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A high level perspective

March 23, 2012

It seems pretty clear that how one understands capitalism depends largely on perspective.  A ground level view shows us a world of fierce competition, greed, poverty, wealth, stock markets, interest rates, government debt downgrades, foreclosures, and so on.  The learned economists thankfully provide us a sense of security in their assurances that this chaotic mess is actually the good, just, and smooth rhythm of supply and demand curves.

If we ascend to a very high level, though, everything seems to change and the world appears far more tranquil.  In this post, I’d like to examine some ideas on what the world may look like from on high.  We lose much of what can be seen from the ground, but I think we gain a good bit of insight.  Luxemburg, Kalecki, and Minsky provide the influence for most of what’s written here.

I’ll frame the discussion around two questions.  The first and by far the easiest is this: In whose interests is the world run?  As noted ad nauseum on this blog, 72% of financial wealth is controlled by just 5% of the population with the bottom 80% having just 7%.  The data is for the United States but similar levels exist throughout the world.  If anything, concentrations are actually even worse given the certainty that substantial hoards are hidden offshore and in secret accounts.  Given these numbers, it’s no surprise that global commerce is a tightly run game, with 40% of total global revenue flowing to just 500 corporations.  The titans who sit on top of the world stage own virtually everything – they control the mass media, all major corporations, the banks, the bond and commodity markets, and every other important institution.  No further time need be spent on this question.  The world is being run in the interests of the owners.

The second question, though, is a bit more complicated than it seems.  It’s this: What are their interests?  A historically popular answer, running from the Marxist left straight through to the far right would be profit.  The prime interest of the owners is for never ending and forever expanding profit.  This of course seems reasonable, but it turns out to be far too simplistic from our idealized high level perspective.

To gain an important insight into the actual interests of the owners, I think it’s useful to look a little closer at ownership within the capitalist system.  There turns out to be an academic discipline – finance – that’s devoted specifically to the practice of capitalist ownership itself and one of its bedrock axioms is The Capital Asset Pricing Model (CAPM) as developed by Harry Markowitz, William Sharpe, and others.  The “optimal investment portfolio” according to this model is a perfectly diversified basket of everything, the weighted sum of every asset in the market – the “market portfolio”.

At the highest level, we don’t find Bob owning corporation B and Bond B competing against Alice with corporation A and Bond A.  We find both having a diversified “market portfolio” and they are therefore indifferent to the relative performance of either security; they are fully diversified.  Each mega owner should also be expected to be well diversified and the ownership class as a whole is necessarily so since they are “the market”.  Bob, Alice, and the rest of the ownership class aren’t competing, they just own.

The view we want to establish here is of the ownership class as a unity, a family so to speak.  If the interests of the mega-owners were thought of in this way, as a family operation, our second question becomes a bit more precise.  What are the interests of the unitary family?  Given its complete diversification, we can see that little within the normal course of “economic” events will affect its interests.  “Asset “values” change but these are almost completely based on sentiments about the future; opinions having no bearing for a family already owning everything.  If it’s impossible to sell an “asset”, what meaning can “market value” have?  Our family, of course, can’t sell its “assets” since there’s no one outside of Earth to buy them.  Projections of the future and estimates of “market value” are therefore as idle as contemplating the future evolution of the universe.

It’s quite a bit like the ownership of a great casino in which everyone on the planet must play.  The owner takes a mathematical cut on all activity and is therefore indifferent to how any particular table performs on a given day.  We can go further and ask if the family should care if the “government” suddenly taxed a portion of the cut and redistributed some chips to the “players”?  Logic would say it wouldn’t care at all since the “players” would have to continue playing at the tables and whatever was taxed away would quickly return to the house.  It’s just circulation.

Similarly, the family shouldn’t care whether wages are high or low since whatever the worker may get is necessarily returned via consumption.  Again, just circulation.  Profit also is a pretty meaningless concept for a family owning all.  What can it mean?  Profit is nothing other than the portion of total circulation that accountants deem proper to “capitalize” rather than “expense”.  Regardless of classification, all funds disbursed are returned and the accountants will always discover that debits equal credits.  Let’s return to the casino to illustrate.  Suppose in year 1 the family decides to issue 10 mega trillion chips to the players of which 7 mega trillion are used to pay for the combination of personal luxuries and regular casino upkeep and 3 mega trillion are used to expand the number of blackjack tables.  10 mega trillion out and 10 mega trillion returns through consumption at the family tables.  The balance is zero; it’s all just circulation.  Was there a “profit”?  In a meaningless sense, yes, as long as the accountants report that the expansion of the blackjack tables qualify as an “investment” and can be “capitalized” on the books.  In year 2, let’s say the casino paid out just 7 mega trillion chips for regular “expenses” and nothing more.  The net balance again is zero as everything returns but this time the accountants say there’s no profit.  Can anyone believe the owners give two shits whether or not the accountants declare a profit?  The owners know what the accountants don’t: it’s not about profit.

Our high level view I think gives us a pretty decent realization that the politics behind “economics” has little to do with anything “economic” and everything to do with the simple maintenance of power.  The family has nothing to fear about non-confiscatory taxation, high wages, or the government use of the printing press.  Everything spent is just circulation and it all returns to the house coffers.

There is, though, one overwhelmingly critical issue for the family, and that’s the maintenance of power.  Were the family confident of its unchallengeable grasp on power, then one could suppose it would be tempted to rule in a caring generous manner.  The technology exists after all to provide excellent living conditions for the population and there’s nothing lost by greatly expanding circulation.  Why not be devoutly loved Lords and bask in the adoration of the people?  The problem is that the family doesn’t hold power based on unchallengeable rights; the claim is based solely on money.  The threat is clearly one of democracy and a spirit of egalitarianism.  The greater the security of the masses, the greater the threat of ever rising demands.  It’s the fear of the slippery slope, a carry forward of the Domino Theory from Vietnam days.  The entire era from the late 70’s through to today can be seen as an ongoing attack against the democratic spirit that arose in the 60’s.

In our public debates we notice that the policies of the right aren’t directed toward increasing profits; they’re aimed instead at reducing the security of the population and enhancing the power of concentrated wealth.  We see it every day, from the austerity drives in Europe, to never ending demands for “worker flexibility” by all international organizations, to the most recent republican approved US budget in the House that seeks to slash all programs providing for worker security. The center-left economists scream at times that this is all bad for the “economy” but they’re completely missing the point.

The population has no real friend in the mainstream left as it’s firmly planted on the same basic playing field as the right.  It offers pathetically limited ideas centered around such crumbs as perhaps a bit more infrastructure, a few hymns to education, or maybe an expansion of the ability for workers to visit a doctor every now and then. Even the slightly more radical left like the MMT economists take pathetically limited positions.  We can print our own money they correctly proclaim, but then meekly add we should do so only to provide minimum wage jobs.  Some even outlandishly propose the printing press should be used to expand the interest income of wealth holders!

Obviously I’m in the camp of those who see the system of power we call capitalism as a moral abomination that needs to be directly confronted.  It’s the towering barrier to any advancement of democracy and the struggle will almost certainly be the primary theme of this century.

From → Wealth & Poverty

  1. peterc permalink

    I think you may be on to something interesting and significant here, Jim. You’ve certainly got me thinking. To me, it still seems that profit is an important part of the story, but not in a way that alters your basic argument or conclusion. I will try to explain my thought process.

    For a given level of real output (real income), the ownership class will want a lower real wage, because this leaves more for the owners as surplus. It’s true that wage income circulates back (except for any wage income saved in aggregate, which will be small), but through their consumption expenditure the non-owners get to consume real output which has resulted from resource utilization that otherwise could have been directed toward production of real output for the ownership class. That is, there is an inverse relationship between the real wage and real surplus if we take the level of output as given.

    This, of course, leaves open the question of what determines the level of real output. I think we are agreed that the level of real output will be demand determined, in particular by autonomous demand and the exogenous (to the circular flow of income) socially determined ‘propensity to leak’ out of income.

    If I am interpreting correctly, you are saying that even though an increase in autonomous demand can enable greater real output, and therefore both a higher real wage and a larger real surplus, the owners will only want such an increase in autonomous demand to occur when it is on their terms. Otherwise, their slippery slope fears might come into play (similar to Kalecki’s argument on the political aspects of full employment).

    In terms of Marx, I think this can be expressed as the owners will only be interested in an expansion of real output (real growth) if they regard the rate of exploitation as sufficient. If, from their perspective, too much of the additional real output is going to go to non-owners, this might undermine the prevailing power relations, and the owners would prefer to hold off on expansion until a more profitable basis for real growth (higher rate of exploitation) was put in place.

    If it were possible, owners would prefer to increase their share out of a given level of real output rather than obtain the same increase in surplus through expansion of real output.

    In the short run, this is unlikely to work, because an attempt to increase the surplus through a sudden reduction in non-owners real consumption will result in negative income adjustments. Higher leakages for a given level of injections will cause income to decline until leakages fall back to the level of injections. So unless the owners coordinate their spending in such a way as to maintain current output, the initial impact will be a decline in real income.

    However, in the long run, the effect of the declining income will be to increase the power of the owners. Higher unemployment will weaken workers’ bargaining position. Deflation will benefit owners (creditors) and increase the real burden on debtors. Both factors make the position of non-owners more precarious, enables an increase in the rate of exploitation and makes possible real growth on terms more favorable to the owners.

    But I think you are correct. The fundamental objective of owners as a class is not profitability per se, but rather to preserve the current social setup in which their extraction of a surplus and control of economic activity can continue indefinitely into the future. Their interests as a class can be undermined by intra-class conflict (just as the interests of non-owners as a class can be undermined by intra-class conflict), but the intensity of such intra-class conflict among (competition between) owners will be dramatically reduced to the extent that ownership is centralized, and capitalism does tend to centralize ownership over time.

    • Hi Peter, greatly appreciate your observations. I’ll throw out a few thoughts which I think are probably not much more than a restatement of what I said in the post and what you mentioned in your comment. The whole thing is such a hall of mirrors, isn’t it? It helps to try to organize your thoughts.

      It seems like one of the most fundamental considerations for our idealized centralized ownership class would be determining to what degree we’re a plantation like economy. If we have limited resources and manpower and the owners wish even greater luxury, then it would be a zero sum game between increased luxuries versus worker consumption. The interests of the owners would clearly be to endlessly crush real wages.

      But in our real world of today, it seems we’ve long since surpassed the pure plantation via tremendous productivity advances and just the sheer number of un/under “utilized” workers. A reasonable assessment, I think, would not see us as in a zero sum game and real wages could be increased without at all reducing luxury consumption. The increased worker consumption would simply be brought into play through the addition of new workers into the system. If there were only two types of goods, call them luxury and worker (and that’s not as drastic a simplification as it sounds), then the real wage, hyper simplified, would be the ratio of workers producing for the working class to the total. In this sense, the ownership class loses nothing in a pure economic sense by expanding the living standards of the workers. The ratio (real wages) would advance for the workers but not at the expense of luxury consumption.

      I think it’s reasonable to conclude that the goals of the consolidated ownership class are luxury consumption and power. Since luxury consumption’s easily being met, the only reason I can see that keeps real wages down is fear of the loss of power.

      I still think the term “profit” is an essentially meaningless term from our high level perspective. We know from Keynes, Kalecki, and others that, government aside, profit equals investment. But is it investment per se that magically creates the accounting category “profit” or is it just the principles of accounting itself which declare this category of outflow as not an “expense” in the current period? Outflows always equal inflows for our ownership class, only an accounting decision on what can be capitalized tells us what the profit is. The extent of the profit doesn’t tell us anything as to which class is benefiting. The investment, after all, could be (but of course rarely is), in things that would fully benefit the working class. The far more important indicator, I think, boils down to the portion of circulation which benefits workers, regardless of whether the accountants call it “expense” or “investment”. And, of course, the most important indicator is the concentration of ownership itself.

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