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Thank you Michael Alexander for the interesting note. Three points.
1.
You define:
R = ‘real’ cumulative retained earnings = cumulative (retained earnings / price index).
According to this definition, R is an aggregation of the ratio between two nominal series. I don’t know how this aggregation is a proxy of ‘real’ capital — first, because retained earnings are at best the consequence of ‘real’ capital; and second, because ‘real’ capital, understood as a material/productive entity, is unknowable to anyone and everyone, including economists. Yes, Marxists claim that the ‘capital stock’ is ploughed-back surplus value (incarnated as ‘real’ retained earnings), though you cannot operationalize this claim with historical summation when prices deviate from values (whatever they might be) and when technical change makes existing plant and equipment useless/worthless to an unknowable degree.
2.
You define:
P/R = S&P 500 price index / R = S&P 500 price index / cumulative (retained earnings / price index).
This is a relationship between three nominal indices. It is bounded because the denominator R is a rising series with the same slope as the stock market trend. Take any other rising series with a similar slope — or the stock market trend for that matter — and you get the same result.
3.
I’m not sure I understand your last chart and associated explanation.
Sundry thoughts on the state of capital:
1. What makes the capitalist mode of power unique, is that it offers a universal measure of power relations in the form of differential capitalization (and its underlying elementary particles – differential future earnings, differential hype and differential risk).
2. Differential capitalization is not only universal, but also increasingly encompassing. It penetrates and creorders more and more power relations in society, minute and grand. And this penetration and creordering makes the mode of power – or the state of capital, as we call it – appear in constant flux.
3. This flux is deeply dialectical in that it interrelates the imposition of power and resistance to this imposition in what Ulf Martin (2019) calls an ‘autocatalytic sprawl’: the imposition of so-called rational power elicits ‘irrational’ resistance, which in turn calls for further impositions, further resistance, and so on.
4. In this context, the key question concerns the limits, or asymptotes, of this process. The capitalist incarnation of Lewish Mumford’s megamachine is probably the tallest, strongest and most encompassing the world has ever known. But these superlatives also indicate that it might be pushing against some limits beyond which its autocatalytic sprawl might implode. For more on these limits and their implications, see ‘The Asymptotes of Power’ (2012), ‘A CasP Model of the Stock Market’ (2016), and ‘Growing through Sabotage’ (2020).
5. The conventional conception of the modern state as a distinct entity, related to but conceptually separate from capital, is ill-equipped to deal with these integrated processes. James C. Scott’s notion of ‘legibility’ is theoretically trivial (and ‘not particularly original’, in his own words). Relations of power, by their very nature, creorder the universe on which they are imposed. And the process by which rulers make the terrain legible to them is by no means new. It’s written all over the history of the earliest states (just read Frankfort et al., Kramer and Mumford).
6. What is novel is that the logic of capital creordered a new state of capital out feudalism (see Ch. 13 in Capital as Power) . In this sense, the modern state is a creature of capitalism, just like capitalism is inconceivable without a state. They are two sides of the same thing: the state of capital.
7. Bottom line. Power relations, including those created by states (conventionally understood), can be and often are quantified. But they are quantified in different ways with different principles and distinct units. It is only when these relations are subjected and translated to the universal logic of capital (as power), that they too become universal….
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Frankfort, Henri, H. A. Groenewegen-Frankfort, John Albert Wilson, Thorkild Jacobsen, and William Andrew Irwin. 1946. The Intellectual Adventure of Ancient Man. An Essay on Speculative Thought in the Ancient Near East. Chicago: The University of Chicago press.
Kramer, Samuel Noah. 1956. [1981]. History Begins at Sumer. Thirty-Nine Firsts in Man’s Recorded History. 3rd rev. ed. Philadelphia: University of Pennsylvania Press.
Mumford, Lewis. 1967. The Myth of the Machine. Technics and Human Development. New York: Harcourt, Brace & World, Inc.
Mumford, Lewis. 1970. The Myth of the Machine. The Pentagon of Power. New York: Harcourt, Brace Jovanovich, Inc.
For those interested in reading more on the subject, here is a list of some of our CasP analyses of oil:
- The Political Economy of Armament and Oil – A Series of Four Articles (1989) https://bnarchives.yorku.ca/136/
- Bringing Capital Accumulation Back In: The Weapondollar-Petrodollar Coalition – Military Contractors, Oil Companies and Middle-East “Energy Conflicts” (1995) https://bnarchives.yorku.ca/13/
- Putting the State In Its Place: US Foreign Policy and Differential Accumulation in Middle-East “Energy Conflicts” (1996) https://bnarchives.yorku.ca/11/
- The Global Political Economy of Israel (2002) https://bnarchives.yorku.ca/8/
- It’s All About Oil (2003) https://bnarchives.yorku.ca/38/
- Dominant Capital and the New Wars (2004) https://bnarchives.yorku.ca/1/
- New Imperialism or New Capitalism? (2006) https://bnarchives.yorku.ca/203/
- Still About Oil? (2015) https://bnarchives.yorku.ca/432/
- Profit Warning: There Will Be Blood (2017) https://bnarchives.yorku.ca/432/
- Still in the Danger Zone (2020) https://bnarchives.yorku.ca/634
Hi Chris:
I have a technical point to make.
Your paper looks at the relationship between health expenditures and Covid19 deaths, implying that the former has a varying effect on the latter, depending on the public/private expenditure mix.
Your chars make this implied causality potentially difficult to follow. In the sciences, it is conventional to plot the implied cause on the horizontal axis and the effect on the vertical one. Your figures — such as the one reproduced below — invert this convention. They put the effect on the horizontal axis and the cause on the vertical one. Changing the axes will make your results easier to read.
Relative oil prices and differential oil profits
By Shimshon Bichler & Jonathan Nitzan
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If you thought that oil profits are about producing oil, think again.
The enclosed chart, updated from our 2015 Real-World Economics Review paper, ‘Still About Oil?’, shows that the main determinant of oil profit — and specifically of differential oil profit — is not output, but prices.
The figure shows the correlation between two series: (1) the differential oil profits of the world’s integrated oil companies, computed as the ratio between their earnings per share and the earnings per share of all listed firms; and (2) the relative price of oil one year earlier, measured by the $ price of crude oil relative to the U.S. consumer price index. (The reason for the annual lag is that ‘current’ profits represent a trailing average of earnings recorded over the past 12 months.)
When we wrote the article in 2015, differential oil profits and the relative price of oil were both at record highs; nowadays, they brush against record lows. And that pattern is to be expected. As the chart shows, the correlation between these two measures remains positive and tight, with a Pearson coefficient of +0.69 for the entire period since Dec 1973, and +0.75 since January 1980.
Inflation is always and everywhere a re-distributional phenomenon.
(And expect differential oil profits to rise next year.)
This figure is from Joseph Baines’ 2013 New Political Economy paper ‘Food Price Inflation as Redistribution: Towards a New Analysis of Corporate Power in the World Food System’, p. 88.
The chart shows how differential inflation, shown here by changes in the price ratio between finished consumer foods and intermediate goods, altered the profit share of supermarkets and wholesalers in the global food sector.
Inflation redistributes income, practically always, and often systematically.
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%
Thank you Max. Here is the revised version of the paper, posted as a Working Paper on Capital as Power.
Here is another update in the ‘inflation-is-always-a-redistributional-phenomenon’ series.
The chart below shows two series. The dotted series is the wholesale price inflation. The solid series is the ratio between earnings per share of the S&P500 companies and the average hourly earnings in the U.S. private sector, measured as a % deviation from its past five years (meaning that, if in a particular year the value of this indicator is +40%, it means that the ratio between earnings per share and the wage rate is now 40% higher than its average over the past five years) .
The figure shows that, since the 1950s, inflation redistributed income from workers to capitalists. When inflation increased, capitalists gained relative to workers, and when it decreased, they lost relative to workers.
The chart also indicates that this positive correlation grew stronger in the second half of the period: until 1985, the correlation was +0.35, whereas from 1985 onward, with the exception of the financial crisis years of 2008-9, it almost doubled to +0.64.
Inflation isn’t neutral.
K/E would give us the price to earnings ratio. I think Blair used the inverse formula: r = E/K
Thanks for the correction, Max.
Lesson: don’t ignore the seemingly obvious!
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?
Good point, Max.
Let’s hope I don’t screw up the algebra:
1. In his paper, Blair used the simple formula r = K / earnings — i.e., without earning growth.
2. Had he used the formula with compounded earning growth, we would have:
K/E = (1+g)/(r-g) = 0.068
Rearranging the equation, we get:
r = (1 + g(1+0.068))/0.068
If g = 0.04, we get r = 0.153, or 15.3%
Are you able to share the underlying data, especially the historical data for r and g (or at least point us to it)?
1. Compounded earnings growth g for the past 150 years is calculated from Robert Shiller’s data.
2. Blair Fix computes the discount rate r for all Compustat firms in the U.S. for 1950-2017, based on the ratio of current profit to current capitalization (i.e. assuming future profits won’t grow), as 6.8%. Since unknown future profits are considered more ‘risky’ than known current profits, we set the discount rate, tentatively, at 8%.
I knew a physics professor who, when asked to explain an unclear statement, answered: ‘as I was saying’.
So:
1.
Perhaps I am completely misunderstanding CasP theory. Does CasP assume that the “price is always right,” that share price is always and everywhere determined by the discounting of future earnings, even when there is evidence to the contrary? If so, this would imply that capitalization isn’t really a ritual of capitalists, but an assumption of CasP. Does CasP assume that all capitalists agree that the price is right? If so, why would anyone ever sell? More importantly, why buy a stock that doesn’t issue dividends, which is the case for at least 60% of publicly traded companies, unless you expect the price to increase? Every stock sale has a seller, who is shorting the stock, and a buyer who is going long, i.e., every stock sale involves a disagreement about the future value of the stock.
Yes, the questions you ask here seem to suggest that you might misunderstand our theory. No, CasP doesn’t suggest that the price ‘is always right’ or vice versa, simply because nobody knows what the ‘right price’ is. No, CasP doesn’t claim that share prices are always determined by discounting. There are technical analysts, momentum traders, and other magicians that use alternative rituals, but most if not all believe that, in the long run, prices discount future earnings. No, CasP doesn’t suggests that capitalists agree with one another. And no, CasP doesn’t consider dividends as necessary relevant for stock pricing. As I was saying.
2.
Did they suspend the transitive property of equality without telling me about it?
Transitivity holds when an equation is true. But when an equation is a theory that can be false, you cannot use it to define its own determinants. Concretely in this case, you don’t need to — and cannot — use capitalization to define hype. It is already defined without it. As I was saying.
3.
Our hype debate here is theoretical. The squabble about the S&P500 methodology is practical. Even if the S&P500 isn’t appropriate — and I’m not sure it isn’t — you can devise one that is appropriate. As I was saying.
Perhaps we should agree to disagree.
Some clarifications.
Definition
In our work, we defined:
(1) hype = expected earnings / actual future earnings
Hype has no moral connotations. You can call it ‘forecasting error’, ‘delusion’, ‘stupidity’, or ‘manipulations’.
In retrospect, hype can be measured for any period — a day, two years (as we have done), a century, infinity. If you can specify expected earnings and measure actual earnings in retrospect, hype is their ratio.
Scot is correct that, strictly speaking, hype is impossible to measure all the way to infinity. We cannot stand at the end of time and look back to see previous earnings. However, under normal circumstances, we can offer a good estimate of till-end-of-time earnings and therefore for till-end-of-time hype. The reason is that the discount factor makes more distant earnings less significant for capitalization, so usually 50 or 100 years, depending on the discount factor, will give you 80-90% or more of the capitalization of earnings all the way to infinity. And 100 years of earnings is certainly something we can examine in retrospect.
You can ignore hype if you wish — but then you’ll be able to say nothing about the gap between actual and expected earnings, and about how this gap is being manipulated and leveraged in capitalism for power ends.
Not a definition
In CasP, we theorize that:
(2) capitalization = future earnings x hype / discount rate
(Note that this is a simple expression, and that under different assumptions regarding the pattern of earning, the formula might differ.)
Scot uses this equation to define hype, such that:
(3) hype = capitalization x discount rate / future earnings
In my view, this is a logical error. Equation (2) isn’t true by definition. It is a theory (in this case, of capitalization), and since a theory can be wrong, it cannot be used to define one of its own determinants (in this case, hype).
S&P500: price and EPS
The price index of the S&P500 is total market capitalization/number of shares.
The EPS of the S&P500 is total earnings /number of shares.
Both are free-float measures, and in that sense they weigh larger firms more heavily than smaller ones.
