1 shows the
historical
evolution of the firm's holdings.
Nitzan Bichler - 2012 - Capital as Power
It had already begun with Engels' 'Law of Value and Rate of Profit' (1894), which defended the labour theory of value on histor- ical rather than analytical grounds and gave rise to the 'value epoch' debate;
122 The enigma of capital
it continued with Hilferding's (1904) reply to Bo? hm-Bawerk, which empha- sized Marx's 'conceptual revolution' while downplaying its quantitative shortcomings; and it received its seal of approval from Sweezy (1942: Ch. 7), who claimed that the qualitative implications of the theory are logically sepa- rate from its quantitative assertions.
The labour theory of value, Sweezy argued, is not essential for under- standing the price structure of capitalism - a structure far better explained by bourgeois economics. But this quantitative deficiency, he continued, in no way undermines the qualitative significance of the theory. The notion of labour value, even if quantitatively flawed, is still essential to dialectically demystify the economy. It has the indispensable role of reminding us of exploitation, and that the only source of profit is unpaid labour.
And so developed a large literature focused exclusively on the qualitative nature of accumulation. The hallmark of this literature is its selectivity: it discards the quantitative conclusions of the theory while upholding its concepts. Labour value and surplus value, even if quantitatively meaningless, are nonetheless taken as a solid starting point for qualitative analysis. Armed with these truncated concepts, the qualitative theorist then proceeds to examine the many features and processes of capitalism - from the restruc- turing of production and class conflict, through alienation and the institu- tions of power, to the business ethos, political organization and the dynamics of culture, among others.
Very few Marxists see anything wrong with exclusively qualitative anal- yses. Most feel that removing Marx's quantitative theory leaves much of his broader conclusions and insights intact, if not enhanced (a claim laboured by Hodgson 1982). Some believe that the whole quantitative/qualitative debate has been misconceived, premised on the erroneous notion that Marx was trying to create a critical political economy 'intended to operationalize the law of value in order to explain the workings of the market' (Postone 1993: 133). And others take this point even further, arguing that Marx's isn't really a labour theory of value but rather a 'value theory of labour' (Elson 1979).
Marx's science
Needless to say, we do not find these arguments persuasive. The notion that Marx was concerned with the qualitative rather than quantitative aspects of capitalism seems to us apologetic and unfounded. More significantly, in our view the belief that his theory of capitalism - or any theory of capitalism for that matter - could be fractured into two independent subsets leads to a dead end.
Begin with the issue of Marx's emphasis. His work was certainly a critique of capitalist ideology. But it was much more than that. Marx tried to create an alternative science, a framework that could replace both bourgeois polit- ical economy and the positivist social management of Auguste Comte. This scheme stood on two main foundations. One was a dialectical history that
The Marxist entanglement II 123
provided the basis for revolutionary consciousness. The other was a value theory that broke the front window of prices and offered a starting point for future democratic planning.
It is perhaps worth reminding ourselves that, unlike today, science was still highly rated in the nineteenth century. Marx followed Hegel in viewing the rise of science as part of the broader development of history. But that view never led him to treat science merely as a matter of fashion and power. He truly believed he could create a new science, one that would both debunk conventional political economy and explain the reality of capitalism.
The task was revolutionary, and revolutions cannot be achieved by mere critiques. Einstein transcended Newtonian physics partly by questioning its epistemology, but mostly by inventing a new one. And the same is true for Marx. To challenge bourgeois economics he needed to construct an alterna- tive capitalist reality, and this new episteme required a different theory of prices. To argue that Marx was not concerned with prices is to argue that his key theses about capitalist development - including the tendency of the rate of profit to fall, the immiseration of the proletariat and the tendency of capi- talism to generate recurrent profitability crises - were meaningless gibberish. These tendencies can be expressed only in terms of price ratios. To theorize them is to theorize prices, and that is precisely what Marx and many of his followers tried to do.
Indeed, for the nineteenth-century intelligentsia, the magic of Marxism lay precisely in the novelty of its scientific structure. Its historical laws of motion seemed as inevitable as the movement of the stars, pushing capitalism toward change, crisis and imminent collapse. Even with the advent of Leninism, when determinism was partly sacrificed in favour of political vitality and party discipline, the thirst for quantitative analysis remained unquenched. In this sense, the Bolshevik apparatus, particularly Lenin and the Comintern, calculated their historical moves just like today's financial strategists, trying to time the coming economic crash and the best entry point for their 'world revolution'. For this purpose, Lenin employed experts such as Nikolai Kondratieff, whose long-term technical analyses (denominated in prices, by the way) were supposed to identify the opportune moment (1926; 1928). Stalin executed Kondratieff and gave his job to Eugen Varga (1935). The latter, coming to his senses, ended up in a gulag. But the quest for the quan- titative magic bullet has remained strong, as evident from the long-wave analyses of contemporary Marxists such as Ernest Mandel (1995).
The fact that Marx erred in trying to anchor prices specifically and some- what mechanically in labour values is secondary. It certainly requires no cover-up or apology. Many eighteenth- and nineteenth-century physicists now seem dated, if not irrelevant. Yet, without their breakthroughs physics would not be where it is today. The same is true for Marx's labour theory of value. It was the first theory to put the study of society on a systematic footing. Had it not been for the stifling influence of the Soviet Union, the spirit of that theory would likely have kept Marxism a vibrant science.
124 The enigma of capital
Quality without quantity?
And here we come to the second and more fundamental point - the notion that we can somehow disconnect the quantitative and qualitative aspects of capitalism, and then discard the former and keep the latter. This path betrays a deep misunderstanding of the subject of inquiry. To study the rationalist order of capitalism without quantities is like studying feudalism without reli- gion, or physics without mathematics. According to Marx, and here he was right on the mark, capitalism, by its very nature, seeks to turn quality into quantity, to objectify and reify social relations as if they were natural and unassailable. In this sense, a qualitative theory of value necessarily implies a quantitative theory of value; it means a society not only obsessed with numbers, but actually shaped and organized by numbers. This organization is the architecture of capitalist power. To understand capitalism therefore is to decipher the link between quality and quantity, to reduce the multifaceted nature of social power to the universal appearance of capital accumulation. The two aspects of the theory rise and fall together. If one is proven wrong, so is the other.
The question, therefore, is not which aspect of value to emphasize, but what the basis of value should be in the first place. The neoclassicists base their value theory on the util, whereas Marxists base it on abstract labour. As we shall see in the next chapter, these elementary particles are deeply prob- lematic. And it is these insoluble difficulties that make both the utility and labour theories of value impossible to salvage.
8 Accumulation of what?
Una fides, pondus, mensura sit idem Et status illaesus totius orbis erit - Let there be one single faith, weight and measure, and the world shall be free from harm.
--Guillaume Bude? (1468-1540) His labor took him about one minute to learn.
--Upton Sinclair, The Jungle
Physicists commonly speak of five fundamental quantities: distance, time, mass, electrical charge and heat. These quantities are fundamental in the sense that every other physical quantity can be derived from them. Velocity is distance divided by time; acceleration is the time derivative of velocity; force is mass multiplied by acceleration; etc. The elementary particles of the phys- ical world - be they electrons, quarks, taus, positrons or strings - as well as the relationships between them and the larger structures to which they give rise - are all characterized by these fundamental quantities. 1
Political economy pretends to mimic this structure. Here, too, we have elementary particles: the neoclassical util and the Marxist abstract labour. Presumably, these are the basic particles that all higher entities of production, consumption and wealth are made of and can be reduced to. But there is a difference. As we shall see in this chapter, unlike the elementary particles of physics, utils and abstract labour are not counted in terms of fundamental quantities. On the contrary, their quantitative dimensions are derived from production, consumption and wealth; that is, they are deduced from the very phenomena they are supposed to explain. And as if to make a bad situation worse, even this reverse derivation is problematic, not to say impossible, since the assumptions it is based on are patently false.
1 There is a debate on whether all five quantities are in fact 'fundamental', and indeed on the very existence of 'fundamental' quantities to begin with (see for instance Laughlin 2005). But these deeper questions need not concern us here.
? 126 The enigma of capital
These considerations serve to further deepen the enigma of capital. We have already seen that political economists find it difficult to theorize why capital accumulates. The measurement riddle shows that they don't even know what gets accumulated.
What gets accumulated?
To a lay person, the question may seem simple to answer: money. Capitalists accumulate when they grow richer; they decumulate when they become poorer. And that is certainly true, but not entirely. To see what is missing, suppose that the actual holdings of a capitalist haven't changed but that their prices have all risen by 10 per cent, thus making him 10 per cent richer. Now assume further that the overall price level - measured by the GDP price deflator - has also grown at the same rate of 10 per cent, so that the 'amount' of commodities the capitalist can buy with his assets remains the same. The capitalist has certainly accumulated in nominal terms, but this increase was merely a price phenomenon. Since the process has affected neither the 'productive capacity' of his assets nor their 'purchasing power', from a material perspective he has ended right where he started. For this reason, political economists - conservative and critical alike - insist that when measuring accumulation we ignore the price of capital and concentrate only on its material, or 'real', quantity.
There is, of course, nothing very unusual about this insistence. After all, political economy is concerned primarily with material processes, so it seems only sensible that the same emphasis should apply to capital. The only problem is that in order to focus on 'real' quantities, we first have to separate them from prices; and surprising at it may sound, in general the two cannot be separated.
Separating quantity from price
To understand the difficulty, let's put aside the theory for a moment and look at what the statisticians do. Their procedure is straightforward: they assume that the dollar market value of any basket of commodities (MV) is equal to its 'real' quantity (Q) times its unit price (P), and then they rearrange the equa- tion. Symbolically, they start from:
1. MV = Q * P Which is equivalent to:
2. Q=MV P
These formulae are taken to be completely general. They apply to any basket of commodities at any point in time - from the contents of a supermarket cart
? Accumulation of what? 127
pushed by a London shopper in 2008, to the annual output of the Chinese economy in 2000, to the global stock of 'capital goods' in 1820. Given data on the market value and price of any set of commodities, calculating its 'real' quantity and growth rate is a simple matter of plugging in the numbers and computing the results.
To illustrate, suppose the U. S. Bureau of Economic Analysis wishes to calculate the 'real' rate of accumulation in the automobile industry from 1990 to 2000. The statisticians know that, over the decade, the market value (at replacement cost) of the industry's capital stock (MV) grew by 93 per cent and that 17 per cent of that increase was due to a rise in unit price (P). Based on these data, the statisticians can easily tell us that the 'real' rate of accumulation - measured by the rate of growth of Q - was 65 per cent (1. 93 / 1. 17 -1 ? 0. 65). 2
A clean, simple computation, no doubt, only that it never works.
The failure is as general as the formulas. The calculation fails with 'capital goods', just as it fails with GDP, private consumption, gross investment or any other collection of heterogeneous commodities. And the reason is embar- rassingly simple. Equation (2) above tells us that in order to compute the quantity we first need to know the price. What it doesn't say is that in order to know the price we first need to know the quantity. . . .
To see the circularity, consider the following facts. An automotive factory is made of many different tools, machines and structures. Over time, the nature of these items tends to change. They may take less time and effort to produce; they may become more or less 'productive' due to technical improvement and wear and tear; their composition may change with new machines replacing older ones; they may be used to produce different and even entirely new output; etc. The result of these many changes is that today's automobile factories are not the same as yesterday's, or as last year's. The price index of automobile factories, however, is supposed to track, over time, the price of the very same factories. The obvious question, then, is: 'How can such an index be computed when the underlying factories - the "things" whose price the index is supposed to measure - keep changing from one year to the next? '
Clearly, in order to measure the price of capital - or of any other collection of different commodities - we must first denominate its underlying 'sub- stance' in some homogenous units. And here we come to the Cartesian 'crux of the matter'. Like Heraclitus, we face the permanent flux of an ever- changing capital stock. Yet, in the spirit of Parmenides, we cannot accept this flux since we need an eternally stable entity to price. And so we fall back on the compromise position of Democritus. According to this compromise,
2 The data in this example pertain to the 'net stock of private fixed assets' in the sector defined as 'motor vehicles, bodies and trailers, and parts'; they are taken from the Fixed Asset Tables of the U. S. Bureau of Economic Analysis.
? 128 The enigma of capital
capitalist phenomena indeed are ever-changing - but this permanent shift is merely the rearrangement of the capitalist atoma. What the naked eye sees as a maelstrom of different commodities, the political economist interprets as the reshuffling of identical, irreducible particles.
For the neoclassicists, the common substance of commodities is the 'utils' they generate. 3 Like any other set of commodities, a collection of machines, factories and structures may be heterogeneous and constantly changing. But no matter how varied and variable its components, say the neoclassicists, they can all be reduced to 'standard efficiency units', elementary particles of productive capacity counted in terms of the utility they create. In this way, an automobile factory capable of producing 1,000 utils is equivalent to two factories each producing 500 utils. As factories change over time, we can simply measure their changing 'magnitude' in terms of their greater or lesser util-generating capacity.
In contrast to the neoclassicists, Marx approached the problem from the input side, arguing that capital, like any other commodity, could be quanti- fied in terms of the socially necessary abstract labour required to produce it. So if we begin with an automotive factory that takes, on average, 10 million hours of abstract labour to construct, and add to it another factory that takes, on average, only 5 million hours to build, we end up with an aggregate capital whose 'magnitude' is equivalent to 15 million hours of abstract labour.
These brave reductions, though, do not help us in the least. In fact, they are totally redundant. After all, had we known the 'util productivity' or 'abstract labour contents' of capital, this knowledge would already tell us its 'real' magnitude, making the whole statistical exercise unnecessary. . . .
Quantifying utility
Let the price tell all
The neoclassical notion of universal utility got off to a bad start. 4 The initial proclamations were decidedly optimistic. In the eighteenth century, mathe- matician Daniel Bernoulli stated that 'people with common sense evaluate money in proportion to the utility they can obtain from it' and went ahead to build on this conviction the quantitative law of diminishing marginal utility (Bernoulli 1738: 33). In the nineteenth century, Philosophical Radical Jeremy Bentham promised his adherents that, in the utilitarian calculus of pleasure and pain, 'Prejudice apart, the game of push-pin is of equal value with the arts and sciences of music and poetry' (1825: Book 3, Ch. 1). He was also convinced that utility could be compared between individuals, though he never bothered to indicate how.
3 The term 'util' was coined by Irving Fisher in his doctoral dissertation (1892: 18).
4 For a sympathetic history of utility theory, see Stigler (1950).
? Accumulation of what? 129
The early neoclassicists, however, weren't nearly as sanguine. Cooled down by the less egalitarian John Stuart Mill, they didn't like the idea of interpersonal comparisons (which implied that society could benefit from greater income equality). But their doubts went deeper. They didn't think the 'quantity of pleasure' from a game of pushpin could be compared to that of music and poetry. In fact, they admitted quite openly that universal utility is impossible to measure and, indeed, difficult to even fathom. The interesting thing, though, is that this recognition did not deter them in the least. 'If you cannot measure, measure anyhow,' complained their in-house critic Frank Knight (quoted in Bernstein 1996: 219). Although the neoclassicists conceded that utility is unquantifiable, they went ahead to build their entire science of 'economics' on the util, an unquantifiable unit. In hindsight, it is hard to think of a more fitting beginning for a successful religion.
In his discussion of utility, Francis Edgeworth, one of the early mathemat- ical economists, admitted that these 'atoms of pleasure' do present 'peculiar difficulties'. Like the invisible Ether, 'they are not easy to distinguish and dis- cern; more continuous than sand, more discreet than liquid; as it were nuclei of the just-perceivable, embedded in circumambient semi-consciousness'. But not to worry:
We cannot count the golden sands of life; we cannot number the 'innu- merable smile' of seas of love; but we seem to be capable of observing that there is here a greater, there a less, multitude of pleasure units, mass of happiness; and that is enough.
(Edgeworth 1881: 8-9)
In fact, Edgeworth was so enthralled with the prospect of quantifying the semi-conscious that he offered to build a 'hedonimeter' that would contin- uously register 'the height of pleasure experienced by an individual' (ibid. : 101). 5 And Edgeworth wasn't alone in disregarding the odds. His contempo- rary, Stanley Jevons, was equally ardent:
A unit of pleasure or pain is difficult even to conceive; but it is the amount of these feelings which is continually promoting us to buying and selling, borrowing and lending, labouring and resting, producing and consuming; and it is from the quantitative effects of the feelings that we must estimate their comparative amounts.
(Jevons 1871: 11, emphases added)
Jevons' last sentence here should strike a chord with neoclassicists. It justifies a logical U-turn that Paul Samuelson would later call 'revealed preferences' (Samuelson 1938). The reason for the U-turn is simple. We cannot measure
? 5 On the early quest for measurable utility, see Colander (2007).
130 The enigma of capital
the utility that drives behaviour, but there is always the option of going in reverse. All it takes is to examine actual behaviour ('the quantitative effects of the feelings') and then assume that, in a perfectly competitive equilibrium, this behaviour 'reveals' the underlying relative utilities ('comparative amounts').
And so arose the infamous neoclassical circularity: 'Utility is the quality in commodities that makes individuals want to buy them, and the fact that indi- viduals want to buy commodities shows that they have utility' (Robinson 1962: 48, original emphases). This circularity, though, operates only at the theoretical level. At the practical level, neoclassicists go in one direction only: from the phenomena to utility. And the phenomenon they find most revealing is price:
Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire.
(Marshall 1920: 78, emphasis added)
And so the path was laid out, and the laity followed - only to find in the end what it assumed in the beginning.
Finding equilibrium
Let's trace this path. We'll use the example of Energy User-Producer, Inc. , a hypothetical corporation that owns two types of assets: automotive factories and oil rigs. The company engages in building, acquiring and selling these assets, so over time their numbers change (for simplicity, we assume that the factories and rigs themselves are of the same type and do not change over time, an assumption that we relax in our discussion of hedonic regression below).
The bottom part of Figure 8.
1 shows the historical evolution of the firm's holdings. We can see that in 1970 it owned 33 automotive factories and 20 oil rigs, and that in subsequent years the former number declined, reaching 15 in 2007, while the latter rose to 47 (since this is a hypothetical corporation, the number of factories and rigs is concocted out of thin air, but the same logic would apply had we used actual numbers).
It is easy to calculate the company's dollar market value for any year t. We simply take the number and price of the automotive factories it owns in that year (denoted by N1t and P1t, respectively) together with the number and price of its oil rigs (N2t and P2t) and plug them into the following expression:
3. MVt = N1t *P1t +N2t *P2t
Accumulation of what? 131 130 ? ? ? ? 160
120 ? ? ? ? 140 110 ? ? ? ? 120 100 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 100 90 ? ? ? ? 80 80 ? ? ? ? 60 70 ? ? ? ? ? ? ? ? ? ? ? ? ? ? 40
60 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 20
50 ? ? ? ? 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Figure 8. 1 Energy User-Producer, Inc.
Note: The number of automotive factories and oil rigs is hypothetical. The 'quantity' of capital with a 1970 equilibrium assumes that the 'util-generating capacities' of an automotive factory and an oil rig have a ratio of 2:1, while the 'quantity' of capital with a 1974 equilibrium assumes that the ratio is 1:1.
For instance, if in 1970 an automotive factory cost $40 million and an oil rig $20 million, the company's 33 factories and 20 oil rigs would be worth $1. 72 billion:
4. $1. 72 bn = 33 * $40 mn + 20 * $20 mn
Now, assume that 1970 was a year of perfectly competitive equilibrium. According to the neoclassical scriptures, this happy situation means that the 2:1 ratio between the price of automotive factories and oil rigs 'reveals' to us their relative efficiencies. It tells us that automotive factories generate twice the universal utils as an oil rig. With this assumption, we can then use Equation (5) to compute the overall 'quantity' of capital (Q) owned by Energy User-Producer, Inc. for any year t:6
6 This computation contains an important caveat that must be noted. According to neo- classical theory, the equilibrium price ratio is proportionate to the relative efficiencies of the marginal automotive factory and oil rig, but that isn't enough for our purpose here. In order to compute the overall 'quantity' of capital, we need to know the relative efficiencies of the
? ? utils 'Quantity' of Capital number equilibrium in 1974
? ? (left)
117
? ? ? ? ? ? ? ? ? 'Quantity' of Capital
equilibrium in 1970 (left)
89
www. bnarchivs. net
? ? Automotive Factories (right)
Oil Rigs
(right)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
122 The enigma of capital
it continued with Hilferding's (1904) reply to Bo? hm-Bawerk, which empha- sized Marx's 'conceptual revolution' while downplaying its quantitative shortcomings; and it received its seal of approval from Sweezy (1942: Ch. 7), who claimed that the qualitative implications of the theory are logically sepa- rate from its quantitative assertions.
The labour theory of value, Sweezy argued, is not essential for under- standing the price structure of capitalism - a structure far better explained by bourgeois economics. But this quantitative deficiency, he continued, in no way undermines the qualitative significance of the theory. The notion of labour value, even if quantitatively flawed, is still essential to dialectically demystify the economy. It has the indispensable role of reminding us of exploitation, and that the only source of profit is unpaid labour.
And so developed a large literature focused exclusively on the qualitative nature of accumulation. The hallmark of this literature is its selectivity: it discards the quantitative conclusions of the theory while upholding its concepts. Labour value and surplus value, even if quantitatively meaningless, are nonetheless taken as a solid starting point for qualitative analysis. Armed with these truncated concepts, the qualitative theorist then proceeds to examine the many features and processes of capitalism - from the restruc- turing of production and class conflict, through alienation and the institu- tions of power, to the business ethos, political organization and the dynamics of culture, among others.
Very few Marxists see anything wrong with exclusively qualitative anal- yses. Most feel that removing Marx's quantitative theory leaves much of his broader conclusions and insights intact, if not enhanced (a claim laboured by Hodgson 1982). Some believe that the whole quantitative/qualitative debate has been misconceived, premised on the erroneous notion that Marx was trying to create a critical political economy 'intended to operationalize the law of value in order to explain the workings of the market' (Postone 1993: 133). And others take this point even further, arguing that Marx's isn't really a labour theory of value but rather a 'value theory of labour' (Elson 1979).
Marx's science
Needless to say, we do not find these arguments persuasive. The notion that Marx was concerned with the qualitative rather than quantitative aspects of capitalism seems to us apologetic and unfounded. More significantly, in our view the belief that his theory of capitalism - or any theory of capitalism for that matter - could be fractured into two independent subsets leads to a dead end.
Begin with the issue of Marx's emphasis. His work was certainly a critique of capitalist ideology. But it was much more than that. Marx tried to create an alternative science, a framework that could replace both bourgeois polit- ical economy and the positivist social management of Auguste Comte. This scheme stood on two main foundations. One was a dialectical history that
The Marxist entanglement II 123
provided the basis for revolutionary consciousness. The other was a value theory that broke the front window of prices and offered a starting point for future democratic planning.
It is perhaps worth reminding ourselves that, unlike today, science was still highly rated in the nineteenth century. Marx followed Hegel in viewing the rise of science as part of the broader development of history. But that view never led him to treat science merely as a matter of fashion and power. He truly believed he could create a new science, one that would both debunk conventional political economy and explain the reality of capitalism.
The task was revolutionary, and revolutions cannot be achieved by mere critiques. Einstein transcended Newtonian physics partly by questioning its epistemology, but mostly by inventing a new one. And the same is true for Marx. To challenge bourgeois economics he needed to construct an alterna- tive capitalist reality, and this new episteme required a different theory of prices. To argue that Marx was not concerned with prices is to argue that his key theses about capitalist development - including the tendency of the rate of profit to fall, the immiseration of the proletariat and the tendency of capi- talism to generate recurrent profitability crises - were meaningless gibberish. These tendencies can be expressed only in terms of price ratios. To theorize them is to theorize prices, and that is precisely what Marx and many of his followers tried to do.
Indeed, for the nineteenth-century intelligentsia, the magic of Marxism lay precisely in the novelty of its scientific structure. Its historical laws of motion seemed as inevitable as the movement of the stars, pushing capitalism toward change, crisis and imminent collapse. Even with the advent of Leninism, when determinism was partly sacrificed in favour of political vitality and party discipline, the thirst for quantitative analysis remained unquenched. In this sense, the Bolshevik apparatus, particularly Lenin and the Comintern, calculated their historical moves just like today's financial strategists, trying to time the coming economic crash and the best entry point for their 'world revolution'. For this purpose, Lenin employed experts such as Nikolai Kondratieff, whose long-term technical analyses (denominated in prices, by the way) were supposed to identify the opportune moment (1926; 1928). Stalin executed Kondratieff and gave his job to Eugen Varga (1935). The latter, coming to his senses, ended up in a gulag. But the quest for the quan- titative magic bullet has remained strong, as evident from the long-wave analyses of contemporary Marxists such as Ernest Mandel (1995).
The fact that Marx erred in trying to anchor prices specifically and some- what mechanically in labour values is secondary. It certainly requires no cover-up or apology. Many eighteenth- and nineteenth-century physicists now seem dated, if not irrelevant. Yet, without their breakthroughs physics would not be where it is today. The same is true for Marx's labour theory of value. It was the first theory to put the study of society on a systematic footing. Had it not been for the stifling influence of the Soviet Union, the spirit of that theory would likely have kept Marxism a vibrant science.
124 The enigma of capital
Quality without quantity?
And here we come to the second and more fundamental point - the notion that we can somehow disconnect the quantitative and qualitative aspects of capitalism, and then discard the former and keep the latter. This path betrays a deep misunderstanding of the subject of inquiry. To study the rationalist order of capitalism without quantities is like studying feudalism without reli- gion, or physics without mathematics. According to Marx, and here he was right on the mark, capitalism, by its very nature, seeks to turn quality into quantity, to objectify and reify social relations as if they were natural and unassailable. In this sense, a qualitative theory of value necessarily implies a quantitative theory of value; it means a society not only obsessed with numbers, but actually shaped and organized by numbers. This organization is the architecture of capitalist power. To understand capitalism therefore is to decipher the link between quality and quantity, to reduce the multifaceted nature of social power to the universal appearance of capital accumulation. The two aspects of the theory rise and fall together. If one is proven wrong, so is the other.
The question, therefore, is not which aspect of value to emphasize, but what the basis of value should be in the first place. The neoclassicists base their value theory on the util, whereas Marxists base it on abstract labour. As we shall see in the next chapter, these elementary particles are deeply prob- lematic. And it is these insoluble difficulties that make both the utility and labour theories of value impossible to salvage.
8 Accumulation of what?
Una fides, pondus, mensura sit idem Et status illaesus totius orbis erit - Let there be one single faith, weight and measure, and the world shall be free from harm.
--Guillaume Bude? (1468-1540) His labor took him about one minute to learn.
--Upton Sinclair, The Jungle
Physicists commonly speak of five fundamental quantities: distance, time, mass, electrical charge and heat. These quantities are fundamental in the sense that every other physical quantity can be derived from them. Velocity is distance divided by time; acceleration is the time derivative of velocity; force is mass multiplied by acceleration; etc. The elementary particles of the phys- ical world - be they electrons, quarks, taus, positrons or strings - as well as the relationships between them and the larger structures to which they give rise - are all characterized by these fundamental quantities. 1
Political economy pretends to mimic this structure. Here, too, we have elementary particles: the neoclassical util and the Marxist abstract labour. Presumably, these are the basic particles that all higher entities of production, consumption and wealth are made of and can be reduced to. But there is a difference. As we shall see in this chapter, unlike the elementary particles of physics, utils and abstract labour are not counted in terms of fundamental quantities. On the contrary, their quantitative dimensions are derived from production, consumption and wealth; that is, they are deduced from the very phenomena they are supposed to explain. And as if to make a bad situation worse, even this reverse derivation is problematic, not to say impossible, since the assumptions it is based on are patently false.
1 There is a debate on whether all five quantities are in fact 'fundamental', and indeed on the very existence of 'fundamental' quantities to begin with (see for instance Laughlin 2005). But these deeper questions need not concern us here.
? 126 The enigma of capital
These considerations serve to further deepen the enigma of capital. We have already seen that political economists find it difficult to theorize why capital accumulates. The measurement riddle shows that they don't even know what gets accumulated.
What gets accumulated?
To a lay person, the question may seem simple to answer: money. Capitalists accumulate when they grow richer; they decumulate when they become poorer. And that is certainly true, but not entirely. To see what is missing, suppose that the actual holdings of a capitalist haven't changed but that their prices have all risen by 10 per cent, thus making him 10 per cent richer. Now assume further that the overall price level - measured by the GDP price deflator - has also grown at the same rate of 10 per cent, so that the 'amount' of commodities the capitalist can buy with his assets remains the same. The capitalist has certainly accumulated in nominal terms, but this increase was merely a price phenomenon. Since the process has affected neither the 'productive capacity' of his assets nor their 'purchasing power', from a material perspective he has ended right where he started. For this reason, political economists - conservative and critical alike - insist that when measuring accumulation we ignore the price of capital and concentrate only on its material, or 'real', quantity.
There is, of course, nothing very unusual about this insistence. After all, political economy is concerned primarily with material processes, so it seems only sensible that the same emphasis should apply to capital. The only problem is that in order to focus on 'real' quantities, we first have to separate them from prices; and surprising at it may sound, in general the two cannot be separated.
Separating quantity from price
To understand the difficulty, let's put aside the theory for a moment and look at what the statisticians do. Their procedure is straightforward: they assume that the dollar market value of any basket of commodities (MV) is equal to its 'real' quantity (Q) times its unit price (P), and then they rearrange the equa- tion. Symbolically, they start from:
1. MV = Q * P Which is equivalent to:
2. Q=MV P
These formulae are taken to be completely general. They apply to any basket of commodities at any point in time - from the contents of a supermarket cart
? Accumulation of what? 127
pushed by a London shopper in 2008, to the annual output of the Chinese economy in 2000, to the global stock of 'capital goods' in 1820. Given data on the market value and price of any set of commodities, calculating its 'real' quantity and growth rate is a simple matter of plugging in the numbers and computing the results.
To illustrate, suppose the U. S. Bureau of Economic Analysis wishes to calculate the 'real' rate of accumulation in the automobile industry from 1990 to 2000. The statisticians know that, over the decade, the market value (at replacement cost) of the industry's capital stock (MV) grew by 93 per cent and that 17 per cent of that increase was due to a rise in unit price (P). Based on these data, the statisticians can easily tell us that the 'real' rate of accumulation - measured by the rate of growth of Q - was 65 per cent (1. 93 / 1. 17 -1 ? 0. 65). 2
A clean, simple computation, no doubt, only that it never works.
The failure is as general as the formulas. The calculation fails with 'capital goods', just as it fails with GDP, private consumption, gross investment or any other collection of heterogeneous commodities. And the reason is embar- rassingly simple. Equation (2) above tells us that in order to compute the quantity we first need to know the price. What it doesn't say is that in order to know the price we first need to know the quantity. . . .
To see the circularity, consider the following facts. An automotive factory is made of many different tools, machines and structures. Over time, the nature of these items tends to change. They may take less time and effort to produce; they may become more or less 'productive' due to technical improvement and wear and tear; their composition may change with new machines replacing older ones; they may be used to produce different and even entirely new output; etc. The result of these many changes is that today's automobile factories are not the same as yesterday's, or as last year's. The price index of automobile factories, however, is supposed to track, over time, the price of the very same factories. The obvious question, then, is: 'How can such an index be computed when the underlying factories - the "things" whose price the index is supposed to measure - keep changing from one year to the next? '
Clearly, in order to measure the price of capital - or of any other collection of different commodities - we must first denominate its underlying 'sub- stance' in some homogenous units. And here we come to the Cartesian 'crux of the matter'. Like Heraclitus, we face the permanent flux of an ever- changing capital stock. Yet, in the spirit of Parmenides, we cannot accept this flux since we need an eternally stable entity to price. And so we fall back on the compromise position of Democritus. According to this compromise,
2 The data in this example pertain to the 'net stock of private fixed assets' in the sector defined as 'motor vehicles, bodies and trailers, and parts'; they are taken from the Fixed Asset Tables of the U. S. Bureau of Economic Analysis.
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capitalist phenomena indeed are ever-changing - but this permanent shift is merely the rearrangement of the capitalist atoma. What the naked eye sees as a maelstrom of different commodities, the political economist interprets as the reshuffling of identical, irreducible particles.
For the neoclassicists, the common substance of commodities is the 'utils' they generate. 3 Like any other set of commodities, a collection of machines, factories and structures may be heterogeneous and constantly changing. But no matter how varied and variable its components, say the neoclassicists, they can all be reduced to 'standard efficiency units', elementary particles of productive capacity counted in terms of the utility they create. In this way, an automobile factory capable of producing 1,000 utils is equivalent to two factories each producing 500 utils. As factories change over time, we can simply measure their changing 'magnitude' in terms of their greater or lesser util-generating capacity.
In contrast to the neoclassicists, Marx approached the problem from the input side, arguing that capital, like any other commodity, could be quanti- fied in terms of the socially necessary abstract labour required to produce it. So if we begin with an automotive factory that takes, on average, 10 million hours of abstract labour to construct, and add to it another factory that takes, on average, only 5 million hours to build, we end up with an aggregate capital whose 'magnitude' is equivalent to 15 million hours of abstract labour.
These brave reductions, though, do not help us in the least. In fact, they are totally redundant. After all, had we known the 'util productivity' or 'abstract labour contents' of capital, this knowledge would already tell us its 'real' magnitude, making the whole statistical exercise unnecessary. . . .
Quantifying utility
Let the price tell all
The neoclassical notion of universal utility got off to a bad start. 4 The initial proclamations were decidedly optimistic. In the eighteenth century, mathe- matician Daniel Bernoulli stated that 'people with common sense evaluate money in proportion to the utility they can obtain from it' and went ahead to build on this conviction the quantitative law of diminishing marginal utility (Bernoulli 1738: 33). In the nineteenth century, Philosophical Radical Jeremy Bentham promised his adherents that, in the utilitarian calculus of pleasure and pain, 'Prejudice apart, the game of push-pin is of equal value with the arts and sciences of music and poetry' (1825: Book 3, Ch. 1). He was also convinced that utility could be compared between individuals, though he never bothered to indicate how.
3 The term 'util' was coined by Irving Fisher in his doctoral dissertation (1892: 18).
4 For a sympathetic history of utility theory, see Stigler (1950).
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The early neoclassicists, however, weren't nearly as sanguine. Cooled down by the less egalitarian John Stuart Mill, they didn't like the idea of interpersonal comparisons (which implied that society could benefit from greater income equality). But their doubts went deeper. They didn't think the 'quantity of pleasure' from a game of pushpin could be compared to that of music and poetry. In fact, they admitted quite openly that universal utility is impossible to measure and, indeed, difficult to even fathom. The interesting thing, though, is that this recognition did not deter them in the least. 'If you cannot measure, measure anyhow,' complained their in-house critic Frank Knight (quoted in Bernstein 1996: 219). Although the neoclassicists conceded that utility is unquantifiable, they went ahead to build their entire science of 'economics' on the util, an unquantifiable unit. In hindsight, it is hard to think of a more fitting beginning for a successful religion.
In his discussion of utility, Francis Edgeworth, one of the early mathemat- ical economists, admitted that these 'atoms of pleasure' do present 'peculiar difficulties'. Like the invisible Ether, 'they are not easy to distinguish and dis- cern; more continuous than sand, more discreet than liquid; as it were nuclei of the just-perceivable, embedded in circumambient semi-consciousness'. But not to worry:
We cannot count the golden sands of life; we cannot number the 'innu- merable smile' of seas of love; but we seem to be capable of observing that there is here a greater, there a less, multitude of pleasure units, mass of happiness; and that is enough.
(Edgeworth 1881: 8-9)
In fact, Edgeworth was so enthralled with the prospect of quantifying the semi-conscious that he offered to build a 'hedonimeter' that would contin- uously register 'the height of pleasure experienced by an individual' (ibid. : 101). 5 And Edgeworth wasn't alone in disregarding the odds. His contempo- rary, Stanley Jevons, was equally ardent:
A unit of pleasure or pain is difficult even to conceive; but it is the amount of these feelings which is continually promoting us to buying and selling, borrowing and lending, labouring and resting, producing and consuming; and it is from the quantitative effects of the feelings that we must estimate their comparative amounts.
(Jevons 1871: 11, emphases added)
Jevons' last sentence here should strike a chord with neoclassicists. It justifies a logical U-turn that Paul Samuelson would later call 'revealed preferences' (Samuelson 1938). The reason for the U-turn is simple. We cannot measure
? 5 On the early quest for measurable utility, see Colander (2007).
130 The enigma of capital
the utility that drives behaviour, but there is always the option of going in reverse. All it takes is to examine actual behaviour ('the quantitative effects of the feelings') and then assume that, in a perfectly competitive equilibrium, this behaviour 'reveals' the underlying relative utilities ('comparative amounts').
And so arose the infamous neoclassical circularity: 'Utility is the quality in commodities that makes individuals want to buy them, and the fact that indi- viduals want to buy commodities shows that they have utility' (Robinson 1962: 48, original emphases). This circularity, though, operates only at the theoretical level. At the practical level, neoclassicists go in one direction only: from the phenomena to utility. And the phenomenon they find most revealing is price:
Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire.
(Marshall 1920: 78, emphasis added)
And so the path was laid out, and the laity followed - only to find in the end what it assumed in the beginning.
Finding equilibrium
Let's trace this path. We'll use the example of Energy User-Producer, Inc. , a hypothetical corporation that owns two types of assets: automotive factories and oil rigs. The company engages in building, acquiring and selling these assets, so over time their numbers change (for simplicity, we assume that the factories and rigs themselves are of the same type and do not change over time, an assumption that we relax in our discussion of hedonic regression below).
The bottom part of Figure 8.
1 shows the historical evolution of the firm's holdings. We can see that in 1970 it owned 33 automotive factories and 20 oil rigs, and that in subsequent years the former number declined, reaching 15 in 2007, while the latter rose to 47 (since this is a hypothetical corporation, the number of factories and rigs is concocted out of thin air, but the same logic would apply had we used actual numbers).
It is easy to calculate the company's dollar market value for any year t. We simply take the number and price of the automotive factories it owns in that year (denoted by N1t and P1t, respectively) together with the number and price of its oil rigs (N2t and P2t) and plug them into the following expression:
3. MVt = N1t *P1t +N2t *P2t
Accumulation of what? 131 130 ? ? ? ? 160
120 ? ? ? ? 140 110 ? ? ? ? 120 100 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 100 90 ? ? ? ? 80 80 ? ? ? ? 60 70 ? ? ? ? ? ? ? ? ? ? ? ? ? ? 40
60 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 20
50 ? ? ? ? 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Figure 8. 1 Energy User-Producer, Inc.
Note: The number of automotive factories and oil rigs is hypothetical. The 'quantity' of capital with a 1970 equilibrium assumes that the 'util-generating capacities' of an automotive factory and an oil rig have a ratio of 2:1, while the 'quantity' of capital with a 1974 equilibrium assumes that the ratio is 1:1.
For instance, if in 1970 an automotive factory cost $40 million and an oil rig $20 million, the company's 33 factories and 20 oil rigs would be worth $1. 72 billion:
4. $1. 72 bn = 33 * $40 mn + 20 * $20 mn
Now, assume that 1970 was a year of perfectly competitive equilibrium. According to the neoclassical scriptures, this happy situation means that the 2:1 ratio between the price of automotive factories and oil rigs 'reveals' to us their relative efficiencies. It tells us that automotive factories generate twice the universal utils as an oil rig. With this assumption, we can then use Equation (5) to compute the overall 'quantity' of capital (Q) owned by Energy User-Producer, Inc. for any year t:6
6 This computation contains an important caveat that must be noted. According to neo- classical theory, the equilibrium price ratio is proportionate to the relative efficiencies of the marginal automotive factory and oil rig, but that isn't enough for our purpose here. In order to compute the overall 'quantity' of capital, we need to know the relative efficiencies of the
? ? utils 'Quantity' of Capital number equilibrium in 1974
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? ? ? ? ? ? ? ? ? 'Quantity' of Capital
equilibrium in 1970 (left)
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? ? Automotive Factories (right)
Oil Rigs
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