The
liberals
analyse capital without power, while the Marxists explain capital and power - but what we need is to theorize capital as power.
Nitzan Bichler - 2012 - Capital as Power
Second, the scale of military conflict had changed, with war becoming both total and global.
And third, war seemed to have become endemic and permanent - whether in the guise of an arms race between the superpowers, local ethnic conflicts, civil wars, wars of culture or clashes of civilization.
Neo-Marxists, of course, were not the only ones to grapple with this new reality. In the twentieth century, we could speak of three basic ideologies of power, all focused more loosely or more tightly on the state. One ideology is the techno-bureaucratic state associated with Comtean positivism, Weberian institutionalism and twentieth-century managerialism. A second speaks of an autonomous state that allegedly seeks power for its own sake. And a third, dealing with the capitalist state, criticizes and complements neo-Marxist economism.
Although these three ideologies have had different beginnings and purposes, their progressive academization has drawn them closer together - so close, in fact, that it is often difficult to differentiate their methodologies and sometimes even their conclusions. All three views - with the possible exception of some Marxist variants - tend to see the state as the centre of social power and the dominant force in human history. Some go even further to consider the state as the 'unity' or 'totality' that contains and shapes its inner economic and social components. And whatever their inclination, all seems to agree that, by the twentieth century, the state - regardless of its origins - had become the key force in domestic and international developments.
Given these overlaps, it seems useful to broaden the vista here beyond the Marxist analysis of the capitalist state and to consider, if only cursorily, also the mainstream approaches to the techno-bureaucratic and autonomous state.
The techno-bureaucratic state
During the Cold War, the debate was dominated by technological deter- minism. Key contributors such as Ralf Dahrendorf (1959), John Kenneth Galbraith (1967) and Daniel Bell (1973), although starting from different
56 Dilemmas of political economy
perspectives and using distinct terminologies, all speak of technological- bureaucratic imperatives. Modern societies, they argue, require massive research and development, complex planning and social stability, and there- fore necessitate giant organizations and intricate bureaucracies.
During the nineteenth century, these requirements were only beginning to take shape and hence were easy to misunderstand. What political economists mistakenly referred to as 'capitalism' was in fact the unorganized precursor of a coming industrial - and, eventually, post-industrial - order. By the early twentieth century, the unplanned market system was beginning to wither, together with the class conflicts and social struggles that socialists errone- ously considered inherent. The capitalists and bankers were demoted, replaced by managers and technocrats.
The move from anarchic market coordination to industrial and post- industrial society, went the argument, necessarily gives rise to bureaucratic statism, a system ruled by rationality and governed by technostructures. In the words of Daniel Bell:
If the dominant figures of the past hundred years have been the entrepre- neur, the businessman, and the industrial executive, the 'new men' are the scientists, the mathematicians, the economists, and the engineers of the new intellectual technology. . . . In the post-industrial society, produc- tion and business decisions will be subordinated to, or will derive from, other forces in society; the crucial decisions regarding the growth of the economy and its balance will come from government, but they will be based on the government's sponsorship of research and development, of cost-effectiveness and cost-benefit analysis; the making of decisions, because of the intricately linked nature of their consequences, will have an increasingly technical nature.
(Bell 1973: 344)
From this post-capitalist perspective, power can no longer be seen as possessed by private owners. Even social democrats such as Ralf Dahrendorf and radicals like Charles Wright Mills succumbed to Weberianism, seeking to replace an analysis of class division with a broader theory of statist-bureau- cratic power.
According to Mills (1956), the class-based approach of Marxism had become insufficient; specifically, it was unable to explain the apparent ascent of governmental-military organizations in the post-war United States. Mills' own solution, partly influenced by the managerialism of James Burnham and the institutionalism of Thorstein Veblen, was to abandon the notion of a capi- talist ruling class in favour of three-way power structure. There are three basic scarcities, he argued - a scarcity of power, a scarcity of wealth and a scarcity of prestige - to which there corresponds a tripartite 'power elite'. Each segment of this elite leverages its power through the effective control of key organizations and institutions:
Deflections of power 57
. . . the elite are not simply those who have the most, for they could not 'have the most' were it not for their positions in the great institutions. For such institutions are the necessary bases of power, of wealth, and of pres- tige, and at the same time, the chief means of exercising power, of acquiring wealth, and of cashing in the higher claims for prestige. By the powerful we mean, of course, those who are able to realize their will, even if others resist it. No one, accordingly, can be truly powerful unless he has access to the command of major institutions, for it is over these insti- tutional means of power that the truly powerful are, in the first instance, powerful. Higher politicians and key officials of government command such institutional power; so do admirals and generals, and so do the major owners and executives of the larger corporations.
(Mills 1956: 9)
This view provided fertile ground for empirical research, primarily by soci- ologists, such as William Domhoff, who have laboured to meticulously docu- ment the structure and behaviour of the power elite, the operational arm of the 'higher circles' (see for example Domhoff 1967, with four subsequent editions, the latest of which was issued in 2005; earlier editions include 1970 and 1979). 13
The techno-bureaucratic approach, however, still treats the state (or the overlapping networks of power in Mann's formulation) mostly as an arena, a framework that organizes and governs society. This perspective started to change during the 1970s, with new studies that emphasized the state as an autonomous institution and a personated actor.
The autonomous state
The instrumental and class-based approaches, some writers now argued, serve to conceal the true nature of the state. The state, they maintained, is not a capitalist means or a social instrument. Rather, it is an actor that stands in its own right, having its own logic and, indeed, its own interests.
The conceptual framework of this view contains three basic entities: (1) the state, (2) economic resources, and (3) an amorphous collection of individuals
13 An outlier of the techno-bureaucratic approach is Michael Mann's work on The Source of Social Power (1986; 1993). Mann rejects the notion of a 'unitary totality'. Society, he argues, is not a well-defined system that can be divided into subsystems such as state, culture and economy, or a clearly bounded entity that has dimensions, levels and factors. Instead, he offers to think of societies and their histories as an overlapping network of inter- actions between four sources of social power: ideological, economic, military and political. The focus of his inquiry, though, is still Weberian. His concern is the organizational means associated with each source of power, and how these develop and change in relation to each other. Earlier in history, he says, political and sometimes military means were primary, whereas in recent times economic power, along with its 'class' relations, has become paramount.
? 58 Dilemmas of political economy
and groups, called society. In this structure, the state holds a unique position: it monopolizes the organized means of violence. The state mobilizes economic groups - be they industrialists, merchants, rentiers, or farmers - in order to obtain economic resources. And it then uses these resources to organize and control its society, as well as to fight and defend itself against other states.
This view is evident in the historical account of Charles Tilly (1975; 1992). The origin of the autonomous state, he argues, goes back to the twilight of feudalism in the second millennium AD. The state was invented not by the bourgeoisie to serve capital accumulation, but by political elites who sought to consolidate their power. The key purpose of the state - from its princely feudal beginnings, through its absolutist and monarchic phase, to its present national form - has been twofold: to organize and finance increasingly expen- sive wars and to discipline tax payers. Capitalism from this viewpoint is merely the economic means that supplies the military and strengthens the state apparatus.
A similar history is told by Theda Skocpol (1979; 1985), who argues that the European and American revolutions were the result not of class struggles but of political weakness in the face of inter-state conflicts. Her argument, although rich in historical detail, boils down to fiscal-organizational deter- minism. The anciens re? gimes, she notes, were burdened by excessive and inef- ficient taxation that strained their access to material resources and limited their ability to finance organized violence; therefore, they were replaced by more rational states with streamlined tax structures and superior war-making capabilities.
In the final analysis, then, history is the cunning of the state. The liberal and Marxist theses, according to which the state serves its citizens, the bour- geoisie, or capital accumulation more generally, are mere fantasies. The state develops in its own right and for its own sake. It inevitably grows and central- izes. It is driven not by an external economic determinism, but by its own statist determinism.
The capitalist state
Marxists began to re-evaluate the role of the state in capitalism around the same time as the 'autonomists'. 14 The post-war era brought new develop- ments - from the ascent of social democratic parties in Europe, through the student movements, to the rise and demise of Keynesianism - and these developments called for new explanations. It was no longer possible to treat the state as a simple extension of the 'capitalist interest'. The state had clear limitations, it had a concrete history, and it was being heavily dissected by competing bourgeois theorists. It was time for Marxists to re-examine their own views.
14 For critical reviews of Marxist state theory, see Holloway and Picciotto (1978b), Block (1987), Jessop (1990; 2002), Clarke (1991), Mann et al. (2001-2) and Anievas et al. (2007).
? The state imperative
Beyond their many disagreements, all Marxists seem to accept that capitalism requires a state for four main reasons. First, the state helps prevent the inher- ently conflictual nature of capitalist production from becoming overtly politi- cized. The capitalist class, argues Gerald Cohen (1978), has 'power' over every worker, but the 'right' over none. It has the systemic ability to act in its own interest, but it lacks the normative, moral and legal sanction that makes such action acceptable. This sanction is provided by the state. Second, the state can help counteract the anarchic, crisis-prone nature of capitalism. Whether the tendency for crisis comes from production or realization, history suggests that the state is able, within limits, to mitigate it (Miller 1987). Third, the state serves to absorb, temporarily or permanently, the bloating social cost of accumulation (O'Connor 1973). Fourth and finally, at the global level, the state system mediates the conflicting and mutual interests of capitalists as well as their relation with non-capitalist entities, although the precise nature of this mediation as well as its logical necessity remain heatedly debated (Mann et al. 2001-2; Callinicos 2007).
Marxist state theorists further agree that the state needs to be sufficiently separate from capital. This is the common point of departure. The debate is over the precise nature and extent of this separation, and here there seem to be two distinct views. The first, 'flat' approach is to treat capital and state as belonging to two interdependent yet distinct spheres - economics and politics - and to consider each sphere as having a separate and equally significant logic. The other, 'hierarchical' approach is to consider the logic of capital as primary, and then derive the state from the broader imperatives and contra- dictions of accumulation.
The flat approach
The flat approach underlies the famous debate between Ralph Miliband and Nicos Poulantzas over the 'autonomy of the state'. 15 The two begin from seemingly different assumptions. Miliband considers the state as an instru- ment of the capitalist class, whereas Poulantzas sees it as rooted in the objec- tive structure of capitalism. Yet both cast their argument in purely political terms. This exclusively political language can be traced back to Friedrich Pollock's 'end of economics' - and, indeed, references to the autonomy of the state have been criticized as neo-Ricardian. The neo-Ricardians have rejected Marx's labour theory of value along with his laws of motion. And since this rejection eliminates economic inevitability (at least in the immediate term), the state is left economically indeterminate (at least for the time being). 16
15 See Miliband (1969; 1970; 1973) and Poulantzas (1969; 1973; 1975).
16 A neo-Ricardian critique of Marx's analysis of production is given in Gough (1972), and its
implications for the state are articulated in Gough (1975). For counterarguments, see Fine and Harris (1976b; 1976a) and Holloway and Picciotto (1978a).
Deflections of power 59
? 60 Dilemmas of political economy
For Miliband, economic indeterminacy means that the state can serve the immediately observed interests of the capitalists, whatever they may happen to be. For Poulantzas, the state lives a more complicated double life - economic in principle, political in practice. In theory, the state is certainly 'determined' by the economy. This determination, though, happens only in the Althusserian 'last instance' - an asymptotic concept that Poulantzas leaves conveniently opaque and safely out of sight. In the interim the key is politics, which means that in its day-to-day operations the state enjoys a 'rela- tive autonomy' to act as it sees fit.
The result is acute schizophrenia. Given that any state action affects both the immediate and 'last' instances (and every instance in between), the state must constantly juggle its own short-term autonomy against the long-term structural interests of the economy. But, then, Poulantzas, whom taxono- mists for some reason like to classify as a 'structuralist', is completely silent on the economics of the 'last instance'. And since this silence leaves the struc- tural imperatives of capitalism undefined, it is rather unclear what exactly it is that the state tries to achieve. For his part, Poulantzas informs us, with emphasis in the original, that 'the State is precisely the factor of cohesion of a social formation and the factor of reproduction of the conditions of production of a system that itself determines the domination of one class over the others. . . ' (1969: 73), and it is obviously to our own demerit if we don't quite understand what this sentence is supposed to mean.
The hierarchical approach
The alternative, vertical approach is different in that it considers capital and state as conceptually unequal. The engine of capitalist history is the economic accumulation of capital. The capitalist state is merely part of that process. Writers who follow this approach are often labelled 'fundamentalists'. They emphasize the deep logic and inherent contradictions of capitalist production as articulated by classical Marxism - this in opposition to the neo-Ricardians who, they argue, deal with the secondary, surface phenomena of 'circulation', market structure and monopoly capital. 17
The contradictory logic of accumulation gives the state its concrete history. Thus, according to Perry Anderson (1974), the capitalist state was never functionally autonomous. In Europe, he argues, state formation was deeply intertwined with the underlying transformation of the mode of production. The feudal and absolutist states prepared the conditions for capitalist accu- mulation and, eventually, also for the political rule of the bourgeoisie. Seen from a functionalist viewpoint, the state doesn't have - and never had - an
17 It should be noted that, in practice, the differences between the two analyses of the state are not that clear cut. Fundamentalists customarily rely on 'surface phenomena', while circula- tionists often make references to 'inevitable contradictions' (see also footnote 9).
? Deflections of power 61
independent role. It merely shapes the requirements of the ruling class, a class that is, in itself, is a creature of the contemporary mode of production.
At a later stage, economic restructuring, driven either by the centralization of capital or the intensification of competition, further transforms the capi- talist state. Gabriel Kolko (1963), for example, maintains that the growth and strengthening of the American state were largely a consequence of a political alliance of big business. The large industrial owners, he says, did not enjoy greater monopoly power. On the contrary, they suffered from mounting competition. They solved the problem with government regulation, for which they needed a big state - hence the emergence of 'political capitalism'.
Whatever the reason, the assent of the state is unavoidable. In the hyped language of Ernest Mandel,
Capitalist private property, the private appropriation of surplus-value and private accumulation increasingly become an obstacle to the further development of the forces of production. State (and supra-national) centralization of part of the social surplus product has once again - as in numerous pre-capitalist societies - increasingly become a material precon- dition for the further development of the forces of production. . . . The strengthening of the State in late capitalism is thus an expression of capi- tal's attempt to overcome its increasingly explosive inner contradictions, and at the same time an expression of the necessary failure of this attempt.
(Mandel 1975: 580-81, original emphases)
And now in simple words: capitalism is born an economic-industrial crea- ture, generating surplus value that accumulates in the form of means of production (counted in undefined units of abstract labour). This process continues for a while, but sooner or later something goes wrong. There is a decline or intensification of competition, an increase in the organic composi- tion of capital, or some other inevitable development that causes normal accu- mulation to turn into over-accumulation (or normal production to become over-production or under-consumption - all fuzzy distinctions which the theorist commonly pays lips service to and quickly glosses over). As a conse- quence of this mishap, capitalism takes a quantum leap and becomes 'polit- ical' (which means that previously it was a-political). The capitalists turn the 'night-watchman' state into a 'regulating' state (a transition that both proves and refutes the ability of the system to survive), and the writer puts the full stop after the QED.
Political Marxism
In a certain important sense, the analysis of the capitalist state has become a fetter on Marxist theory. The problem is that the state - whether equal to capital, subordinate to capital, or derived jointly with capital from a broader
62 Dilemmas of political economy
materialist history as argued by the German 'state derivation debate' - always ends up fracturing the overall picture. 18 Because the state is assumed to be inherently and necessarily separate from accumulation, we end up with two distinct appearances: one of economics and the other of politics.
Some 'political Marxists' have attempted to transcend the problem by redefining the politics/economics duality in continuous rather than binary terms. According to Ellen Meiksins Wood (1981), capital is the 'privatization of politics' insofar as it gives private owners the authority to organize produc- tion. Meiksins Wood accepts the existence of the 'economy', complete with Marx's laws of capitalist development, etc. The novelty is that the boundaries of her economy are not rigid, but supple:
'Political Marxism', then, does not present the relation between base and superstructure as an opposition, a 'regional' separation between a basic 'objective' economic structure, on the one hand, and social, juridical, and political forms, on the other, but rather as a continuous structure of social relations and forms with varying degrees of distance from the imme- diate processes of production and appropriation, beginning with those relations and forms that constitute the system of production itself.
(1981: 78, original emphases)
Although this formulation sounds tempting, it really does little to square the circle. First, there is a confusion of terms. Meiksins Wood is right to argue that capital is the privatization of politics. But the private/public distinction is not the same as the distinction between economics and politics. And since capital is not an 'economic' entity, the fact that it privatizes power tells us nothing about the relationship between the 'economic' and the 'political'.
This confusion becomes evident when we consider Meiksins Wood's defi- nition of the economy: she doesn't have one. Meiksins Wood never tells us what she means by the 'immediate processes of production and appropria- tion', what constitutes the 'system of production itself', or how we can measure the 'degree of distance' from these yardsticks.
Perhaps these concepts had a clear enough meaning during the transition from the fields and meadows of pre-capitalist Europe to the factories of early industrialization. But as we shall see later in the book, this clarity has been lost since then, leaving us with a set of empty formulations. What exactly are the 'immediate' processes of production and appropriation of a modern pharmaceutical drug, of a jet fighter, of an automobile, of a complex software
18 The German 'derivationists' reject the orthodox 'fundamentalist' notion according to which the economic is somehow prior to the political, and instead seek to treat both as part of the same materialistic development. This rejection, though, seems largely semantic, since the deriviationists do not offer any meaningful rethinking of Marx's original category of capital. For a recent statement of the derivation approach, see Altvater and Hoffman (1990).
? Deflections of power 63
system, of an insurance system, or of health care? Where do these complex processes start and where do they end? Can the 'immediate' processes of production and consumption be delineated, even roughly, from those that are 'less immediate'? If this delineation is impossible to make, what constitutes the system of production 'itself'? And if the 'system of production' remains unspecified, what does it mean to say that the economy and politics are 'distinct', whether the distinction is rigid or supple?
The capitalist totality
As Marx himself put it, if there were nothing behind the 'thing', there would be no need for science. If we accept that the politics-economics fracture is merely the 'appearance' of capitalism, we need to see what lies behind this fracture. Physicists tell us that behind the separate appearance of colours lies the unifying logic of the wave length. Likewise, Marx tells us that behind the distinct appearances of economics and politics, of production and state, of exploitation and oppression, lies a single capitalist totality.
And yet, Marxists do not have a theory to explain this totality. They have an explanation for why the world seems bifurcated between factory and state, and for why this separation is cunning, misleading and alienating. But they offer no unified science to transcend the bifurcation, no alternative totality to stand against capitalism.
The flat, 'autonomous' explanations give up the possibility for such a unified science altogether by accepting from the start that politics and economics obey two semi-independent logics. By contrast, the hierarchical, 'structuralist' explanations do try to devise a single theory in which the state is derived from the material basis of accumulation. Yet they, too, cannot go very far: their conception of capital adheres to Marx's notion of abstract labour value, and this loyalty keeps them entangled in the same logical and historical impossibilities that have haunted Marxism for more than a century.
The result is a dead end. Since labour values cannot be observed and calcu- lated, it follows that structuralist theories - no matter how sophisticated - cannot know anything about the actual accumulation of labour values. And given that the value reality of accumulation remains unknown, structuralists have no concrete basis from which to 'derive' the state.
This entanglement serves to explain why structural Marxism has plenty to say on the logic of the capitalist state but little on its contemporary reality: fiscal and monetary policies, military spending and war, financial markets and workers' pensions, the debt and energy policies of the American empire - these are all issues that structuralists can do little more than speculate about (Block 1987: Part I).
During the early twentieth century, the meaning of 'socialism' was pretty clear. It was an alternative to the logic of capitalism and the reality of the capitalist state. Socialism represented a new way of democratically articu- lating the good of society, of scientifically assessing its possibilities, of
64 Dilemmas of political economy
systematically planning its production and consumption. But after a century of Stalinist abuse and academic fracturing, this vision has dissipated. We have neo-Marxian economics, cultural studies and state theory - but we no longer have a theory of the capitalist order as a whole. Marxism has been unable to either save the labour theory of value or come up with a different theory of value in its stead. There is no university, academy or forum where Marxists systematically study, debate and prepare an alternative democratic future. Today, no serious Marxist would claim to have a systematic alternative to capitalism. And the ruling class knows it: 'Even in crisis, capitalism remains fortunate in its enemies', concludes the ironic Financial Times commentator (Skapinker 2008).
As we shall see in the next part of the book, the reason for this vacuum is the lingering enigma of capital. Political economy, both mainstream and crit- ical, lacks a coherent conception of capital. And it lacks such a theory because it deflects the issue of power.
The liberals analyse capital without power, while the Marxists explain capital and power - but what we need is to theorize capital as power.
Part II
The enigma of capital
5 Neoclassicalparables
The price is determined by the market, what we try to do is to make the market balanced. Today there is disequilibrium between supply and demand. Today we are trying to get the market to the normal equilibrium and the price will take care of itself.
--Ali Al-Naimi, Saudi Arabia's Oil Minister
The principal casualty of separating economics from politics is the theory of capital. Academic departmentalization placed it firmly in the hands of econo- mists, leaving political scientists, sociologists and anthropologists with practically no say. The economists have chosen to emphasize material consid- erations and to all but ignore power, yet that choice has hardly cleared the water. In fact, despite their complete monopoly, economists have been unable to even define what capital means.
While all agree that capital is monetary wealth, figuring out what makes this wealth grow has proven much harder. 'What a mass of confused, futile, and downright silly controversy it would have saved us', writes Joseph Schumpeter (1954: 323), 'if economists had had the sense to stick to those monetary and accounting meanings of the term instead of trying to "deepen" them! '
Of course, the problem lies not in the desire to deepen, but in the direction economists have gone digging. Their main goal has been to link accumulation with productivity, but with social production having grown in complexity the link has become increasingly difficult to pin down. And the difficulty persists precisely because economists insist it is exclusively theirs. According to Bliss (1975), once economists agree on the theory of capital, 'they will shortly reach agreement on everything else'. But then how could they agree on this theory, if capital, by its very nature, involves power, which they view as lying outside their domain?
68 The enigma of capital
The material basis of capital
Despite their pivotal significance, the definition of capital and the meaning of accumulation remain unsettled. 1 Historically, the principal contention stemmed from trying to marry two different perceptions of capital - one quantitative, the other qualitative. Originally, capital was seen as an income- generating fund, or 'financial wealth', and as such it had a definite quantity. It was also viewed as a stock of physical instruments, or 'capital goods', char- acterized by a particular set of qualities (Pasinetti and Scazzieri 1987). The key question concerned the connection between these two incarnations: are 'capital goods' productive, and if so, how does their productivity affect their overall magnitude as 'capital'? (Hennings 1987).
Mainstream economics has been trying to show that capital goods indeed are productive and that this positive attribute is what makes capital as a fund valuable. The marriage, though, hasn't work well, partly due to a large age difference: the concept of capital predates that of capital goods by a few thou- sand years, suggesting that their overlap is not that self-evident.
The older partner, capital, comes from the Latin caput, a word whose origin goes back to the Fertile Crescent in the Middle East. In both Rome and Mesopotamia capital had a similar, unambiguous economic meaning: it was a monetary magnitude. There was no relation to produced means of produc- tion. Indeed, caput meant 'head', which fits well with another Babylonian invention - the human 'work day' (Schumpeter 1954: 322-23; Bickerman 1972: 58, 63).
The younger partner, capital goods, was born millennia later, roughly together with capitalism. The growing significance of mechanized instru- ments captured the attention of pre-classical writers, but initially these were referred to mostly as 'stocks' (Barbon 1690; Hume 1752). The first to give capital a productive role were the French Physiocrats, and it was only with Franc? ois Quesnay and Jacques Turgot during the latter half of the eighteenth century that the association between capitals (as monetary advances) and mechanized production started to take shape (Hennings 1987).
Since then, the material-productive bias has grown ever more dominant. Thus, Adam Smith speaks of 'stocks accumulated into capital' which is 'necessary for carrying on this great improvement in the productive powers of labour' (1776: 260-61); similarly with David Ricardo, who equates capital with 'that part of the wealth of a country which is employed in production, and consists of food, clothing, tool, raw materials, machinery, &c. necessary to give effect to labour' (1821: 85); Karl Marx talks about 'constant capital' represented 'by the means of production, by the raw material, auxiliary material and instruments of labour' (1909, Vol. 1: 232); John Bates Clark asserts that 'Capital consists of instruments of production', which 'are always
1 For the deep sense of unease regarding the definition of capital, see Schumpeter (1954: 322- 27) and Braudel (1977; 1985, Vol. 2: 232-49).
? Neoclassical parables 69
concrete and material' and whose appearance as value is 'an abstract quantum of productive wealth' (1899: 116, 119); Irving Fisher takes capital as equivalent to the prevailing stock of wealth (1906: 52); Frank Knight sees capital as 'consisting of non-human productive agencies' (1921: 328); while Arthur Pigou conceives of capital as a heterogeneous material entity 'capable of maintaining its quantity while altering its form' (1935: 239). Summing it all up, Joseph Schumpeter naturally concludes that, in its essence, 'capital consisted of goods', and specifically of 'produced means of production' (1954: 632-33). No matter how you twist and turn it, fundamentally capital is a material entity.
Yet, the classical political economists did not have a complete theory of capital. Recall that these new scientists of society started to write when indus- trialization was still in its infancy, smokestack factories were few and far between, and the population was still largely rural. They therefore tended to treat the amalgamate of capital goods as a 'fund' or 'advance' whose role, in their words, is merely to assist the 'original' factors of production - labour and land. Although the general view was that capital goods were valuable due to their productivity, no attempt was made to quantify their 'amount'. The link between capital goods and capital therefore was left unspecified.
In hindsight, the principal obstacle in establishing this link was that the classicists still viewed capital goods as a secondary input, and in that sense as qualitatively different from the original primary inputs. This belief, though, proved no more than a temporary roadblock.
The production function
Taking the classical lead but without its associated inhibitions, the neo- classicists followed the Earl of Lauderdale (Maitland 1804) in making capital goods a fully independent factor of production, on par with labour and land. Their view of capital, articulated since the latter part of the nineteenth century by writers such as Phillip Wicksteed, Alfred Marshall, Carl Menger and, primarily, John Bates Clark, emphasized the distinct productivity of capital goods, and by so doing elevated these goods from mere accessories to requisites.
The two assumptions
In his book, The Distribution of Wealth (1899), Clark used this newly found symmetry among the factors of production to offer an alternative theory of distribution. The theory stipulates a two-step mathematical link between income and production.
The first step asserts the existence of a 'production function'. The level of output, Clark argued, is a function of quantifiable 'factors of production', each with its own distinct productive contribution. This assertion assumes that labour, land and capital are observable and measurable (so for instance,
70 The enigma of capital
we can see that production uses 20, 10 and 15 units of each factor, respec- tively); it argues that the way these factors interact with one another in production is similarly straightforward (so we know exactly what factors enter the production process and how they affect the productivity of all others factors); and it posits that we can associate definite portions of the output with each of the factors (for example, labour contributes 40 per cent, land 15 and capital goods 25).
The second step uses the production function to explain the distribution of income. Clark claimed that, under conditions of perfect competition ('with- out friction', in his words), the income of the factors of production is pro- portionate to their contributions - or more precisely, to their marginal contributions (so that the wage rate is equal to the productive contribu- tion of the last worker added to production, the rent is equal to the contri- bution of the last hectare of land, and the profit rate is equivalent to the contribution of the last unit of capital).
Where does profit come from?
Formulated at a critical historical junction, the new theory combined a powerful justification with a seemingly solid explanation. And there was certainly need for such theory. The emergence of US big business during the latter part of the nineteenth century accelerated the centralization of capital, raised profit margins and heightened income inequality - much along the lines anticipated by Karl Marx - and these developments made earlier profit theories look hopelessly irrelevant.
Chief among these theories were the notions of 'abstinence' as argued by Nassau Senior (1872) and of 'waiting' as stipulated by Alfred Marshall (1920). According to these explanations, capitalists who invest their money are abstaining from current consumption and therefore have to be remuner- ated for the time they wait until their investment matures. By the end of the nineteenth century, though, the huge incomes of corporate magnates, such as Rockefeller, Morgan and Carnegie, enabled them to consume conspicuously regardless of how much they ploughed back as investment; and even when these magnates chose to be frugal, usually they did so in order to augment their power, not their future consumption.
Other theorists, such as Herbert Spencer (1904), William Sumner (1920; 1963) and later Ayn Rand (1966), took a more 'biological' path, claiming that profit was simply due to superior human traits. This version of financial Darwinism was happily underwritten by large US capitalists eager to make their blood turn blue. But the basic theoretical and moral problem remained.
Even if this 'science of remuneration' were all true, and even if capitalists indeed were superhumans whose waiting in abstinence had to be compen- sated, the magnitude of their remuneration remained unexplained. Why should the pay on their investment be 20 per cent rather than 5 or 50? What
Neoclassical parables 71
caused the return to fluctuate over time? And why did some capitalists win the jackpot while others, despite their merit and patience, ended up losing money? Clearly, there was a pressing need for a more robust ideology, and this is where Clark's theory of marginal productivity came into the picture.
Contrary to the Marxist claim, Clark insisted that capital is not in the least parasitic: much like labour, it too receives its own marginal productivity, an income which therefore is essential for the growth process. Indeed, since income is proportionate to productive contributions, it is rather clear that capitalists, through their ownership of capital, in fact are more productive than workers. That must be so - for otherwise, why would their earnings be so much greater? 2
The birth of 'economics'
The marginal productivity theory enabled neoclassicists to finally remove their classical shackles and finish the liberal project of de-politicizing the economy. The classicists, whether radical or liberal, were interested primarily in well-being and distribution. Production was merely a means toward those higher ends. Clark helped reverse this order, making distribution a corollary of production. And indeed, since the turn of the twentieth century, attention has gradually shifted from the causes of income inequality to its ramifica- tions, a subject economists felt they could safely delegate to sociologists and political scientists. The old ideological disputes of political economy were finally over. From now on, announced Alfred Marshall, we have a new science: the science of economics - complete with both the rigour and suffix of mathematics and physics.
In fact, Clark and his contemporaries not only de-politicized the economy, they also 'de-classed' it. Instead of workers, capitalists, rentiers and the state - differentiated entities whose struggles loomed large in the classical canons - the neoclassical landscape is populated by abstract individuals - 'actors' who can choose to be workers one day, capitalists the next, and voluntarily unem- ployed the day after. These individuals live not in society as such, but in a special space called the 'economy'. Their sole preoccupation is to rationally maximize pleasure from consumption and minimize the pain of work. Indeed,
2 The productive origin of profit is now an all prevalent logic. A typical example is provided by the recent debate over the resurgence of leverage buyouts. Supporters of the trend argue that private firms are more productive than those listed on the stock market, while its critics maintain that delisting is driven by manipulators and asset strippers. 'So who is right? ' asks Martin Wolff, chief economist of the Financial Times. 'An obvious answer is that private equity is a growing activity in which willing sellers meet willing buyers. If it prospers, it must be profitable. If it is profitable, it should also be adding value' (Wolf 2007). This rule can be frustrated by 'market imperfections', but its underlying logic is taken as self-evident.
? 72 The enigma of capital
society for them is an external and largely irrational sphere which constantly threatens to prevent their 'economy' from reaching its collective orgasm of Pareto Optimality. 3
With so much going for it, the marginal productivity theory was quickly endorsed by professional economists - and, of course, by their captains of finance. The latter used and abused the theory partly for what it said, but especially for what it didn't.
Marginal productivity theory in historical context
It turns out that Clark's theory of distribution could say very little about the reality in which it developed - and this for a simple reason: the theory rose to prominence precisely when the conditions necessary for it to work disap- peared.
Recall that, in liberal theology, everyone is equal before mother competi- tion and father market. No single person can affect the market outcome. This conclusion (or assumption) is formalized in neoclassical manuals through the properties of demand and supply. Individual consumers are said to face a supply curve which they cannot alter (a flat schedule equal to the market price); similarly, individual producers confront a flat demand curve over which they have no control (also equal to the market price). This convenient setting makes the market demand and supply independent of each another. And this independence in turn leads to a unique equilibrium - a spontaneous yet stable 'one dollar, one vote' democracy.
The end of equilibrium
By the beginning of the twentieth century, however, when this vision became the canon, the assumption of independent supply and demand - as well as of the autonomy of consumers, the anonymity of sellers and the absence of government - was no longer tenable. It turned out that perfectly competitive equilibrium was no longer possible, even on paper.
There were three basic reasons for this impossibility. First, oligopoly substituted for 'free' competition, and that changed pretty much everything. In oligopolistic markets sellers become inter-dependent, and this inter- dependence - even if we pretend that consumers remain fully rational, know- ledgeable and autonomous - makes the individual firm's demand curve
3 Pareto Optimum, a neoclassical mantra named after the Italian thinker Vilfredo Pareto, refers to a situation in which no individual can be made better off without another individual becoming worse off. This situation is said to exist when the overall pie cannot be made any bigger - that is, when the economy works at full employment and in maximum efficiency. Of course, since no one has thus far been able to identify such an Optimum, the mantra is of little practical significance. But its ideological importance is considerable: if maximum output is already optimal, why worry about its distribution?
? Neoclassical parables 73
indeterminate. In the absence of a clear demand curve, firms don't know how to maximize income. And without this unambiguous yardstick for action the oligopolistic market as a whole becomes clueless, lacking a clear equilibrium point on which to converge. 4
Second, by the end of the nineteenth century there emerged an obvious asymmetry between the buy and sell sides. While individual consumers remained powerless to alter market conditions and therefore had to obey them, the giant corporation enjoyed far greater flexibility. For large firms, the 'demand curve' was no longer an external condition given by sovereign consumers, but rather a malleable social context to be influenced and shaped relentlessly as part of the firm's broader investment and pricing strategy. 5 Of course, in public big business continued to talk about the 'market discipline' to which it was presumably subjugated. But that was doublespeak, the use of mythical forces to conceal real power. In private, large firms saw themselves not only as 'price makers', but also as 'market makers'. 6
These two developments marked the end of spontaneous equilibrium. Originally, economics had two unknown variables and two independent func- tions with which to explain them: jointly solving the demand and supply equations yielded unique values for price and quantity. But with the introduc- tion of power into the picture, demand became dependent on, if not subsumed by, supply, leaving economics with only one (combined) equation to explain the two unknowns. In one swoop, economics lost its 'degree of freedom'.
4 To illustrate this conclusion with a hypothetical example, consider a price change by Nokia. This price change will elicit responses from Nokia's oligopolistic rivals, such as Motorola, Samsung and Panasonic, and these responses will in turn change the demand curve for Nokia's own product. Since the direction and magnitude of these responses are open-ended, the eventual position of Nokia's demand curve becomes unclear. And given that Nokia cannot foretell this eventual position, it cannot know the profit maximizing price and there- fore cannot know how to act. Game theorists have managed to solve this problem a million times over - but only by imposing predetermined theoretical rules that real oligopolists such as Nokia and its rivals are perfectly free to ignore.
5 The concept of 'consumer sovereignty' also depreciated due to the immense increase in the complexity of production and consumption. We can perhaps fathom an independent farmer in the United States of the mid-nineteenth century assessing the marginal benefit of growing corn and cabbage instead of beets and tobacco, or of a slave hunter contemplating the marginal rate of substitution between the income from seizing an additional escapee and a week of idle leisure. But these types of computations are rather difficult to make in a world loaded with millions of different commodities and endless 'choices'. It is no wonder that instead of the individualist ethos of the nineteenth century we now refer to consumers as 'masses' and to investors - even the most sophisticated - as 'herds'.
6 These concepts were already part of common business parlance at the turn of the twentieth century. For early analyses of firms as 'price makers', see the works of Brown (1924) on General Motors, of Means (1935a) on administrative prices and of Hall and Hitch (1939) on business behaviour. On the broader politics of 'market making', see Kaplan et al. (1958). The nineteenth-century precursors of anti-market corporatism (including the young J. B. Clark) are examined in Perelman (2006). The power aspects of pricing will be examined in Chapter 12.
? 74 The enigma of capital
From now on, there could be any number of price/quantity outcomes, all perfectly consistent and none necessarily stable. And if the real world did appear stable, the reason was not the invisible hand of the market but the visible hand of power. 7
The third development, which we already alluded to in previous chapters, was the rise of big government and, later, of active economic policy. This development presented another serious difficulty for mainstream economics. On the one hand, large governments have become integral if not necessary to the process of capital accumulation. On the other hand, their existence has 'contaminated' economics with power, annulling the invisible hand and leaving the notion of spontaneous equilibrium hanging on the thread of denial.
Public management
As noted in Chapter 4, economists have partly managed to ignore this dilemma by keeping the study of macroeconomics as separate as possible from microeconomics, nested uneasily in what Paul Samuelson called the 'neoclassical synthesis' and John Ruggie later labelled 'embedded liberalism'. But that wasn't enough. It was also necessary to ascertain that the public sector, no matter how large and active, remained subservient to the logic of laissez faire individualism and the interests of its large capitalists.
This requirement was greatly assisted by the founding of 'public manage- ment' - a new social science that would imitate, at least nominally, the princi- ples of Frederick Taylor's 'scientific management' (1911). We say nominally, since unlike the so-called scientific management of private enterprise, public management lacked from the beginning any clear yardstick for success.
7 For those who care to read further, we should add that demand and supply are unlikely to be independent of each other even in the absence of power. The basic reason is that any change in the supply price of a given commodity redistributes income between buyers and sellers of that commodity. This redistribution in turn shifts the respective demand curves of those buyers and sellers. And since different buyers have different preferences, the redistribution of income works to alter the overall market demand curve. This simple logic implies that move- ments along the supply curve are accompanied by shifts of the demand curve - leading not to one, but to multiple equilibria.
Neoclassical economists solve this problem by making two assumptions. First, they ask us to forget about the liberal ideal of individual freedom and think of all consumers as drones, each one identical to the 'representative consumer' and therefore possessing the same set of preferences. Second, they ask us to further believe that these drones have a mental fix, such that the proportion of their income spent on various items is independent of their income level (a consumer spending 30 per cent on food when her annual income is $10,000 will also spend 30 per cent on food when her income is $10 million). These two assumptions - known as the Sonnenshein-Mantel-Debreu conditions - indeed imply that redistribution of consumer income leaves the market demand curve unchanged. But since these assumptions are patently impossible, they also imply that neoclassical consumer theory has practically nothing to say about any real world situation.
? Neoclassical parables 75
The dilemma is simple. The administration of business, neoclassicists argue, is guided by a single goal: the maximization of profit. According to Clark's marginal productivity theory, the more profit the corporation earns, the greater the well-being it must have generated, by definition. Public admin- istration, though, has no comparable rule. Since public services commonly do not have a market price, and since public officials do not normally profit from the services they administer, there is no 'natural' way to tell how much utility is being generated. Unlike in the private sphere, here you have to decide what the utility is. But then utility is subjective, so how can public administrators ever hope to mimic the objective market?
There are two solutions to the problem. The first, used mostly to justify higher budgets, is to keep a straight face, pretend that the public sector behaves just like a free market, and subject it to the neoclassical mechanics of indifference curves, budget lines, production functions and possibilities fron- tiers. The absurd, albeit politically effective, outcome of this venue is best illustrated by marginalist analyses of 'national defence' - the arena most removed from the neoclassical fantasy land (Hitch and McKean 1960). The second solution, ideal for periods of 'belt tightening', is to simply reiterate the basic maxim of liberalism: if in doubt, minimize. Since the public sector is a necessary evil, an authoritarian wasteful institution whose sole purpose is to ameliorate temporary 'market failure' and counteract communist ideology, the best yardstick for its success is the extent to which we can limit its inter- vention. 8
Many of the key institutions of the welfare state were originally established and run by people schooled in and conditioned by neoclassical maxims. Although they all spoke of 'public policy' and 'government intervention', they tended to think of such activities as necessary 'distortions'. With a few exceptions, mostly in the Nordic countries, there was never a systematic attempt to develop the public sector into a humane form of democratic planning.
And it is not as if the possibility wasn't there. As a new discipline - and one that emerged after the chaos and misery of the Great Depression and two world wars - public management could have opened the door to new ways of thinking about and organizing society. It could have introduced truly demo- cratic budgeting, new ways of assessing public projects, new frameworks for
8 The inferior status of the public sector is evident in the theory and practice of the national accounts. In these accounts, government expenditures on goods and services are (reluctantly) treated on par with private spending: both are considered additions to GDP. But the treat- ment of interest payments - paid usually to capitalist owners of the public debt - is different. Interest on private debt (to finance the production of cosmetics, cigarettes and fast food, say) is counted as payment for a productive service and is therefore made part of the national income. By contrast, interest on the public debt (for instance, to finance education, war and health services) is considered a mere 'transfer', a one-sided transaction like welfare or unem- ployment insurance payments. Presumably, no service is being rendered, and therefore there is no reason to treat such interest payments as part of the national income.
? 76 The enigma of capital
ecological planning, new pension schemes, a new architecture for public credit, mass housing for the benefit of inhabitants rather than contractors, effective public transportation, non-neoclassical conceptions of intergenera- tional transfers, and perhaps even a new, democratic theory of value.
But that never happened. Instead of transcending neoclassical dogma and the business creed, much of the post-war effort went into making sure people didn't even think in such directions. As a rule, public-sector salaries were kept low, public processes were presented as inefficient and corrupt, the status of public activity was demeaned and public officials were commonly criticized and mocked. And indeed, once communism collapsed in the late 1980s, government officials and politicians around the world seemed all too eager to dismantle their own welfare states. The neoclassical Trojan horse has achieved its purpose. The commanding heights again are controlled by the free marketeers. It is as if the Great Depression had never happened.
The best investment I ever made
And so, although Clark's distribution theory was out of sync with the new reality of power, paradoxically, it has proven immensely useful in both concealing and manipulating that very reality. The theory helps protect the belief in perfect competition despite the massive gravitational force created by large governments and big business.
Neo-Marxists, of course, were not the only ones to grapple with this new reality. In the twentieth century, we could speak of three basic ideologies of power, all focused more loosely or more tightly on the state. One ideology is the techno-bureaucratic state associated with Comtean positivism, Weberian institutionalism and twentieth-century managerialism. A second speaks of an autonomous state that allegedly seeks power for its own sake. And a third, dealing with the capitalist state, criticizes and complements neo-Marxist economism.
Although these three ideologies have had different beginnings and purposes, their progressive academization has drawn them closer together - so close, in fact, that it is often difficult to differentiate their methodologies and sometimes even their conclusions. All three views - with the possible exception of some Marxist variants - tend to see the state as the centre of social power and the dominant force in human history. Some go even further to consider the state as the 'unity' or 'totality' that contains and shapes its inner economic and social components. And whatever their inclination, all seems to agree that, by the twentieth century, the state - regardless of its origins - had become the key force in domestic and international developments.
Given these overlaps, it seems useful to broaden the vista here beyond the Marxist analysis of the capitalist state and to consider, if only cursorily, also the mainstream approaches to the techno-bureaucratic and autonomous state.
The techno-bureaucratic state
During the Cold War, the debate was dominated by technological deter- minism. Key contributors such as Ralf Dahrendorf (1959), John Kenneth Galbraith (1967) and Daniel Bell (1973), although starting from different
56 Dilemmas of political economy
perspectives and using distinct terminologies, all speak of technological- bureaucratic imperatives. Modern societies, they argue, require massive research and development, complex planning and social stability, and there- fore necessitate giant organizations and intricate bureaucracies.
During the nineteenth century, these requirements were only beginning to take shape and hence were easy to misunderstand. What political economists mistakenly referred to as 'capitalism' was in fact the unorganized precursor of a coming industrial - and, eventually, post-industrial - order. By the early twentieth century, the unplanned market system was beginning to wither, together with the class conflicts and social struggles that socialists errone- ously considered inherent. The capitalists and bankers were demoted, replaced by managers and technocrats.
The move from anarchic market coordination to industrial and post- industrial society, went the argument, necessarily gives rise to bureaucratic statism, a system ruled by rationality and governed by technostructures. In the words of Daniel Bell:
If the dominant figures of the past hundred years have been the entrepre- neur, the businessman, and the industrial executive, the 'new men' are the scientists, the mathematicians, the economists, and the engineers of the new intellectual technology. . . . In the post-industrial society, produc- tion and business decisions will be subordinated to, or will derive from, other forces in society; the crucial decisions regarding the growth of the economy and its balance will come from government, but they will be based on the government's sponsorship of research and development, of cost-effectiveness and cost-benefit analysis; the making of decisions, because of the intricately linked nature of their consequences, will have an increasingly technical nature.
(Bell 1973: 344)
From this post-capitalist perspective, power can no longer be seen as possessed by private owners. Even social democrats such as Ralf Dahrendorf and radicals like Charles Wright Mills succumbed to Weberianism, seeking to replace an analysis of class division with a broader theory of statist-bureau- cratic power.
According to Mills (1956), the class-based approach of Marxism had become insufficient; specifically, it was unable to explain the apparent ascent of governmental-military organizations in the post-war United States. Mills' own solution, partly influenced by the managerialism of James Burnham and the institutionalism of Thorstein Veblen, was to abandon the notion of a capi- talist ruling class in favour of three-way power structure. There are three basic scarcities, he argued - a scarcity of power, a scarcity of wealth and a scarcity of prestige - to which there corresponds a tripartite 'power elite'. Each segment of this elite leverages its power through the effective control of key organizations and institutions:
Deflections of power 57
. . . the elite are not simply those who have the most, for they could not 'have the most' were it not for their positions in the great institutions. For such institutions are the necessary bases of power, of wealth, and of pres- tige, and at the same time, the chief means of exercising power, of acquiring wealth, and of cashing in the higher claims for prestige. By the powerful we mean, of course, those who are able to realize their will, even if others resist it. No one, accordingly, can be truly powerful unless he has access to the command of major institutions, for it is over these insti- tutional means of power that the truly powerful are, in the first instance, powerful. Higher politicians and key officials of government command such institutional power; so do admirals and generals, and so do the major owners and executives of the larger corporations.
(Mills 1956: 9)
This view provided fertile ground for empirical research, primarily by soci- ologists, such as William Domhoff, who have laboured to meticulously docu- ment the structure and behaviour of the power elite, the operational arm of the 'higher circles' (see for example Domhoff 1967, with four subsequent editions, the latest of which was issued in 2005; earlier editions include 1970 and 1979). 13
The techno-bureaucratic approach, however, still treats the state (or the overlapping networks of power in Mann's formulation) mostly as an arena, a framework that organizes and governs society. This perspective started to change during the 1970s, with new studies that emphasized the state as an autonomous institution and a personated actor.
The autonomous state
The instrumental and class-based approaches, some writers now argued, serve to conceal the true nature of the state. The state, they maintained, is not a capitalist means or a social instrument. Rather, it is an actor that stands in its own right, having its own logic and, indeed, its own interests.
The conceptual framework of this view contains three basic entities: (1) the state, (2) economic resources, and (3) an amorphous collection of individuals
13 An outlier of the techno-bureaucratic approach is Michael Mann's work on The Source of Social Power (1986; 1993). Mann rejects the notion of a 'unitary totality'. Society, he argues, is not a well-defined system that can be divided into subsystems such as state, culture and economy, or a clearly bounded entity that has dimensions, levels and factors. Instead, he offers to think of societies and their histories as an overlapping network of inter- actions between four sources of social power: ideological, economic, military and political. The focus of his inquiry, though, is still Weberian. His concern is the organizational means associated with each source of power, and how these develop and change in relation to each other. Earlier in history, he says, political and sometimes military means were primary, whereas in recent times economic power, along with its 'class' relations, has become paramount.
? 58 Dilemmas of political economy
and groups, called society. In this structure, the state holds a unique position: it monopolizes the organized means of violence. The state mobilizes economic groups - be they industrialists, merchants, rentiers, or farmers - in order to obtain economic resources. And it then uses these resources to organize and control its society, as well as to fight and defend itself against other states.
This view is evident in the historical account of Charles Tilly (1975; 1992). The origin of the autonomous state, he argues, goes back to the twilight of feudalism in the second millennium AD. The state was invented not by the bourgeoisie to serve capital accumulation, but by political elites who sought to consolidate their power. The key purpose of the state - from its princely feudal beginnings, through its absolutist and monarchic phase, to its present national form - has been twofold: to organize and finance increasingly expen- sive wars and to discipline tax payers. Capitalism from this viewpoint is merely the economic means that supplies the military and strengthens the state apparatus.
A similar history is told by Theda Skocpol (1979; 1985), who argues that the European and American revolutions were the result not of class struggles but of political weakness in the face of inter-state conflicts. Her argument, although rich in historical detail, boils down to fiscal-organizational deter- minism. The anciens re? gimes, she notes, were burdened by excessive and inef- ficient taxation that strained their access to material resources and limited their ability to finance organized violence; therefore, they were replaced by more rational states with streamlined tax structures and superior war-making capabilities.
In the final analysis, then, history is the cunning of the state. The liberal and Marxist theses, according to which the state serves its citizens, the bour- geoisie, or capital accumulation more generally, are mere fantasies. The state develops in its own right and for its own sake. It inevitably grows and central- izes. It is driven not by an external economic determinism, but by its own statist determinism.
The capitalist state
Marxists began to re-evaluate the role of the state in capitalism around the same time as the 'autonomists'. 14 The post-war era brought new develop- ments - from the ascent of social democratic parties in Europe, through the student movements, to the rise and demise of Keynesianism - and these developments called for new explanations. It was no longer possible to treat the state as a simple extension of the 'capitalist interest'. The state had clear limitations, it had a concrete history, and it was being heavily dissected by competing bourgeois theorists. It was time for Marxists to re-examine their own views.
14 For critical reviews of Marxist state theory, see Holloway and Picciotto (1978b), Block (1987), Jessop (1990; 2002), Clarke (1991), Mann et al. (2001-2) and Anievas et al. (2007).
? The state imperative
Beyond their many disagreements, all Marxists seem to accept that capitalism requires a state for four main reasons. First, the state helps prevent the inher- ently conflictual nature of capitalist production from becoming overtly politi- cized. The capitalist class, argues Gerald Cohen (1978), has 'power' over every worker, but the 'right' over none. It has the systemic ability to act in its own interest, but it lacks the normative, moral and legal sanction that makes such action acceptable. This sanction is provided by the state. Second, the state can help counteract the anarchic, crisis-prone nature of capitalism. Whether the tendency for crisis comes from production or realization, history suggests that the state is able, within limits, to mitigate it (Miller 1987). Third, the state serves to absorb, temporarily or permanently, the bloating social cost of accumulation (O'Connor 1973). Fourth and finally, at the global level, the state system mediates the conflicting and mutual interests of capitalists as well as their relation with non-capitalist entities, although the precise nature of this mediation as well as its logical necessity remain heatedly debated (Mann et al. 2001-2; Callinicos 2007).
Marxist state theorists further agree that the state needs to be sufficiently separate from capital. This is the common point of departure. The debate is over the precise nature and extent of this separation, and here there seem to be two distinct views. The first, 'flat' approach is to treat capital and state as belonging to two interdependent yet distinct spheres - economics and politics - and to consider each sphere as having a separate and equally significant logic. The other, 'hierarchical' approach is to consider the logic of capital as primary, and then derive the state from the broader imperatives and contra- dictions of accumulation.
The flat approach
The flat approach underlies the famous debate between Ralph Miliband and Nicos Poulantzas over the 'autonomy of the state'. 15 The two begin from seemingly different assumptions. Miliband considers the state as an instru- ment of the capitalist class, whereas Poulantzas sees it as rooted in the objec- tive structure of capitalism. Yet both cast their argument in purely political terms. This exclusively political language can be traced back to Friedrich Pollock's 'end of economics' - and, indeed, references to the autonomy of the state have been criticized as neo-Ricardian. The neo-Ricardians have rejected Marx's labour theory of value along with his laws of motion. And since this rejection eliminates economic inevitability (at least in the immediate term), the state is left economically indeterminate (at least for the time being). 16
15 See Miliband (1969; 1970; 1973) and Poulantzas (1969; 1973; 1975).
16 A neo-Ricardian critique of Marx's analysis of production is given in Gough (1972), and its
implications for the state are articulated in Gough (1975). For counterarguments, see Fine and Harris (1976b; 1976a) and Holloway and Picciotto (1978a).
Deflections of power 59
? 60 Dilemmas of political economy
For Miliband, economic indeterminacy means that the state can serve the immediately observed interests of the capitalists, whatever they may happen to be. For Poulantzas, the state lives a more complicated double life - economic in principle, political in practice. In theory, the state is certainly 'determined' by the economy. This determination, though, happens only in the Althusserian 'last instance' - an asymptotic concept that Poulantzas leaves conveniently opaque and safely out of sight. In the interim the key is politics, which means that in its day-to-day operations the state enjoys a 'rela- tive autonomy' to act as it sees fit.
The result is acute schizophrenia. Given that any state action affects both the immediate and 'last' instances (and every instance in between), the state must constantly juggle its own short-term autonomy against the long-term structural interests of the economy. But, then, Poulantzas, whom taxono- mists for some reason like to classify as a 'structuralist', is completely silent on the economics of the 'last instance'. And since this silence leaves the struc- tural imperatives of capitalism undefined, it is rather unclear what exactly it is that the state tries to achieve. For his part, Poulantzas informs us, with emphasis in the original, that 'the State is precisely the factor of cohesion of a social formation and the factor of reproduction of the conditions of production of a system that itself determines the domination of one class over the others. . . ' (1969: 73), and it is obviously to our own demerit if we don't quite understand what this sentence is supposed to mean.
The hierarchical approach
The alternative, vertical approach is different in that it considers capital and state as conceptually unequal. The engine of capitalist history is the economic accumulation of capital. The capitalist state is merely part of that process. Writers who follow this approach are often labelled 'fundamentalists'. They emphasize the deep logic and inherent contradictions of capitalist production as articulated by classical Marxism - this in opposition to the neo-Ricardians who, they argue, deal with the secondary, surface phenomena of 'circulation', market structure and monopoly capital. 17
The contradictory logic of accumulation gives the state its concrete history. Thus, according to Perry Anderson (1974), the capitalist state was never functionally autonomous. In Europe, he argues, state formation was deeply intertwined with the underlying transformation of the mode of production. The feudal and absolutist states prepared the conditions for capitalist accu- mulation and, eventually, also for the political rule of the bourgeoisie. Seen from a functionalist viewpoint, the state doesn't have - and never had - an
17 It should be noted that, in practice, the differences between the two analyses of the state are not that clear cut. Fundamentalists customarily rely on 'surface phenomena', while circula- tionists often make references to 'inevitable contradictions' (see also footnote 9).
? Deflections of power 61
independent role. It merely shapes the requirements of the ruling class, a class that is, in itself, is a creature of the contemporary mode of production.
At a later stage, economic restructuring, driven either by the centralization of capital or the intensification of competition, further transforms the capi- talist state. Gabriel Kolko (1963), for example, maintains that the growth and strengthening of the American state were largely a consequence of a political alliance of big business. The large industrial owners, he says, did not enjoy greater monopoly power. On the contrary, they suffered from mounting competition. They solved the problem with government regulation, for which they needed a big state - hence the emergence of 'political capitalism'.
Whatever the reason, the assent of the state is unavoidable. In the hyped language of Ernest Mandel,
Capitalist private property, the private appropriation of surplus-value and private accumulation increasingly become an obstacle to the further development of the forces of production. State (and supra-national) centralization of part of the social surplus product has once again - as in numerous pre-capitalist societies - increasingly become a material precon- dition for the further development of the forces of production. . . . The strengthening of the State in late capitalism is thus an expression of capi- tal's attempt to overcome its increasingly explosive inner contradictions, and at the same time an expression of the necessary failure of this attempt.
(Mandel 1975: 580-81, original emphases)
And now in simple words: capitalism is born an economic-industrial crea- ture, generating surplus value that accumulates in the form of means of production (counted in undefined units of abstract labour). This process continues for a while, but sooner or later something goes wrong. There is a decline or intensification of competition, an increase in the organic composi- tion of capital, or some other inevitable development that causes normal accu- mulation to turn into over-accumulation (or normal production to become over-production or under-consumption - all fuzzy distinctions which the theorist commonly pays lips service to and quickly glosses over). As a conse- quence of this mishap, capitalism takes a quantum leap and becomes 'polit- ical' (which means that previously it was a-political). The capitalists turn the 'night-watchman' state into a 'regulating' state (a transition that both proves and refutes the ability of the system to survive), and the writer puts the full stop after the QED.
Political Marxism
In a certain important sense, the analysis of the capitalist state has become a fetter on Marxist theory. The problem is that the state - whether equal to capital, subordinate to capital, or derived jointly with capital from a broader
62 Dilemmas of political economy
materialist history as argued by the German 'state derivation debate' - always ends up fracturing the overall picture. 18 Because the state is assumed to be inherently and necessarily separate from accumulation, we end up with two distinct appearances: one of economics and the other of politics.
Some 'political Marxists' have attempted to transcend the problem by redefining the politics/economics duality in continuous rather than binary terms. According to Ellen Meiksins Wood (1981), capital is the 'privatization of politics' insofar as it gives private owners the authority to organize produc- tion. Meiksins Wood accepts the existence of the 'economy', complete with Marx's laws of capitalist development, etc. The novelty is that the boundaries of her economy are not rigid, but supple:
'Political Marxism', then, does not present the relation between base and superstructure as an opposition, a 'regional' separation between a basic 'objective' economic structure, on the one hand, and social, juridical, and political forms, on the other, but rather as a continuous structure of social relations and forms with varying degrees of distance from the imme- diate processes of production and appropriation, beginning with those relations and forms that constitute the system of production itself.
(1981: 78, original emphases)
Although this formulation sounds tempting, it really does little to square the circle. First, there is a confusion of terms. Meiksins Wood is right to argue that capital is the privatization of politics. But the private/public distinction is not the same as the distinction between economics and politics. And since capital is not an 'economic' entity, the fact that it privatizes power tells us nothing about the relationship between the 'economic' and the 'political'.
This confusion becomes evident when we consider Meiksins Wood's defi- nition of the economy: she doesn't have one. Meiksins Wood never tells us what she means by the 'immediate processes of production and appropria- tion', what constitutes the 'system of production itself', or how we can measure the 'degree of distance' from these yardsticks.
Perhaps these concepts had a clear enough meaning during the transition from the fields and meadows of pre-capitalist Europe to the factories of early industrialization. But as we shall see later in the book, this clarity has been lost since then, leaving us with a set of empty formulations. What exactly are the 'immediate' processes of production and appropriation of a modern pharmaceutical drug, of a jet fighter, of an automobile, of a complex software
18 The German 'derivationists' reject the orthodox 'fundamentalist' notion according to which the economic is somehow prior to the political, and instead seek to treat both as part of the same materialistic development. This rejection, though, seems largely semantic, since the deriviationists do not offer any meaningful rethinking of Marx's original category of capital. For a recent statement of the derivation approach, see Altvater and Hoffman (1990).
? Deflections of power 63
system, of an insurance system, or of health care? Where do these complex processes start and where do they end? Can the 'immediate' processes of production and consumption be delineated, even roughly, from those that are 'less immediate'? If this delineation is impossible to make, what constitutes the system of production 'itself'? And if the 'system of production' remains unspecified, what does it mean to say that the economy and politics are 'distinct', whether the distinction is rigid or supple?
The capitalist totality
As Marx himself put it, if there were nothing behind the 'thing', there would be no need for science. If we accept that the politics-economics fracture is merely the 'appearance' of capitalism, we need to see what lies behind this fracture. Physicists tell us that behind the separate appearance of colours lies the unifying logic of the wave length. Likewise, Marx tells us that behind the distinct appearances of economics and politics, of production and state, of exploitation and oppression, lies a single capitalist totality.
And yet, Marxists do not have a theory to explain this totality. They have an explanation for why the world seems bifurcated between factory and state, and for why this separation is cunning, misleading and alienating. But they offer no unified science to transcend the bifurcation, no alternative totality to stand against capitalism.
The flat, 'autonomous' explanations give up the possibility for such a unified science altogether by accepting from the start that politics and economics obey two semi-independent logics. By contrast, the hierarchical, 'structuralist' explanations do try to devise a single theory in which the state is derived from the material basis of accumulation. Yet they, too, cannot go very far: their conception of capital adheres to Marx's notion of abstract labour value, and this loyalty keeps them entangled in the same logical and historical impossibilities that have haunted Marxism for more than a century.
The result is a dead end. Since labour values cannot be observed and calcu- lated, it follows that structuralist theories - no matter how sophisticated - cannot know anything about the actual accumulation of labour values. And given that the value reality of accumulation remains unknown, structuralists have no concrete basis from which to 'derive' the state.
This entanglement serves to explain why structural Marxism has plenty to say on the logic of the capitalist state but little on its contemporary reality: fiscal and monetary policies, military spending and war, financial markets and workers' pensions, the debt and energy policies of the American empire - these are all issues that structuralists can do little more than speculate about (Block 1987: Part I).
During the early twentieth century, the meaning of 'socialism' was pretty clear. It was an alternative to the logic of capitalism and the reality of the capitalist state. Socialism represented a new way of democratically articu- lating the good of society, of scientifically assessing its possibilities, of
64 Dilemmas of political economy
systematically planning its production and consumption. But after a century of Stalinist abuse and academic fracturing, this vision has dissipated. We have neo-Marxian economics, cultural studies and state theory - but we no longer have a theory of the capitalist order as a whole. Marxism has been unable to either save the labour theory of value or come up with a different theory of value in its stead. There is no university, academy or forum where Marxists systematically study, debate and prepare an alternative democratic future. Today, no serious Marxist would claim to have a systematic alternative to capitalism. And the ruling class knows it: 'Even in crisis, capitalism remains fortunate in its enemies', concludes the ironic Financial Times commentator (Skapinker 2008).
As we shall see in the next part of the book, the reason for this vacuum is the lingering enigma of capital. Political economy, both mainstream and crit- ical, lacks a coherent conception of capital. And it lacks such a theory because it deflects the issue of power.
The liberals analyse capital without power, while the Marxists explain capital and power - but what we need is to theorize capital as power.
Part II
The enigma of capital
5 Neoclassicalparables
The price is determined by the market, what we try to do is to make the market balanced. Today there is disequilibrium between supply and demand. Today we are trying to get the market to the normal equilibrium and the price will take care of itself.
--Ali Al-Naimi, Saudi Arabia's Oil Minister
The principal casualty of separating economics from politics is the theory of capital. Academic departmentalization placed it firmly in the hands of econo- mists, leaving political scientists, sociologists and anthropologists with practically no say. The economists have chosen to emphasize material consid- erations and to all but ignore power, yet that choice has hardly cleared the water. In fact, despite their complete monopoly, economists have been unable to even define what capital means.
While all agree that capital is monetary wealth, figuring out what makes this wealth grow has proven much harder. 'What a mass of confused, futile, and downright silly controversy it would have saved us', writes Joseph Schumpeter (1954: 323), 'if economists had had the sense to stick to those monetary and accounting meanings of the term instead of trying to "deepen" them! '
Of course, the problem lies not in the desire to deepen, but in the direction economists have gone digging. Their main goal has been to link accumulation with productivity, but with social production having grown in complexity the link has become increasingly difficult to pin down. And the difficulty persists precisely because economists insist it is exclusively theirs. According to Bliss (1975), once economists agree on the theory of capital, 'they will shortly reach agreement on everything else'. But then how could they agree on this theory, if capital, by its very nature, involves power, which they view as lying outside their domain?
68 The enigma of capital
The material basis of capital
Despite their pivotal significance, the definition of capital and the meaning of accumulation remain unsettled. 1 Historically, the principal contention stemmed from trying to marry two different perceptions of capital - one quantitative, the other qualitative. Originally, capital was seen as an income- generating fund, or 'financial wealth', and as such it had a definite quantity. It was also viewed as a stock of physical instruments, or 'capital goods', char- acterized by a particular set of qualities (Pasinetti and Scazzieri 1987). The key question concerned the connection between these two incarnations: are 'capital goods' productive, and if so, how does their productivity affect their overall magnitude as 'capital'? (Hennings 1987).
Mainstream economics has been trying to show that capital goods indeed are productive and that this positive attribute is what makes capital as a fund valuable. The marriage, though, hasn't work well, partly due to a large age difference: the concept of capital predates that of capital goods by a few thou- sand years, suggesting that their overlap is not that self-evident.
The older partner, capital, comes from the Latin caput, a word whose origin goes back to the Fertile Crescent in the Middle East. In both Rome and Mesopotamia capital had a similar, unambiguous economic meaning: it was a monetary magnitude. There was no relation to produced means of produc- tion. Indeed, caput meant 'head', which fits well with another Babylonian invention - the human 'work day' (Schumpeter 1954: 322-23; Bickerman 1972: 58, 63).
The younger partner, capital goods, was born millennia later, roughly together with capitalism. The growing significance of mechanized instru- ments captured the attention of pre-classical writers, but initially these were referred to mostly as 'stocks' (Barbon 1690; Hume 1752). The first to give capital a productive role were the French Physiocrats, and it was only with Franc? ois Quesnay and Jacques Turgot during the latter half of the eighteenth century that the association between capitals (as monetary advances) and mechanized production started to take shape (Hennings 1987).
Since then, the material-productive bias has grown ever more dominant. Thus, Adam Smith speaks of 'stocks accumulated into capital' which is 'necessary for carrying on this great improvement in the productive powers of labour' (1776: 260-61); similarly with David Ricardo, who equates capital with 'that part of the wealth of a country which is employed in production, and consists of food, clothing, tool, raw materials, machinery, &c. necessary to give effect to labour' (1821: 85); Karl Marx talks about 'constant capital' represented 'by the means of production, by the raw material, auxiliary material and instruments of labour' (1909, Vol. 1: 232); John Bates Clark asserts that 'Capital consists of instruments of production', which 'are always
1 For the deep sense of unease regarding the definition of capital, see Schumpeter (1954: 322- 27) and Braudel (1977; 1985, Vol. 2: 232-49).
? Neoclassical parables 69
concrete and material' and whose appearance as value is 'an abstract quantum of productive wealth' (1899: 116, 119); Irving Fisher takes capital as equivalent to the prevailing stock of wealth (1906: 52); Frank Knight sees capital as 'consisting of non-human productive agencies' (1921: 328); while Arthur Pigou conceives of capital as a heterogeneous material entity 'capable of maintaining its quantity while altering its form' (1935: 239). Summing it all up, Joseph Schumpeter naturally concludes that, in its essence, 'capital consisted of goods', and specifically of 'produced means of production' (1954: 632-33). No matter how you twist and turn it, fundamentally capital is a material entity.
Yet, the classical political economists did not have a complete theory of capital. Recall that these new scientists of society started to write when indus- trialization was still in its infancy, smokestack factories were few and far between, and the population was still largely rural. They therefore tended to treat the amalgamate of capital goods as a 'fund' or 'advance' whose role, in their words, is merely to assist the 'original' factors of production - labour and land. Although the general view was that capital goods were valuable due to their productivity, no attempt was made to quantify their 'amount'. The link between capital goods and capital therefore was left unspecified.
In hindsight, the principal obstacle in establishing this link was that the classicists still viewed capital goods as a secondary input, and in that sense as qualitatively different from the original primary inputs. This belief, though, proved no more than a temporary roadblock.
The production function
Taking the classical lead but without its associated inhibitions, the neo- classicists followed the Earl of Lauderdale (Maitland 1804) in making capital goods a fully independent factor of production, on par with labour and land. Their view of capital, articulated since the latter part of the nineteenth century by writers such as Phillip Wicksteed, Alfred Marshall, Carl Menger and, primarily, John Bates Clark, emphasized the distinct productivity of capital goods, and by so doing elevated these goods from mere accessories to requisites.
The two assumptions
In his book, The Distribution of Wealth (1899), Clark used this newly found symmetry among the factors of production to offer an alternative theory of distribution. The theory stipulates a two-step mathematical link between income and production.
The first step asserts the existence of a 'production function'. The level of output, Clark argued, is a function of quantifiable 'factors of production', each with its own distinct productive contribution. This assertion assumes that labour, land and capital are observable and measurable (so for instance,
70 The enigma of capital
we can see that production uses 20, 10 and 15 units of each factor, respec- tively); it argues that the way these factors interact with one another in production is similarly straightforward (so we know exactly what factors enter the production process and how they affect the productivity of all others factors); and it posits that we can associate definite portions of the output with each of the factors (for example, labour contributes 40 per cent, land 15 and capital goods 25).
The second step uses the production function to explain the distribution of income. Clark claimed that, under conditions of perfect competition ('with- out friction', in his words), the income of the factors of production is pro- portionate to their contributions - or more precisely, to their marginal contributions (so that the wage rate is equal to the productive contribu- tion of the last worker added to production, the rent is equal to the contri- bution of the last hectare of land, and the profit rate is equivalent to the contribution of the last unit of capital).
Where does profit come from?
Formulated at a critical historical junction, the new theory combined a powerful justification with a seemingly solid explanation. And there was certainly need for such theory. The emergence of US big business during the latter part of the nineteenth century accelerated the centralization of capital, raised profit margins and heightened income inequality - much along the lines anticipated by Karl Marx - and these developments made earlier profit theories look hopelessly irrelevant.
Chief among these theories were the notions of 'abstinence' as argued by Nassau Senior (1872) and of 'waiting' as stipulated by Alfred Marshall (1920). According to these explanations, capitalists who invest their money are abstaining from current consumption and therefore have to be remuner- ated for the time they wait until their investment matures. By the end of the nineteenth century, though, the huge incomes of corporate magnates, such as Rockefeller, Morgan and Carnegie, enabled them to consume conspicuously regardless of how much they ploughed back as investment; and even when these magnates chose to be frugal, usually they did so in order to augment their power, not their future consumption.
Other theorists, such as Herbert Spencer (1904), William Sumner (1920; 1963) and later Ayn Rand (1966), took a more 'biological' path, claiming that profit was simply due to superior human traits. This version of financial Darwinism was happily underwritten by large US capitalists eager to make their blood turn blue. But the basic theoretical and moral problem remained.
Even if this 'science of remuneration' were all true, and even if capitalists indeed were superhumans whose waiting in abstinence had to be compen- sated, the magnitude of their remuneration remained unexplained. Why should the pay on their investment be 20 per cent rather than 5 or 50? What
Neoclassical parables 71
caused the return to fluctuate over time? And why did some capitalists win the jackpot while others, despite their merit and patience, ended up losing money? Clearly, there was a pressing need for a more robust ideology, and this is where Clark's theory of marginal productivity came into the picture.
Contrary to the Marxist claim, Clark insisted that capital is not in the least parasitic: much like labour, it too receives its own marginal productivity, an income which therefore is essential for the growth process. Indeed, since income is proportionate to productive contributions, it is rather clear that capitalists, through their ownership of capital, in fact are more productive than workers. That must be so - for otherwise, why would their earnings be so much greater? 2
The birth of 'economics'
The marginal productivity theory enabled neoclassicists to finally remove their classical shackles and finish the liberal project of de-politicizing the economy. The classicists, whether radical or liberal, were interested primarily in well-being and distribution. Production was merely a means toward those higher ends. Clark helped reverse this order, making distribution a corollary of production. And indeed, since the turn of the twentieth century, attention has gradually shifted from the causes of income inequality to its ramifica- tions, a subject economists felt they could safely delegate to sociologists and political scientists. The old ideological disputes of political economy were finally over. From now on, announced Alfred Marshall, we have a new science: the science of economics - complete with both the rigour and suffix of mathematics and physics.
In fact, Clark and his contemporaries not only de-politicized the economy, they also 'de-classed' it. Instead of workers, capitalists, rentiers and the state - differentiated entities whose struggles loomed large in the classical canons - the neoclassical landscape is populated by abstract individuals - 'actors' who can choose to be workers one day, capitalists the next, and voluntarily unem- ployed the day after. These individuals live not in society as such, but in a special space called the 'economy'. Their sole preoccupation is to rationally maximize pleasure from consumption and minimize the pain of work. Indeed,
2 The productive origin of profit is now an all prevalent logic. A typical example is provided by the recent debate over the resurgence of leverage buyouts. Supporters of the trend argue that private firms are more productive than those listed on the stock market, while its critics maintain that delisting is driven by manipulators and asset strippers. 'So who is right? ' asks Martin Wolff, chief economist of the Financial Times. 'An obvious answer is that private equity is a growing activity in which willing sellers meet willing buyers. If it prospers, it must be profitable. If it is profitable, it should also be adding value' (Wolf 2007). This rule can be frustrated by 'market imperfections', but its underlying logic is taken as self-evident.
? 72 The enigma of capital
society for them is an external and largely irrational sphere which constantly threatens to prevent their 'economy' from reaching its collective orgasm of Pareto Optimality. 3
With so much going for it, the marginal productivity theory was quickly endorsed by professional economists - and, of course, by their captains of finance. The latter used and abused the theory partly for what it said, but especially for what it didn't.
Marginal productivity theory in historical context
It turns out that Clark's theory of distribution could say very little about the reality in which it developed - and this for a simple reason: the theory rose to prominence precisely when the conditions necessary for it to work disap- peared.
Recall that, in liberal theology, everyone is equal before mother competi- tion and father market. No single person can affect the market outcome. This conclusion (or assumption) is formalized in neoclassical manuals through the properties of demand and supply. Individual consumers are said to face a supply curve which they cannot alter (a flat schedule equal to the market price); similarly, individual producers confront a flat demand curve over which they have no control (also equal to the market price). This convenient setting makes the market demand and supply independent of each another. And this independence in turn leads to a unique equilibrium - a spontaneous yet stable 'one dollar, one vote' democracy.
The end of equilibrium
By the beginning of the twentieth century, however, when this vision became the canon, the assumption of independent supply and demand - as well as of the autonomy of consumers, the anonymity of sellers and the absence of government - was no longer tenable. It turned out that perfectly competitive equilibrium was no longer possible, even on paper.
There were three basic reasons for this impossibility. First, oligopoly substituted for 'free' competition, and that changed pretty much everything. In oligopolistic markets sellers become inter-dependent, and this inter- dependence - even if we pretend that consumers remain fully rational, know- ledgeable and autonomous - makes the individual firm's demand curve
3 Pareto Optimum, a neoclassical mantra named after the Italian thinker Vilfredo Pareto, refers to a situation in which no individual can be made better off without another individual becoming worse off. This situation is said to exist when the overall pie cannot be made any bigger - that is, when the economy works at full employment and in maximum efficiency. Of course, since no one has thus far been able to identify such an Optimum, the mantra is of little practical significance. But its ideological importance is considerable: if maximum output is already optimal, why worry about its distribution?
? Neoclassical parables 73
indeterminate. In the absence of a clear demand curve, firms don't know how to maximize income. And without this unambiguous yardstick for action the oligopolistic market as a whole becomes clueless, lacking a clear equilibrium point on which to converge. 4
Second, by the end of the nineteenth century there emerged an obvious asymmetry between the buy and sell sides. While individual consumers remained powerless to alter market conditions and therefore had to obey them, the giant corporation enjoyed far greater flexibility. For large firms, the 'demand curve' was no longer an external condition given by sovereign consumers, but rather a malleable social context to be influenced and shaped relentlessly as part of the firm's broader investment and pricing strategy. 5 Of course, in public big business continued to talk about the 'market discipline' to which it was presumably subjugated. But that was doublespeak, the use of mythical forces to conceal real power. In private, large firms saw themselves not only as 'price makers', but also as 'market makers'. 6
These two developments marked the end of spontaneous equilibrium. Originally, economics had two unknown variables and two independent func- tions with which to explain them: jointly solving the demand and supply equations yielded unique values for price and quantity. But with the introduc- tion of power into the picture, demand became dependent on, if not subsumed by, supply, leaving economics with only one (combined) equation to explain the two unknowns. In one swoop, economics lost its 'degree of freedom'.
4 To illustrate this conclusion with a hypothetical example, consider a price change by Nokia. This price change will elicit responses from Nokia's oligopolistic rivals, such as Motorola, Samsung and Panasonic, and these responses will in turn change the demand curve for Nokia's own product. Since the direction and magnitude of these responses are open-ended, the eventual position of Nokia's demand curve becomes unclear. And given that Nokia cannot foretell this eventual position, it cannot know the profit maximizing price and there- fore cannot know how to act. Game theorists have managed to solve this problem a million times over - but only by imposing predetermined theoretical rules that real oligopolists such as Nokia and its rivals are perfectly free to ignore.
5 The concept of 'consumer sovereignty' also depreciated due to the immense increase in the complexity of production and consumption. We can perhaps fathom an independent farmer in the United States of the mid-nineteenth century assessing the marginal benefit of growing corn and cabbage instead of beets and tobacco, or of a slave hunter contemplating the marginal rate of substitution between the income from seizing an additional escapee and a week of idle leisure. But these types of computations are rather difficult to make in a world loaded with millions of different commodities and endless 'choices'. It is no wonder that instead of the individualist ethos of the nineteenth century we now refer to consumers as 'masses' and to investors - even the most sophisticated - as 'herds'.
6 These concepts were already part of common business parlance at the turn of the twentieth century. For early analyses of firms as 'price makers', see the works of Brown (1924) on General Motors, of Means (1935a) on administrative prices and of Hall and Hitch (1939) on business behaviour. On the broader politics of 'market making', see Kaplan et al. (1958). The nineteenth-century precursors of anti-market corporatism (including the young J. B. Clark) are examined in Perelman (2006). The power aspects of pricing will be examined in Chapter 12.
? 74 The enigma of capital
From now on, there could be any number of price/quantity outcomes, all perfectly consistent and none necessarily stable. And if the real world did appear stable, the reason was not the invisible hand of the market but the visible hand of power. 7
The third development, which we already alluded to in previous chapters, was the rise of big government and, later, of active economic policy. This development presented another serious difficulty for mainstream economics. On the one hand, large governments have become integral if not necessary to the process of capital accumulation. On the other hand, their existence has 'contaminated' economics with power, annulling the invisible hand and leaving the notion of spontaneous equilibrium hanging on the thread of denial.
Public management
As noted in Chapter 4, economists have partly managed to ignore this dilemma by keeping the study of macroeconomics as separate as possible from microeconomics, nested uneasily in what Paul Samuelson called the 'neoclassical synthesis' and John Ruggie later labelled 'embedded liberalism'. But that wasn't enough. It was also necessary to ascertain that the public sector, no matter how large and active, remained subservient to the logic of laissez faire individualism and the interests of its large capitalists.
This requirement was greatly assisted by the founding of 'public manage- ment' - a new social science that would imitate, at least nominally, the princi- ples of Frederick Taylor's 'scientific management' (1911). We say nominally, since unlike the so-called scientific management of private enterprise, public management lacked from the beginning any clear yardstick for success.
7 For those who care to read further, we should add that demand and supply are unlikely to be independent of each other even in the absence of power. The basic reason is that any change in the supply price of a given commodity redistributes income between buyers and sellers of that commodity. This redistribution in turn shifts the respective demand curves of those buyers and sellers. And since different buyers have different preferences, the redistribution of income works to alter the overall market demand curve. This simple logic implies that move- ments along the supply curve are accompanied by shifts of the demand curve - leading not to one, but to multiple equilibria.
Neoclassical economists solve this problem by making two assumptions. First, they ask us to forget about the liberal ideal of individual freedom and think of all consumers as drones, each one identical to the 'representative consumer' and therefore possessing the same set of preferences. Second, they ask us to further believe that these drones have a mental fix, such that the proportion of their income spent on various items is independent of their income level (a consumer spending 30 per cent on food when her annual income is $10,000 will also spend 30 per cent on food when her income is $10 million). These two assumptions - known as the Sonnenshein-Mantel-Debreu conditions - indeed imply that redistribution of consumer income leaves the market demand curve unchanged. But since these assumptions are patently impossible, they also imply that neoclassical consumer theory has practically nothing to say about any real world situation.
? Neoclassical parables 75
The dilemma is simple. The administration of business, neoclassicists argue, is guided by a single goal: the maximization of profit. According to Clark's marginal productivity theory, the more profit the corporation earns, the greater the well-being it must have generated, by definition. Public admin- istration, though, has no comparable rule. Since public services commonly do not have a market price, and since public officials do not normally profit from the services they administer, there is no 'natural' way to tell how much utility is being generated. Unlike in the private sphere, here you have to decide what the utility is. But then utility is subjective, so how can public administrators ever hope to mimic the objective market?
There are two solutions to the problem. The first, used mostly to justify higher budgets, is to keep a straight face, pretend that the public sector behaves just like a free market, and subject it to the neoclassical mechanics of indifference curves, budget lines, production functions and possibilities fron- tiers. The absurd, albeit politically effective, outcome of this venue is best illustrated by marginalist analyses of 'national defence' - the arena most removed from the neoclassical fantasy land (Hitch and McKean 1960). The second solution, ideal for periods of 'belt tightening', is to simply reiterate the basic maxim of liberalism: if in doubt, minimize. Since the public sector is a necessary evil, an authoritarian wasteful institution whose sole purpose is to ameliorate temporary 'market failure' and counteract communist ideology, the best yardstick for its success is the extent to which we can limit its inter- vention. 8
Many of the key institutions of the welfare state were originally established and run by people schooled in and conditioned by neoclassical maxims. Although they all spoke of 'public policy' and 'government intervention', they tended to think of such activities as necessary 'distortions'. With a few exceptions, mostly in the Nordic countries, there was never a systematic attempt to develop the public sector into a humane form of democratic planning.
And it is not as if the possibility wasn't there. As a new discipline - and one that emerged after the chaos and misery of the Great Depression and two world wars - public management could have opened the door to new ways of thinking about and organizing society. It could have introduced truly demo- cratic budgeting, new ways of assessing public projects, new frameworks for
8 The inferior status of the public sector is evident in the theory and practice of the national accounts. In these accounts, government expenditures on goods and services are (reluctantly) treated on par with private spending: both are considered additions to GDP. But the treat- ment of interest payments - paid usually to capitalist owners of the public debt - is different. Interest on private debt (to finance the production of cosmetics, cigarettes and fast food, say) is counted as payment for a productive service and is therefore made part of the national income. By contrast, interest on the public debt (for instance, to finance education, war and health services) is considered a mere 'transfer', a one-sided transaction like welfare or unem- ployment insurance payments. Presumably, no service is being rendered, and therefore there is no reason to treat such interest payments as part of the national income.
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ecological planning, new pension schemes, a new architecture for public credit, mass housing for the benefit of inhabitants rather than contractors, effective public transportation, non-neoclassical conceptions of intergenera- tional transfers, and perhaps even a new, democratic theory of value.
But that never happened. Instead of transcending neoclassical dogma and the business creed, much of the post-war effort went into making sure people didn't even think in such directions. As a rule, public-sector salaries were kept low, public processes were presented as inefficient and corrupt, the status of public activity was demeaned and public officials were commonly criticized and mocked. And indeed, once communism collapsed in the late 1980s, government officials and politicians around the world seemed all too eager to dismantle their own welfare states. The neoclassical Trojan horse has achieved its purpose. The commanding heights again are controlled by the free marketeers. It is as if the Great Depression had never happened.
The best investment I ever made
And so, although Clark's distribution theory was out of sync with the new reality of power, paradoxically, it has proven immensely useful in both concealing and manipulating that very reality. The theory helps protect the belief in perfect competition despite the massive gravitational force created by large governments and big business.
