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I think of things a bit more simply.
Price = Cost + Profit
Profit = Price – Cost
Profit Margin = (Price – Cost)/Price
Interest expense increases Cost.
To maintain the same Profit Margin with increased Cost requires increasing the Price.
For example, achieving a Profit Margin of 50% requires setting the Price equal to twice the Cost.
So, if the self-funded (debt-free) Cost is $10 and the desired Profit Margin is 50%, the Price is $20.00.
If the debt-based cost is $11 (adding $1.00 in interest expense), to achieve the same 50% Profit Margin requires increasing the Price to $22.
While there’s nothing physically stopping the seller from maintaining the same Price of $20 and accepting a reduced Profit of $11 and a lowly Profit Margin of 45% (or merely increasing the Price by $1 to maintain $10 in Profit while accepting a reduced 47.6% Profit Margin), the capitalist ethos requires increasing the Price to maintain the Profit Margin. Profit margins are indicative of the rate of return of the capital asset (aka the discount rate) and much more important to investors than the absolute amount of profit.
Now, assume the increased Cost is not due to interest but to increased labor costs . . . exact same analysis.
For me, capitalism has to do with growth in output per person, whether measured in terms of GDP units, military power, QUADs of power generated or what have you. It also economic in nature and has to do with economic actors–businesspersons. I think you get capitalism when businesspersons develop a “growth ethic”. Here’s a biological analogy: phages. A phage is a virus that infects bacteria, taking over their metabolic machinery and putting it work replicating phases. Capital infects businesspersons, turning them into capitalists, who now devote their lives to replicating capital. Now this is just as analogy, just as the concept of infectious memes or social contagion are analogies. But I do think it is a cultural construct, or social technology that spread in the same way other cultural constructs do. Previously, in pre- or noncapitalist situations, successful businesspersons would spend surplus profits on land/titles of nobility, patronage of the arts (the Renaissance happened where it did because that’s was where the surplus profits were at the time), or (in China) education for their children to gain entrance to the elite mandarin class, etc. Merchants tended to have low prestige and all these things boosted one’s prestige. Once rulers made the connection between more taxable enterprise –> more income streams–>military power–>achieving career success, they accelerate this chain of events by conferring prestige onto individuals who continued to be businesspersons. That is, elevating merchants who operated in ways that augmented the ruler’s ability to achieve success relative to their peers. Such merchants gained the growth ethic and became capitalists.
I have seen the exponential growth in GDP and human population since the dawn of capitalism, too. I’ve also seen the exponential growth in greenhouse gas emissions. The growth is amazing, but is consumption-driven (read “waste-driven”) growth really a good thing?
You clearly have spent a lot of time studying history and society, all with an eye towards understanding exactly what makes capitalism unique. I have engaged in similar pursuits, although I think may have had different motivations (I cared more about understanding the origins of liberalism, capitalism’s fraternal twin). Our individual understanding of capitalism is even informed by some of the same people, e.g. Steve Keen.
Have you reached any conclusions as to WHY capitalism results in output growth? And have you considered why you think output growth is important, especially when you acknowledge the costs of that growth in terms of global warming? I suppose some of my answers in your book, but I was hoping you could summarize.
This is not a test. I don’t claim to have, or believe I have, the “right” answers to the questions I’m asking you, and I am happy to share my own answers to the same questions before engaging in any kind of “debate” because I think this kind of dialogue can lead us both to a broader understanding of what we both seem to care about: humanity.
Best regards,
Scot
A couple of observations. These first two theories of values do not strike me as theories at all. Theories are validated hypotheses, which cannot be done before measurement was possible.
The neoclassical theory of value is likewise unfalsifiable and, therefore, according to Popper, not a scientific theory. See, e.g., Sraffa, Bichler & Nitzan, etc.
So what? Does anybody think economics is really a science? Neoclassical economics is just classical economics dressed up as physics and sugar-coated by liberal rhetoric to make the bitter fact that capitalism (a system premised on indentured servitude) is antithetical to liberalism (a system based on individual dignity and liberty) easier to swallow/ignore.
The fact is classical economics, Marxist economics and neoclassical economics all have theories of value. Yes, in actuality all these theories are really normative, ethical judgments, but I didn’t label them theories. Economists did.
Also, who said all theories must be scientific? Sure, all scientific theories ought to be scientific, i.e., falsifiable, but other “theories”? Take secular cycle theory, for example. Such theories are not scientific at all. They are just another example of historicism (which Popper criticized as unscientific), the hindsight projection of “perceived” patterns on the past with hopes of predicting the future. Are secular cycles a theory, though? Sure.
This is what I mean by embracing disciplines outside of your own on their own terms. I didn’t invent economic terminology, but I am compelled to use that terminology as I find it in order to communicate with political economists about their discipline. For example, there are many terms that CasP theory insists on using in a way contrary to my experience as a capitalist and investor. What CasP calls “capitalization” I know as “valuation.” What CasP refers to as “the discount rate,” I know as the “annualized rate of return on equity” (the discount rate used in DCFF valuation models is a firm’s weighted average cost of capital or WACC, which considers the annualized cost of debt as well as the annualized rate of return on equity). While I prefer my common understanding to CasP’s usage, when communicating on this forum, I conform with CasP’s usage of the terminology.
I call that capitalism, and see it as a different animal as the sorts of economic organizing common before it showed up.
How do you define capitalism, e.g., what are the basic requirements/elements that a society must have for you to consider it as capitalist?
As a natural scientist, I come at this from a very different perspective. Below is a plot of per capita GDP (GDPpc) in England over six centuries. There was an initial rise in GDPpc around 1350 due to the Black Death, which reduced the number of people without reducing the amount of other factors of production (Land and Capital) resulting in a boost in labor productivity. There was a subsequent rise after 1370 due to the rise in real wages, which incented employers to optimize their use of increasingly expensive labor, resulting in a further rise of labor productivity. By 1400 these adjustments were complete and for 250 years GDPpc rose no further. This limit can be related to what is known as the Malthusian limits to growth which I will not go into here. What matters is how the profile was flat for a long time after 1400, but then started to rise in the last third of the 17th century, a trend that has continued to this day. What happened? I define capitalism, in a phenomenological sense, as that which caused this trend change. I also note that the power a ruler could draw from the territory he ruled was directly dependent on GDPpc and on population, which also began to rise as agricultural productivity rose along with GDPpc. The result of this was the rulers of a small island in 1650 had, two centuries later, become the masters a globe-girdling empire encompassing a fourth of humanity. Clearly, this “capitalism” was a powerful “scale up tech” for rulers. It was also clear that capitalism involved economic activity by private enterprise operating in a market milieu. But such activity had been going for millennia, in ancient Rome, medieval Islam and China, and elsewhere. Why didn’t this “capitalism” thing show up then? And what the hell was it? More on this later.
Michael,
I am not an economist (or political economist), either. My undergraduate degree was in Electrical Engineering, and I have practiced law (primarily intellectual property law) for almost thirty years.
That said, I feel compelled to embrace economic concepts/constructs such as theories of value on their own terms. Allow me to offer a shoot-from-the-hip summary of the major historical economic theories of value (I have not thought through all of this before, so I reserve the right to amend it).
The first economic theory of value, the classical theory of value, flowed from the natural law of Locke, etc., which claimed that all value derived from man’s labor, i.e., the work necessary to transform nature’s resources into something mankind could use and exchange. The classical theory of value and its natural law underpinnings were used to justify slavery, colonialism and imperialism more broadly. Natural resources should belong to those will “improve” them most, so stealing land from others who won’t/can’t improve the land as much as you is not actually stealing, it’s doing God’s work.
The second economic theory of value, the Marxist theory of value, sought to systematize the classical theory of value around an objective unit of measure, the SNALT, as part of a larger effort to explain how and why capitalists claimed such an outsized portion of society’s output when they did not labor themselves. Where the classical theory of value was used to justify inequality between conqueror and conquered, i.e., between a society and outsiders, the Marxist theory of value was used to lay bare the inequality within capitalist society and to advocate for a more (ideally, perfectly) equitable distribution of the fruits of society’s labor.
The third economic theory of value, the neoclassical theory of value, took Marx’s concept of an objective unit of measure and recast it to put “capital” on an equal footing with labor. Thus, the “util” was born. Like the classical theory of value, the neoclassical theory of value seeks to justify economic inequality as natural and inevitable.
Ironically, there is currently another economic theory of value that increasingly dominates economic/legal discourse, but it is not recognized as such. I am referring to the so-called Coase Theorem, which somehow manages to marry classical value theory to neoclassical theory to justify private takings (theft) within a capitalist society: whoever’s actions will maximize the utility of a property should the proper owner of that property.
GDP is not a theory of value. It is an econometric first developed and introduced by Simon Kuznets of the National Bureau of Economic Research in 1934 to measure the output of a society (not its citizens’ well-being) by its consumption. GDP was tailor-made to measure what a capitalist society does (while studiously ignoring debt and finance). Because GDP was never measured prior to 1934, the ability to accurately estimate GDP becomes more difficult (if not impossible) the farther back you go in time from 1934. Accordingly, I find historical GDP data to be of little value. (Also, one has to ask how capitalist societies would measure up using a metric that ignores what GDP measures.)
CasP’s “power theory of value” does not seek to justify or advocate the allocation of income, wealth and resources, which is why I argue it really isn’t a theory of value (other than “there is no such thing as value”).
Obviously, CasP’s “power theory of value” is not an econometric, either.
P.S. Consider picking up a copy of William Goetzmann’s Money Changes Everything. It may make you question whether modern capitalism is as historically unique as you seem to think it is, and to what extent it actually is, if it is. HINT: the primary difference between capitalism and prior finance-driven societies is that the only duties owed by individuals of a capitalist society as between one another are contractual and nominally, at least, entered into freely and without duress. Of course, how free are you when you need money before you can access “the market” (i.e., before you can participate in the society into which you were born)?
P.P.S. I have a working theory that major shifts in Western societies (I include the Middle East here) have all been accompanied by a major shift in attitude towards usury/finance. The Greek diaspora led by Alexander was due, in part, to debts accumulated from decades of war. Rome “collapsed” (really, its elites became the Catholic church) because debts grew faster than tribute from conquered lands could service those debts. The Catholic Church secured its own political power, in part, by outlawing usury, and protestant reformers quickly gained equal footing by “legalizing” usury. And the history of capitalism itself has been marked by pitched battles over the proper roll of finance within society.
First, I had always understood that the Fed’s love affair with monetarism died with Volcker’s failed monetarist experiment in the 1980s, that the Fed thereafter returned to targeting the Fed Funds Rate instead of trying to actively manage debt and monetary aggregates.
Second, what the Fed publishes (and the IMF appears to use) as the US monetary base (the series BOGMBASE) is not “the overall value of notes and coins circulating in each country/area” but rather the “currency in circulation” plus “reserve balances,” which by definition do not circulate. See the H.6 Release of Monetary Stock Measures. Since Sep 2008, most of the increase in BOGMBASE has been driven by increasing reserve balances, and reserves currently equal roughly double the currency in circulation. Compare reserve balances (TOTRESNS) to currency in circulation (CURRSL).
My working theory is the Fed in 2008 increased reserve requirements such that reserve balances were roughly equal to M1 (which then only include demand deposits, i.e., checking accounts, and not savings accounts) to prevent further bank failures. In 2020, the Fed redefined M1 to include most of M2, and last year the Fed reduced reserve requirements to 0%, which makes the increase in reserves last year hard to explain (unless the Fed also upped the interest paid on reserves).
Jon writes: I’m not sure what this measure tells us. R provides a useful measure for capital. By this I means it serves a proxy for what “capital” needs to do. For example. capital, along with people and resources are a factor of production. Resources are consumed, their quantity does not affect output. If you double the size of the coal pile outside a power plant,you do not double the electrical output. On the other hand, capital and labor do affect the rate at which output is generated. Put a second generator in the power plant and you do increase the electrical output. Increase the number of installers and you can put more windows in. (We are having new windows installed and when asked how long it takes, they said all jobs take a day, they simply assign whatever number of installers necessary to get the job done in a day). Given these properties of workers and capital we expect that GDP should rise with population and have a special statistic, GDPpc, that we use to characterize growth in GDP independent of number of people. Thus, we should expect growth in GDPpc to reflect growth in capital, that is, capital accumulation. The stock market is the capital market. Therefore, there should be a relation between the value of the stock market and the amount of capital. If we assume the S&P500 is a good proxy for the market as a whole, then the value of the index can serve as a measure of the amount of capital per share in the index. R corresponds to both of these notions of what capital is. [Jon] If the Standard Oil of New Jersey retained $20 million of net earnings in 1890, and if this $20 million was used to pay for drilling equipment, train companies, bribed politicians and what not, how much of this equipment, material or immaterial as the case may be, is still a “resource” in 2022? None of it, as such. The money spent for the equipment is recovered by depreciation and so ceases to exist as a corporate asset on the books. The people trained/bribed are dead and so no trace of this still exists. The R created in 1890 was a resource in that year and measured at $20 million 1890 dollars ($540 million in 2020 dollars). The capital created by that investment is not associated with that equipment or training. It is the product of the increased sales (economic output) enabled by that investment. Those sales/output translate into increased income and a richer material environment resulting in a more complex culture that manifests as things like rising population-average IQ (Flynn effect). [Jon] Your method suggests that all of it is, and you argue further that you know its quantity in ‘real terms’. My opinion is that you cannot know either. The capital created by the investment in resources is preserved, the resources themselves are not. The former is part of the larger society, while the latter continues to belong to the company that made the original investment.
CasP theory starts from the simple– and indisuptable– observation that capitalists price a financial asset by calculating the net present value of future income generated by that asset. This is the essence of the capital asset pricing model (CAPM), which dominates finance. I don’t care whether the future income is unknowable (for bonds, it actually is known, at least nominally). Why? Because capitalists don’t care. If they did, they’d price financial assets differently.
Bichler and Nitzan did not create this reality. They don’t even argue that this reality is even a particularly good idea. They just accepted this reality is capitalism as understood by capitalists, and they used it to construct CasP theory.
Is there some reason you choose to ignore how capitalists price financial assets? Why isn’t their real capital your real capital?
The importance of metaphors and metonyms to both linguistics and how we think, generally, is discussed in George Lakoff’s and Mark Johnson’s The Metaphors We Live By. (available on SCRIBD at the link).
The danger of employing the market metaphor is that it an orientational metaphor that suggests organizational structure beyond the market itself, especially in neoclassical economics where the assumption of perfect competition is embedded in the market metaphor.
As suggested by the concept of “the state of capital” and the observation of Philip Mirowski and others that the market cannot exist without the state to structure, realize and enforce it, considering the market in isolation creates many blind spots regarding how capitalism actually functions, including, e.g., the importance of credit money to the system, which Marx did not fully understand and, therefore, blithely dismissed finance itself.
Anyway, as I’ve said here before, for the market to be free, people must be in chains. For the 70% of Americans who live paycheck-to-paycheck and cannot afford an unexpected expense of $400, the difference between their lives and living in a gulag is the illusion of autonomy fostered by a lack of a physical prison and guards along with the extension of high-cost credit that ensures they remain indentured servants.
The capitalist mode of power is mediated through monetary exchange. And if exchange is a vehicle of power, you cannot assume it away. In this sense, capitalism sans markets is an oxymoron.
I do not proposing assuming or abstracting away exchange, but the metaphor of the market assumes/abstracts away power. What I am proposing is using a different analytical metaphor that will encourage/allow us to focus on and better understand exchange as a vehicle for both using and extracting capital/power.
For example, the way I see it, every market transaction involves two separate exchanges, the exchange of money which is always intermediated by finance, and the exchange of the commodity itself between buyer and seller. Accordingly, I illustrate the market to show each circuit (the money circuit and the commodity circuit) such that finance is central, not exogenous, to the market. My concern is that defining the market as it is will not necessarily change anybody’s existing understanding of “market,” which like “freedom” and “liberty” is iconic and capable of meaning different things to different people.
You have already explored pricing power as it affects exchange, and Tim DiMuzio has explored credit-money as it affects exchange, so it is clear that CasP is robust enough to make progress even through the market metaphor, but that may be because “power” itself is the primary analytical metaphor of CasP.
Scot, Your notion of a “market” refers to the neoclassical setting of perfect competition. But this is only one possible setting, even in neoclassical theory. In capitalism, a market is a setting where commodities are exchanged (usually) for money. This is a very general definition that can accommodate any commodity/ies, participants, institutions and patterns of activity. If you get rid of this concept, how would you describe the reality it refers to?
I agree that I presented the neoclassical definition of a market subject to perfect competition. At the very least, though, the concept of a “market” should require the voluntary exchange of commodities, shouldn’t it?
So, let’s take a look at the infamous “company store,” the only store in town where commodities are sold to laborers by the company that employs them in exchange for company scrip (i.e., a form of private “money”) in which they are paid. The goods offered for sale in the company store are curated (purchased, repriced to add a profit margin, and resold) by the company that employs labor to the laborers, and only company scrip is accepted for purchases.
Is the company store a market, or something else?
I think it is extortion by another name, something that helps secure the indentured, if not involuntary, servitude of the company’s labor force. The presence of an exchange of money for commodities does not change the asymmetry of power in the relationship that enables the company to not only consume the labor of its employees but the fruit of their labor, as well. The market has been made a tool for extraction and is not merely a neutral “setting.”
I am considering a variety of alternative metaphors, and I am not certain that any single one fully captures the reality of asymmetric power. All I know for certain is that the reliance of classical and neoclassical economists on the term “market” is intended to hide power, to assume it away, and I don’t know how continuing to use that term can do anything other than slow down progress in understanding capital as power. This is an error that Marx made, as well. In many situations, if you accept your opponent’s framing of the debate, you lose the argument.
I have some quibbles with these definitions. Capital is defined financially, in terms of market capitalization. Capital has a second definition as the means of production. Put another way, we can say, the “resources employed by businessmen to produce a profit”.
CasP theory explicitly rejects the second definition.
For the single best CasP discussion addressing most, if not (more than) all, of your points, see Bichler’s and Nitzan’s 2015 article Capital Accumulation: Fiction and Reality. https://bnarchives.yorku.ca/456/
If you haven’t already done so, you may also want to read the 2009 book, Capital as Power: A Study of Order and Creorder, which is available in its entirety (and for free) here.
In a mature capitalist state, State Power and Capital Power are intertwined and inseparable.
To be clear, such a condition is not inevitable. In the beginning, all social power derives from the state. Whether the state advances the status of one segment of society over another, or fails to protect one segment of society from another, society’s order flows from state action and/or inaction.
Capitalism requires the delegation of state power to private parties, i.e., capitalism proceeds from privilege.
I think of social power as a pie chart, with state power initially representing the whole pie. A state that believes in freedom of religion, in giving expression to that belief, carves out a domain of social power exclusive to religion. Over time, capitalist states have delegated more and more social power to capital, e.g., by ceding the power to control the money supply, limited sovereign immunity (limited liability), favorable tax treatment for capital, etc. The false duality of politics v. economics has been instrumental in securing this outcome for capital. (As an aside, I believe the separation of politics and economics logically flows from the separation of church and state; that doesn’t make it true, but the basic argument is the same when grounded in natural rights).
If Neoclassical and Marxist economic ideologies are predicated on theories of value, then can we similarly inspect the theories of value that underpin the State? Liberal Democracies are supposed to be predicated on Liberty, Consent of the Governed, and Equality before the Law. But on the face of it, we can see an absolute failure of the foundation. So can we deconstruct the liberal ideology and use Liberty, Consent, and Equality as the quanta for measuring the accumulation of political power? Or would it be more apt to view The State not in terms of accumulation, and more broadly in terms of strength and rigidity?
Perhaps, liberalism, although presented as if it were universal, was never intended to be universal? Liberty, consent and equality for me, but not for you?
The reality is liberalism describes the political reality of the wealthy quite well.
Whether your trace the origins of liberalism to its early 19th century France and Benjamin Constant or late 17th century England and John Locke, the origins of capitalism preceded and informed liberalism. At this point, I view the liberal ideology as little more than capitalist propaganda, a clutch of normative myths (what Jason Stanley calls “flawed ideology”) we have been conditioned to embrace even while they always seem to recede from us. This does not mean I do not believe in the ideals liberalism espouses, I just don’t believe liberalism believes in the ideals liberalism espouses.
So my questions are these: 1. Is State Power the Qualitative mirror of the Quantitative Power of Capital? 2. Can the legibility of society be used to Qualitatively measure the State’s ability to creorder society? 3. If the answers to 1. & 2. are yes, would there be a correlation between the Power of the State, and the Power of Capital?
In a mature capitalist state, State Power and Capital Power are intertwined and inseparable. They are not mirrors of one another, nor is one qualitative and the other quantitative. They are, for all intents and purposes, one and the same. Yes, Dominant Capital is presented as all carrot (promises of liberty and the pursuit of happiness), and the State is presented as all stick (threats of and the use of legalized force), but Dominant Capital has captured the State, who by then has delegated many of its most important powers, including the power to create money, the power to control the money supply and limited sovereign immunity (aka limited liability), to Dominant Capital.
Once a state has delegated the power to create money to finance (aka Dominant Capital), finance will inexorably transform that state into an oligarchy or plutocracy, regardless of the state’s nominal constitutional form (monarchy, republic, liberal democracy, social democracy, communist).
What is happening in China right now is very interesting in that the state clearly has maintained control not only over the power to create money, but over finance generally. China may be the only “capitalist” state that controls capital instead of being controlled by it.
Within the US, it would be interesting to see if the same pattern shows up between states. I haven’t looked into whether there are data on the public/private mix of institutions at that level. Though I was unable to figure out how to segregate private for-profit from private not-for-profit organizations, it appeared that private insurance made up a significant portion of private funding of healthcare. If this is the case everywhere, I believe my approximation should hold.
The Kaiser Family Foundation (KFF) website has a breakdown of hospital ownership for each state in the U.S.. (URL embedded). The KFF data only goes through 2019, but the American Hospital Association (AHA) is the source of KFF’s data, and they should have an update. https://www.aha.org/
The state of California has a tremendous amount of data available regarding the state’s hospital finances, utilization and pricing. See, e.g., https://hcai.ca.gov/data-and-reports/
You may find this website of interest. The website is owned by a San Francisco Bay Area doctor who decided to dig into what it really costs to deliver healthcare in the U.S.. He eventually published a book about his findings.
