How big is this
distortion?
Nitzan Bichler - 2012 - Capital as Power
The process proceeds in two steps.
In the first, different human brands are mass-produced on an assembly line of test tubes.
In the second, the 'newborns' are subjected to repetitive mantras that fine tune their cravings and anxieties.
Huxley conceived this authoritarian utopia as his own Fabian alternative to the anarchy of free-market liberalism.
But, then, he didn't know much about the powers of capitalization.
Capitalism seems able to shape 'preferences' as effectively as any authori- tarian regime - including Huxley's - is able to mould habits and instil fears. But capitalism does much more than that: it makes these 'preferences' suffi- ciently predictable for capitalists to translate them into expected profit discountable to present value.
On the face of it, liberal capitalism is all about 'individuality' and 'free choice'. And yet, the so-called individual consumer ends up being part of a collectively managed mob, as described so eloquently in Herbert Marcuse's One-Dimensional Man (1964). The attractive aspect of this tendency was articulated with great enthusiasm already in the nineteenth century by Francis Galton, one of the forefathers of the science of crowds:
The huger the mob and the greater the apparent anarchy, the more perfect is its sway. It is the supreme law of Unreason. Whenever a large sample of chaotic elements are taken in hand and marshalled in the order of their magnitude, an unsuspected and most beautiful form of regularity proves to have been latent all along.
(Quoted in Newman 1956, Vol. 3: 1481)
The Friedmanite individual may feel 'free to choose' his location in the distribution, but the distribution itself is shaped by the power institutions and organizations of capitalism. And it is this shaping - i. e. the very creation of a predictable 'representative' consumer - that gets capitalized.
The process follows two parallel paths. The first and more transparent is the relentless promise of pleasure - the carrot that 'sovereign consumers' love to pay for. The second and less obvious is the threat of pain. It turns out that the hedonic lure of consumption can be greatly amplified by fear, so the promise of pleasure is usually spiced up with plenty of anxiety and unease.
The division of labour is relatively straightforward. The official news reels scare their audiences with uncertainty, loneliness, violence and disaster, the sports programmes elate them into ecstasy, and the blockbuster films give them their 'two minutes of hate' between the chainsaw massacres and end-of- the-world catastrophes. This simmering brew is then cooled down by the
A brief anthropology 161
soothing solutions of commercial advertisements: sexual impotence is cured by a chemical fix, decrepit apartments by affordable mortgages, ruinous illness by pricey health insurance, dead-end jobs by professional night courses, wrinkles by magic lotions, random violence by gated communities. Don't be a left-behind fool, buy my ware and be cool.
Capitalists worldwide are estimated to spend up to $600 billion annually just to remind us of these options. If we assume a 15 per cent markup on these advertising expenditures, we get $90 billion of net profit. This sum represents roughly 5 per cent of global net corporate income and a comparable portion of global market capitalization. 16 The computations of course are tentative ('half my advertising is wasted, but I don't know which half', goes the famous Madison Avenue saying). They also exclude sales promoting expenditures buried in the 'cost of production' (as noted in the discussion of advertising in Chapter 7). But the very fact that so much is spent on persuasion suggests that a significant chunk of outstanding corporate assets discounts the very ability of capitalists to shape human hopes and fears.
Now, this is the downstream part of the story, but like in Huxley's utopia, there is also an upstream part. Over the past decade or two, investors have started to discount, in addition to people's mental aspirations and worries, the code of their physical reproduction: the genome. It is now possible not only to modify and replicate existing organisms, but also to convert one organism into another via a 'genome transplant' (Sample 2007). Soon enough, it may be feasible to produce a creature from scratch, and one day perhaps even a 'human being' (hopefully modelled after the universal bond trader).
Capitalists have been eager to protect and defend these god-like acts of creation with multiple patents and other expressions of goodwill - all in order to ascertain that the making of plants, animals and people won't end up being a free lunch. After all, what's the use of making life if it can't help you make money? And so far - at least according to the capitalists' own bets - the odds of achieving both goals look promising indeed: from its inception in 1994 to 2007, the AMEX Biotechnology Index has risen ten times faster than the S&P 500 Index. Apparently, it is now finally possible to play God and be rich.
Organizations, institutions, processes
Capitalization of course is hardly restricted to the individual. Take education, an activity estimated to account for roughly 5 per cent of world GDP. The idea of free public schooling was born out of the French Revolution. The new method served to both liberate human beings and turn the newly literate into patriotic citizens and soldiers on the cheap. The arrangement worked smoothly for a while, but by the twentieth century a new complication had
16 The estimate of advertisement spending is from Saatchi (2007). Global profits for 2005-6 are computed from Thomson Datastream by dividing world market value TOTMKWD(MV) by the world price-to-earning ratio TOTMKWD(PE).
? 162 Capitalization
emerged. Having been butchered in two world wars, the citizens/soldiers demanded that warfare be complemented by expensive welfare. Suddenly, the draft was no longer a panacea, and with 'free soldiers' turning out to be rather pricey, the benefit of educating them was called into question. The final disin- tegration of the model came in the 1970s. After the US loss in Vietnam and the arrival of neoliberal globalization, there was no longer a need for costly mass armies. Instead, the capitalists started to invest in 'smart weapons' that could be operated by high-school dropouts. The draft was gradually aban- doned in favour of purely professional armies, and free education in favour of privatized learning.
And so, the organization of learning, once the prerogative of state, church and community, is now increasingly capitalized - even when the teaching itself is still publicly administered. The process is discounted directly by its private suppliers - particularly the publishers of journals, textbooks and databases, whose profits margins can reach 100 per cent (Bergstrom 2001: 186-87). Education is also discounted indirectly insofar as it shapes prefer- ences and mutes criticism, and in so doing helps boost profit and reduce risk (recall John D. Rockefeller's pronouncement that his investment in the University of Chicago was the best he had ever made).
The same logic applies to the organization of entertainment, a process whose global turnover is estimated at $1 trillion (Vogel 2007: xix). Enter- tainment, like education, is capitalized directly by its providers as well as indi- rectly by those whose profits it affects. Another capitalized institution is the newly emergent social networks such as Facebook, MySpace and YouTube, where education and entertainment are fused seamlessly with subliminal and not-so-subliminal marketing. Although these so-called virtual communities are open for everyone to join and participate at no cost, they are anything but free. Each has a captive audience that can be persuaded to spend money, a prospect that capitalists readily discount to the tune of billions.
Other organized institutions, such as the law or religion, are rarely discounted explicitly, but their indirect impacts are extensively capitalized. The assets of pharmaceutical corporations, software companies and other businesses dealing with patents and copyrights depend on the enforcement of intellectual property rights, and in that sense capitalize both the law and the extent to which it is enforced. The same process, only negated, applies to criminal organizations. Whereas legal business discounts the protection of the law, criminal networks - from drug dealing to human trafficking, money laundering, contraband trade, illegal gambling and gun smuggling - capi- talize their ability to violate the law and enforce their own private order.
Similarly with religion. The assets of Islamic banks and investment compa- nies, for example, as well as of secular financial institutions dealing with Muslim savers and investors, discount the extent to which these companies and institutions comply with the sharia (Islamic law). More broadly, religion - just like the law, entertainment and education - shapes the social structure
A brief anthropology 163
and therefore has a wider effect on profit, and that effect too is promptly, if implicitly, capitalized. 17
Organized violence and war are extensively discounted. The immediate beneficiaries are the military contractors, but the profit expectations of other capitalists are also affected, sometimes in a much bigger way. In either case, the impact - direct or indirect, positive or negative - gets discounted into asset prices. This much should be obvious. The process, though, also works in reverse.
Over the past half-century, the logic of capitalization has penetrated mili- tary jargon and praxis. The first steps in this direction were taken during the 1960s by Robert McNamara. This was the beginning of the end of US 'Military Keynesianism', and President Kennedy, who wanted to limit the nuclear arms race and shift the Cold War to a more 'conventional', labour intensive path, entrusted McNamara with putting the US military on an 'efficient' footing. McNamara brought to the Pentagon people like Hitch and McKean, whose work on The Economics of Defense in the Nuclear Age (1960) (which we mentioned in Chapter 5) was one of the earlier attempts to apply hedonic cost/benefit analysis to military affairs. Initially, the computations were rather nai? ve by today's standards, but with time and money the economics of defence (or attack, depending on the perspective) grew more sophisticated and gradually integrated the broader logic and full scope of capitalization.
Military officers and strategists nowadays speak of 'military investment', while national accountants routinely measure the country's 'military assets'. 18 Furthermore, the military seems to have endorsed the notion that the 'market knows best', and it now uses 'market signals' to predict future military events and to evaluate the success of military operations. In 2003, the U. S. Defense Advanced Research Projects Agency (DARPA) proposed to set up a futures
17 During the 2000s, soaring oil prices have given rise to an 'Islamic finance industry' with 2007 assets estimated at around $750 billion. The expansion has been so rapid and unex- pected that the business still lacks standardization. It is presently 'regulated' by a few dozen religious scholars whose human capital consists of the exclusive right to declare a finan- cial instrument 'sharia compliant'. A unit of this religiously sanctioned capital can fetch millions of dollars a year on the free market for fatwas (Bokhari and Oakley 2006; Khalaf 2007). Religious investment of course is hardly limited to Muslims. Rabbinate organiza- tions around the world run capitalized networks of 'kosher' certification, each with its own code of conduct and an army of invigilators. Businesses that fail to pay protection are deprived from accessing the purchasing power of the observant laity. Christians also capi- talize divinity. The United States for one has plenty of 'faith-based funds', each catering to the investment preferences of a particular denomination, be it Catholic, Presbyterian or Baptist, and all based on the premise that god loves a winner (Brewster 2008).
18 The U. S. Department of Commerce provides a detailed breakdown of military assets by type, including different kinds of planes, missiles, ships and military vehicles, each discounted according the damage it can cause (U. S. Department of Commerce. Bureau of Economic Analysis 1999). A theoretical 'Typology of Military Assets' is given in Brzoska, Franko and Husbands (2000). See also footnote 8 in Chapter 8.
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exchange that would help predict coups, assassinations and terrorist attacks (Graham 2003; Hulse 2003). The rationale was straightforward. Given that the quest for profit is the best generator of information, and since the market is the most efficient mechanism for distilling such information, why not fuse the working of the army with the logic of capitalism? After all, the army has always been an 'arm' of the ruling class, so it is only appropriate that in a capitalist state the army obeys the same logic as the ruling capitalists. Let investors discount future contracts on such events, and then simply follow the money. A sharp increase in the capitalized price of a 'pipeline explosion contract in 12 months', for example, would then give strategists reason to believe that such an explosion is more likely, while a drop in the price of a 'Jordanian coup contract 6 months ahead' would mean a lower probability for that particular outcome.
Apparently the scheme was a bit too politically incorrect for US voters to digest and was quickly shot down. But there was really nothing exceptional about it. Violent events do affect profits, so investors continuously try to discount the prospects of such events into asset prices. This ongoing capital- ization means that even without an official bourse for violence the military can still tease out information from the capital market: all it has to do is look at the interest-rate spread between the bonds of the affected country and comparable international instruments. Victory is in the eye of the bond- holder. 19
The future of humanity
The all-encompassing role of discounting is most vividly illustrated by recent discussion of environmental change. One key issue is the process of global warming/dimming and what humanity should do about it. Supporters of immediate drastic action, such as Nicholas Stern, argue that there is no time to waste. According to The Economics of Climate Change (2007), the report produced by a review panel that he headed for the British Government, the world should invest heavily in trying to limit climate change: the cost of inac- tion could amount to a permanent 5-20 per cent reduction in global GDP (p. xv). But this conclusion is by no means obvious. Critics such as William Nordhaus (2007) argue against drastic actions. In their view, the overall cost of climate change may end up being negligible and the investment to avert it a colossal blunder.
19 Chaney (2007) looks at variation in the yield spread on Iraqi sovereign debt to evaluate the US 'pacification policy' in Iraq, while Greenstone (2007) uses a similar method to judge the success of the US troop 'surge' in Iraq. The latter author explains in his article's abstract that 'After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds'. In his opinion, 'This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it'. Go argue otherwise.
? A brief anthropology 165
The interesting thing about this debate - apart from the fact that it may affect the future of humanity - is that both sides base their argument on the very same model: capitalization. Climate change is likely to have multiple effects - some positive, most negative - and the question is how to discount them to their net present value. Part of the disagreement concerns the even- tual consequences and how they should be priced relative to each other and in relation to other social outcomes. But the most heated debate rages over the discount rate. At what rate of return should the damage be capitalized?
One thousand dollars' worth of environmental damage a hundred years from now, when discounted at 1. 4 per cent, has a present value of -$249 (negative since we measure cost). This is the discount rate that led Stern to conclude that climate change would be enormously harmful, and that urgent action was needed. But the same one thousand dollars' worth of damage, discounted at 6 per cent, has a present value of only -$3. This is the long-term discount rate that Nordhaus likes to use in his computations. It implies that the impact of climate change may end up being minimal, and so should the response be, at least for now. 20
Although most investors are probably unaware of this climate-splitting debate, they too view the process through the lens of capitalization. By 2007, there were nearly 50 'climate change' funds listed on the Bloomberg news service. The HSBC Global Climate Change Benchmark Index, an investment vehicle that tracks 300 companies that 'make money from fighting climate change', has outperformed the MSCI World Index by 70 per cent since 2004 (Oakley 2007). In parallel, there has been a boom in the market of 'catastrophe bonds'. The emergence of these bonds in the 2000s has enabled investors to buy from insurance companies the 'tail risk' of large-scale cata- strophes such as earthquakes, pandemics and perfect storms, and by so doing has given capitalists the illusion they can somehow 'externalize' the more cataclysmic impacts of nature on society (Lewis 2007).
It seems that, just like the Salamander traders who underwrite the slow- motion holocaust in Karel Capek's War with the Newts (1937), capitalists today cannot resist the temptation of dancing at both weddings: on the one hand they contribute to climate change, while on the other they cheerfully discount the boom in the doom. As long as their capitalization keeps rising, they themselves will happily go under with their thumbs up. 21
20 The controversy over the 'proper' discount rate has been staged with much fanfare by the panellists of the Copenhagen Consensus conference (Lomborg 2004).
21 'The history of the newts is thus characterised from the very outset by its perfect and rational organization; the principal but not exclusive credit for this must go to the Salamander Syndicate; it should, however, be acknowledged that science, philanthropic endeavour, enlightenment, the press and other factors also played a considerable part in the spectacular spread and progress of the Newts. That said, it was the Salamander Syndicate which, so to speak, daily conquered new continents and new shores for the Newts, even though it had to overcome many an obstacle to that expansion. . . . In short, unlike human
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Capitalization and the qualitative-quantitative nomos of capitalism
Extrapolating the foregoing illustrations, we can say that in capitalism most social processes are capitalized, directly or indirectly. Every process - whether focused on the individual, societal or ecological levels - impacts the level and pattern of capitalist earnings. And when earnings get capitalized, the processes that underlie them get integrated into the numerical architecture of capital. Moreover, no matter how varied the underlying processes, their inte- gration is always uniform: capitalization, by its very nature, converts and reduces qualitatively different aspects of social life into universal quantities of money prices. In this way, individual 'preferences' and the human genome, the structure of persuasion and the use of force, the legal structure and the social impact of the environment - are qualitatively incomparable yet quanti- tatively comparable. The capitalist nomos gives every one of them a present value denominated in dollars and cents, and prices are always commensurate.
? colonisation of the globe, the spread of the Newts proceeded in accordance with a plan and on a generous scale; had it been left to nature it would have dragged on over hundreds and thousands of years. Say what you will, but nature is not, and never has been, as enterprising and purposeful as human production and commerce. . . . ' (Capek 1937: 122-23).
10 Capitalization
Fiction, mirror or distortion?
He had the same trouble as all intellectuals - he was ineffectual. He knew too many things, and they confused him.
--Louis-Ferdinand Ce? line, Journey to the End of the Night
How are we to theorize the all-embracing architecture of capital? The exam- ples in the previous chapter suggest that capitalization is an encompassing social process of valuation in need of a comprehensive theory of value. The conventional neoclassical and Marxist approaches, though, lack such a theory and therefore fall back on narrow 'economic' explanations. In both cases, capitalization is explained in relation to the so-called material-productive processes of capitalism.
As usual, the starting points of the two approaches are diametrically opposed. Marx considers capital goods the real thing and nominal capital- ization a mere fiction, whereas the neoclassicists view nominal capitalization as a mirror of capital goods (and vice versa). Yet in the end, because of their wrong starting point, the two schools meet in the middle of nowhere, with capitalization seen as an inescapable 'distortion'. We have mentioned these biases several times in the book, and it is now time to look at them more closely.
From fiction to distortion: Marx's view
Marx wrote before the corporation emerged as the dominant form of busi- ness organization, and therefore before capitalization came into its own. Nonetheless, he was familiar with the technique of discounting and offered one of the first attempts to understand the role of credit and financial markets in capitalist dynamics.
He started by juxtaposing two different entities: 'actual' capital versus 'illusionary' or 'fictitious' capital. Actual capital exists as commodities - means of production, work in progress and commodity money whose prices are governed by labour time, whether historical or current. By contrast,
168 Capitalization
fictitious capital consists of ownership claims on earnings whose price is the present value of those earnings. 1
Why is the latter capital 'fictitious'? Marx lists three basic reasons. First, a claim on earnings often has no actual capital, or 'principal', to call on. This is the case of state debt, for instance. Here the capitalist lends money to the government, yet this money does not create - nor is it intended to create - means of production. Instead, it is spent on current operations. And since the government repays the money plus interest out of its revenues, the capitalist ends up having a claim not over actual capital, but merely over state taxes (or the printing press, as the case may be). Second, a claim on earnings, even on those generated by actual capital, extends into the future. It covers expected as well as current payments, and the two cannot be treated equally. Unlike present income, future income expectations may not materialize; and since their level cannot be known beforehand, their present value could end up being partly or wholly illusionary. Finally, a given flow of income, whether generated by actual capital or not, would create different levels of capital- ization depending on the rate of interest (Marx 1909, Vol. 3: 546-47 and 550-51).
Clearly, actual and fictitious capitals are totally different creatures. They consist of different entities and are quantified through different processes - the former via past and current productive labour time, the latter through future earnings expectations and the rate of interest. So, when considered separately, their respective magnitudes and movements need have nothing in common. The problem, though, is that they cannot be considered separately. The capitalist system is denominated in prices, and as Marx himself conceded, prices are affected by both fictitious and actual accumulation. As a result, any divergence of the former from the latter is bound to 'distort' the value system.
How big is this distortion? Marx's own view was ambivalent. On the one hand, he made it sound as if fictitious capital contaminates the price system to the point of making it incomprehensible:
All connection with the actual process of self expansion of capital is thus lost to the last vestige, and the conception of capital as something which expands itself automatically is thereby strengthened. . . . The accumula- tion of the wealth of this class [the large moneyed capitalists] may proceed in a direction very different from actual accumulation. . . . Moreover, everything appears turned upside down here, since no real prices and their real basis appear in this paper world, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in the centers, in which the whole money business of the country is crowded together, like
1 'The forming of a fictitious capital is called capitalising. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest' (Marx 1909, Vol. 3: 548).
? Fiction, mirror or distortion? 169 London, this reversion becomes apparent; the entire process becomes
unintelligible.
(Marx 1909, Vol. 3: 549, 561 and 576, emphasis added)
On the other hand, Marx seemed to believe that the relationship between the two types of capital can be mapped. Focusing on the accumulation of 'money capital', he asks:
To what extent is it, and is it not, an indication of an actual accumulation of capital, that is, of reproduction on an enlarged scale? The so-called plethora of capital, an expression used only with reference to the interest- bearing capital, is it only a peculiar way of expressing industrial over- production, or does it constitute a separate phenomenon alongside of it?
(Vol. 3: 559)
Marx himself never provided a systematic answer to this question. As noted, he was writing early in the processes and perhaps believed that capi- talism would collapse well before fictitious capital could become entrenched. The Marxists after him, however, could no longer ignore the process. Consequently, they have tried to piece together his scattered insights and, weaving in their own interpretation, yield a Marxist theory of capitalization.
According to the careful reconstruction of Michael Perelman (1990), Marx saw fictitious capital as having a contradictory effect. As a form of credit it helps make the organization of production much more flexible. Yet as a source of information it sends the 'wrong' price signals, and in so doing undermines the coordination of production.
During the boom, the two processes diverge. Ballooning fictitious capital facilitates investment, while growing price distortions amplify the misalloca- tion of resources. These are conflicting trajectories, however, and therefore cannot continue forever. Sooner or later a crisis strikes, and the 'excessive imbalance' between prices and values is rectified:
In order for the price system to work, financial forces should cause ficti- tious capitals to move in directions that parallel changes in reproduction values. . . . By losing any relationship to the underlying system of values, strains eventually build up in the sphere of production until a crisis is required to bring the system back into a balance, whereby prices reflect the real cost of production. The fiction of fictitious value cannot be main- tained indefinitely. At some unknown time in the future, prices will have to return to a rough conformity with values. . . .
(Perelman 1990: 83)
And so we come full circle. Recall that Marx began by suggesting that actual and fictitious capitals are two different entities. But, then, since ficti- tious capital distorts the relationship between prices and labour time, it serves
170 Capitalization
to undermine Marx's labour theory of value. To uphold the labour theory of value, this distortion must be neutralized. And the only way to neutralize it is to assume that the system periodically 'equilibrates' fictitious and actual capital. In the end, the two entities, although different in essence, have to assume the same appearance.
There is of course another possibility altogether, and that is that prices do not obey the labour theory of value. In this latter case, capitalization has no material/productive benchmark to converge on, so we need another theory to explain its trajectory and oscillation.
Unfortunately, there is no way to choose between these two opposing views for the simple reason that labour values cannot be known even if they exist. This impossibility means that we cannot tell whether prices deviate from values, and therefore whether fictitious capital is larger or smaller than the underlying 'actual' capital.
The net result is to leave Marxists with no scientific theory of capitaliza- tion, and therefore with neither a unique explanation for nor an alternative to the actual capitalism of the present. As noted in Chapter 7, this void has been filled by culturalists and state theorists of various denominations who usually have no clue as to what they are missing. And the few who still try to study fictitious capital seriously are fighting a losing battle. Being unable to use labour time as their anchor, most have gravitated toward the hedonic measures of neoclassical economics. Their empirical studies - including those that have adopted Minsky's financial instability hypothesis (1975; 1982) - see credit and fictitious capital as oscillating around the util-denominated 'capital stock' publicized by the national accounts. And with orthodox measurements come orthodox explanations, leading one observer to conclude that 'there is no qualitatively distinct radical monetary perspective' and that no monetary approach within radical political economy can be 'prevalidated as Marxian' (Dymski 1990: 58-59). 2
From mirror to distortion: the neoclassical view
Contrary to the Marxists, who begin from two different entities, the neoclas- sicists start from equivalence: capitalization both derives from and reflects on capital goods. The stylized expression of this symmetry is due to Irving Fisher. In an article aptly titled 'What is Capital? ' (1896), Fisher opens by devising a consistent set of definitions. His starting point is a distinction between 'stock' (quantity at a point in time) and 'flow' (quantity per unit of time). Capital is a stock, income is a flow. Capital gives rise to income, whereas income gives capital its value. The precise correspondence between these concepts is articulated in his book The Rate of Interest (1907):
2 Wall Street (1997) by Doug Henwood is one of the more comprehensive radical dissections of modern finance. But even a razor-sharp and highly versatile author like Henwood is unable to inject much Marxism into the subject.
? Fiction, mirror or distortion? 171
The statement that 'capital produces income' is true only in the physical sense; it is not true in the value sense. That is to say, capital-value does not produce income-value. On the contrary, income-value produces capital- value. . . . [W]hen capital and income are measured in value, their causal connection is the reverse of that which holds true when they are measured in quantity. The orchard produces the apples; but the value of the apples produces the value of the orchard. . . . We see, then, that present capital- wealth produces future income-services, but future income-value produces present capital-value.
(pp. 13-14, original emphases) The feedback loop is illustrated in the following table (p. 14):
Table 10. 1
Quantities Values
Fisher's house of mirrors
Present capital
Capital wealth Capital value
? ? ? ?
Future income
Income services
? ?
Income value
? ? ? Explanation: In the material world, depicted by step 1 of the sequence, capital wealth (measured by the physical quantity of capital goods) produces future income services (similarly measured by their physical quantity). In the nominal world, depicted by stage 3, the income value of the future services (measured in dollars) is discounted by the prevailing rate of interest to generate the present value of capital (also measured in dollars). The two worlds are connected through stage 2, whereby the physical quantity of future income services determines their dollar price.
Hypothetical numerical illustration: Intel has 10 million units of capital wealth, which, during its future life, will produce 1 billion units of income services in the form of microchip-generated utils (step 1). These 1 billion utils' worth of services, spread over the life of the capital wealth, will fetch 100 billion dollars' worth of future profits and interest (step 2), which in turn are discounted to 50 billion dollars' worth of capital value (step 3).
Unfortunately, this neat sequence cannot work. As we saw in previous chapters, a collection of capital goods cannot have a definite physical quan- tity, so it is impossible to say how much services these capital goods 'produce' (thus annulling step 1). And since we don't know the physical productivity of capital goods, obviously we cannot deduce from this productivity either their nominal value (cancelling step 2), or their dollar capitalization (invalidating step 3). So we are still in a bind. While money income is routinely discounted to its present value, there is no way to connect the resulting dollar capitaliza- tion with the 'physical quantity' of the so-called underlying capital goods.
172 Capitalization
At this point, then, the neoclassical search should have been called off. Needless to say, that didn't happen. On the contrary, the quest for the Holy Grail continues unabated. Neoclassical analysts and theorists remain convinced, today perhaps more than ever, that there exists an invisible bridge between the under world of machines and technology and the over world of discounted capitalization. And they certainly have put their mouth where the money is. Over the past century, they have built numerous models, estimated countless regressions and written billions of words - all with the purpose of keeping the bridge standing and the faith unbending.
So in order not to nip their investment in the bud, let's put aside our concern for logical consistency and in what follows assume, along with the believers, that the material quantity of capital goods (whether that quantity 'exists' or not) can be measured by their prices. This assumption puts Fisher's 'capital value' and 'capital wealth' on the same monetary footing, denominated in dollars and cents. And since the two entities are now perfectly comparable, the test becomes pragmatic: for the doctrine to stand there must be empirical correspondence between capitalization and the money price of capital goods.
Sadly, though, even this watered-down correspondence doesn't exist. It turns out not only that the two magnitudes are very unequal, but that their rates of growth oscillate in opposite directions. Let's see why.
Microsoft vs General Motors
Begin with a simple example. Figure 10. 1 provides basic information on two leading corporations in the United States - Microsoft and General Motors (GM). There are four sets of bars in the chart, each presenting a different set of facts about the two companies. The grey bars are for GM, the black ones for Microsoft. On top of each of the Microsoft bars, we denote the per cent ratio of Microsoft relative to GM.
The two sets of bars on the left present data on the 'material' operations of the two firms. In terms of relative employment, depicted by the first set, GM is a giant and Microsoft is a dwarf. In 2005, GM had 335,000 workers, 5. 5 times more than Microsoft's 61,000. The second set of bars denotes the respective dollar value of the companies' plant and equipment, measured in historical cost. In line with our concession, we assume that these dollar values are proportionate to the 'productive capacity' of the two companies. According to these statistics, in 2005, GM's 'productive capacity', standing at $78 billion, was 33 times larger than Microsoft's, whose capital goods were worth a mere $2. 3 billion.
The two sets of bars on the right show the companies' respective capital- ization. Here the picture is exactly the opposite, with Microsoft being the giant and GM the dwarf. In 2005, Microsoft's equity had a market value of $283 billion, nearly 26 times GM's $11 billion. And even if we take the sum of debt and market value (which supposedly stands as the total claim on a
500
400
300
200
100
0
Fiction, mirror or distortion? 173
? ? ? ? ? ? ? GM
Microsoft
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 18%
2,583%
64%
? ? ? ? ? ? 3%
www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? Employees (000)
Plant and Equipment ($bn)
Market Value ($bn)
Market Value and Debt ($bn)
Figure 10. 1 General Motors versus Microsoft, 2005
Note: The per cent figures indicate, for any given measure, the size of Microsoft relative to GM.
Source: Compustat through WRDS (series codes: data29 for employees; data8 for net plant and equipment; data24 for price; data54 for common shares outstanding; data181 for total liabilities).
company's productive assets), the GM total of $475 billion was only 55 per cent greater than Microsoft's $306 billion - a far cry from its relatively huge work force and massive plant and equipment.
The usual response to such a discrepancy, from Alfred Marshall onward, points to 'technology' and 'human capital'. This is the 'knowledge economy', tells us Peter Drucker (1969: Ch. 12). Obviously, Microsoft's dispropor- tionate market value must be due to its superior know-how, packed as 'intan- gibles'. And since intangibles are not included in the plant and equipment category of corporate balance sheets on the one hand yet bear on capitaliza- tion on the other, we end up with a market value that deviates, often consid- erably, from the tangible capital stock.
This is a popular academic claim, and for a good reason: it is entirely reversible and totally irrefutable. To illustrate, simply consider the reverse assertion - namely that GM has more know-how than Microsoft. Since nobody knows how to quantify technology, how can we decide which of the two claims is correct?
174 Capitalization
Tobin's Q: adding intangibles
The discrepancy between capitalization and real assets is by no means limited to individual firms or particular time periods. In fact, it appears to be the rule rather than the exception. Consider Figure 10. 2, which plots the so-called Tobin's Q ratio for US corporate sector from 1932 to 2006. 3 In this figure, Tobin's Q measures the ratio between corporate capitalization and capital goods: for each year, the series takes the market value of all outstanding corporate stocks and bonds and divides it by the current replacement cost of corporate fixed assets (plant and equipment). Since both magnitudes are denominated in current prices, the ratio between them is a pure number.
3.
Capitalism seems able to shape 'preferences' as effectively as any authori- tarian regime - including Huxley's - is able to mould habits and instil fears. But capitalism does much more than that: it makes these 'preferences' suffi- ciently predictable for capitalists to translate them into expected profit discountable to present value.
On the face of it, liberal capitalism is all about 'individuality' and 'free choice'. And yet, the so-called individual consumer ends up being part of a collectively managed mob, as described so eloquently in Herbert Marcuse's One-Dimensional Man (1964). The attractive aspect of this tendency was articulated with great enthusiasm already in the nineteenth century by Francis Galton, one of the forefathers of the science of crowds:
The huger the mob and the greater the apparent anarchy, the more perfect is its sway. It is the supreme law of Unreason. Whenever a large sample of chaotic elements are taken in hand and marshalled in the order of their magnitude, an unsuspected and most beautiful form of regularity proves to have been latent all along.
(Quoted in Newman 1956, Vol. 3: 1481)
The Friedmanite individual may feel 'free to choose' his location in the distribution, but the distribution itself is shaped by the power institutions and organizations of capitalism. And it is this shaping - i. e. the very creation of a predictable 'representative' consumer - that gets capitalized.
The process follows two parallel paths. The first and more transparent is the relentless promise of pleasure - the carrot that 'sovereign consumers' love to pay for. The second and less obvious is the threat of pain. It turns out that the hedonic lure of consumption can be greatly amplified by fear, so the promise of pleasure is usually spiced up with plenty of anxiety and unease.
The division of labour is relatively straightforward. The official news reels scare their audiences with uncertainty, loneliness, violence and disaster, the sports programmes elate them into ecstasy, and the blockbuster films give them their 'two minutes of hate' between the chainsaw massacres and end-of- the-world catastrophes. This simmering brew is then cooled down by the
A brief anthropology 161
soothing solutions of commercial advertisements: sexual impotence is cured by a chemical fix, decrepit apartments by affordable mortgages, ruinous illness by pricey health insurance, dead-end jobs by professional night courses, wrinkles by magic lotions, random violence by gated communities. Don't be a left-behind fool, buy my ware and be cool.
Capitalists worldwide are estimated to spend up to $600 billion annually just to remind us of these options. If we assume a 15 per cent markup on these advertising expenditures, we get $90 billion of net profit. This sum represents roughly 5 per cent of global net corporate income and a comparable portion of global market capitalization. 16 The computations of course are tentative ('half my advertising is wasted, but I don't know which half', goes the famous Madison Avenue saying). They also exclude sales promoting expenditures buried in the 'cost of production' (as noted in the discussion of advertising in Chapter 7). But the very fact that so much is spent on persuasion suggests that a significant chunk of outstanding corporate assets discounts the very ability of capitalists to shape human hopes and fears.
Now, this is the downstream part of the story, but like in Huxley's utopia, there is also an upstream part. Over the past decade or two, investors have started to discount, in addition to people's mental aspirations and worries, the code of their physical reproduction: the genome. It is now possible not only to modify and replicate existing organisms, but also to convert one organism into another via a 'genome transplant' (Sample 2007). Soon enough, it may be feasible to produce a creature from scratch, and one day perhaps even a 'human being' (hopefully modelled after the universal bond trader).
Capitalists have been eager to protect and defend these god-like acts of creation with multiple patents and other expressions of goodwill - all in order to ascertain that the making of plants, animals and people won't end up being a free lunch. After all, what's the use of making life if it can't help you make money? And so far - at least according to the capitalists' own bets - the odds of achieving both goals look promising indeed: from its inception in 1994 to 2007, the AMEX Biotechnology Index has risen ten times faster than the S&P 500 Index. Apparently, it is now finally possible to play God and be rich.
Organizations, institutions, processes
Capitalization of course is hardly restricted to the individual. Take education, an activity estimated to account for roughly 5 per cent of world GDP. The idea of free public schooling was born out of the French Revolution. The new method served to both liberate human beings and turn the newly literate into patriotic citizens and soldiers on the cheap. The arrangement worked smoothly for a while, but by the twentieth century a new complication had
16 The estimate of advertisement spending is from Saatchi (2007). Global profits for 2005-6 are computed from Thomson Datastream by dividing world market value TOTMKWD(MV) by the world price-to-earning ratio TOTMKWD(PE).
? 162 Capitalization
emerged. Having been butchered in two world wars, the citizens/soldiers demanded that warfare be complemented by expensive welfare. Suddenly, the draft was no longer a panacea, and with 'free soldiers' turning out to be rather pricey, the benefit of educating them was called into question. The final disin- tegration of the model came in the 1970s. After the US loss in Vietnam and the arrival of neoliberal globalization, there was no longer a need for costly mass armies. Instead, the capitalists started to invest in 'smart weapons' that could be operated by high-school dropouts. The draft was gradually aban- doned in favour of purely professional armies, and free education in favour of privatized learning.
And so, the organization of learning, once the prerogative of state, church and community, is now increasingly capitalized - even when the teaching itself is still publicly administered. The process is discounted directly by its private suppliers - particularly the publishers of journals, textbooks and databases, whose profits margins can reach 100 per cent (Bergstrom 2001: 186-87). Education is also discounted indirectly insofar as it shapes prefer- ences and mutes criticism, and in so doing helps boost profit and reduce risk (recall John D. Rockefeller's pronouncement that his investment in the University of Chicago was the best he had ever made).
The same logic applies to the organization of entertainment, a process whose global turnover is estimated at $1 trillion (Vogel 2007: xix). Enter- tainment, like education, is capitalized directly by its providers as well as indi- rectly by those whose profits it affects. Another capitalized institution is the newly emergent social networks such as Facebook, MySpace and YouTube, where education and entertainment are fused seamlessly with subliminal and not-so-subliminal marketing. Although these so-called virtual communities are open for everyone to join and participate at no cost, they are anything but free. Each has a captive audience that can be persuaded to spend money, a prospect that capitalists readily discount to the tune of billions.
Other organized institutions, such as the law or religion, are rarely discounted explicitly, but their indirect impacts are extensively capitalized. The assets of pharmaceutical corporations, software companies and other businesses dealing with patents and copyrights depend on the enforcement of intellectual property rights, and in that sense capitalize both the law and the extent to which it is enforced. The same process, only negated, applies to criminal organizations. Whereas legal business discounts the protection of the law, criminal networks - from drug dealing to human trafficking, money laundering, contraband trade, illegal gambling and gun smuggling - capi- talize their ability to violate the law and enforce their own private order.
Similarly with religion. The assets of Islamic banks and investment compa- nies, for example, as well as of secular financial institutions dealing with Muslim savers and investors, discount the extent to which these companies and institutions comply with the sharia (Islamic law). More broadly, religion - just like the law, entertainment and education - shapes the social structure
A brief anthropology 163
and therefore has a wider effect on profit, and that effect too is promptly, if implicitly, capitalized. 17
Organized violence and war are extensively discounted. The immediate beneficiaries are the military contractors, but the profit expectations of other capitalists are also affected, sometimes in a much bigger way. In either case, the impact - direct or indirect, positive or negative - gets discounted into asset prices. This much should be obvious. The process, though, also works in reverse.
Over the past half-century, the logic of capitalization has penetrated mili- tary jargon and praxis. The first steps in this direction were taken during the 1960s by Robert McNamara. This was the beginning of the end of US 'Military Keynesianism', and President Kennedy, who wanted to limit the nuclear arms race and shift the Cold War to a more 'conventional', labour intensive path, entrusted McNamara with putting the US military on an 'efficient' footing. McNamara brought to the Pentagon people like Hitch and McKean, whose work on The Economics of Defense in the Nuclear Age (1960) (which we mentioned in Chapter 5) was one of the earlier attempts to apply hedonic cost/benefit analysis to military affairs. Initially, the computations were rather nai? ve by today's standards, but with time and money the economics of defence (or attack, depending on the perspective) grew more sophisticated and gradually integrated the broader logic and full scope of capitalization.
Military officers and strategists nowadays speak of 'military investment', while national accountants routinely measure the country's 'military assets'. 18 Furthermore, the military seems to have endorsed the notion that the 'market knows best', and it now uses 'market signals' to predict future military events and to evaluate the success of military operations. In 2003, the U. S. Defense Advanced Research Projects Agency (DARPA) proposed to set up a futures
17 During the 2000s, soaring oil prices have given rise to an 'Islamic finance industry' with 2007 assets estimated at around $750 billion. The expansion has been so rapid and unex- pected that the business still lacks standardization. It is presently 'regulated' by a few dozen religious scholars whose human capital consists of the exclusive right to declare a finan- cial instrument 'sharia compliant'. A unit of this religiously sanctioned capital can fetch millions of dollars a year on the free market for fatwas (Bokhari and Oakley 2006; Khalaf 2007). Religious investment of course is hardly limited to Muslims. Rabbinate organiza- tions around the world run capitalized networks of 'kosher' certification, each with its own code of conduct and an army of invigilators. Businesses that fail to pay protection are deprived from accessing the purchasing power of the observant laity. Christians also capi- talize divinity. The United States for one has plenty of 'faith-based funds', each catering to the investment preferences of a particular denomination, be it Catholic, Presbyterian or Baptist, and all based on the premise that god loves a winner (Brewster 2008).
18 The U. S. Department of Commerce provides a detailed breakdown of military assets by type, including different kinds of planes, missiles, ships and military vehicles, each discounted according the damage it can cause (U. S. Department of Commerce. Bureau of Economic Analysis 1999). A theoretical 'Typology of Military Assets' is given in Brzoska, Franko and Husbands (2000). See also footnote 8 in Chapter 8.
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exchange that would help predict coups, assassinations and terrorist attacks (Graham 2003; Hulse 2003). The rationale was straightforward. Given that the quest for profit is the best generator of information, and since the market is the most efficient mechanism for distilling such information, why not fuse the working of the army with the logic of capitalism? After all, the army has always been an 'arm' of the ruling class, so it is only appropriate that in a capitalist state the army obeys the same logic as the ruling capitalists. Let investors discount future contracts on such events, and then simply follow the money. A sharp increase in the capitalized price of a 'pipeline explosion contract in 12 months', for example, would then give strategists reason to believe that such an explosion is more likely, while a drop in the price of a 'Jordanian coup contract 6 months ahead' would mean a lower probability for that particular outcome.
Apparently the scheme was a bit too politically incorrect for US voters to digest and was quickly shot down. But there was really nothing exceptional about it. Violent events do affect profits, so investors continuously try to discount the prospects of such events into asset prices. This ongoing capital- ization means that even without an official bourse for violence the military can still tease out information from the capital market: all it has to do is look at the interest-rate spread between the bonds of the affected country and comparable international instruments. Victory is in the eye of the bond- holder. 19
The future of humanity
The all-encompassing role of discounting is most vividly illustrated by recent discussion of environmental change. One key issue is the process of global warming/dimming and what humanity should do about it. Supporters of immediate drastic action, such as Nicholas Stern, argue that there is no time to waste. According to The Economics of Climate Change (2007), the report produced by a review panel that he headed for the British Government, the world should invest heavily in trying to limit climate change: the cost of inac- tion could amount to a permanent 5-20 per cent reduction in global GDP (p. xv). But this conclusion is by no means obvious. Critics such as William Nordhaus (2007) argue against drastic actions. In their view, the overall cost of climate change may end up being negligible and the investment to avert it a colossal blunder.
19 Chaney (2007) looks at variation in the yield spread on Iraqi sovereign debt to evaluate the US 'pacification policy' in Iraq, while Greenstone (2007) uses a similar method to judge the success of the US troop 'surge' in Iraq. The latter author explains in his article's abstract that 'After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds'. In his opinion, 'This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it'. Go argue otherwise.
? A brief anthropology 165
The interesting thing about this debate - apart from the fact that it may affect the future of humanity - is that both sides base their argument on the very same model: capitalization. Climate change is likely to have multiple effects - some positive, most negative - and the question is how to discount them to their net present value. Part of the disagreement concerns the even- tual consequences and how they should be priced relative to each other and in relation to other social outcomes. But the most heated debate rages over the discount rate. At what rate of return should the damage be capitalized?
One thousand dollars' worth of environmental damage a hundred years from now, when discounted at 1. 4 per cent, has a present value of -$249 (negative since we measure cost). This is the discount rate that led Stern to conclude that climate change would be enormously harmful, and that urgent action was needed. But the same one thousand dollars' worth of damage, discounted at 6 per cent, has a present value of only -$3. This is the long-term discount rate that Nordhaus likes to use in his computations. It implies that the impact of climate change may end up being minimal, and so should the response be, at least for now. 20
Although most investors are probably unaware of this climate-splitting debate, they too view the process through the lens of capitalization. By 2007, there were nearly 50 'climate change' funds listed on the Bloomberg news service. The HSBC Global Climate Change Benchmark Index, an investment vehicle that tracks 300 companies that 'make money from fighting climate change', has outperformed the MSCI World Index by 70 per cent since 2004 (Oakley 2007). In parallel, there has been a boom in the market of 'catastrophe bonds'. The emergence of these bonds in the 2000s has enabled investors to buy from insurance companies the 'tail risk' of large-scale cata- strophes such as earthquakes, pandemics and perfect storms, and by so doing has given capitalists the illusion they can somehow 'externalize' the more cataclysmic impacts of nature on society (Lewis 2007).
It seems that, just like the Salamander traders who underwrite the slow- motion holocaust in Karel Capek's War with the Newts (1937), capitalists today cannot resist the temptation of dancing at both weddings: on the one hand they contribute to climate change, while on the other they cheerfully discount the boom in the doom. As long as their capitalization keeps rising, they themselves will happily go under with their thumbs up. 21
20 The controversy over the 'proper' discount rate has been staged with much fanfare by the panellists of the Copenhagen Consensus conference (Lomborg 2004).
21 'The history of the newts is thus characterised from the very outset by its perfect and rational organization; the principal but not exclusive credit for this must go to the Salamander Syndicate; it should, however, be acknowledged that science, philanthropic endeavour, enlightenment, the press and other factors also played a considerable part in the spectacular spread and progress of the Newts. That said, it was the Salamander Syndicate which, so to speak, daily conquered new continents and new shores for the Newts, even though it had to overcome many an obstacle to that expansion. . . . In short, unlike human
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Capitalization and the qualitative-quantitative nomos of capitalism
Extrapolating the foregoing illustrations, we can say that in capitalism most social processes are capitalized, directly or indirectly. Every process - whether focused on the individual, societal or ecological levels - impacts the level and pattern of capitalist earnings. And when earnings get capitalized, the processes that underlie them get integrated into the numerical architecture of capital. Moreover, no matter how varied the underlying processes, their inte- gration is always uniform: capitalization, by its very nature, converts and reduces qualitatively different aspects of social life into universal quantities of money prices. In this way, individual 'preferences' and the human genome, the structure of persuasion and the use of force, the legal structure and the social impact of the environment - are qualitatively incomparable yet quanti- tatively comparable. The capitalist nomos gives every one of them a present value denominated in dollars and cents, and prices are always commensurate.
? colonisation of the globe, the spread of the Newts proceeded in accordance with a plan and on a generous scale; had it been left to nature it would have dragged on over hundreds and thousands of years. Say what you will, but nature is not, and never has been, as enterprising and purposeful as human production and commerce. . . . ' (Capek 1937: 122-23).
10 Capitalization
Fiction, mirror or distortion?
He had the same trouble as all intellectuals - he was ineffectual. He knew too many things, and they confused him.
--Louis-Ferdinand Ce? line, Journey to the End of the Night
How are we to theorize the all-embracing architecture of capital? The exam- ples in the previous chapter suggest that capitalization is an encompassing social process of valuation in need of a comprehensive theory of value. The conventional neoclassical and Marxist approaches, though, lack such a theory and therefore fall back on narrow 'economic' explanations. In both cases, capitalization is explained in relation to the so-called material-productive processes of capitalism.
As usual, the starting points of the two approaches are diametrically opposed. Marx considers capital goods the real thing and nominal capital- ization a mere fiction, whereas the neoclassicists view nominal capitalization as a mirror of capital goods (and vice versa). Yet in the end, because of their wrong starting point, the two schools meet in the middle of nowhere, with capitalization seen as an inescapable 'distortion'. We have mentioned these biases several times in the book, and it is now time to look at them more closely.
From fiction to distortion: Marx's view
Marx wrote before the corporation emerged as the dominant form of busi- ness organization, and therefore before capitalization came into its own. Nonetheless, he was familiar with the technique of discounting and offered one of the first attempts to understand the role of credit and financial markets in capitalist dynamics.
He started by juxtaposing two different entities: 'actual' capital versus 'illusionary' or 'fictitious' capital. Actual capital exists as commodities - means of production, work in progress and commodity money whose prices are governed by labour time, whether historical or current. By contrast,
168 Capitalization
fictitious capital consists of ownership claims on earnings whose price is the present value of those earnings. 1
Why is the latter capital 'fictitious'? Marx lists three basic reasons. First, a claim on earnings often has no actual capital, or 'principal', to call on. This is the case of state debt, for instance. Here the capitalist lends money to the government, yet this money does not create - nor is it intended to create - means of production. Instead, it is spent on current operations. And since the government repays the money plus interest out of its revenues, the capitalist ends up having a claim not over actual capital, but merely over state taxes (or the printing press, as the case may be). Second, a claim on earnings, even on those generated by actual capital, extends into the future. It covers expected as well as current payments, and the two cannot be treated equally. Unlike present income, future income expectations may not materialize; and since their level cannot be known beforehand, their present value could end up being partly or wholly illusionary. Finally, a given flow of income, whether generated by actual capital or not, would create different levels of capital- ization depending on the rate of interest (Marx 1909, Vol. 3: 546-47 and 550-51).
Clearly, actual and fictitious capitals are totally different creatures. They consist of different entities and are quantified through different processes - the former via past and current productive labour time, the latter through future earnings expectations and the rate of interest. So, when considered separately, their respective magnitudes and movements need have nothing in common. The problem, though, is that they cannot be considered separately. The capitalist system is denominated in prices, and as Marx himself conceded, prices are affected by both fictitious and actual accumulation. As a result, any divergence of the former from the latter is bound to 'distort' the value system.
How big is this distortion? Marx's own view was ambivalent. On the one hand, he made it sound as if fictitious capital contaminates the price system to the point of making it incomprehensible:
All connection with the actual process of self expansion of capital is thus lost to the last vestige, and the conception of capital as something which expands itself automatically is thereby strengthened. . . . The accumula- tion of the wealth of this class [the large moneyed capitalists] may proceed in a direction very different from actual accumulation. . . . Moreover, everything appears turned upside down here, since no real prices and their real basis appear in this paper world, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in the centers, in which the whole money business of the country is crowded together, like
1 'The forming of a fictitious capital is called capitalising. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest' (Marx 1909, Vol. 3: 548).
? Fiction, mirror or distortion? 169 London, this reversion becomes apparent; the entire process becomes
unintelligible.
(Marx 1909, Vol. 3: 549, 561 and 576, emphasis added)
On the other hand, Marx seemed to believe that the relationship between the two types of capital can be mapped. Focusing on the accumulation of 'money capital', he asks:
To what extent is it, and is it not, an indication of an actual accumulation of capital, that is, of reproduction on an enlarged scale? The so-called plethora of capital, an expression used only with reference to the interest- bearing capital, is it only a peculiar way of expressing industrial over- production, or does it constitute a separate phenomenon alongside of it?
(Vol. 3: 559)
Marx himself never provided a systematic answer to this question. As noted, he was writing early in the processes and perhaps believed that capi- talism would collapse well before fictitious capital could become entrenched. The Marxists after him, however, could no longer ignore the process. Consequently, they have tried to piece together his scattered insights and, weaving in their own interpretation, yield a Marxist theory of capitalization.
According to the careful reconstruction of Michael Perelman (1990), Marx saw fictitious capital as having a contradictory effect. As a form of credit it helps make the organization of production much more flexible. Yet as a source of information it sends the 'wrong' price signals, and in so doing undermines the coordination of production.
During the boom, the two processes diverge. Ballooning fictitious capital facilitates investment, while growing price distortions amplify the misalloca- tion of resources. These are conflicting trajectories, however, and therefore cannot continue forever. Sooner or later a crisis strikes, and the 'excessive imbalance' between prices and values is rectified:
In order for the price system to work, financial forces should cause ficti- tious capitals to move in directions that parallel changes in reproduction values. . . . By losing any relationship to the underlying system of values, strains eventually build up in the sphere of production until a crisis is required to bring the system back into a balance, whereby prices reflect the real cost of production. The fiction of fictitious value cannot be main- tained indefinitely. At some unknown time in the future, prices will have to return to a rough conformity with values. . . .
(Perelman 1990: 83)
And so we come full circle. Recall that Marx began by suggesting that actual and fictitious capitals are two different entities. But, then, since ficti- tious capital distorts the relationship between prices and labour time, it serves
170 Capitalization
to undermine Marx's labour theory of value. To uphold the labour theory of value, this distortion must be neutralized. And the only way to neutralize it is to assume that the system periodically 'equilibrates' fictitious and actual capital. In the end, the two entities, although different in essence, have to assume the same appearance.
There is of course another possibility altogether, and that is that prices do not obey the labour theory of value. In this latter case, capitalization has no material/productive benchmark to converge on, so we need another theory to explain its trajectory and oscillation.
Unfortunately, there is no way to choose between these two opposing views for the simple reason that labour values cannot be known even if they exist. This impossibility means that we cannot tell whether prices deviate from values, and therefore whether fictitious capital is larger or smaller than the underlying 'actual' capital.
The net result is to leave Marxists with no scientific theory of capitaliza- tion, and therefore with neither a unique explanation for nor an alternative to the actual capitalism of the present. As noted in Chapter 7, this void has been filled by culturalists and state theorists of various denominations who usually have no clue as to what they are missing. And the few who still try to study fictitious capital seriously are fighting a losing battle. Being unable to use labour time as their anchor, most have gravitated toward the hedonic measures of neoclassical economics. Their empirical studies - including those that have adopted Minsky's financial instability hypothesis (1975; 1982) - see credit and fictitious capital as oscillating around the util-denominated 'capital stock' publicized by the national accounts. And with orthodox measurements come orthodox explanations, leading one observer to conclude that 'there is no qualitatively distinct radical monetary perspective' and that no monetary approach within radical political economy can be 'prevalidated as Marxian' (Dymski 1990: 58-59). 2
From mirror to distortion: the neoclassical view
Contrary to the Marxists, who begin from two different entities, the neoclas- sicists start from equivalence: capitalization both derives from and reflects on capital goods. The stylized expression of this symmetry is due to Irving Fisher. In an article aptly titled 'What is Capital? ' (1896), Fisher opens by devising a consistent set of definitions. His starting point is a distinction between 'stock' (quantity at a point in time) and 'flow' (quantity per unit of time). Capital is a stock, income is a flow. Capital gives rise to income, whereas income gives capital its value. The precise correspondence between these concepts is articulated in his book The Rate of Interest (1907):
2 Wall Street (1997) by Doug Henwood is one of the more comprehensive radical dissections of modern finance. But even a razor-sharp and highly versatile author like Henwood is unable to inject much Marxism into the subject.
? Fiction, mirror or distortion? 171
The statement that 'capital produces income' is true only in the physical sense; it is not true in the value sense. That is to say, capital-value does not produce income-value. On the contrary, income-value produces capital- value. . . . [W]hen capital and income are measured in value, their causal connection is the reverse of that which holds true when they are measured in quantity. The orchard produces the apples; but the value of the apples produces the value of the orchard. . . . We see, then, that present capital- wealth produces future income-services, but future income-value produces present capital-value.
(pp. 13-14, original emphases) The feedback loop is illustrated in the following table (p. 14):
Table 10. 1
Quantities Values
Fisher's house of mirrors
Present capital
Capital wealth Capital value
? ? ? ?
Future income
Income services
? ?
Income value
? ? ? Explanation: In the material world, depicted by step 1 of the sequence, capital wealth (measured by the physical quantity of capital goods) produces future income services (similarly measured by their physical quantity). In the nominal world, depicted by stage 3, the income value of the future services (measured in dollars) is discounted by the prevailing rate of interest to generate the present value of capital (also measured in dollars). The two worlds are connected through stage 2, whereby the physical quantity of future income services determines their dollar price.
Hypothetical numerical illustration: Intel has 10 million units of capital wealth, which, during its future life, will produce 1 billion units of income services in the form of microchip-generated utils (step 1). These 1 billion utils' worth of services, spread over the life of the capital wealth, will fetch 100 billion dollars' worth of future profits and interest (step 2), which in turn are discounted to 50 billion dollars' worth of capital value (step 3).
Unfortunately, this neat sequence cannot work. As we saw in previous chapters, a collection of capital goods cannot have a definite physical quan- tity, so it is impossible to say how much services these capital goods 'produce' (thus annulling step 1). And since we don't know the physical productivity of capital goods, obviously we cannot deduce from this productivity either their nominal value (cancelling step 2), or their dollar capitalization (invalidating step 3). So we are still in a bind. While money income is routinely discounted to its present value, there is no way to connect the resulting dollar capitaliza- tion with the 'physical quantity' of the so-called underlying capital goods.
172 Capitalization
At this point, then, the neoclassical search should have been called off. Needless to say, that didn't happen. On the contrary, the quest for the Holy Grail continues unabated. Neoclassical analysts and theorists remain convinced, today perhaps more than ever, that there exists an invisible bridge between the under world of machines and technology and the over world of discounted capitalization. And they certainly have put their mouth where the money is. Over the past century, they have built numerous models, estimated countless regressions and written billions of words - all with the purpose of keeping the bridge standing and the faith unbending.
So in order not to nip their investment in the bud, let's put aside our concern for logical consistency and in what follows assume, along with the believers, that the material quantity of capital goods (whether that quantity 'exists' or not) can be measured by their prices. This assumption puts Fisher's 'capital value' and 'capital wealth' on the same monetary footing, denominated in dollars and cents. And since the two entities are now perfectly comparable, the test becomes pragmatic: for the doctrine to stand there must be empirical correspondence between capitalization and the money price of capital goods.
Sadly, though, even this watered-down correspondence doesn't exist. It turns out not only that the two magnitudes are very unequal, but that their rates of growth oscillate in opposite directions. Let's see why.
Microsoft vs General Motors
Begin with a simple example. Figure 10. 1 provides basic information on two leading corporations in the United States - Microsoft and General Motors (GM). There are four sets of bars in the chart, each presenting a different set of facts about the two companies. The grey bars are for GM, the black ones for Microsoft. On top of each of the Microsoft bars, we denote the per cent ratio of Microsoft relative to GM.
The two sets of bars on the left present data on the 'material' operations of the two firms. In terms of relative employment, depicted by the first set, GM is a giant and Microsoft is a dwarf. In 2005, GM had 335,000 workers, 5. 5 times more than Microsoft's 61,000. The second set of bars denotes the respective dollar value of the companies' plant and equipment, measured in historical cost. In line with our concession, we assume that these dollar values are proportionate to the 'productive capacity' of the two companies. According to these statistics, in 2005, GM's 'productive capacity', standing at $78 billion, was 33 times larger than Microsoft's, whose capital goods were worth a mere $2. 3 billion.
The two sets of bars on the right show the companies' respective capital- ization. Here the picture is exactly the opposite, with Microsoft being the giant and GM the dwarf. In 2005, Microsoft's equity had a market value of $283 billion, nearly 26 times GM's $11 billion. And even if we take the sum of debt and market value (which supposedly stands as the total claim on a
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Fiction, mirror or distortion? 173
? ? ? ? ? ? ? GM
Microsoft
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 18%
2,583%
64%
? ? ? ? ? ? 3%
www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? Employees (000)
Plant and Equipment ($bn)
Market Value ($bn)
Market Value and Debt ($bn)
Figure 10. 1 General Motors versus Microsoft, 2005
Note: The per cent figures indicate, for any given measure, the size of Microsoft relative to GM.
Source: Compustat through WRDS (series codes: data29 for employees; data8 for net plant and equipment; data24 for price; data54 for common shares outstanding; data181 for total liabilities).
company's productive assets), the GM total of $475 billion was only 55 per cent greater than Microsoft's $306 billion - a far cry from its relatively huge work force and massive plant and equipment.
The usual response to such a discrepancy, from Alfred Marshall onward, points to 'technology' and 'human capital'. This is the 'knowledge economy', tells us Peter Drucker (1969: Ch. 12). Obviously, Microsoft's dispropor- tionate market value must be due to its superior know-how, packed as 'intan- gibles'. And since intangibles are not included in the plant and equipment category of corporate balance sheets on the one hand yet bear on capitaliza- tion on the other, we end up with a market value that deviates, often consid- erably, from the tangible capital stock.
This is a popular academic claim, and for a good reason: it is entirely reversible and totally irrefutable. To illustrate, simply consider the reverse assertion - namely that GM has more know-how than Microsoft. Since nobody knows how to quantify technology, how can we decide which of the two claims is correct?
174 Capitalization
Tobin's Q: adding intangibles
The discrepancy between capitalization and real assets is by no means limited to individual firms or particular time periods. In fact, it appears to be the rule rather than the exception. Consider Figure 10. 2, which plots the so-called Tobin's Q ratio for US corporate sector from 1932 to 2006. 3 In this figure, Tobin's Q measures the ratio between corporate capitalization and capital goods: for each year, the series takes the market value of all outstanding corporate stocks and bonds and divides it by the current replacement cost of corporate fixed assets (plant and equipment). Since both magnitudes are denominated in current prices, the ratio between them is a pure number.
3.
