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Capital is power: an extremely useful simplification

January 29, 2013

I haven’t posted in a while so why not get back in to it with some thoughts on what’s perhaps the central theme of this blog, the gaping chasm between our amazing productive potential and actual real life conditions “on the ground”.  How does one explain the dire fact that vast majorities on our planet, including even those in the “rich” countries, live in poverty, marginal conditions, or continuous insecurity?  Why do so many have to struggle for mere existence when we’ve clearly advanced far beyond that point?

Apologists of the status-quo like to cite things like inadequate education or insufficient motivation but such nonsense should be summarily rejected: the problem is systemic and this can easily be demonstrated with just a bit of reflection on the logic of capitalism.

Jonathan Nitzan and Shimshon Bichler in their work ‘Capital as Power’ bring us directly to the essential point: the fundamental fact of our socio-economic system is power.  Capital isn’t a “factor of production”; it’s simply power, nothing more.  That capital is power and power is capital is a highly fruitful simplification which must be accepted if we are to understand the nature of our system.

A brief look around shows us that the capital / power identity is self evidently true.  In the United States, we know that the bottom 80% of the population owns just 7% of financial wealth and it’s about the same everywhere else.  It’s certainly even more unequal than this given the massive hoards held in secret “offshore” accounts.  Just 500 corporations control 40% of global sales and every major industry is under oligopolistic control.  David Rothkopf, well connected former managing director of Kissinger Associates, observes in his book ‘Superclass – The Global Power Elite and the World They Are Making’, that “A global elite has emerged over the past several decades that has vastly more power than any other group on the planet” and estimates that this elite numbers just 6,000 individuals.  Stefania Vitali, James B. Glattfelder, and Stefano Battiston performed a comprehensive network analysis of direct and indirect corporate control and found that control is concentrated within a “tightly knit” core of financial institutions which they brand a “super-entity”.  According to them, just 737 global holders control an incredible 80% of the value of all transnational corporations.

These are stark figures indeed and they make a mockery of such mainstream economic ideas as unfettered free markets.  Nitzan and Bichler may as well be telling us the sky is blue – of course capital is power.  Yet apparently the color of the sky isn’t that obvious and many critically oriented scholars devote their careers to developing carefully constructed critiques and arguments.  But we shouldn’t really have to do this when it seems so clear the simple logic of capitalism is so antithetical to the interests of the majority of the world population.  How can workers ever prosper, one should only have to ask, when their ability to work is determined strictly by the extent of profit they can produce for the owners?  Suppose no one on Earth could work unless they provided profit to Martian owners?  Awe!  Clearly exploitation!  But how is our present condition any different?  Capitalism is a system of exploitation and mass prosperity is simply not part of the equation.  The great “economic” problems of our world can be directly traced to this fact.

Let’s look at the system from a very high global level, assuming realistically that there are two fundamental classes, owners and workers, that our productive capacity is far above what is being utilized, and production is only undertaken when it’s profitable to owners.  We can easily demonstrate that worker consumption can never be stand alone profitable to the owners.  This is because the total possible sales proceeds for the owners are limited to the wages paid to the workers.  No matter how hard the owners may try, sales for worker consumption products will always exactly equal the wages paid out and there will never be a profit.  Excluding the unsustainable possibility of ever rising worker debt, this is self-evidently true.  A company cannot make a profit selling only to its own workers and similarly the consumer industry as a whole cannot make a profit selling only to consumer industry workers.

The unprofitability of worker consumption is a fundamental and greatly under-appreciated reality of the capitalist system.  Simple logic tells us that workers will not be employed to produce for their own good.  They won’t because it can’t ever be profitable.  That many call the system “consumer capitalism” is in fact darkly humorous in an Orwellian way.  The profitability problem was recognized over 100 years ago by Rosa Luxemburg and it’s a key reason for worldwide poverty and insecurity.  Workers will not yield profits to owners through the activity of producing for their own consumption; to garner profit, workers must produce for the consumption of some “outsider” who will provide the profit increment to the owners.

The extreme concentration of today’s capitalism demands more than ever that we consider the system from a consolidated global class view, and when we assume that perspective, the only “outsiders” we can find are the owners themselves and the government.  There’s simply no one else that could possibly supply the increment over the wage which is the profit.  This absolutely absurd circularity was clearly demonstrated by economist Michal Kalecki through his well known profit equation for a purely “private” economy:

Profit = Capitalist consumption + Investment

This was translated by someone, it seems unclear exactly who, as “Workers spend what they earn; capitalists earn what they spend”.

Workers, we notice, play no part in this equation which is what should be expected given that wages are both an income and an expense, a net of zero.  It is of course absurd to consider the capitalist owners as “outsiders” and the equation therefore exposes the game as completely rigged for the insiders; one in which the owners control the productive resources of society.  The identity of power and capital becomes clear.  Power is the ability to monetarily spend (command); profit is the monetary amount spent (commanded).  Profit itself should be seen as a meaningless circularity when we consider the capitalist class as a whole and this makes sense when we realize it’s only about power.  Nitzan and Bichler are right – the only meaning of profit and capital is in its competitive differential level between individual capitalists and that’s where they put their focus.  But for the class as a whole, profit and capital valuation have no meaning at all.  It makes no difference whether their ownership of Earth is valued at $100 trillion or $10 trillion or $1 trillion when there’s no one outside of Earth to whom they could possibly sell the planet.  God help us if there were!  It’s not about profit; it’s about power.

Those sitting at the pinnacle determine how and to what level the productive resources of humanity are used.  The basic flow isn’t “economic”, it’s political and it goes something like this:

Command to produce is issued by owners ==> Command is executed by workers

The command is communicated via money.  In a system of power, a command should have no cost attached to it.  If it did, power would eventually leak to others.  If capital and power are identical within capitalism, we should notice that there is also no monetary cost to the command.  And there isn’t when considering the capitalist class as a whole.  Say the command is for the production of a luxury yacht.  It’s issued to a yacht production company and the monetary sum paid consists of an amount that covers the firm’s profit and applicable wages.  The profit portion is simply an intra family affair as the firm is owned by the capitalist class, and the wages quickly return as workers spend on consumer goods.  The net monetary flow is a break even.  The command is fulfilled and a yacht is produced at no cost to power or money.  The initial funds can be obtained either from the capitalist’s own liquid funds or from the banking industry which of course is also owned by the class.

We should see capitalism as a top down hierarchical process whereby workers are ordered into production to produce for the interests of the owners – either for their consumption or investment.  Investment in worker consumption goods is not stand alone profitable so the investment will normally be in things that don’t directly benefit the worker.

The workers who produce the luxury consumption and investment goods and services receive a wage but the amount of that wage is “economically” immaterial to the owners given the high level of productivity.  The fight over the real wage is nothing more than a fight over the level of production that should be brought online for the consumption of the workers themselves.  It’s a simple power struggle between the owners and workers and supply and demand curves have almost nothing to do with it.  If there are more resources brought online for the workers, then the real wage is higher and so is total output and employment.  Luxury consumption and investment, and therefore profit (remember the equation), are completely unaffected.  As Kalecki clearly showed, high wages (or low wages) have no effect on profit – the conditions of the worker are immaterial to the ownership class as a whole from a profit point of view since wages are always both an income and expense and net to zero.  That the ownership class constantly seeks to reduce wages and impose austerity is a clear demonstration of the power nature of the relationship.  The reason is power and not profit.  A fully secure and prosperous population is not remotely conducive to a hierarchical system of power.

Of course many will explain the drive for reduced living standards as due to the neutral forces of international competition and the dynamics of the globalized market economy.  But that should be seen as absurdly unconvincing.  The drive existed well before international competition was as high and agreements could easily be reached to turn the viscous cycle into a virtuous one.  Arguments of competitiveness, flexibility, “sound finance”, and the like are frivolous diversions.  The system is power, nothing more.

I’ll stop here as this post is already too long.  Thanks for staying with me if you’ve come this far.  What I’ve said will be obvious to most of my readers and for that I apologize.  But it’s not obvious to the many center-left “liberals” out there nor the well intentioned “centrists”, so I think it’s worthwhile to keep trying to simplify things.  And the most fruitful simplification I think we can make is that capital is nothing but power.

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