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which tends to have a positive effect on the replacement cost of the capital stock and a negative impact on corporate capitalization.
An empirical rather than analytical observation, right? Since, in principle, inflation can have the same positive effect on the value of different kinds of assets (through an increase in expected future profits); and the rate of interest is universal in its effect on capitalization.
Does a possible explanation lie in differential risk, as corporate capitalization is more susceptible to the heightened “risk environment” of high inflation rates?
Or maybe a simpler (connected) explanation: capital stock pricing is influenced more by debt, and an increase in the price of debt (interest) is transferred to the price of capital stock commodities by its sellers.
While this statement may be theoretically correct, it is NOT what we want to say.
I understand the point as it is an important part of an ordered presentation directed for the general audience. But what I’m trying to think here is the inability to elicit a meaningful response from established heterodoxians, based on the current exposition. They (honestly, I believe) can’t see in it any worthwhile theoretical contribution, or at least it’s “nothing new”. This is not to say the general exposition should change, but maybe there are some tactical choices, different emphases to make, which might have an impact in this regard. Tentatively, I think it can be done by going after their presumably safe accounting reality (as opposed to “the financial fiction”). If some of the critique would be reoriented in this fashion, it might be harder to conclude out of hand that “our narratives are identical” (“forward-looking capitalization and backward-looking real capital [read: tangible book value] are de-linked? of course they are! We said it all along!”).
I think that Hudson’s reference to ‘book value’ here is misleading
Maybe so, but I doubt he will choose the more “accurate” way, based on real abstract/metaphysical units. I’m pretty sure the other heterodoxians I mentioned before will not go down that path. And for good reasons. So they stay explicitly anchored in accounting reality, even though that reality is not theoretically grounded (for them) in any value theory. That’s the starting point of the engagement, as I see it.
Our point, rather, is that forward-looking capitalization and backward-looking real capital are de-linked (and in the U.S. case inversely correlated, as the figure below shows).
And in this context, what the above analysis shows for the heterodoxians, has little to do with “real capital”. It shows the relationship between capitalization and tangible book value (this time in replacement rather than historical cost). When discussed in those terms, can we say anything about the reasons for the inverse correlation?
OK, so following on the above qoute from Hudson (which seems to suggest he is dependent on book value to represent “cost value”) — it would be valid to rephrase one of your subsequent paragraphs into:
“…the real capital stock, which political economists see as the beginning and end of capitalism, has nothing to do with (tangible) book value, which is the sole god of heterodox, anti-finance, economists.”
Tia and I have some thoughts on the matter, and we’ll try to articulate them soon.
But first, can you please explain what did you mean by saying:
“Second, if you drill a little deeper into the concepts of these two entities, you realize that real capital is backward-looking. It depends on the reinvestment of past profits, whereas market capitalization, which is emphasized by capitalists as well as CasP, is entirely forward-looking. It depends not on the bygone past, but on expectations about the unknown future.”
This seems to contrast with your exposition in רווחי מלחמה (I’m not sure if you wrote it in English as well), when you used the example of an oil tanker to speak about the actual nature of capital goods as forward looking capitalized items, recorded historically on the balance sheet.
Michael Hudson: “…But instead of using the general term ‘power’, I wanted to be very specific and focus on the term economic ‘rent’ as distinguished from ‘value’, as the unearned element; as was just described, the capitalization of corporate wealth over and above the actual value, cost value. (The book value of the tangible wealth — the socially necessary labor costs, ultimately, necessary to create the means of production.)”
This is the most substantial theoretical claim I could track down in what Hudson said. At face value, it points to a plain adherence to some labor theory of value, at the core at least. But it’s totally secondary. When Jonathan claims the distinction between productive and unproductive entities is meaningless, Hudson skates through the problem by saying something like – nowadays, all industrial capital is “infected” by capitalization, so sure, I can go along with that (I’m paraphrasing into lingua CasPa). So it’s not the categorization of different entities which is at the heart of disagreement. It is the apparent radical difference between book value and financial value, and their qualitatively different meanings.
A different line of argument from a CasP perspective could emphasize commodities in general, pointing out that book value is just historical value recorded, dependent on prices which are themselves the product of capitalization at a specific time (a machine worth is determined by discounting expected future earnings associated with control of the machine in a certain production setup). So all “cost value” is already “financial”, in a way. And if we can convince this is the case, then there is no radical difference between those categories of prices.
Now, the gist of the matter lies here. I would argue the inability of heterodox scholars to engage with CasP is not rooted in adherence to different theories of value. I’m thinking here about Keen, Varoufakis, Hudson and the likes (mostly post-Keynesians and neo-Marxists). They are not dependent on a quantitatively meaningful “real” theory or quantities. Implicitly, I think they accept it’s all about power, but they regard the power associated with controlling production directly (as supposedly manifested through cost value) as “good”. But good in what way? I don’t think it’s mainly based on morals, as Blair indicated. It’s based on functionality: The rational power-based order of production under capitalism (we could agree it’s more rational than the centrally planned economy of the USSR, right?). It functions in reproducing social order and sustain needs, and that is considered good (at least as a starting point, politically).
The rest is rent, finance, crises, bubbles, etc. Not the bubbles of the real/nominal divide, but the ones emerging from the mismatch of different rational orders. After all, the nominal sphere of capitalist production is grounded in real bio-physical quantities, or at least, it must take them into account when operating as a quantitative ordering of society. Prices are all nomos, yes, but it’s not the detached, parasitic and often delusional nomos of finance. Of course, capitalist production shouldn’t be autonomous. It should be directed, for example, to take into account the ecological crises. It’s not a perfect rational system, but it’s a whole other beast than finance.
Responding with fundamental critiques of neoclassical or Marxist value theories is not really effective in this context. So a reorientation of exposition and argument might be required if we to facilitate more fruitful engagements.
Well, a nice opportunity to engage with a researcher who carries a good reputation and considerable popularity (at least on the fringe of political economy discourse). And I appreciate the comradely discussion. But as the talk progressed I felt a growing sense of frustration. The potential was there for a meaningful engagement, but it did not materialize, in my opinion. Hudson was generally satisfied with pointing out apparent similarities, when anything of value actually lies in examining the differences of the two approaches more closely.
It made me think of dozens of conversations (with political partners, friends, sympathizers) I have had over the years, about the usefulness and necessity of a (new) power theory of capitalism. Unlike debates with orthodox Marxists, and similar to the one with Hudson, the faultlines were not situated at the heart of theories of value but at the boundaries of each. Later on, I’ll try to find the time to explain what I mean by that. For now I’ll just say this conversation is useful for identifying some practical hurdles CasP is facing, in appealing as an alternative framework for political praxis. So, it’s worth our attention, even though it doesn’t provide a lucid theoretical engagement.
Don’t know about Boychuk’s book, but in the oil&gas business it is (sometimes) possible to find costs per project (per field in the upstream industry). They’re published in corporate reports as projects’ cashflows, and/or cost per unit of oil/gas extracted. So it can be done also from the costs side, bottom-up, if aggregated geographically.
Interbank transfers, whether accomplished via physical check or electronic transfer, do not require an exchange of currency, just the exchange of liabilities (deposits).
Thanks Scot. Are you sure about that? I don’t see how it can make sense from an accounting point of view (deposits can’t just be striked-out by one bank and added to the balance sheet of the second bank). I believe the rest of your exposition (which I think is flawed) is connected to the above point, so maybe it would be helpful to sort it out first.
An added complication might arise because the same products, ‘produced’ by the same ‘industries’, can be recorded differently depending on the sector to whom they are sold (e.g. coffee machines sold to corporations will be labeled as capital goods, but when sold to households they’ll be labeled as consumers goods).
If I’m not mistaken, this classification (and aggregation) is dependent on corporations’ reports of capital formation, and not on attributing the corporation’s output to a specific industry.
So even if corporations were ‘pure’ (with regards to industry), it would still be problematic to reconcile industrial imputations and domestic product accounts of recorded capital formation.
Having said that, taking those classifications at face value, and looking at it from the ‘expenditure’ side: is it possible, in principle, to impute shares of income (profits/wages/etc.) to ‘gross investment’/’capital formation’ – based on aggregated data from corporations individual reports? Without recourse to industrial classification.
money is by definition on the liabilities side of the bank’s balance sheet
There are two kinds of ‘money’ in operation here. One is ‘credit money’ which sits on the liabilities side. The second is ‘currency money’ (which originates from a central bank loan or from the bank owners equity) and it sits on the assets side (reserves). Let’s just agree to call it currency for now.
As I understand it, the argument (by Keen, et al.) is as follows – The books need to be kept balanced at any time and after each monetary occurrence by a double-entry procedure:1: New loan [+ Asset (loan)]–>new deposit [+ Liabilities]
2: Deposit leaves the bank [- Liabilities]–> currency leaves the bank [- Assets (reserves)]
3: interest paid on the loan: currency flows to the bank [+ Assets (reserves)] –>profit registered for owners [+ Liabilities (equity)]
4: principal returns [- Assets (loan “write-off”)]–>currency returns to the bank [+ Assets (reserves)]This is a simple example involving all of the recorded credit money leaving the bank (so all of the currency corresponding to the loan/deposit figures needs to be employed). But a similar procedure can be described for the extreme counter example (all recorded credit money stays in the bank, so no need for currency transfers).
In my opinion, this is the only explanation that makes sense. Registering the returned principal as a net asset would violate accounting rules since it would register twice on the asset side (as currency and as “write-off loan money”), resulting in the need for recording a third monetary occurrence (crediting equity out of the blue) with no corresponding double-entry registration. Or else the books will not stay balanced.
By Tia & Max
Increased consumption and the inception of ‘new needs’ does not equate with wellbeing. And it does not imply that business is productive. But Corentin raises an issue which we know to bother some of us who try to think in the above terms.
In actuality, industry is not a separate, autonomous and deliberate institution. It has no democratic organizational structure of its own, but one that is intertwined with business management. Industry’s autonomy might well be a potentiality (with strong grasp in reality, since without this potentiality being manifested at least partially, social production could not exist), but under capitalism its ‘terrain’, so to speak, is already everywhere dismorphed and dislodged. Its cooperative DNA is already ‘infected’ by business control, which does not exert itself from the outside but channels industry from the inside.
Industry is not only intertwined with business at present, the two also emerged together. industry as the rationalization of cooperative processes of creation and production appeared alongside the fundamental institutions of capital, and so we do not even have a concrete historical example of industry operating without the effects of business upon it.
Assuming this is a valid description, a question arises concerning appropriate proxies for sabotage. If the proxy is unemployment, does it follow that when employment rises industry is necessarily less sabotaged? Even if the added employment is directed at the production and consumption of junk? Surely, full employment does not mean in this case a fully autonomous and wellbeing-oriented industry.
We can think of unemployment as a wide measure of sabotage, but only if we consider it as one dimension of the latter: as sabotaging the given industrial terrain, which is already shaped by needs, production Techniques and goals co-determined by business power. And if this is the case, we might have a complication because we are talking about different levels of analysis. The ‘upper’ level of sabotage might indicate a falling share of capital income as unemployment diminishes, but this does not necessarily mean industry operates in a more autonomous, democratic and deliberate mode. It can mean something else entirely: workers manage to wrestle a higher share of income while producing and consuming more junk, destroying the environment and poisoning the entire population (expressions of ‘deeper’ societal sabotage).
This line of reasoning alludes to the possibility that different metrics of sabotage, referring to different levels of analysis, might move in opposite directions. More importantly, it is not clear why a single viewpoint, that of capital and the distribution of income, should be able to give us a clear-cut ‘bottom-line’ when estimating the ‘degree’ of industry’s autonomy (which is not the same as estimating power relations between different social groups).
P.S.
Castoriadis offers an alternative way with which to understand the dynamic nature of innovation under capitalism, which might be of relevance. He writes: “…what we see is neither technology creating capitalism, nor capitalism creating out of nothing an entire technology to meet its wishes; what we see is the emergence of a capitalist world, of which this technology is an ‘everywhere dense subset'” (Technique, Crossroads in the Labyrinth, 1986: 252). This “technology” is characterized by an abundance and diversity of innovation: “for every ‘need’, for every productive process, it develops not one object or technique, but a vast range of objects and techniques”. Thus, the selection between these creative potentials of production, the promotion of some techniques and the simultaneous repression of others, lies at the heart of the dynamics of power and resistance under capitalism.This means that one dimension in which the analysis of business-industry relations should be carried out is at the level of industrial transitions – how these play out, who do they benefit, and what wider changes do they harbor.
K/E would give us the price to earnings ratio. I think Blair used the inverse formula: r = E/K
Adjusted to include compounded growth:
E/K = (r-g)/(1+g) = 0.068
g = 0.04
r = 0.068+1.068g = 0.1107 = 11.07%Shouldn’t we expect capitalists to already include growing perpetuity of earnings when pricing these kind of assets? If so, Blair’s ‘effective’ discount rate actually corresponds to [r-g]. And if the projected growth rate of earnings is 4%, than the ‘actual’ discount rate [r] is around 12% (instead of 8%). Or am I confusing something?
Thanks for this, Yoni. A few follow up questions:
1. Is the pharma PE ratio actually rising in absolute terms? I’m not sure if it’s directly evident from the graph.
2. Is the PE ratio rising diferentially (compared to the global PE)?
3. If it is, why assume it has to do with differential expected profits and not with differential risk reduction?
Well, something seems to be moving on that front. but is the focus on IP to narrow? This piece can be read as to suggest production is sabotaged (at least on the near to medium term) at wider (and maybe deeper?) levels – limitations on techno-scientific design and modularity of vaccines production, as well as the control of essential raw materials supply. Though stock prices have plummeted following the Biden administration declaration, they haven’t collapsed. Surely, investors know it’s all talk for now and the risk to IP might not materialize, but maybe expectations also take into account IP is only the first line of defense for profit, in the current circumstances.
