Confidence in Obedience, or Confidence in Liquidity?

Jonathan Nitzan wrote:

Scot Griffin wrote:

It seems to me that how capital assets are priced–i.e., looking backward or looking forward– reflects relative confidence in the proper functioning of the Market and, more specifically, the continued existence of liquidity.

Scot, what do you mean by ‘liquidity’, exactly?

That’s a good question. To a great extent, I am trying to use the term as Colin Drumm does in his thesis “The Difference That Money Makes.”  Is there a market in money for capital assets, i.e., are there enough potential buyers willing to trade money for capital assets at their current market prices? If not, those prices goes down, generally, and if there is a liquidity crisis (i.e., a broad preference to hold “money” over holding capital assets), the price trends towards zero.  If everybody prefers to hold money instead of capital assets, what is the value of those capital assets?

So, I’d guess the best way to define “liquidity” is the availability of a counter-party willing to trade money for a capital asset at or near its current market price.  If the spread between bid and ask for a stock becomes too large, the market for that stock fails, and the share price of the stock collapses.

Liquidity requires a sufficient number of buyers willing to support the prices demanded by the sellers (i.e., the market price).   I hope that’s not too circular, but hysteresis (positive feedback) is part of market pricing for capital assets.

Jonathan Nitzan wrote:

Thank you Scot. Your claim, then, is that if, as a group, capitalists think that asset prices should be lower, they will likely go down — and if they think asset prices should be higher, they will likely rise.  I believe we agree on this mechanism.  The interesting question is why. Why do capitalists. as a group, think that asset prices should be higher or lower — or, in your language, why should liquidity go up or down?

Unfortunately, that is not my claim. It would be nice if it were so simple, but for me the meaning of “liquidity” depends on the context of its use.  Let me fumble around some and try to explain my thinking more clearly.

Liquidity is not the process for setting capital asset prices, it is the predicate for an orderly and functioning Market, by which I mean specifically the market for capital assets.  In the absence of liquidity, there are no transactions, and the price of all assets is effectively zero.  In this context, liquidity means “potential buyers with money and a desire spend it on capital assets.” If nobody is willing to exchange their money for your capital, how much power do you have?  If there are willing buyers but you must sell your capital assets for pennies on the dollar to cover your debts, how much power did you ever have?

In my view, the answer has to do with what capitalists, as a group, think about future earnings, risk and the normal rate of return; and what they think about these three elementary particles hinges on power — that is, on the obedience of the system and people that they collectively rule (including policymakers, mind you). Finally, if we agree that asset prices are set by the capitalists themselves, it follows that their capitalized power gauges their own confidence in this obedience.

The Market is not the same as “the market” (aka the market for goods and services).  In the market, capitalists set the prices for goods and services, and consumers pay those prices. In the Market, capital assets are not “priced” in this sense at all. There is a bid, and there is an ask.  The difference between the bid and the ask is the spread, and a transaction only occurs if somebody is willing to cross the spread.  The “Market price” for a security simply refers to the share price paid in the most recent public sale and is not binding on other buyers and sellers, i.e., prices in the Market are not fixed, they are aspirational.  The more confidence capitalists have in liquidity, the more capital asset prices approach the aspirational ideal of discounted future earnings, and vice versa.

Liquidity crises often arise when a capitalist is forced to liquidate its Market holdings to cover debts.  If there is not enough liquidity to purchase the holdings at or near current “Market pricing,” this can cause major downward and cascading dislocations in capital asset prices, causing the Market to crash.  Such panics arise because capitalists don’t look to the ruled for their cues on when to liquidate their capital assets, they look at each other because threats to their capital (power) almost always come from other capitalists, not from the ruled.

Since its inception, the Market has been beset by fraud and sharp practices designed to give false signals of liquidity and urge prices upwards. We see this every day now with high frequency trading and so-called dark pools, both of which are designed to prevent price-discovery.  We also see it with “market making” service providers who, for a fee from a publicly traded company, will buy shares of that company to make sure it does not fall below a certain price.  Capitalists have as much concern about the obedience of the ruled as the shepherd has fear of his sheep.  To dominant capital, the ruled are sheep, the market pens them in for shearing, and the state rounds up the sheep that try to escape.

This is why I think your Power Index measures confidence in liquidity, not confidence in the obedience of the ruled, and why I believe capital is power only so long as there is sufficient liquidity to ensure a properly functioning Market.  Of course, if the Market fails, the state (which the ruled consider separate and distinct from the Market) will step in and impose austerity to ensure the Market’s return to liquidity.  Until recently, the sole purpose and role of the Federal Reserve was to ensure Market participants of liquidity, which it is now starting to unwind through quantitative tightening.

Rowan Pryor wrote:

“Capitalists are not “rulers” in the traditional sense. They do not issue or enforce laws, they set prices and rely on the Market to intermediate everything, including their own power. ” – Scott Griffin. This statement is qualified by the term “traditional” which isn’t defined but I assume it means state power (by monarch or parliament for example), though it could also mean outright violence which has been rather traditional too, for all of chieftains, monarchs and states. Modern dominant capitalists fund candidates, “capture” laws and regulations (regulatory capture) and lobby, all in manners not open to those who do not possess very large amounts of capital. Then when the laws are written as they require, they employ cadres of lawyers to fight their cases in courts where the judges are schmoozed, if not bought, and where the law they payed to game is brought to bear. They also have a great deal of confidence that the laws used against poor and marginalised people will not be used against them, the rich people, and if by some extraordinary clumsiness on their own part, they do end up in court, they can lawyer-up and escape a negative judgement or pay their way out of trouble (most usually) whilst still retaining large parts of their fortunes. “Confidence in Obedience”, “Confidence in Liquidity”, “Confidence in Impunity”? These are all the inscriptions of the faces of the many-sided die which they cast and which are numbered or labelled on almost all faces with good outcomes for them. One can play confidently with ostensibly unloaded die if the rules of the game grant you wins or at least impunity and significant residual wealth with every throw.

The word “traditional” is actually important.  When we consider the key insight of CasP theory, that “in the real world the quantum of capital exists as finance, and only as finance,” does it make sense to refer back to theories of political science designed to describe and understand something entirely different? If we are going to understand capital as power, shouldn’t we consider discarding traditional concepts like “the ruled” and “the state” and build a new lexicon from finance on up? If instead of starting with “the state” of capital, we start with the Market (i.e., the market for capital assets, which like capital exists wholly within Finance), might we see things a bit differently and perhaps more clearly? The ruled are excluded from the Market , i.e., they are not participants of the Market or citizens of the state of capital, they’re just another commodity to be marketed and consumed.  From the Market’s point of view, the ruled haven’t been marginalized any more than timber, fish, wheat  or cows have been marginalized, and to think otherwise is a category-error.

To the extent the Market controls the market through what we traditionally call the state, we must consider the state’s role relative to the Market, i.e., a state that enforces the market’s rule of the ruled is an appendage of the Market, not vice versa.  At the end of the day, capitalism relies primarily on the systemic, institutional violence of the market to render the ruled as helpless as any other commodity.  The market requires you to have money to live, so you must work for a wage.  Because I gave you a job, you owe me a portion of the value you created, etc.  Because the bank “loaned” me money to start my business, I owe it some of the profits I make from my business.  It’s this chain of debts that creates and maintains the hierarchies of capitalism, which ensures that Finance is always the senior and secured party.

Jonathan Nitzan wrote:

And this is where CasP’s claims about power and confidence in obedience come in. To earn a profit, corporate owners must exert their power over society. And to provide the liquidity needed to price this power, they must be confident that society will continue to obey them – because if it doesn’t, future profits will falter along with prices. I can go on to talk how risk and the normal rate of return are also anchored in power, but I think my point is clear.

“Society” is another traditional term that we need to revisit.  Do we even have a society, in the traditional sense, within the capitalist mode of power? Or are we just using the term to refer to a set of people commonly living within the geographical boundaries of a state?

One could argue, and in some ways you do, that confidence in liquidity and confidence in obedience are effectively the same thing because the former implies the latter, but I think “confidence in obedience” collapses too many disparate issues into a singularity, obliterating any opportunity to distinguish between those issues and understand their differences.

At least with “confidence in obedience,” you begin with the domain over which dominant capital has direct and complete control: Finance and the Market (which we can also think of as Business).  The ruled don’t occupy this domain because they don’t have the money or capital needed for meaningful access.  Instead, the ruled occupy the domain directly controlled by states and the laws they enact to create Industry and the market for services and commodities.  Yes, Finance does exert influence over these states, but influence and control are two different things.  At the end of the day, it is the states who must act to ensure the ruled obey their laws.

This where I think CASP’s outright rejection of the politics v. economics duality is problematic.  I have always agreed with you that this dichotomy is a false one, that politics and economics are inseparable, but I also think we have to accept that this dichotomy, as false as it is, is a normative myth that has real power over people’s thinking and drives the formation of capitalist institutions.  Whether we treat the state and Finance as separate entities or lump them together as “the state of capital,” the two operate in concert towards the same ends, but they operate differently and independently according to the normative myth and false dichotomy of politics v. economics.

My preferred approach is to think of the state as an instrument of dominant capital, a tool for creating the institutional violence of the market and punishing those who disobey or seek to escape it.  But states do maintain some level of independence, as they must to maintain the illusion created by the normative myth of politics/economics.  Next to the capitalists themselves, it is the states whose potential “disobedience” is most concerning to dominant capital.  As long as a state ensures that its ruled are reduced to a commodity that can be exploited by capital, dominant capital does not particularly care what the state does to its ruled.  Commodities are incapable of obeying or disobeying dominant capital; they exist to be exploited and nothing else.

While the ruled are citizens of their respective states, they are not citizens of the state of capital, where they are at best metics, at worst slaves.

In any event, if power is  confidence in the obedience of the ruled, and the Power Index reflects and measures that confidence, it should be easy to use historical events to explain what caused observed changes in confidence as reflected by the Index.  For example, what were the ruled up to that shook dominant capital so much it resulted in the Panic of 1907? What about the Great Recession and the austerity that followed?  One would think austerity would just enrage the ruled even more, but it seems to be a go-to strategy for dealing with financial crises.

Jonathan Nitzan wrote:

Scot Griffin wrote:

I think “confidence in obedience” collapses too many disparate issues into a singularity, obliterating any opportunity to distinguish between those issues and understand their differences.

Yes, “confidence in obedience” is a way of describing the totalizing meaning of capitalized power (see Questions 15-16 in ‘The Capitalist as Power Approach’).

Do you believe your Power Index directly measures confidence in obedience, or do you view it as merely indicative of it? I’ve gone back to the paper in which you first introduce the Power Index, but your assertions and reasoning are more logical than empirical.

I’m not sure, though, how the existence of this abstract notion is “obliterating any opportunity to distinguish between those issues and understand their differences.”

Abstraction destroys the ability to study details that are ignored or eliminated for the sake of simplification.  You can’t look at what you aren’t allowed to see.

Scot Griffin wrote:

This where I think CASP’s outright rejection of the politics v. economics duality is problematic. I have always agreed with you that this dichotomy is a false one, that politics and economics are inseparable, but I also think we have to accept that this dichotomy, as false as it is, is a normative myth that has real power over people’s thinking and drives the formation of capitalist institutions. Whether we treat the state and Finance as separate entities or lump them together as “the state of capital,” the two operate in concert towards the same ends, but they operate differently and independently according to the normative myth and false dichotomy of politics v. economics.

I realize that we don’t share the same views on this matter, but I don’t think that we reject the politics-economics duality outright. Here is what we write on pp. 29-30 of Capital as Power:

To sum up, then, both neoclassicists and Marxists separate politics from economics, although for different reasons. The neoclassicists see the separation as desirable and, if handled properly, potentially beneficial. By contrast, Marxists view the distinction as contradictory and, in the final analysis, destructive for capitalism. Yet, both conclusions, although very different, are deeply problematic — and for much the same reason. The difficulty lies less in the explanation of the duality and more in the widespread assumption that such a duality exists in the first place. Even E. P. Thompson, a brilliant historian who was otherwise critical of Marxist theoretical abstractions, seems unable to escape it. Writing on the development of British capitalism from the viewpoint of industrial workers, he describes the class socialization of workers as ‘subjected to an intensification of two intolerable forms of relationship: those of economic exploitation and of political oppression’ (1964: 198–99). In this dual world, the industrial labourer works for and is exploited by the factory owner — and when he organizes in opposition, in comes the policeman who breaks his bones, the sheriff who evicts him and the judge who jails him. Now, this bifurcation is certainly relevant and meaningful — but only up to a point. From the everyday perspective of a worker, an unemployed person, a professional, even a small capitalist, economics and politics indeed seem distinct. As noted, most people tend to think of entities such as ‘factory’, ‘head office’, ‘pay cheque’ and ‘shopping’ differently from the way they think of ‘political party’, ‘taxation’, ‘police’, ‘military spending’ and ‘foreign policy’. Seen from below, the former belong to economics, the latter to politics. But that is not at all what capitalism looks like from above. It is not how the capitalist ruling class views capitalism, and it is not the most revealing way to understand the basic concepts and broader processes of capitalism. When we consider capitalist society as a whole, the separation of politics and economics becomes a pseudofact. Contrary to both neoclassicists and Marxists who see this duality as inherent in capitalism, in our view it is a theoretical impossibility, one that is precluded by the very nature of capitalism. To paraphrase David Bohm (1980), from this broader perspective, the politics–economics duality is not a useful division, but a misleading fragmentation. It cannot be shown to exist — and if it did exist, profit and accumulation would cease and capitalism would disappear. The consequences of this entanglement for capital theory are dramatic. As we shall demonstrate, without an ‘economy’ clearly demarcated from ‘politics’ we can no longer speak of quantifiable utility and objective labour value; and with these measures gone, neoclassical and Marxian capital theories lose their basic building blocks. They can observe that Microsoft is worth $300 billion and that Toyota pays $2 billion for a new factory, but they cannot explain why.

Any disagreement about this dichotomy is more a matter of degree than substance (we both agree it is false, but I think it remains useful to consider).  Thanks for reminding me of the above language from your book. I was thinking of some of your more recent polemics against neoclassical and Marxist economics.

You write that:

Scot Griffin wrote:

Next to the capitalists themselves, it is the states whose potential “disobedience” is most concerning to dominant capital.

Yes. Conflicts within dominant capital, which we think of as a complex network of big capitalists, large corporations, government organs and so-called policymakers, are crucial. But in our view, these inner-class conflicts are tied to and delineated by the conflict between the rulers and the ruled. If this latter conflict did not exist or was insignificant, the share of profit in national income would have been far higher, the laws would have been very different and potentially far harsher for the underlying population, violence would have been more extreme, etc.

When I first read CasP (the book), it seemed to me that you and Bichler had established a new paradigm, a true break from how we understand political economy. I still believe that, and I realize now that the elements of current CasP theory that I find chafing are those that borrow too heavily from the old paradigm and seem, at least to me, to hold CasP back from achieving many of the goals you state in your 2015 paper “The CasP Project: Past, Present, Future.”

For example, I think that theorizing a “State of Capital” does not go far enough, that it would be better simply to focus on understanding and studying the Market as sovereign and relegate the modern state to the Market’s subject, as we all are (including capitalists).  The ruler is the Market, not the capitalists, but the capitalists have rights and privileges within the Market (are “citizens” of the Market), while the vast majority of people do not even have access to the Market because they must spend everything they have in the market for commodities to survive and so cannot afford to accumulate the capital necessary to enter the Market, i.e., to become a citizen of the State of Capital instead of a mere subject.  The difference between capitalists and everyone else is the power they derive from having enough freedom from the market to be members of the Market, which is why they fear the Market disappearing if liquidity disappears.

In this sense, I believe that capitalist power does not derive from confidence in the obedience of the ruled but from confidence in the continued rule of the Market.  And I’d prefer to jettison words like “ruler,” “ruled,” “citizen,” and “class” to focus entirely developing a new taxonomy based on differential power, which I think is more likely to lead to insights that eliminate such power altogether.

As an aside, I feel MMT, which is an entirely different thing than CasP theory, suffers from similar problems arising from the use of language and concepts of the former paradigm, but MMT’s wounds are self-inflicted because it insists on interpreting the history of classical money to pretend it was just like modern money, which Colin Drumm has disproven.  CasP’s reliance on the old paradigm seems to be a mix of habit and a sincere desire to explain the new paradigm in a way that your peers could understand (even if they ultimately refuse to do so).

Jonathan Nitzan wrote:

Scot Griffin wrote:

I think that theorizing a “State of Capital” does not go far enough, that it would be better simply to focus on understanding and studying the Market as sovereign and relegate the modern state to the Market’s subject, as we all are (including capitalists).

The study of the “state of capital” is in its infancy, and I doubt you can predict its potential reach and likely insights. Having said that, you are more than welcome to make the “Market” the supreme subject and see if it offers different/better insights.

Scot Griffin wrote:

And I’d prefer to jettison words like “ruler,” “ruled,” “citizen,” and “class” to focus entirely developing a new taxonomy based on differential power, which I think is more likely to lead to insights that eliminate such power altogether.

We scarcely refer to “citizens” and “classes”. I’m not sure, though, how one can speak of differential power without differentiating rulers from ruled.

Thank you, Jonathan.  Between your responses here and your recent comments on Twitter, you’ve convinced me that capitalist power  is not confidence in liquidity.  You have also given me a deeper appreciation of the power-fear dialectic and its purpose.  That said, I think developing a market-centric version of the power-fear dialectic could provide additional utility, and I will post a proposed market-centric power-fear dialectic as a new topic on the forum once I think I have something worthy of everyone’s time.  Thanks again. –Scot

• This reply was modified 2 years, 2 months ago by Scot Griffin. Reason: corrected spelling error