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).
Nitzan Bichler - 2012 - Capital as Power
Therefore, in the remainder of the book, we focus on what seems to be the most salient dimension: the power underpinnings and implications of capi- talist earnings.
Hopefully, this analysis will provide insight and raise ques- tions to encourage further explorations into the subject.
Appendix to Chapter 11: strategists' estimates of S&P earnings per share
Figure 11. 2 presents earnings-related data for the S&P 500 group of compa- nies over the period between 1988 and 2006. The chart contrasts the actual level of earnings per share (EPS) with the consensus estimates of strategists made one to two years earlier. The figure also plots a hype index, calculated as the ratio of estimated to actual earnings.
The thin line in the upper part of the figure plots the actual EPS. The data pertain to annual earnings, which usually are reported during the first quarter of the following year. For example, the annual EPS data for 1999 would be reported during the first three months of 2000.
The thicker broken line in the upper part of the chart shows the corre- sponding consensus estimates. The data points on this line are monthly read- ings, denoting the consensus forecasts made during the previous year. For instance, the data point for January 1999 is the estimate, made in January 1998, for the 1999 annual earnings; the data point for February 1999 is the estimate, made in February 1998, for the 1999 annual earnings; and so on. The last estimate for each year is made in December of the previous year. This setup gives us up to 11 observations for each year's earnings (some months do not have reported estimates). The first estimate is made 23 months prior to the last month of the projected year (for instance, in January 1999 for the year ending December 2000), and the last estimate is made 12 months before that year's end (in December 1999 for the year ending December 2000). The series appears 'broken' since every December the forecast shifts to next years' earnings.
The thicker line at the bottom of the figure computes a monthly hype index
70 ? ? ? ? 4. 0 3. 8
Elementary particles 213
? ? ? index
ratio
? ? ? ? IBES consensus EPS estimate made in the previous year (left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Actual EPS
(left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Hype Index
(right)
? ? ? ? ? ? www. bnarchives. net
? ? ? ? 60
50
40
30
20
10
0 -10
3. 6 3. 4 3. 2 3. 0 2. 8 2. 6 2. 4 2. 2 2. 0 1. 8 1. 6 1. 4 1. 2 1. 0 0. 8 0. 6 0. 4 0. 2
-20 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 0. 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Figure 11. 2 S&P 500: earnings, earning estimates and hype
Note: EPS denotes earnings per share. The Hype Index is the ratio between the consensus EPS
estimate and the actual EPS. Source: IBES through WRDS.
based on the two earning series. 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.
Accumulation and sabotage 219
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.
Accumulation and sabotage 221
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.
Appendix to Chapter 11: strategists' estimates of S&P earnings per share
Figure 11. 2 presents earnings-related data for the S&P 500 group of compa- nies over the period between 1988 and 2006. The chart contrasts the actual level of earnings per share (EPS) with the consensus estimates of strategists made one to two years earlier. The figure also plots a hype index, calculated as the ratio of estimated to actual earnings.
The thin line in the upper part of the figure plots the actual EPS. The data pertain to annual earnings, which usually are reported during the first quarter of the following year. For example, the annual EPS data for 1999 would be reported during the first three months of 2000.
The thicker broken line in the upper part of the chart shows the corre- sponding consensus estimates. The data points on this line are monthly read- ings, denoting the consensus forecasts made during the previous year. For instance, the data point for January 1999 is the estimate, made in January 1998, for the 1999 annual earnings; the data point for February 1999 is the estimate, made in February 1998, for the 1999 annual earnings; and so on. The last estimate for each year is made in December of the previous year. This setup gives us up to 11 observations for each year's earnings (some months do not have reported estimates). The first estimate is made 23 months prior to the last month of the projected year (for instance, in January 1999 for the year ending December 2000), and the last estimate is made 12 months before that year's end (in December 1999 for the year ending December 2000). The series appears 'broken' since every December the forecast shifts to next years' earnings.
The thicker line at the bottom of the figure computes a monthly hype index
70 ? ? ? ? 4. 0 3. 8
Elementary particles 213
? ? ? index
ratio
? ? ? ? IBES consensus EPS estimate made in the previous year (left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Actual EPS
(left)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Hype Index
(right)
? ? ? ? ? ? www. bnarchives. net
? ? ? ? 60
50
40
30
20
10
0 -10
3. 6 3. 4 3. 2 3. 0 2. 8 2. 6 2. 4 2. 2 2. 0 1. 8 1. 6 1. 4 1. 2 1. 0 0. 8 0. 6 0. 4 0. 2
-20 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 0. 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Figure 11. 2 S&P 500: earnings, earning estimates and hype
Note: EPS denotes earnings per share. The Hype Index is the ratio between the consensus EPS
estimate and the actual EPS. Source: IBES through WRDS.
based on the two earning series. 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-
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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,
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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.
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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-
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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
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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).
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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.
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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.
