The Great Recession proved, once again, that economic experts understand no more about the world than any of the rest of us. Yet, despite repeated wayward forecasts, their subject – economics – remains, ideologically at least, the most powerful lens through which to see the world. When we and the politicians we (barely) elect, talk about spending cuts, pay rises, the cost of war and an infinite number of other issues, we frequently rely on economics and all the assumptions that underpin it.
Lifting the veil on the subject reveals a mess of tangled ideas about how the world works, one of the most important of which is the concept of ‘capital’. It’s a strangely slippery idea.
Mainstream economists, the ones who populate newspapers, think-tanks and banks, talk about two things when they talk about capital. The money in your bank account – ‘financial capital’ – and, at the same time, the machines (like a printing press) that help make the things we buy, what they call ‘capital goods’.
To make these two different things into one, important questions need answering. Firstly, are ‘capital goods’ actually productive – does a machine, in itself, produce the goods we need?
Mainstream economists insist they are. This is what makes the second part of capital – financial capital – valuable. Why? If machines print the books we need, and money can by the machines to print the books, then money is a valuable thing to have.
Money gives you the ability to purchase the means of making something. So, if the economy grows, and people are making more profit, what do they gain? The ability to buy more capital goods which will produce the things we want. Financial capital is the ownership of future production.
Assuming that is true (gulp), the second question is how does the productivity of the capital good (the printing press, in our example) affect the value of ‘financial capital’? i.e how do the two parts of capital – machines and money – relate?
Mainstream economists say the value of the money capital – profit, saving etc – depends on how productive the capital goods are. How much it can produce compared with how much it costs – what economists call the ‘rate of return of capital’. If the printing press machine makes £1m worth of books and cost £0.5m to buy – it is clearly valuable. But wait, I hear you cry! A problem! To find the exact value of capital, mainstream economists need to know the… value of capital. It’s an irrevocable circle that destroys mainstream economic theory.
This slightly disconcerting observation* came out in the 1960s (check out the Cambridge controversy) and despite mainstream economists becoming ever-more revered since, there has been no resolution. Instead it is simply glossed over.
Fortunately, there are some economists, now driven to the margins, that have a different story to tell. Economic Marxists thought ‘capital’ was nothing more than hard work. A ‘capital good’ – machine, or what have you – is simply the culmination of hours of human labour. So the printer that makes the books we buy was at some point made by someone. When a company produces books and sells for a profit, what they end up with is a figure, say £50, that can buy a chunk of ‘socially necessary’ human labour time. Its ‘value’ is the number of ‘socially defined hours’ (ie, given the external conditions and ‘average skill’ of all workers), it can buy. To economic Marxists, value is made by labour. Profit, (or ‘surplus capital’ as they like to call it) comes from paying workers less than the value of what they produce.
Yet this doesn’t quite work out.
Imagine a number book printers, all equally productive, and competing with one another for customers. They have to lower prices in order to sell more than their competitor, and, if they all had similar technology the only way to produce more (and drive price below your competitor) is to extend the working day from 10 to 14 hours.
But if they all did, no one would any extra profit. Indeed they would lose profit, because everyone would have lowered prices equally, and so wouldn’t have gained any more customers. The value of the finance capital they produced (profit) is less, despite the dramatic increase in the working day. So labour hours go up, but capital earned at the end goes down.
The value of capital is apparently neither a quantity of labour hours (as the economic Marxists say) or the ‘productivity of capital goods’ (as the mainstream suggest), instead it comes from the ability for one producer to differentiate their costs from another. Why? Profit comes from selling something for more than it cost you to make it. But the price you can charge depends on your competitor. If it costs her £20 to make a book, she can sell it for £21 and make a profit. If it costs you £18, you can sell it for £20 and make double the profit.
So what is the profit you’re making? Because economics likes to think of itself as a science, it tries to reduce the world to numbers. But the numbers are not an ‘objective’ quantity (like hours of labour or productivity of a machine), they are social quality: the ability to beat your competitor – the power to stop them being as productive as you.
It may not sound revolutionary, but if economists viewed the world through an understanding that capital is power – a social category, rather than productivity – a scientific ‘fact’ – they would be much better placed to understand how it grows for some and shrinks for others.
*Note, the wibble is simplified, to the point of inaccuracy probably, from a load of equations I don’t understand.