This post is a follow on from my previous post, Capitalism is Not a Useful Concept. While in the previous post my critique is focused on capitalism as a concept, this post presents an alternative lineage in critical political economy which largely puts to rest the Marxian conception of capital, and with it Marx’s historical materialism. This is quite a big claim to make, however I am not claiming to have done it! This work has been done already by the work of major 20th century institutional economists, namely Thorstein Veblen and John Kenneth Galbraith, and by two contemporary researchers, Jonathan Nitzan and Shimshon Bichler, who build on Veblen’s work.
Why am I interested in dismissing Marxian economics in favour of these institutional economists? Quite simply because these thinkers describe far better than Marx the economic functioning of the world of work and the economic system I have experienced in 15 years as a corporate, white-collar technology worker. Their methodology is more refined. They have incorporated a contingent, evolutionary approach to economic dynamics that did not exist in the 19th century. And they were nonetheless critical political economists.
It seems that to even hint about forgetting Marx in matters of political economy leaves you open to accusations of having being lured to the dark side, that you are an apologist for capitalism (whatever capitalism means), or at the best of times, that you are doing so out of ignorance, and are promptly given more Hegel to read. There seems to be this perception that Marx holds a monopoly on radical, critical political economy, and should you question the Marxian hegemony you cannot anymore perform a critical analysis of the workings of the economic system. A hybrid stance is to bastardise, pick and choose and juxtaposition Marx along with just about anything, in order to create something which is Marxian in name only. I have two theories for this bastardisation approach, it is possibly either done out of timidity, for fear of the immune response of the Marxian hegemony, the jostling for academic careers plays a large part here, or out of genuine affection for dear Marx. I have much sympathy for both these imagined reasons, people do what they need to do to stay in jobs they love, and I have my pet, seminal thinkers too, I cannot help but filter new information through these mentors, ‘oh this reminds me of what Deleuze/Nietzsche said in XYZ’. If your pet thinker turns out to have been wrong, or to have been a staunch Nazi (Heidegger), I can imagine I would probably perform similar mental acrobatics to restore my pet’s good name or contemporary relevance.
Marx wrote widely on a huge array of topics, but what I am specifically concerned with here is his conception of economics, and you just can’t do away with the labour theory of value, or historical materialism, and still consider it Marxian economics, as these are the foundational elements of his economic system. Marx remains unsurpassed in his ambitious vision of how things could, and ought to be, and this normative vision is the essence of the progressive left. This this where Marx’s grandeur lies, and this must not be conflated with his political economy work when critiquing or surpassing him. This is a clever rhetorical stratagem employed the Marxist hegemony, where a critique of Marxian political economy is taken as a critique on the normative vision. Critiquing, or ignoring completely Marxian economics, does not mean the person doing so thinks wage labour exploitation (or clubbing baby seals) is a good thing. And let’s not even go down the path of my-critique-is-more-radical-than-yours, if capitalism is an ill-defined concept, socialism as a concept fairs just as badly. If radical critique, to be considered radical, needs to raise as it deep, radical insight the question of capitalism vs socialism, yet both are badly defined concepts with even vaguer economic policy implications, it becomes instantly apparent what a dead end such dick-sizing competitions become.
That being said, now on to the interesting stuff.
Large Corporations and the Market
Galbraith sees the large enterprise which emerged in the 20th century as a planning and risk-mitigation apparatus. As technological innovation advanced since the industrial revolution, the resources required for research and development, as well as the production of commodities have increased dramatically. These resources include yes raw materials and specialised knowledge, in addition to vast amounts of financing and long R&D cycles, Galbraith notes advanced manufacturing requires coordination with other corporations and extensive planning. Another key challenge, as noted by Galbraith in The Affluent Society, was the management of demand for produced goods, by carefully controlling supply and by generating demand for non-essential commodities through marketing. It must be noted that a great deal of economic activity occurs between corporations, and the consumer market is only the most visible market.
Planning
Galbraith’s concept of modes of coordination examines two predominant institutional modes for coordinating intra- and inter-institutional transactions. The market system makes use of price signals for coordination, while large organisations use command and administration for coordination. These two dominant modes of coordination give rise to what Galbraith terms the dual economy. For Galbraith, large corporations grew largely to contain market uncertainty, and have largely succeeded now in dominating price signals rather than being dominated by them. In the dual economy, the thousand or so most powerful corporations have developed sophisticated planning and coordinating structures, and this power is so great as to be able to both manage consumer demand through advertising, which influences social attitudes and value judgements, as well as direct state policy objectives. The planning objectives of these corporations are largely concerned with maintaining their position of dominance, rather than concern for society’s needs as a whole. This planning dominance prevents the widespread benefits to society that the affluent society would be able to provide, limiting these benefits to the few.
Price and power
This dual economy is further described by Galbraith by how prices are determined. Small and medium firms are dominated by competitive market pressures, as such they are price-takers. While the largest corporations have the power to be price-setters, by both managing demand and by exerting monopolistic barriers to entry of smaller firms. In the affluent society, commodities that comprise the basic needs of survival are largely available, so price is hardly at all influenced by use-value needs of survival, and most consumption is driven by the creation of demand by large corporations rather than by consumers demands to which the corporation is subservient. Galbraith terms this the revised sequence, as opposed to the tradition sequence imagined in an economy where consumer demand and market competition to meet this demand forms the basis of market competition. This revised sequence however only applies to the largest corporations in the dual economy. It will be my argument, already noted by Galbraith, that due to the long timeframes and large amounts of resources necessary to research and develop new technology, innovation in automation technologies that can dramatically increase productivity and reduce the need for human labour are largely in the control of the largest organisations and therefore operate in the planned mode of coordination. Innovation is therefore largely not driven by competitive market pressures to innovate, but rather innovation is seen as something that must be controlled. It is more important to prevent other corporations from innovating, while presenting the marketing narrative of large corporations being the motors innovation.
Differential accumulation and sabotage
Veblen defined the sabotage of industry as ‘the conscientious withdrawal of efficiency’, for him mechanical industry and innovation tends to be too productive. He described a fundamental tension between industry and business. Industry is dominated by the figure of the engineer, whose prime concern is the increasing of efficiency in industrial production. It is the engineer whose creativity is the driver of innovation. Business on the other hand is driven by the requirement to generate sufficient profit, it is primarily concerned not with production but with distribution of commodities. Business therefore exerts sabotage by artificially limiting efficiency as overproduction will drive down prices and reduce profit. Veblen did not see this as inherently this sabotage as evil, but rather as necessary to survival in a competitive economy. Veblen’s understanding of industrial sabotage is key a different understanding of the relationship of innovation and competition. If we take Veblen’s sabotage together with Galbraith’s dual economy as outlined previously, as well as Bichler and Nitzan’s concepts of differential accumulation, it becomes possible to further examine the dynamics of competition and power in a price-setting economy.
Differential, as opposed to absolute, accumulation is per Bichler and Nitzan, the main objective of capitalist enterprises. If maintaining and increasing relative power and barriers to entry in regards to other corporations is the main objective in the largely oligopolistic or monopolistic economies of the largest corporations, then pursuing an aggressive competitive strategy on price or product features, that would be largely fought by an innovation arms race, would be suicidal to dominant firms. It is therefore more important to beat the average growth rates either of the market or of one’s main competitors, and when examining periods of high aggregate growth or recession, to understand which corporations are gaining or losing power it becomes more useful to examine exactly which firms are losing less or growing more. There are two main strategies of differential accumulation, depth and breath, and both of these can be further distinguished by whether these strategies are undertaken using internal or external means. Breadth is achieved by expanding the relative size of the organisation, and therefore commanding a larger market share and relative power, for example by mergers and acquisitions(external), or by growing it’s by increasing headcount or investment in additional production capacities(internal). Depth is achieved by increasing its relative elemental power, for example by cost-cutting(internal), or pricing competitors out of the market(external). Another depth strategy, key to understanding the political economy of innovation is by preventing access of other firms to entry in a market, and this could be by influencing public policy, for example lobbying for stronger copyright and patent laws.
The primacy of finance
A common narrative today to explain why innovation beyond consumer gadgetry has stagnated, or why productivity seems to have plateaued, is to blame the rise of financial innovation and market speculation. While it is true that complex derivatives or algorithmic trading are relatively new developments, and that toxic collateralised debt obligations (CDO) were largely to blame for the 2007-8 financial crisis, to think that if we could free ourselves from the toxic excrescence that is financial speculation and focus on the ‘real’ economy is to both fundamentally misunderstand the nature of capitalism, as well as play into austerity policies and often anti-Semitic movements which see debt in inherently evil and favour a return to gold-standard currencies.
Braudel, Graeber and Bichler and Nitzan point out that financial instruments of debt preceded the industrial revolution, and are not a new invention but where present in the earliest identified emergence of what we today call capitalism, in the mercantile city-states of Italy in the 14th century. Taking Bichler and Nitzan’s assumption of the primacy of finance has big implications for understanding what drives industrial innovation makes the present growth of financialisation and financial innovation not only unsurprising but almost inevitable. Innovation-driven industrial growth outpaced financial speculation when industrial production provided the largest opportunities for growth, however as widespread affluence rose over-production became more and more an issue, once marketing and consumer debt were no longer providing the returns expected, it is not surprising that growth opportunities were sought increasingly in financial innovation. If ‘capital exists as forward-looking capitalization, a universal financial ritual that discounts expected future earnings to a singular present value’ production and industrial innovation are only secondary to this objective. While the physical world still exists, and with it the need still to produce physical commodities – not forgetting the military-industrial complex – these activities are only secondary to the importance of a corporation’s market valuation which is largely driven by the market’s perception of the firm’s future expected earnings.
See more key concepts in institutional economics here.