and at the service of a military chieftain. The armed retainers of the Frankish king were initially known as comi- tatus and later as trustis (Ganshof 1964: 3-5).
? 258 Bringing power back in
100 ? ? ? ? ? 100. 00
10. 00
10 ? ? ? ? ? 1. 00
0. 10
1 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 0. 01 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 12. 4 Business trust and industrial sabotage in the United States
Note: Series are expressed as 5-year moving averages. The ratio of net interest to corporate profit
compares the already smoothed series.
Source: U. S. Department of Commerce through Global Insight (series codes: RUC for the rate of unemployment; INTNETAMISC for net interest and miscellaneous payments; ZBECON for pre-tax corporate profit with capital consumption allowance and inventory valuation adjustment).
The 1930s and 1940s were marked by great turbulence. As the figure indi- cates, during the Great Depression business control over industry had become 'excessive', while later, with the war-induced boom, it became 'too loose' (see also Figure 12. 2). The 1950-1980 period was much more stable. Business slowly regained control over industry, boosting confidence in the regular flow of capital income and trust among lenders and borrowers. The consequence was a gradual rise in unemployment on the one hand and a shift from profit to fixed income on the other. Since the mid-1980s, however, the trend seems to have reversed. The increasing globalization of business enter- prise and the progressive opening of the US political economy have put existing business institutions under duress and transformed the very way in which business controls industry. And as the promise of return weakened relative to the mere expectation of return, unemployment fell together with the 'maturity' ratio of interest to capital income.
? ? ? ? log scale
Unemployment
(%, left)
log scale
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Ratio of Net Interest to Corporate Profit (right)
? ? ? ? ? ? ? ?
Unlike its ancient predecessor, the normal rate of return is no longer a mere administrative device. Whereas in antiquity the rate of interest was a subsidiary of state power, under the system of business enterprise the capi- talist state itself is gradually subsumed by the logic of the normal rate of return. Government deliberations and decisions are constantly under the long shadow of the bond market, and even central bankers, who ostensibly 'deter- mine' the short-term 'risk-free' rate of interest, in fact take their cue from the 'market'. 25 The normal rate becomes a central feature of the capitalist nomos. It is the yardstick on which capitalization is based and the principal evidence that not only the level of organized power, but also its augmentation, is natural, inherent and just.
The differential underpinnings of universal sabotage
Where does the capitalist normal rate of return come from? Paradoxically, the universality of profit and the regularity of its expansion are based on the specific institutions of differential sabotage. Indeed, a normal rate of return can exist only because owners are never satisfied with it. What owners believe they are entitled to under normal circumstances is not what they seek in prac- tice. The primal drive of modern business enterprise is not to meet but to beat the average. Business performance is denominated in relative, not absolute terms, and it is 'getting ahead of the competition' that constitutes the final aim of all business undertakings. This compelling desire to outperform - to earn more, to grow larger, to expand faster than others - is perhaps the most fundamental urge of contemporary business. In that sense, even members of the tightest oligopolistic coalition are fiercely competitive.
Paul Johnson (1983: Ch. 1) associates this relativism with the twentieth- century vulgarization of Einstein's theory. In his view, the misplaced social-
25 This subjugation is illustrated by the fact that, since the 1980s, the fund rate set by the U. S. Federal Reserve Board and the three-month rate on government T-bills have both followed rather than led the 'market-determined' yield on long-term bonds.
? Accumulation and sabotage 247
ization of physics ushered in a total meltdown of the absolute values, both religious and ethical, that characterized the nineteenth century. But such cultural emphasis, however appealing, misses the structural imperative of accumulation. Understood as a power institution, capital is inherently differ- ential, a crucial aspect to which we turn below. For the moment, though, our focus is on how the differential limitation of industry forms the basis for the normal rate of return.
Differential returns mean above-average profit growth. Such returns usually require raising one's own profit growth - though that in itself is rarely feasible without also limiting the average growth of profit. The problem is simple. Profit is a product of sales and the profit share in sales. Individual firms can try to raise their sales volume faster than the average; but that alone will not guarantee differential profit growth, since sales and the profit share are not independent. If all firms push their sales up, the consequence is an overall loss of business control over industry and a resulting drop in the overall profit share of income. The conclusion - well known since antiquity but broadly institutionalized only since the late nineteenth century - is the imperative of restricted access: for the profits of one owner (or a coalition of owners) to beat the average, others must be prevented from accessing the same earnings. Whereas the conventional logic of profit maximization focuses only on the capitalist's own lot, the quest for differential profit also involves the lot of other capitalists.
The means of achieving this differential end are numerous, transcending both business and politics and spanning the societal spectrum from the indi- vidual to the global. These means include direct limitations, such as predatory pricing, formal and informal collusion, advertising and exclusive contracts. They also include broader strategies like targeted education, patent and copyright laws, industrial policies, financial regulations, preferential tax treatment, legal monopolies, labour legislation, trade and investment pacts and barriers and, of course, the use of force, including military, for differen- tial business ends.
The negative industrial impact here is often indirect. For the benefiting owner, the differential gain accrues because the necessary industrial limi- tation is borne by other owners. For instance, historically the large petroleum companies have gained from expanding world demand at least partly because they have been politically able to keep smaller 'independent' companies largely out of the loop (Blair 1976). On the other hand, when exclusion cannot be ensured, like in the case of software development or the manufacturing of microchips, soaring production often overshoots into excess capacity and falling profits. In general, then, the negative impact of business on industry is both indirect and non-linear: while profits usually correlate posi- tively with one's owned industrial activity, beyond a certain point this corre- lation is maintained only insofar as the production controlled by others is contained.
248 Bringing power back in In sum
Business profits are possible because absentee owners can strategically limit industry to their own ends. Such control is carried out routinely, either by pricing products toward earning a target rate of return at some standard capacity utilization, or by making industrial activity conditional on earning a normal rate of return. Underlying these universal business principles are numerous differential practices, with owners, individually or in groups, trying to redistribute income via institutional and organizational change. The specific aim of most (though not all) differential tactics is to restrict the indus- trial activity controlled by existing or potential rivals. Their aggregate conse- quence is dissonance that undermines the industrial community at large, yielding a natural rate of unemployment on the one hand and a corre- sponding normal rate of return on the other.
The link between differential and universal industrial sabotage is closely related to the twin conflicts pervading the regime of business enterprise - one between absentee owners and the industrial community, the other between absentee owners themselves. These two conflicts resemble Marx's distinction between the class struggle and intra-capitalist competition - but with a big difference. Whereas for Marx the class struggle was conceptually prior to the intra-class relationship among capitalists, in our view they are two sides of the same process: the dominance of capital over society depends on a pecking order among capitalists themselves, and vice versa. On a disaggregate level, the distribution of profit among absentee owners is roughly related to the balance of business damage they can inflict on each other. And on the aggre- gate level, the overall industrial sabotage arising from their internal business warfare determines their overall profit share (although not in any linear way and along with other factors). In other words, the goals of business owners revolve around the distribution of profit, while the methods of business sabo- tage ensure that such profit is made available in the first place.
Capital and the corporation
Capital as negation
One reason why Veblen's analysis never became too popular is that it made business capital a negative industrial magnitude. This view of the business- industry nexus is alien to both neoclassical and Marxian thinking. For neoclassicists, who emphasize harmony and equilibrium, the positive social value of capital is hardly in doubt. Contrary to this view, Marx accentuated the antagonistic social basis of capital, linking accumulation to exploitation. However, just like his liberal counterparts, he too stressed the relentless pres- sure to improve productivity - pressure that stems not from the lure of monopoly and imperative of power, but from the discipline of competition. And so despite the antagonism - or perhaps because of it - capitalists according to Marx must use their capital in the most productive way possible.
Even British contributors to the Cambridge Controversy were still
Accumulation and sabotage 249
ambiguous on the industrial footing of capital. As Joan Robinson (1971) pointed out, Sraffa broke the 'conspiracy of silence' by destroying the presumption that the profit rate measured the contribution of investment to national income, let alone to human welfare; by calling into question the positive connotation of both accumulation and growth; and by refocusing attention on distribution. But although Robinson later realized that Veblen had anticipated much of this critique, she never took the next step to explore the possibility that distributive power and industrial production were not simply uncorrelated, but negatively correlated (1967: 60; 1975: 115-16).
The difference is subtle but crucial: while the Cambridge Controversy raised the possibility that capital could be unproductive, Veblen contended that, from an industrial point of view, it was necessarily counterproductive.
This claim is not easy to dismiss. Business, like other power institutions throughout history, can force people to act, but it cannot make them pro- ductive. Moreover, productivity as such, being socially hologramic and there- fore open and unrestricted, cannot generate a profit. The only way for capitalists to profit from productivity is by subjugating and limiting it. And since business earnings hinge on strategic sabotage, their capitalization repre- sents nothing but incapacitation. In this particular sense, capital, by its very construction, is a negative industrial magnitude.
The rise of the modern corporation
The emergence of capital as a business limitation of industry was greatly facilitated by the rise of the modern corporation and the larger use of credit as ownership. Now, on the face of it, this claim sounds counterintuitive. In fact, most readers would probably expect the exact opposite to be true - namely, that the corporation emerged precisely because of its productivity. But as with many other productivist categories, there is more here than meets the eye.
Perhaps the first to contemplate the broad social significance of incorpor- ation was Karl Marx. Prescient as usual, he suggested that the corporation may mark the dawn of a new capitalist regime: 'The capitalist stock compa- nies as well as the co-operative factories', he wrote, 'may be considered as forms of transition from the capitalist mode of production to the associated one' (Marx 1909, Vol. 3: 521). Yet, in his opinion, this transition was driven by the imperative of efficiency. The corporation helped concentrate the means of production and in so doing enabled capitalists to further increase productivity and hasten accumulation.
The liberal view is different, but not by much. According to mainstream economics, the corporation is the most effective way for society - not just its capitalists - to reap the benefits of large-scale production. The following pronouncement by Samuelson Inc. is typical:
Large-scale production is technically efficient, and a large corporation is an advantageous way for investors to pool the irreducible risks of
250 Bringing power back in
business life. Without limited liability and the corporation, a market economy simply could not reap the benefit that comes when large supplies of capital need to be attracted to efficient-sized corporations. . . .
(Samuelson, Nordhaus, and McCallum 1988: 453)
From a Veblenian standpoint, though, this productivist logic makes no sense. The corporation is a business institution, not an industrial unit, and so the reason for its emergence and continuous success must go beyond econo- mies of scale and scope.
First, although incorporation certainly reduces risk, as we have argued in Chapter 11 and will show further in Chapter 13, risk reduction has more to do with power than with efficiency. In fact, the focus on power was there from the very start. The purpose of the proto-corporations that first emerged in Italy of the tenth century was to bypass or at least mitigate feudal sabotage and the dangers of piracy. These early 'investment brotherhoods' had two basic structures - one maritime, the other landed. The maritime organization, known as the commenda, was a short-lived joint venture between an 'investor' (commendator) and an operator. Its whole terminology connotes power: the voyage itself was called taxedion, meaning a 'military expedition'; the task of the leader was called procertari, meaning 'to engage in struggle'; and the investments were called iactare, meaning 'rolling the dice'. The comparable landed organization was the compagnia, meaning 'sharing of bread'. In contrast to the one-time commenda, here the investment was locked for a number of years and ostensibly was less risky. But many compagnia owners, such as the Perruzis of Florence, were pulled into the lucrative business of princely war finance, a highly unproductive enterprise whose business conse- quences often proved far more disastrous than the hazards of the sea (Pirenne 1937: 122-23; Lopez 1967: 141-42, 295-98).
The second difficulty with the common rationale is that large-scale produc- tion is a sound business practice only if it serves to raise profits - yet contrary to popular conviction one does not necessarily imply the other. Since the 1890s, the modern corporation has outgrown its largest industrial unit, suggesting that economies of scale are no longer the paramount determinant of business size, if they ever were (Scherer 1975: 334-36; Edwards 1979: 217- 18). A typical modern firm now owns numerous, in some cases hundreds of industrial establishments, often in unrelated industries. And while the corpo- ration continues to grow in size, its industrial units do not. 26 The fact that
26 According to the Statistics of U. S. Business program (SUSB), the size of establishments (defined as production locations) does not differ much between super-large firms (with over 10,000 employees) and medium-sized ones (with 100-999 employees): in 2005, both groups had an average establishment size of 52 employees. The real difference was in the number of establishments: in that year, a typical large firm owned an average of 658 establish- ments, whereas its medium-sized counterpart had only 4. 6 (U. S. Department of Commerce. Bureau of the Census).
? Accumulation and sabotage 251
industrial size is not a necessity for business success has been demonstrated forcefully with the growing significance of outsourcing. Many of today's corporate giants have successfully reinstated the putting out system of the industrial revolution, with the typical result being rising profit coupled with falling payroll.
The rise of the corporation of course is related to the emergence of large- scale industry, but causality may well run opposite to what mainstream economics argues: the corporation emerged not to enable large-scale industry, but rather to prevent it from becoming 'excessively' productive.
In the case of the United States, this rationale is illustrated by the two prin- cipal processes charted in Figure 12. 3. Between 1790 and the Civil War, population growth averaged 3 per cent annually. With the conquering of the western frontier, this rate fell to 2. 2 per cent between the Civil War and the turn of the twentieth century, and further down to 1. 6 per cent between the turn of the century and the onset of the Great Depression. The second significant development occurring at the same time was a rapid acceleration
5
4
3
2
1
0
1860s 1870s 1880s 1890s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s
Figure 12. 3 The productivity threat
* Measured labour productivity in manufacturing, based on the Frickey Index spliced with the FRB index and divided by the number of manufacturing production workers. The average productivity growth during the 1910s was zero per cent.
Source: U. S. Department of Commerce.
? ? ? ? US Productivity * US Population
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? www. bnarchives. net www. bnarchives. net
? ? ? Annual % Change
252 Bringing power back in
in (officially measured) labour productivity. In manufacturing, the growth of output per employee rose from less than 1/2 per cent in the 1860s to over 3 per cent by the turn of the century. 27
The crucial intersection of these two opposing trends occurred during the last decade of the nineteenth century. Until then, with population expanding faster than productivity, the main concern for individual firms was how to satisfy soaring demand. Sales could therefore grow at maximum potential without threatening markups and profitability. This was the golden age of 'free competition'. But then things began to change. After the Civil War, the state of the industrial arts benefited from improved transportation and communication, an unprecedented increase in the use of new raw materials, the development and assimilation of numerous innovations, new production techniques and growing product diversity. The net result was a marked acceleration in the growth of productive capacity. Given that this process coincided with slowing population growth, the threat was that sooner or later the industrial system would become 'inordinately productive', as Veblen would have put it. If the earlier pattern of competitive production were to continue, industry would tend to generate much more output than could be profitably sold, bringing pricing down and business enterprise to a halt.
It was at this point that the modern business corporation as we know it came into its own. Until then, business combination largely took the form of pools and trusts whose primary purpose was to constrain aggregate output to 'what the traffic could bear' at profitable prices. Yet as Olson (1965; 1982) convincingly argues, collaboration is usually difficult and often impossible in large groups, and an excessive number of firms was indeed a primary reason for the relative fragility of these early combinations (Cochran and Miller 1961: 140-46; Chandler 1977: 317-18). There was a pressing need to reduce the number of firms, and the most effective method was merger. Mergers, however, were not only structural transformations, but also financial transac- tions. They involved buying and selling capital, which in turn meant that firms had to have a pecuniary value. In short, capital itself had to be made vendible.
The developments that followed were quick and swift. During the 1890s, the United States saw the widespread incorporation of business firms, the rapid growth of stock and bond markets and the expanding use of credit as a form of ownership. It was during that period that the separation of business from industry was finally completed. Firms were turned into corporations and investors into absentee owners of discounted future earnings. From then on, the predicament of excess capacity remained a more or less permanent feature of US capitalism. As Figure 12. 3 shows, official productivity growth continued to run ahead of population growth. Industrial limitation therefore
27 The precise productivity growth figures are dubious for the reasons outlined in Chapter 8, but the quantum technological leaps that underlay them were very real.
? Accumulation and sabotage 253 remained a business necessity, carried out by progressive corporate central-
ization and the relentless restructuring of broader power institutions.
Productive wealth and corporate finance
Equity versus debt
With the corporation seen as a means of limiting industrial activity for busi- ness gain, accumulation can no longer be understood in terms of the under- lying productive apparatus of the firm. We have already seen the temporal dimension of this rupture. As a forward-looking entity, capital accumulates upfront - that is, before the profit is earned and usually before any material equipment is created. But the rupture persists even without the timing issue. Simply put, rising capacity brings more industrial production - but then too much industrial production is bad for business and disastrous for accumu- lation.
This 'twisted' link between accumulation and production becomes evident from a closer examination of equity and debt. For the archaic 'captain of industry', capital meant equity; debt did not provide the direct control neces- sary to run industry. For the modern 'captain of solvency', however, the difference is no longer clear cut. As an absentee owner, the contemporary investor views both equity and debt as undifferentiated, self-expanding claims on the asset side of the balance sheet, universal capitals qualified only by their risk/reward profiles.
Although entries on the liabilities side of the balance sheet do not stand against specific entries on the assets side, it is generally accepted that equity capitalizes mostly the corporation's 'immaterial assets', whereas debt discounts mainly its 'material assets'. The conventional accounting creed is that both assets are valuable because of their productivity. The former repre- sents the company's unique knowledge, client loyalty and other aspects of its supposed industrial superiority; the latter denotes its undifferentiated plant and equipment. We shall now see that these accounting conventions hold little water, even on their own terms.
Immaterial assets
Consider first the 'immaterial assets'. The popular conception is that these represent the unique productivity of the firm's own industrial apparatus. But do they? Take inventions and innovations. Both are deemed productive - though given the hologramic nature of knowledge, it isn't easy to sort out how much of this productivity 'originates' in the firm that owns them. 28
Think of a Microsoft software package. This package - essentially a coded
28 For the sake of simplicity we treat here the firm and its employees as synonymous. Insofar as they are not, the 'origin' of knowledge becomes even fuzzier.
? 254 Bringing power back in
set of ideas - could not have been developed without similar codes having been written by others - or indeed without computer languages, the micro- chip, semi-conductivity, binary logic, mathematical functions or human language for that matter. Such knowledge owes its existence to society at large; much of it was invented for its own sake, often with no immediate 'applications'; and all of it is available free of charge. In this sense, most of Microsoft's inventions and innovations are not really Microsoft's - and this delinking means that the 'productivity' of these innovations, whatever it may be, isn't Microsoft's either and therefore cannot account for its 'immaterial assets'. In fact, had Microsoft followed the productivity doctrine of distribu- tion to the letter, paying royalties on the use of such knowledge, it would probably have no 'immaterial assets' whatsoever and an infinitely large debt.
In practice, though, none of this matters. The real issue is not whether Microsoft's knowledge 'originates' inside or outside the company, but whether that knowledge - whatever its source - can be protected. Note that on its books, Microsoft - like any other corporation - capitalizes not the invention itself, but the patent or copyright that defends it. And by now the reason shouldn't be surprising: unless the innovation is protected, everyone can use it, and what everyone can use nobody can profit from. Conclusion: a corporation - no matter how 'innovative' it claims to be - can only capitalize the protection of knowledge, never the knowledge itself. 29
Moving from legally sanctioned intellectual property rights to unsanc- tioned items, the alleged productivity of 'immaterial assets' becomes even more dubious. Unsanctioned items are commonly classified under 'goodwill'. The accounting meaning of 'goodwill', though, is quite different from its
29 Much like in Budd Schulberg's classic tale of modern America, What Makes Sammy Run? (1941), the success of many techno-entrepreneurs often owes more to their ruthless power than creative acumen. Their common strategy is known as 'fast following': being the first to spot new ideas created by others, to wrestle them away from their creators and to quickly turn them into the fast follower's own property.
Bill Gates' MS-DOS operating system, for instance, is surprisingly similar to a previous system named QDOS, a system written by one Tim Peterson, to whom Gates paid $50,000 so that he would give up any future claims to it. Likewise, the idea for Gates' Windows system was reputably taken, this time gratis, from Steven Jobs of Apple, who tried in vain to block it in court, after himself having 'borrowed' it, along with the computer mouse, from developers at Xerox. Even Jim Clark, the legendary Silicon Valley innovator, owes almost his entire fortune to simple, back-of-the-envelope ideas - the idea to use the Mosaic browser developed by Marc Andreessen as a basis for Netscape, and the idea to use the internet as a basis for Healtheon's integration of the US health-care industry. The actual development and implementation of both ideas were done entirely by others.
According to Michael Lewis (2000: xvii), many of Silicon Valley's greatest innova- tions - including its so-called 'new-new things' - are rarely earth shattering or even novel. Rather, they are notions 'poised to be taken seriously in the marketplace', ideas that have been worked out almost entirely, and are only 'a tiny push away from general acceptance' - that is, a tiny push away from being legally packaged so that others cannot use them unless they pay.
? Accumulation and sabotage 255
original connotation of customer loyalty based on intimate knowledge in a small community. On the company books, 'goodwill' is usually used (or abused) as a catch-all term for the unsanctioned power to strategically limit industry for differential business gains.
A good case in point is corporate merger, a business transaction that has the occult ability to make the whole grow bigger than its parts. When two companies amalgamate, their post-merger capitalization almost always exceeds their separate pre-merger capitalizations put together. Some attribute this miracle to productive synergy: when fused, the two companies suppos- edly complement and boost each other's efficiency. As we shall see in Chapter 15, though, this explanation is very thin on evidence. Worse still, it is largely irrelevant for the common practice of conglomerate amalgamation, and it is totally undermined by the widespread practice of post-merger 'downsizing' to shed excess capacity.
The real cause is very different. In the final analysis, what makes the combined capitalization greater than the sum of its parts is the additional social power generated by the merger: the power to increase differential earn- ings, raise differential hype and reduce differential uncertainty. Of course, the power underpinnings of this 'added value' cannot be admitted in public. So, instead, the extra capitalization is minted on the balance sheet as fresh 'goodwill'.
In conclusion, equity accumulation capitalizes not differential productivity but differential power. In this sense, any institutional arrangement leading to higher profit expectations and lower risk perceptions - be it favourable polit- ical rearrangements, the creation of new consumer 'wants', the re-organiza- tion of collusion, or the weakening of competitors - will sooner or later lead to higher equity values backed by new 'goodwill'.
Material assets
But then what about debt? Is it not true that, unlike equity, debt is commonly backed by a material apparatus whose productive essence can hardly be denied? And doesn't this fact suggest that capital income, at least partly, is a function of productivity? The answer, again, is negative. Plant and equipment are productive in the hologramic context of 'industry at large'. And it is only because of that broader context that the ownership of machines yields the ability to threaten industry and the right to appropriate part of society's income. Only under these circumstances can machines be capitalized.
To illustrate, consider a tanker vessel. Its ability to transfer crude petro- leum changes very gradually and predictably over time. By contrast, its dollar value as a 'capital good' tends to vary dramatically with the price of oil. This latter price is affected by very broad social circumstances, including the rela- tive cohesion of OPEC and the large petroleum companies, Middle East wars, the ups and downs of global production and changes in energy efficiency. When these circumstances change, so does the price of oil; when the price of
256 Bringing power back in
oil goes up or down, a greater or smaller share of global income goes to the vessel's owner; and as the profit from the vessel fluctuates, so does the vessel's capitalized value - and yet this entire sequence occurs without there being any perceptible change in the vessel's productivity! 30
This example is by no means unique. The very same principle applies to aircraft, factories, office space and every other piece of 'capital equipment' on earth. Their capitalized value depends not on their intrinsic productivity, but on the general political, institutional and business circumstances within which they operate.
Now, on the company books, physical assets are recorded not at current market value, but at cost. This is what accountants call 'book value'. Consciously or not, there is an attempt here to separate the portion attribut- able to social power from the so-called 'true' value of the asset as measured by its historical cost. As it turns out, though, even this presumably 'objective' convention is unable to expunge power from prices.
The reason is that, at any point in time, the very cost of producing plant and equipment is already a manifestation of systemic conflict and struggle. Consider again our example of tanker vessels. If ownership of such tankers confers large profits, some of these will likely be appropriated by the compa- nies producing them (as well as by their workers, depending on their own bargaining position). The acquiring shipping line will record the book value of the vessel as an undifferentiated quantum, a 'cost' item stripped of any power consideration. But this cost already reflects a redistributional power struggle that enabled the shipyard to up the price of the newly launched vessel to begin with. Moreover, even in the unlikely absence of differential earning capacity, the cost of producing tangible equipment already embodies the normal rate of return and therefore the average limitation of industry by business.
To sum up, the distinction between stocks and bonds is rooted in power considerations, not industrial circumstances. Both forms of capital rest on power, though the nature of power is different in each case. Most generally, equity capitalizes the firm's differential ability to restrict industry for its own benefit, whereas debt capitalizes the average ability of all owners to limit industry at large.
The maturity of capitalism
The power distinction between debt and equity can also be viewed by contrasting their respective returns and the industrial limitations from which
30 The list of assets affected by oil prices can easily be extended. The efficiency of oil traders, for instance, does not change much faster than that of sea vessels; their 'human capital', though, measured by their sign-on fees, fluctuates, as if by magic, with the price of oil and the Baltic Dirty Tanker Index (Morrison 2006). Similarly for the governments of oil- producing countries: their oil-drilling expertise changes only gradually, while the value of
? Accumulation and sabotage 257
they derive: interest on debt represents average sabotage, while profit on equity denotes differential sabotage. From this viewpoint, long-term swings in the ratio of interest to profit can be interpreted as a proxy for the 'maturity' of capitalism.
Our notion of maturity here refers loosely to the strength and solidity of existing power institutions; and this strength and solidity, we argue, is inti- mately linked to the nature of earning expectations and their associated forms of capitalization. Frankel (1980) sees the basic difference between equity and debt as a question of trust: the former represents an expected return, the latter a promise of return. But then, under business enterprise, the degree of trust among owners depends on the 'normalization' of their power. 31
For this reason, we can expect that as capitalism matures and industrial control increasingly petrifies into accepted institutions, perceptions of risk decline, trust rises and debt becomes an increasingly acceptable form of accu- mulation. Conversely, when changing circumstances work to loosen the previous grip of existing conventions and understandings (and in that sense 'invigorate' capitalism), debt becomes relatively more difficult to issue and the more risky equity investment again is used as the primary vehicle of capi- talization. Seen in this light, the maturity of capitalism does not develop linearly, and in fact has no preset direction. It may increase as well as decrease, depending on the trajectory of it power institutions, organizations and processes.
Following this logic, we expect the maturity of capitalism, approximated by the ratio of interest to profit, to be positively correlated with the extent of industrial sabotage. And, indeed, as illustrated in Figure 12. 4, this correlation seems to exist in the United States. Since the 1930s, our index of maturity has been closely correlated with the unemployment rate, a readily available (albeit imperfect and partial) proxy for industrial limitation.
At first sight, the relationship may seem intuitive and not particularly significant. After all, economic fluctuations affect profit more than interest, so when unemployment rises so should the ratio of interest to profit. How- ever, this triviality holds only in the short term. In the longer haul, interest payments are much more flexible, so there is no technical reason for the interest-to-profit ratio to correlate positively with unemployment. Note that Figure 12. 4 smoothes the two series as 5-year moving averages. In this light, the fact that their long-term gyrations are so similar is highly significant.
their sovereign wealth funds swells and contracts with the ups and downs of petroleum
prices (Farrell and Lund 2008).
31 It is perhaps worth noting here that the terms 'commitment' and 'trust' have rather violent
origins. The anarchy of private warfare during the early period of Medieval feudalism left little public space and eliminated any semblance of personal security. This context gave rise to armed gangs of inge? nue in obsequio - free men under the protection and at the service of a military chieftain. The armed retainers of the Frankish king were initially known as comi- tatus and later as trustis (Ganshof 1964: 3-5).
? 258 Bringing power back in
100 ? ? ? ? ? 100. 00
10. 00
10 ? ? ? ? ? 1. 00
0. 10
1 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 0. 01 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 12. 4 Business trust and industrial sabotage in the United States
Note: Series are expressed as 5-year moving averages. The ratio of net interest to corporate profit
compares the already smoothed series.
Source: U. S. Department of Commerce through Global Insight (series codes: RUC for the rate of unemployment; INTNETAMISC for net interest and miscellaneous payments; ZBECON for pre-tax corporate profit with capital consumption allowance and inventory valuation adjustment).
The 1930s and 1940s were marked by great turbulence. As the figure indi- cates, during the Great Depression business control over industry had become 'excessive', while later, with the war-induced boom, it became 'too loose' (see also Figure 12. 2). The 1950-1980 period was much more stable. Business slowly regained control over industry, boosting confidence in the regular flow of capital income and trust among lenders and borrowers. The consequence was a gradual rise in unemployment on the one hand and a shift from profit to fixed income on the other. Since the mid-1980s, however, the trend seems to have reversed. The increasing globalization of business enter- prise and the progressive opening of the US political economy have put existing business institutions under duress and transformed the very way in which business controls industry. And as the promise of return weakened relative to the mere expectation of return, unemployment fell together with the 'maturity' ratio of interest to capital income.
? ? ? ? log scale
Unemployment
(%, left)
log scale
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Ratio of Net Interest to Corporate Profit (right)
? ? ? ? ? ? ? ?
