9	Capitalization
	A brief anthropology

It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.

—Karl Marx, Preface to A Contribution to the Critique of Political Economy

The size of my chequebook and the content of my pockets do not determine my social consciousness.

—Tokyo Sexwale, South African political prisoner-cum-business tycoon

Utility, abstract labour, or the nomos?

When Milton Friedman claims that ‘there is no such thing as a free lunch’, he echoes Antoine Lavoisier, the eighteenth-century French tax-farmer-cum-chemist who invented the Law of Conservation of Matter. Burnt carbon produces a new substance — carbon dioxide — but according to Lavoisier there was nothing miraculous about this transformation. The reaction can be achieved only by adding oxygen to the carbon. And when the combustion takes place in a sealed container, the new substance has a mass equal that of its ingredients. Your lunch always has to come from somewhere.

The theory was not concocted in a vacuum. Lavoisier’s patron, Louis XVI, was strapped for cash, and the resourceful chemist was looking for ways to shore up the monarch’s finances. His idea: surround Paris with a high wall to create a sealed container in which individual incomes could be partly converted into crown revenues. The plan was only partly successful. The wall certainly was tight enough to trap much of the city’s taxable income, to the joy of the vigilant collectors. But it was also loathed enough to have Lavoisier’s head lost to the revolutionary guillotine and the wall to the Parisian mob. The underlying principle of conservation, though, remained intact. It soon became the foundation stone of modern science, spreading to other physical entities, most notably energy, as well as to the study of society.

In the spirit of Lavoisier, political economists came to believe that there was ‘intrinsic equivalence’ in production and exchange. Abstract labour and utility — like all matter and energy — could neither disappear into nor be created out of thin air. Their form may change, but their content cannot. Just as the infinite diversity of natural bodies can be reduced to different combinations of universal atoms (or their subatomic particles), so can the endless diversity of commodities be reduced to alternative groupings of identical utils or abstract labour time. As we have seen, for Marx, who approached the process from the input side, the commodity’s value was transformed labour: the live abstract labour expended in producing the capital reappeared as dead abstract labour in the newly produced capital. Similarly for the neoclassicists, who view the process from the output side: as the quantity of capital depreciates, the lost utils resurface in the goods and services being produced.¹¹³

The answer of both theories to the question ‘what is capital?’ lies in this transformation. Since exchange merely transfers the substantive quantities of production and consumption, it follows that underneath every ratio of prices there lies a corresponding ratio of utils or abstract labour. In both cases, the pecuniary appearance of capital is merely the mirror image of its material/ energy substance. The financial liabilities on the right-hand side of the balance sheet derive their value from — and in the final analysis, are equivalent to — the productive assets on the left-hand side.

But there is hair in the soup. Conservation and intrinsic equivalence are rather demanding principles. They can be considered meaningful only if utility and abstract labour can be measured; only if there is an ‘economy’ that is distinct from ‘politics’ and free from the ‘distortions’ of power; and only in so-called perfectly competitive equilibrium. Unfortunately, though, these conditions can never hold. As previous chapters have made clear, no one knows what utility and abstract labour look like, let alone how to measure them; there is no way to distinguish economics from politics and to keep power out of the picture; and capitalism has never experienced even a momentary equilibrium, let alone a perfectly competitive one.

So we are back to square one, if not square zero. We still do not know what makes something capital or what determines its magnitude in dollars and cents. Worse still, now we no longer have the principle of intrinsic equivalence to build on.

But, then, isn’t this rejection detrimental to the very possibility of political economy? By giving up the material basis of capitalism, are we not cutting the branch we sit on? Indeed, is there anything else — other than utility or labour value — with which we can explain the quantitative order of prices, exchange and distribution?

The short answer is yes. There is an alternative. According to Cornelius Castoriadis (1984), this alternative was articulated some 2,500 years ago, by Aristotle. Equivalence in exchange, Aristotle argued, came not from anything intrinsic to commodities, but from what the Greek called the nomos. It was rooted not in the material sphere of consumption and production, but in the broader social–legal–historical institutions of society. It was not an objective substance, but a human creation.

And when we think about this question without theoretical blinders, this ‘loose’ determination is not that difficult to fathom. In all pre-capitalist societies, prices — and distribution more generally — were determined through some mixture of social struggles and cooperation. Authoritarian regimes emphasized power and decree, while more egalitarian societies used negotiation, volition and even gifts (Polanyi, Arensberg, and Pearson 1957). This same loose determination is also evident in more recent alternatives to capitalism. It characterizes broad regimes such as communism, as well as small-scale formations like the Spanish cooperative Mondragon and the Israeli anarchism of the early Kibbutz.

In all of these cases prices and distribution are creatures of their particular nomos. So why can’t the same loose determination happen in capitalism? Consider the ratio between the price of petroleum and the wages of oil rig workers; between the value of Enron’s assets and the salaries of accountants; between General Electric’s rate of profit and the price of jet engines; between Halliburton’s earnings and the cost of ‘re-building’ Iraq; between Viacom’s taxes and advertisement rates; between the market capitalization of sub-prime lenders and government bailouts. Why insist that these ratios are somehow determined by — or deviate from — relative utility or relative abstract labour time? Why anchor the logic of capitalism in quanta that cannot be shown to exist, and that no one — not even those who need to know them in order to set prices — has the slightest idea what they are? Isn’t it possible that these capitalist ratios are simply the outcome of social struggles and cooperation?

Most political economists prefer to steer clear of such a loose determination. The ideological stakes are simply too high. If prices and distribution are not determined by objective productive contributions, neoclassicists have nothing with which to explain income and justify profit. Similarly for the Marxists: without labour values there is no objective basis to condemn capitalist exploitation.

Unfortunately, and as already noted, this insistence on so-called objective determination is mostly a formality. In practice, political economists are entirely dependent on a very loose determination of prices and distribution. In the neoclassical case, this dependency is evident when economists set up perfectly competitive equilibrium models — and then retrofit them to reality with the generous help of endless shocks and imperfections (in the know-all language of the news agencies: ‘oil prices have risen because of excess demand from China’; and a day later, ‘despite excess demand from China, oil prices have fallen amid easing security concerns at Ras Tanura’). Marxists do the very same thing when they first articulate the laws of expanded reproduction and then immediately violate them with the endless mischief of force, manipulation and accumulation by dispossession.

Now, this mixture of hard and loose determination would be scientifically acceptable if we could somehow draw the line separating the objective laws from their distortions. But neither neclassicists nor Marxists can do so, even on paper. The basic units of utility and abstract labour underlying these laws are pseudo-quantities and, by extension, so are their deviances and distortions. Moreover, even if these quantities were real and observable, there is still no obvious reason why human beings would have to obey any ‘objective’ law based on such units.

This critique does not imply social chaos. Far from it. Society is not a formless mass and its history is not a mere collection of accidents. There are rules, patterns and a certain logic to human affairs. But these socio-historical structures are created, articulated and instituted not from the outside, but by society itself. They are manifested through religion, the law, science, ideology, conviction, habit and force. Although embedded in the physis, they are all creatures of the nomos. Whether imposed by rulers for the sake of power or crafted by the demos for their own happiness, they are all made by human beings.

The above considerations are crucial for our purpose here, for, if we start from the nomos rather than utility or labour value, we end up with a completely different concept of capital, a radically different understanding of accumulation and new ways to interpret capitalist development.

This part of the book begins our exploration of the capitalist nomos. The engine of capitalism, we argue, is the process of capitalization — the discounting into present value of future earnings. When we speak of capital accumulation we speak of the growth of capitalization. The current chapter sketches the anthropology of capitalization from its humble beginnings in fourteenth-century Italy to its all-embracing moment of the present. It shows that capitalization — and therefore the accumulation of capital — has little to do with ‘means of production’ and everything to do with the multifaceted restructuring of the capitalist order. This encompassing nature of accumulation in turn explains why prevailing theories of capitalization, both Marxist and neoclassical, head in the wrong direction. Chapter 10 shows that these theories, anchored in the supposedly productive underpinnings of capital, are inevitably led to view capitalization as a ‘distortion’. Chapter 11 negates this view, laying the foundations for an alternative approach. It provides a framework that identifies the elementary particles of capitalization, outlines their significance and indicates how they form the basis for our new theory of ‘capital as power’.

The unit of capitalist order

Every ‘order’ — in society, as in nature — is articulated or generated through categories and forms.¹¹⁴ The most potent of these are numbers. The greater our ability to use numbers, the more accurate and comprehensive our capacity to articulate order. In capitalism, the fundamental numerical unit is price. In principle, this unit can be assigned to anything that can be owned. In that sense, everything that can be owned — from natural objects, through produced commodities, to social organizations, ideas and human beings — can also be quantified. Moreover, the quantification is uniform across time and space. Prices in Europe of the eighteenth century are readily comparable to prices in India of the twenty-first century, just as the price of health care is readily comparable to that of nuclear weapons. This uniformity enables ownership to be intricately interrelated — or ordered — and with great precision.

Historically, the expansion of the capitalist price system progressed along two trajectories — one that incorporated into the process an ever-growing proportion of the population, and another that privatized and priced more and more social activities.

It is perhaps worth noting that the first systematic attempt to explain and justify prices appeared only in the early nineteenth century, long after the first theories of capitalism. John Locke (1690) had anchored private property in productivity in the seventeenth century, and Adam Smith (1776) had analysed the free market in the eighteenth. But it was only with David Ricardo’s labour theory of value (1821) that the focus shifted explicitly to prices. And why the long delay? Partly because, until the nineteenth century, there wasn’t a pressing need for such a theory: prices simply weren’t that important.

It is of course well known that prices already existed in the early civilizations of the Near East, and that in large ancient metropolises they even fulfilled a significant role. But the extent to which they ordered society remained limited. In Rome, for instance, prices were used in local markets, as well as in transportation and long-distance trade; yet roughly 90 per cent of the Roman population is estimated to have lived off farming, and three fourths of the output is believed to have been consumed by its own producers. Furthermore, even in the city of Rome, the annona food rations, although partly purchased by the authorities, were freely distributed to the population.¹¹⁵ After the fall of the Roman Empire prices became even less important. During the feudal era, up to 90 per cent of the European population lived in the countryside, organized in autarkic units with little or no connection to prices. The bourgs in Italy and in the Low Countries used prices extensively, but these city states were small enclaves whose logic was antithetical to the feudal self-sufficiency in which they were embedded.

The first society to become subjugated to the architecture of prices was probably England. Symbolically, this transition happened sometime in the first half of the nineteenth century, as urban dwellers approached 50 per cent of the population. Since the cities depended on the countryside for food and raw materials, the rural population too was gradually drawn into the price system. Other European countries followed in the footsteps of England, and by the late nineteenth century most had become predominantly urban. On a global level, however, the shift from self-sufficient agriculture to urban-dominated, price-denominated societies was much slower and was completed only in the twentieth century. In the 1900s, the worldwide rate of urbanization was still around 10 per cent, and it was only in the early years of the twenty-first century that it surpassed 50 per cent.¹¹⁶

If we take capitalist urbanization as a rough proxy for the geographic spread of the price system, we can say that the architecture of prices emerged as a dominant way of organizing society only two centuries ago, and that it was only recently that its logic has come to dominate nearly every corner of the world.

In parallel to this expansion, the price system has also grown increasingly complex. Underlying this complexity is the explosive growth in the number of social activities denominated in prices. To give some sense of the magnitudes involved, consider the North American Industry Classification System (NAICS) and the North American Product Classification System (NAPCS), which together provide the most up-to-date method of categorizing industries, establishments and the products and services they produce.¹¹⁷ In this classification, each ‘industry’ (a grouping of physical establishments with the same primary output) is identified by a 6-digit code, while each type of product or services is identified by a 10-digit code. The latter can accommodate up to 100 billion possible prices (less one). If we assume that only 1/10th of these numbers are in use, we end up with 10 billion prices — the same order of magnitude as the world population. But that is merely the beginning. Typical 10-digit products include relatively broadly defined items such as ‘fabricated automobile seat covers and tire covers’, ‘professional use hair mousse’, ‘rigid magnetic disk drives’ and ‘toothbrushes’ — each of which comes in numerous shapes and forms. To describe all these shapes and forms, we would probably need an additional two or three digits. And there is more. The NAICS/NAPCS system does not include second-hand commodities, primary commodities or financial assets; it doesn’t include future contracts or options that can be applied to every product and service; and it doesn’t include bundles of products and services. If we added these extra layers, the number of different prices would be much bigger, requiring even more digits.

All in all, then, it seems safe to conclude that the world today has billions and possibly trillions of different commodities, all denominated in universal price units and therefore connected through a single quantitative architecture that cuts across time and space. Marx began his Capital with reference to the ‘immense accumulation of commodities’ (1909, Vol. 1: 41). Yet even this most prescient observer would probably have found the present complexity of prices baffling. Nothing remotely similar has ever existed in human history.

The comprehensive reach, complexity and uniformity of the price system have made capitalism the most ordered society ever. In no prior epoch have numbers been so extensively and consistently used to describe, organize and shape human behaviour. Prices enable entirely new ways of re-ordering society. What previously required military conquest can now be done through currency devaluation; what once necessitated religious conversion today takes a mere shuffle of a few paper records we call portfolio investment. Furthermore, the highly malleable nature of prices — i.e. their remarkable ability to go up and down — makes capitalism by far the most dynamic of all historical orders. In fact, in capitalism change itself has become the key moment of order.

The pattern of capitalist order

Now, price is merely the unit with which capitalism is ordered. The actual pattern of order — namely, the way in which prices are structured and restructured relative to one another — is governed by capitalization. Capitalization is the algorithm that generates and organizes prices. It is the central institution and key logic of the capitalist nomos. It is the ‘generative order’, to use David Bohm’s term, through which the capitalist order, denominated in prices, is created and re-created, negotiated and imposed.¹¹⁸

Formulae

What exactly is capitalization? We have mentioned the term several times in the book, and it is now time to examine it more closely. Most generally, capitalization represents the present value of a future stream of earnings: it tells us how much a capitalist would be prepared to pay now to receive a flow of money later. A simple example: a $1,000 payment due in a year’s time (K_t+1) and ‘discounted’ at a 5 per cent rate of interest (r) would have a present value (K_t) equal of $952.38.

To see why this is so, let’s back step and look at the process in reverse. Suppose the capitalist invests K_t dollars now (the present value of $952.38) in order to get back a year from now K_t+1 dollars (the future payment of $1,000). The capitalist engages in this transaction because the future payment is bigger than its present value: it comprises the repayment of the original investment plus additional earnings (K_t+1 = K_t + E_t+1). And since in this case the capitalist knows both the original investment and the future payment, he can compute the rate of return (r):

\[\begin{equation} \begin{split} r &= \frac{E_{t+1}}{K_t} \\ \\ &= \frac{K_{t+1} –K_t}{K_t} \\ \\ &= \frac{K_{t+1}}{K_t} –1 \\ \\ &= \frac{\$1000}{\$952.38} –1 \\ \\ &= 0.05 \end{split} \tag{1} \end{equation}\]

Now, let’s rearrange the terms of this equation. If we know the future payment and the going rate of interest, we can easily figure out how much the capitalist believes is appropriate to pay for it now, namely the ‘present value’:

\[\begin{equation} \begin{split} K_t &= \frac{K_{t+1}}{1+r} \\ \\ &= \frac{\$1000}{1.05} \\ \\ &= \$952.38 \end{split} \tag{2} \end{equation}\]

Given this principle, the computation can be further generalized deep into the exciting future. For instance, an earning flow of a constant or varying magnitude (E), paid over n periods, would be discounted by successive compounding of the rate of interest:

\[\begin{equation} K_t = \frac{E_{t+1}}{1+r} + \frac{E_{t+2}}{(1+r)^2} + \ldots + \frac{E_{t+n}}{(1+r)^n} \tag{3} \end{equation}\]

If the payments are uniform over time (so E_t+1 = E_t+2 = … = E_t+n = E), their capitalized value would be:¹¹⁹

\[\begin{equation} K_t = \frac{E}{r} \times \left( 1 - \frac{1}{(1+r)^n} \right ) \tag{4} \end{equation}\]

If these equal payments continue in perpetuity (so n ⟶ ∞), the present value becomes:¹²⁰

\[\begin{equation} K_t = \frac{E}{r} \tag{5} \end{equation}\]

And if the perpetual payments are expected to grow at a rate of g per period, the present value becomes:¹²¹

\[\begin{equation} K_t = \frac{E}{r-g} \tag{6} \end{equation}\]

First steps

Simple computations in this spirit were used as early as the fourteenth century.¹²² Italian merchants allowed customers to pre-pay their bills at a ‘discount’, applying the rate of interest to the time left until payment was due. Initially, the practice was relatively limited. The Church opposed usury, and the merchants, trying to keep out of trouble, restricted their discounting to foreign bills where the rate of interest could easily be concealed by modifying the exchange rate. Eventually, though, the Church’s stranglehold loosened, and in the seventeenth century, with religious tolerance spreading and the Glorious Revolution in the wings, English goldsmiths started to discount domestic bills openly (de Roover 1942: 56; 1944: 402–3; 1974: 210–11).

Although the practice of discounting spread rapidly, its underlying ideology remained largely undeveloped. There was no formal theory and there were no textbooks. Instead, there were rules of thumbs and plenty of confusion. As late as the mid-eighteenth century, financiers and traders still used what twentieth-century economists retrospectively describe as ‘incorrect’ calculations, ‘erroneous’ tables and ‘inefficient’ discounting. Sometimes, the practitioners even committed the cardinal sin of failing to compound interest (Faulhaber and Baumol 1988: 583).

Coming of age

Capitalization came of age only in the twentieth century. It was only with the rise of the modern corporation and the spread of large-scale financial markets that discounting turned from a loose practice to a full-fledged ideology, complete with detailed bureaucratic procedures, a rigid ethical code and trained professional cadres — and even then, the going proved tough.

It turns out that the first systematic rules of discounting were laid down already in the mid-nineteenth century, by a group of German foresters (Faustmann 1849). The foresters tried to figure out how they should value wooded land and the associated activities of planting and harvesting, and in the process developed many of the mathematical formulae of present value. But with business organizations still largely unincorporated, these formulae had limited use and remained obscure. It took another half-century for them to be reinvented by economists, who, incidentally, never suspected that they were moving in already well-charted territory.

The most famous of these economists is Irving Fisher. In The Rate of Interest (1907), he developed the logic and ethics of discounting in great detail. His key contribution was the emphasis on universality. Capitalization through discounting, he argued, was a general principle. It should be applied not only to the pricing of debt, but to every income-generating asset:

It is evident that not bonds and notes alone, but all securities, imply in their price and their expected returns a rate of interest. There is thus an implicit rate of interest in stocks as well as in bonds. . . . It is, to be sure, often difficult to work out this rate definitely, on account of the elusive element of chance; but it has an existence in all capital. . . . It is not because the orchard is worth $20,000 that the annual crop will be worth $1000, but it is because the annual crop is worth $1000 that the orchard will be worth $20,000. The $20,000 is the discounted value of the expected income of $1000 per annum; and in the process of discounting, a rate of interest of 5 per cent. is implied.

(Fisher 1907: 10–11, 13, original emphasis)

In other words, a pecuniary asset, taken in its most general form, is merely a claim on earnings. In this sense, bonds, corporate shares, preferred stocks, mortgages, bank accounts, personal loans, or the registered ownership of an apartment block are simply different incarnations of the same thing: they are all income-generating entities. As such, their price is nothing but the present value of the earnings they are expected to generate.

Frank Fetter, another early advocate of capitalization, argued that the discounting process applies not only to all assets, but also to all times:

The primitive economy in its choice of enjoyable goods of different epochs of maturity, in its wars for the possession of hunting grounds and pastures, in its slow accumulation of a store of valuable durable tools, weapons, houses, boats, ornaments, flocks and herds, first appropriated from nature, and then carefully guarded and added to by patient effort — in all this and in much else the primitive economy, even though it were quite patriarchal and communistic, without money, without formal trade, without definite arithmetic calculations, was nevertheless capitalizing, and therefore embodying in its economic environment a rate of premium and discount as between present and future.

(Fetter 1914b: 77, original emphasis)

In short, if human beings were indeed made in the image of God, the Almighty must have been a bond trader.

Despite their forceful elegance and claim for universality, Fetter and Fisher’s generalizations hardly echoed for another half-century. There was some discussion of capitalization in American economic journals, and discounting procedures occasionally surfaced in textbooks. But for the most part, the enthusiasts were outnumbered by the sceptics.¹²³

The sceptics had good reason to be suspicious. The early twentieth century marked the dawn of a new capitalism. Central to this new formation was the modern corporation. It was an entirely new way of organizing business, both inside and outside the firm. Moreover, it spread rapidly, carried by a tidal wave of public offerings. Securities of every colour, size and denomination were being floated in ever larger numbers. It was all very novel, and the sheer magnitude and exponential growth of the process left economists baffled and public officials gasping for air.

There were very few theoretical tools and scarcely any data to make sense of this new development. There was no ‘transparency’ to speak of (as politically correct investors now demand); the paucity of historical time series meant that there was little ‘prior knowledge’ to build models on (and therefore no ‘parameters’ to estimate); there was no ground on which to form ‘rational expectations’ (and hence no way to evaluate the rosy earning projections of the financiers); and it was unclear which interest rate to use in discounting and how to account for ‘risk’ (Fisher’s ‘elusive element of chance’). To make matters worse, the newspapers were only too happy to amplify the exploits of corporate promoters. The owners and their bankers were blamed, not without cause, for ‘overcapitalizing’ their assets and ‘watering’ their stocks relative to their ‘actual’ investments — all in order to rip off the innocent public.¹²⁴

The whole thing smelled of a racket: ‘the principle that capitalization should be based on earning capacity rather than on actual cost’, declared one disgruntled reviewer, ‘is not only unsound in theory but is also vicious in its practical application’ (Bonbright 1921: 482). Under these conditions, officials and theorists were unsure how to reconcile the new practice of discounted earnings with the familiar ‘par value’. It seemed much easier to stick to the conservative principles of ‘historical cost’ accounting.

But these proved to be no more than minor pains of adjustment. The encompassing tendencies of capitalization were too powerful to resist, the historical data started to accumulate, and the economists eventually adjusted their theories. By the 1950s, capitalization was finally established as the heart of the capitalist nomos, engraved on both sides of the balance sheet. On the asset side, net present value became the practice of choice in capital budgeting to allocate corporate resources. Meanwhile, on the liabilities side, the invention of portfolio selection theory by Harry Markowitz (1952) and of the capital asset pricing model (CAPM) by William Sharpe (1964) and John Lintner (1965) bureaucratized the concept of risk and in so doing helped formalize the calculus of financial investment. Finally, both developments were facilitated greatly by the spread of electronic computing, which enabled capitalization formulae to be applied easily and universally to every possible asset under the sun.

The capitalization of every thing

And, so, finally the floodgates were open. Nowadays, every expected income stream is a fair candidate for capitalization. And since income streams are generated by social entities, processes, organizations and institutions, we end up with the ‘capitalization of every thing’. Capitalists routinely discount human life, including its genetic code and social habits; they discount organized institutions from education and entertainment to religion and the law; they discount voluntary social networks; they discount urban violence, civil war and international conflict; they even discount the environmental future of humanity. Nothing seems to escape the piercing eye of capitalization: if it generates earning expectations it must have a price, and the algorithm that gives future earnings a price is capitalization.

This encompassing mechanism of social ordering and reordering lies at the heart of our theory of capital, so it is worthwhile to flesh it out with some examples.

Human beings

Begin with people’s lives. These of course had already been commodified in the early power civilizations, starting with the institution of the ‘working day’. But it was only since the spread of bourgeois accounting and the development of probability and statistics that the process assumed the forward-looking form of discounted future income.

The first steps in this direction were taken by the eighteenth-century mathematician Daniel Bernoulli (1738). According to Bernoulli, all human beings have a certain ‘productive capacity’. They can work for a living — and if that proves impossible, there is always the option of begging. People’s ability to produce future income constitutes their ‘wealth’, or what economists today call ‘human capital’. And how much is this ‘human capital’ worth? Easy: just ask the person how much money he or she would demand now for giving up the potential to earn this income in the future.¹²⁵

Presumably, this is the equation workers today balance when they borrow money to buy a car, take a mortgage to purchase a home, or open a line of credit to acquire what they otherwise can’t with their immediate income.¹²⁶ Following Bernoulli, they take money now in return for giving up more of it later. As borrowers, they commit themselves to repaying the principal and interest, a liability that the lending institution happily discounts as an asset. Now, to settle their debt the workers need to work (or beg) for an income. In other words, they need to devote part of their life to the bank. And it is this part of the worker’s life that the bank capitalizes as an asset on its balance sheet.

Of course, the process hardly stops here. The discounting of human lives extends in various directions — some explicit, others less so. The most obvious is the premium insurance companies put on the future earning loss associated with particular limbs, body or soul (Mishan 1979).¹²⁷ Less blatant but no less important is the price governments and international organizations are prepared (or unprepared) to pay in order to save (or sacrifice) entire communities — a price that involves discounting the future ‘worth’ of the said community (Cropper, Aydede, and Portney 1991). The issue here is decreasingly one of choice based on morals and feelings and increasingly a matter of cold calculations based on the ‘imperatives’ of discounted incomes.

In his Brave New World (1932), Aldous Huxley articulated the making of a postmodern humanoid. The process proceeds in two steps. In the first, different human brands are mass-produced on an assembly line of test tubes. In the second, the ‘newborns’ are subjected to repetitive mantras that fine tune their cravings and anxieties. Huxley conceived this authoritarian utopia as his own Fabian alternative to the anarchy of free-market liberalism. But, then, he didn’t know much about the powers of capitalization.

Capitalism seems able to shape ‘preferences’ as effectively as any authoritarian regime — including Huxley’s — is able to mould habits and instil fears. But capitalism does much more than that: it makes these ‘preferences’ sufficiently predictable for capitalists to translate them into expected profit discountable to present value.

On the face of it, liberal capitalism is all about ‘individuality’ and ‘free choice’. And yet, the so-called individual consumer ends up being part of a collectively managed mob, as described so eloquently in Herbert Marcuse’s One-Dimensional Man (1964). The attractive aspect of this tendency was articulated with great enthusiasm already in the nineteenth century by Francis Galton, one of the forefathers of the science of crowds:

The huger the mob and the greater the apparent anarchy, the more perfect is its sway. It is the supreme law of Unreason. Whenever a large sample of chaotic elements are taken in hand and marshalled in the order of their magnitude, an unsuspected and most beautiful form of regularity proves to have been latent all along.

(Quoted in Newman 1956, Vol. 3: 1481)

The Friedmanite individual may feel ‘free to choose’ his location in the distribution, but the distribution itself is shaped by the power institutions and organizations of capitalism. And it is this shaping — i.e. the very creation of a predictable ‘representative’ consumer — that gets capitalized.

The process follows two parallel paths. The first and more transparent is the relentless promise of pleasure — the carrot that ‘sovereign consumers’ love to pay for. The second and less obvious is the threat of pain. It turns out that the hedonic lure of consumption can be greatly amplified by fear, so the promise of pleasure is usually spiced up with plenty of anxiety and unease.

The division of labour is relatively straightforward. The official news reels scare their audiences with uncertainty, loneliness, violence and disaster, the sports programmes elate them into ecstasy, and the blockbuster films give them their ‘two minutes of hate’ between the chainsaw massacres and end-of-the-world catastrophes. This simmering brew is then cooled down by the soothing solutions of commercial advertisements: sexual impotence is cured by a chemical fix, decrepit apartments by affordable mortgages, ruinous illness by pricey health insurance, dead-end jobs by professional night courses, wrinkles by magic lotions, random violence by gated communities. Don’t be a left-behind fool, buy my ware and be cool.

Capitalists worldwide are estimated to spend up to $600 billion annually just to remind us of these options. If we assume a 15 per cent markup on these advertising expenditures, we get $90 billion of net profit. This sum represents roughly 5 per cent of global net corporate income and a comparable portion of global market capitalization.¹²⁸ The computations of course are tentative (‘half my advertising is wasted, but I don’t know which half’, goes the famous Madison Avenue saying). They also exclude sales promoting expenditures buried in the ‘cost of production’ (as noted in the discussion of advertising in Chapter 7). But the very fact that so much is spent on persuasion suggests that a significant chunk of outstanding corporate assets discounts the very ability of capitalists to shape human hopes and fears.

Now, this is the downstream part of the story, but like in Huxley’s utopia, there is also an upstream part. Over the past decade or two, investors have started to discount, in addition to people’s mental aspirations and worries, the code of their physical reproduction: the genome. It is now possible not only to modify and replicate existing organisms, but also to convert one organism into another via a ‘genome transplant’ (Sample 2007). Soon enough, it may be feasible to produce a creature from scratch, and one day perhaps even a ‘human being’ (hopefully modelled after the universal bond trader).

Capitalists have been eager to protect and defend these god-like acts of creation with multiple patents and other expressions of goodwill — all in order to ascertain that the making of plants, animals and people won’t end up being a free lunch. After all, what’s the use of making life if it can’t help you make money? And so far — at least according to the capitalists’ own bets — the odds of achieving both goals look promising indeed: from its inception in 1994 to 2007, the AMEX Biotechnology Index has risen ten times faster than the S&P 500 Index. Apparently, it is now finally possible to play God and be rich.

Organizations, institutions, processes

Capitalization of course is hardly restricted to the individual. Take education, an activity estimated to account for roughly 5 per cent of world GDP. The idea of free public schooling was born out of the French Revolution. The new method served to both liberate human beings and turn the newly literate into patriotic citizens and soldiers on the cheap. The arrangement worked smoothly for a while, but by the twentieth century a new complication had emerged. Having been butchered in two world wars, the citizens/soldiers demanded that warfare be complemented by expensive welfare. Suddenly, the draft was no longer a panacea, and with ‘free soldiers’ turning out to be rather pricey, the benefit of educating them was called into question. The final disintegration of the model came in the 1970s. After the US loss in Vietnam and the arrival of neoliberal globalization, there was no longer a need for costly mass armies. Instead, the capitalists started to invest in ‘smart weapons’ that could be operated by high-school dropouts. The draft was gradually abandoned in favour of purely professional armies, and free education in favour of privatized learning.

And so, the organization of learning, once the prerogative of state, church and community, is now increasingly capitalized — even when the teaching itself is still publicly administered. The process is discounted directly by its private suppliers — particularly the publishers of journals, textbooks and databases, whose profits margins can reach 100 per cent (Bergstrom 2001: 186–87). Education is also discounted indirectly insofar as it shapes preferences and mutes criticism, and in so doing helps boost profit and reduce risk (recall John D. Rockefeller’s pronouncement that his investment in the University of Chicago was the best he had ever made).

The same logic applies to the organization of entertainment, a process whose global turnover is estimated at $1 trillion (Vogel 2007: xix). Entertainment, like education, is capitalized directly by its providers as well as indirectly by those whose profits it affects. Another capitalized institution is the newly emergent social networks such as Facebook, MySpace and YouTube, where education and entertainment are fused seamlessly with subliminal and not-so-subliminal marketing. Although these so-called virtual communities are open for everyone to join and participate at no cost, they are anything but free. Each has a captive audience that can be persuaded to spend money, a prospect that capitalists readily discount to the tune of billions.

Other organized institutions, such as the law or religion, are rarely discounted explicitly, but their indirect impacts are extensively capitalized. The assets of pharmaceutical corporations, software companies and other businesses dealing with patents and copyrights depend on the enforcement of intellectual property rights, and in that sense capitalize both the law and the extent to which it is enforced. The same process, only negated, applies to criminal organizations. Whereas legal business discounts the protection of the law, criminal networks — from drug dealing to human trafficking, money laundering, contraband trade, illegal gambling and gun smuggling — capitalize their ability to violate the law and enforce their own private order.

Similarly with religion. The assets of Islamic banks and investment companies, for example, as well as of secular financial institutions dealing with Muslim savers and investors, discount the extent to which these companies and institutions comply with the sharia (Islamic law). More broadly, religion — just like the law, entertainment and education — shapes the social structure and therefore has a wider effect on profit, and that effect too is promptly, if implicitly, capitalized.¹²⁹

Organized violence and war are extensively discounted. The immediate beneficiaries are the military contractors, but the profit expectations of other capitalists are also affected, sometimes in a much bigger way. In either case, the impact — direct or indirect, positive or negative — gets discounted into asset prices. This much should be obvious. The process, though, also works in reverse.

Over the past half-century, the logic of capitalization has penetrated military jargon and praxis. The first steps in this direction were taken during the 1960s by Robert McNamara. This was the beginning of the end of US ‘Military Keynesianism’, and President Kennedy, who wanted to limit the nuclear arms race and shift the Cold War to a more ‘conventional’, labour intensive path, entrusted McNamara with putting the US military on an ‘efficient’ footing. McNamara brought to the Pentagon people like Hitch and McKean, whose work on The Economics of Defense in the Nuclear Age (1960) (which we mentioned in Chapter 5) was one of the earlier attempts to apply hedonic cost/benefit analysis to military affairs. Initially, the computations were rather naïve by today’s standards, but with time and money the economics of defence (or attack, depending on the perspective) grew more sophisticated and gradually integrated the broader logic and full scope of capitalization.

Military officers and strategists nowadays speak of ‘military investment’, while national accountants routinely measure the country’s ‘military assets’.¹³⁰ Furthermore, the military seems to have endorsed the notion that the ‘market knows best’, and it now uses ‘market signals’ to predict future military events and to evaluate the success of military operations. In 2003, the U.S. Defense Advanced Research Projects Agency (DARPA) proposed to set up a futures exchange that would help predict coups, assassinations and terrorist attacks (Graham 2003; Hulse 2003). The rationale was straightforward. Given that the quest for profit is the best generator of information, and since the market is the most efficient mechanism for distilling such information, why not fuse the working of the army with the logic of capitalism? After all, the army has always been an ‘arm’ of the ruling class, so it is only appropriate that in a capitalist state the army obeys the same logic as the ruling capitalists. Let investors discount future contracts on such events, and then simply follow the money. A sharp increase in the capitalized price of a ‘pipeline explosion contract in 12 months’, for example, would then give strategists reason to believe that such an explosion is more likely, while a drop in the price of a ‘Jordanian coup contract 6 months ahead’ would mean a lower probability for that particular outcome.

Apparently the scheme was a bit too politically incorrect for US voters to digest and was quickly shot down. But there was really nothing exceptional about it. Violent events do affect profits, so investors continuously try to discount the prospects of such events into asset prices. This ongoing capitalization means that even without an official bourse for violence the military can still tease out information from the capital market: all it has to do is look at the interest-rate spread between the bonds of the affected country and comparable international instruments. Victory is in the eye of the bondholder.¹³¹

The future of humanity

The all-encompassing role of discounting is most vividly illustrated by recent discussion of environmental change. One key issue is the process of global warming/dimming and what humanity should do about it. Supporters of immediate drastic action, such as Nicholas Stern, argue that there is no time to waste. According to The Economics of Climate Change (2007), the report produced by a review panel that he headed for the British Government, the world should invest heavily in trying to limit climate change: the cost of inaction could amount to a permanent 5–20 per cent reduction in global GDP (p. xv). But this conclusion is by no means obvious. Critics such as William Nordhaus (2007) argue against drastic actions. In their view, the overall cost of climate change may end up being negligible and the investment to avert it a colossal blunder.

The interesting thing about this debate — apart from the fact that it may affect the future of humanity — is that both sides base their argument on the very same model: capitalization. Climate change is likely to have multiple effects — some positive, most negative — and the question is how to discount them to their net present value. Part of the disagreement concerns the eventual consequences and how they should be priced relative to each other and in relation to other social outcomes. But the most heated debate rages over the discount rate. At what rate of return should the damage be capitalized?

One thousand dollars’ worth of environmental damage a hundred years from now, when discounted at 1.4 per cent, has a present value of –$249 (negative since we measure cost). This is the discount rate that led Stern to conclude that climate change would be enormously harmful, and that urgent action was needed. But the same one thousand dollars’ worth of damage, discounted at 6 per cent, has a present value of only –$3. This is the long-term discount rate that Nordhaus likes to use in his computations. It implies that the impact of climate change may end up being minimal, and so should the response be, at least for now.¹³²

Although most investors are probably unaware of this climate-splitting debate, they too view the process through the lens of capitalization. By 2007, there were nearly 50 ‘climate change’ funds listed on the Bloomberg news service. The HSBC Global Climate Change Benchmark Index, an investment vehicle that tracks 300 companies that ‘make money from fighting climate change’, has outperformed the MSCI World Index by 70 per cent since 2004 (Oakley 2007). In parallel, there has been a boom in the market of ‘catastrophe bonds’. The emergence of these bonds in the 2000s has enabled investors to buy from insurance companies the ‘tail risk’ of large-scale catastrophes such as earthquakes, pandemics and perfect storms, and by so doing has given capitalists the illusion they can somehow ‘externalize’ the more cataclysmic impacts of nature on society (Lewis 2007).

It seems that, just like the Salamander traders who underwrite the slow-motion holocaust in Karel Capek’s War with the Newts (1937), capitalists today cannot resist the temptation of dancing at both weddings: on the one hand they contribute to climate change, while on the other they cheerfully discount the boom in the doom. As long as their capitalization keeps rising, they themselves will happily go under with their thumbs up.¹³³

Capitalization and the qualitative–quantitative nomos of capitalism

Extrapolating the foregoing illustrations, we can say that in capitalism most social processes are capitalized, directly or indirectly. Every process — whether focused on the individual, societal or ecological levels — impacts the level and pattern of capitalist earnings. And when earnings get capitalized, the processes that underlie them get integrated into the numerical architecture of capital. Moreover, no matter how varied the underlying processes, their integration is always uniform: capitalization, by its very nature, converts and reduces qualitatively different aspects of social life into universal quantities of money prices. In this way, individual ‘preferences’ and the human genome, the structure of persuasion and the use of force, the legal structure and the social impact of the environment — are qualitatively incomparable yet quantitatively comparable. The capitalist nomos gives every one of them a present value denominated in dollars and cents, and prices are always commensurate.

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1. Of course, in each theory input or output are just the starting point, and the conservation continues through subsequent cycles in the input–output chain. For a critical analysis of conservation theories in political economy, see Mirowski (1989).↩

2. We use ‘order’ here in the sense of kosmeo, without normative connotations.↩

3. For the debate on the ‘economic’ nature of antiquity, see for example Finley (1973) and Temin (2001).↩

4. Trends in the labour force tended to lead those in urbanization. The non-agricultural share of the English labour force surpassed 50 per cent already in the second half of the eighteenth century. By comparison, the US non-agricultural labour force accounted for 20 per cent of the total as late as 1800, and rose to more than 50 per cent only after the Civil War. In China, half of the population is still agricultural, while in India the proportion is two thirds (Cipolla 1980: p. 75, Table 2–6; Sullivan 1995; World Bank Online).↩

5. The NAICS/NAPCS replaces the earlier Standard Industrial Classification (SIC). For a detailed listing of NAICS/NAPCS manufacturing and mining categories from which the examples in this paragraph are taken see U.S. Department of Commerce. Economics and Statistics Administration (2004).↩

6. The notion of the ‘generative order’ is developed in Bohm and Peat (1987). We return to it in Ch. 14.↩

7. To obtain Equation (4), replace all E_t+i in Equation (3) by E, multiply both sides of the equation by (1+r), subtract the original equation from the new one and rearrange the terms.↩

8. When the number of payments (n) grows infinitely large, the expression in the brackets of Equation (4) approaches 1.↩

9. To derive Equation (6), substitute E(1+g)ⁱ for E_t+i (with i = 1, 2, 3, … n) in Equation (3), multiply both sides of the new equation by (1+r)/(1 +g), and follow the remaining steps of footnotes 7 and 8.↩

10. For a succinct overview of the origin and evolution of capital budgeting and net present value, see Faulhaber and Baumol (1988: 583–85). Part of our account here is informed by their summary.↩

11. For early textbook sections, see Fetter (1904: Division C) and Lough (1917: Ch. VIII). A sample of journal articles include Swayze et al. (1908), Davenport (1908), Scott (1910), Brown (1914), Fetter (1914a; 1914b), Bonbright (1921) and Machlup (1935). Reading the simple language and clear arguments put forth in this early debate, one is struck by how obscure mainstream economics has become since then. A comparable debate today would be entirely indecipherable to the uninitiated.↩

12. This early financial history is told with great insight and much fanfare by Matthew Josephson’s classic tale of The Robber Barons (1934).↩

13. In the words of Bernoulli:

    There is then nobody who can be said to possess nothing at all in this sense unless he starves to death. For the great majority the most valuable portion of their possessions so defined will consist in their productive capacity, this term being taken to include even the beggar’s talent: a man who is able to acquire ten ducats yearly by begging will scarcely be willing to accept a sum of fifty ducats on condition that he henceforth refrain from begging or otherwise trying to earn money. For he would have to live on this amount, and after he had spent it his existence must also come to an end. I doubt whether even those who do not possess a farthing and are burdened with financial obligations would be willing to free themselves of their debts or even to accept a still greater gift on such a condition. But if the beggar were to refuse such a contract unless immediately paid no less than one hundred ducats and the man pressed by creditors similarly demanded one thousand ducats, we might say that the former is possessed of wealth worth one hundred, and the latter of one thousand ducats, though in common parlance the former owns nothing and the latter less than nothing.

    (Bernoulli 1738: 25)

    It seems that the basic underpinnings of ‘human capital’ theory haven’t changed much since these early pronouncements.↩

14. For the moment, these options are available only to a minority of the world’s workers, although ‘micro-credit’ banks and similar innovations gradually extend the Bernoullian principle even to the most wretched.↩

15. The most publicized are the premiums paid by celebrities (or their owners/employers) to protect their bodily assets. A recent account of notable coverage lists primarily legs: actress Betty Grable’s were the first ‘million dollar legs’ (named after the sum for which they were insured), but her pair was later superseded by supermodel Heidi Klum’s ($2 million), dancer Michael Flatley’s ($39 million) and soccer player David Beckham’s (£60 million). Other insured bodily assets include voice (Marlene Dietrich’s was covered for $1 million and Bruce Springsteen’s for $6 million), teeth (comic actor Ken Dodd’s for £4 million), face (supermodel Claudia Schiffer’s for $5 million) and fingers (guitarist Keith Richards’ for $1 million). The interested reader can find these details and more in Cordas (2005).↩

16. The estimate of advertisement spending is from Saatchi (2007). Global profits for 2005–6 are computed from Thomson Datastream by dividing world market value TOTMKWD(MV) by the world price-to-earning ratio TOTMKWD(PE).↩

17. During the 2000s, soaring oil prices have given rise to an ‘Islamic finance industry’ with 2007 assets estimated at around $750 billion. The expansion has been so rapid and unexpected that the business still lacks standardization. It is presently ‘regulated’ by a few dozen religious scholars whose human capital consists of the exclusive right to declare a financial instrument ‘sharia compliant’. A unit of this religiously sanctioned capital can fetch millions of dollars a year on the free market for fatwas (Bokhari and Oakley 2006; Khalaf 2007). Religious investment of course is hardly limited to Muslims. Rabbinate organizations around the world run capitalized networks of ‘kosher’ certification, each with its own code of conduct and an army of invigilators. Businesses that fail to pay protection are deprived from accessing the purchasing power of the observant laity. Christians also capitalize divinity. The United States for one has plenty of ‘faith-based funds’, each catering to the investment preferences of a particular denomination, be it Catholic, Presbyterian or Baptist, and all based on the premise that god loves a winner (Brewster 2008).↩

18. The U.S. Department of Commerce provides a detailed breakdown of military assets by type, including different kinds of planes, missiles, ships and military vehicles, each discounted according the damage it can cause (U.S. Department of Commerce. Bureau of Economic Analysis 1999). A theoretical ‘Typology of Military Assets’ is given in Brzoska, Franko and Husbands (2000). See also footnote 8 in Chapter 8.↩

19. Chaney (2007) looks at variation in the yield spread on Iraqi sovereign debt to evaluate the US ‘pacification policy’ in Iraq, while Greenstone (2007) uses a similar method to judge the success of the US troop ‘surge’ in Iraq. The latter author explains in his article’s abstract that ‘After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds’. In his opinion, ‘This decline signals a 40% increase in the market’s expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it’. Go argue otherwise.↩

20. The controversy over the ‘proper’ discount rate has been staged with much fanfare by the panellists of the Copenhagen Consensus conference (Lomborg 2004).↩

21. ‘The history of the newts is thus characterised from the very outset by its perfect and rational organization; the principal but not exclusive credit for this must go to the Salamander Syndicate; it should, however, be acknowledged that science, philanthropic endeavour, enlightenment, the press and other factors also played a considerable part in the spectacular spread and progress of the Newts. That said, it was the Salamander Syndicate which, so to speak, daily conquered new continents and new shores for the Newts, even though it had to overcome many an obstacle to that expansion. . . . In short, unlike human colonisation of the globe, the spread of the Newts proceeded in accordance with a plan and on a generous scale; had it been left to nature it would have dragged on over hundreds and thousands of years. Say what you will, but nature is not, and never has been, as enterprising and purposeful as human production and commerce. . . .’ (Capek 1937: 122–23).↩