William Davies writes:
The words ‘market’ and ‘capitalism’ are frequently used as if they were synonymous. Especially where someone is defending the ‘free market’, it is generally understood that they are also making an argument for ‘capitalism’. Yet the two terms can also denote very different sets of institutions and logics. According to the taxonomy developed by the economic historian Fernand Braudel, they may even be opposed to each other.
In Braudel’s analogy, long phases of economic history are layered one on top of another like the storeys of a house. At the bottom is ‘material life’, an opaque world of basic consumption, production and reproduction. Above this sits ‘economic life’, the world of markets, in which people encounter one another as equals in relations of exchange, but also as potential competitors. Markets are characterised by transparency: prices are public, and all relevant activity is visible to everyone. And because of competition, profits are minimal, little more than a ‘wage’ for the seller. Sitting on top of ‘economic life’ is ‘capitalism’. This, as Braudel sees it, is the zone of the ‘antimarket’: a world of opacity, monopoly, concentration of power and wealth, and the kinds of exceptional profit that can be achieved only by escaping the norms of ‘economic life’. Market traders engage with one another at a designated time and place, abiding by shared rules (think of a town square on market day); capitalists exploit their unrivalled control over time and space in order to impose their rules on everyone else (think of Wall Street). . . . Capitalism, in Braudel’s words, is ‘where the great predators roam and the law of the jungle operates’.
Interesting. Put this way, it all seems obvious, and I guess this must all be well known in economics, but I’ve never thought of it that way.
There can be no sharp distinction between “economic life” and “capitalism” or between “the market” and “the law of the jungle”—even the largest companies have to compete in some way in order to make payroll—but, yeah, the idea of capitalism as an antimarket, that makes sense. I was already familiar with the idea that firms are, in the words of Dan Davies, “islands of central planning linked by bridges of price signals,” but I hadn’t thought about this as a sort of definition of capitalism. (Dan Davies is, I assume, not directly related to William Davies who was quoted above.)
Here’s an example. Later in his article, Willam Davies writes:
Academic publishing, for example, is one of the most egregious rent-grabs around. Scholars, editors and reviewers work for free, so that large copyright-protected conglomerates can charge libraries several thousand pounds a year for digital access to journals they can’t do without. The profit margins of the big scientific publishers run as high as 40 per cent, enough to make the boss of Shell blush. Hence the enthusiasm for projects such as the not-for-profit Open Library of Humanities, set up by Birkbeck academics in 2013, which now publishes 33 open access journals per year. When it’s capitalism that’s the problem, and not markets, the only alternative is post-capitalism.
There’s some truth to that. I use Arxiv and my home page and, for that matter, this blog, to communicate scientific ideas directly without paying rent to Elsevier etc. I also publish articles in journals and I publish books with for-profit and non-profit publishers, so you could say I operate in some sort of mixed economy of publication.
But then I can tell you a story that puts us back into the capitalism-as-antimarket situation.
About 25 years ago, my friend Aaron Edlin started a set of journals which he called the Berkeley Electronic Press. The clever idea was that his journals would be online-only and freely accessible to all and, if you published a paper for one of his journals, you agreed to review some number of submissions. Also, the journals were arranged in four different tiers: you’d submit an article, and the editors would decide based on the reviews which tier your article would go in. Aaron’s an economist, and these innovations seemed like great resolutions of the problem of hassling reviewers and the problem of deciding what to publish. I published a paper in one of Aaron’s journals, back in the day, and it all went very smoothly. My article ended up in the third-tier “Contributions” category, and it’s only been cited 30 times, but, hey, what are you gonna do? The experience was much better than the usual story with academic journals where they act like they’re doing you some sort of huge favor for publishing your article. It was all very efficient and low-key. Aaron got his friends to edit some of these journals. He asked me too, but I was too busy.
In any case, their original business model didn’t seem to have worked out. Now they’ve just become one more crappy series of paywalled journals. I went to the Berkeley Electronic Press website and saw this: “In 2011, bepress chose to exit the commercial subscription-based journal business in order to focus all of our energies on our open access services; this meant selling the 60+ bepress journals which we had published for the last decade.”
I’m thinking that the mistake was to have 60+ journals in the first place. How can you possibly keep track of all of that? Maybe they should’ve just capped their number of journals at 10, and then it could all have worked out, I dunno. I don’t fault Aaron for this—I’ve started all sorts of projects that didn’t continue the way I’d originally planned, and nothing lasts forever in any case. He did keep those journals going for a few years, which isn’t nothing.
The relevance to the main theme of this post is that the Berkeley Electornic Press started out as some sort of cooperative or possibly market-based system but then got sucked into the capitalist antimarket.
We think of capitalism = market and cooperative being the opposite of a market, but in this case the connections go differently. The cooperative and market versions of the Berkeley Electronic Press are similar in that they involve some sort of open exchange between independent agents, whereas the capitalist antimarket version is all happening behind many layers of obscurity.
I recognize that none of this is new to economists. This particular perspective was new to me, though, hence this post.
As an economist, I can say that this terminology does not comport with what I’ve been taught or seen used by economists. Equating “economic life” with “markets” is ok, but calling “capitalism” the opposite (or failure) of markets is definitely not the traditional way of viewing things. So much so, that I have a hard time adjusting to the terminology – it also seems somewhat value-laden casting “capitalism” as the evil failure of markets to provide for the social good. But if I ignore this non-standard way of putting things, economists have characterized perfect markets as the textbook ideal and then laid various imperfections (market power, asymmetric information, public goods, externalities) as detracting from that idealized state. I can see Braudel’s contribution as saying that these things that economists portray as market imperfections are really natural products of capitalism. That is a refreshing (to me) way to look at things, more in line with sociology than economics. But I think it would be hard to prove that capitalism will always result in these departures from the idealized perfect market economy – there are surely countervailing forces (the main one is probably competition).
If I try to apply this to the example of academic publishing, then cooperative efforts (such as the Berkeley Electronic Press or perhaps open source software) must co-exist in the same markets as for profit competitive enterprises. It is possible that one form or the other will win out, but I don’t think that has yet proven to be true. In the case of open source software, for instance, despite all the successes and hype, for profit software firms remain profitable. I can imagine cooperative academic publishing occupying a successful niche (perhaps BEP would have succeeded if it has limited its scope as you suggest), but it is hard to see it dethroning the admittedly dysfunctional for-profit academic publishing. More likely, I see coexistence of both models, sort of an evolutionary adaptation that has them occupying somewhat different niches. And I think the interesting questions are then which models are most successful in which niches.
Also an economist, and also find the terminology to be highly questionable (which is never a good sign). In fact the idiosyncratic terminology used here seems to be pre-tailored specifically to draw the conclusion that “the only alternative is post-capitalism.” If we can define capitalism however is convenient, then we can draw whatever conclusions we want about whatever alternatives we want. I am not impressed.
The idea that firms are essentially a command structure operating within a free market goes back at least to Coase in the 1930s.
It is also odd that the author points to academic publishing as a problem, and then also starts highlighting one of the solutions that co-exist with for-profit publishers. (And again, trying to pass off not-for-profit as being somehow anti-capitalism is an abuse of terminology.)
Oh and I’ll add that examining the outcomes of any economic system without also examining the legal environment can lead to false attributions. For example, a lot of people equate corporations with capitalism, but corporations are a legal entity that need not exist in a capitalist system — get rid of the legal protection of limited liability and you still have capitalism but no longer have corporations.
Likewise with academic publishing, there are legal issues involved that are probably more meaningful. For example, the question of whether federally funded research (from grants, a researcher working at a public university, etc) can be paywalled is primarily a legal question, not a question about the means of production that should lead to hamfisted navel gazing about “post-capitalism.”
The trouble here is that this terminology is neither new nor idiosyncratic. This is essentially how the terms capital and capitalism were used when they were essentially coined and popularized by Marx and his contemporary political economists. Since then, mainstream economics and the descendants of Marx have continued to use the same words to mean completely different things and all discussion is completely intractable.
Even though I’m intellectually much more in agreement with mainstream economics, and as much as Marxism fails philosophically and practically, mainstream economics has a serious problem with teaching context. Serious Marxist economists like Yanis Varoufakis have at least a pretty decent basic understanding of the premises of neoclassical economics and disagree from a place of knowledge. On the other side, mainstream economists have no problem talking about Marxism with absolutely no knowledge of the very basics. This is not the fault of individual economists; economics pedagogy has some kind of propagandistic structure which teaches theories as if they sprang out from nowhere. Economists never read Marx, they don’t read Ricardo to learn about the origins of comparative advantage, they don’t read Adam Smith, tbh they don’t even actually read Keynes in his actual words. By way of comparison, in my physics education, reading Einstein’s actual mirabilus papers and the EPR debates and contextualizing electromagnetism with the aether debates and the Michelson-morley experiment was required and enormously instructive.
I’m with “somebody” 100% on this and I’m angry as hell at Economists because I feel like the economics I studied in high school, and college equated capitalism and markets and is completely ahistorical and the reality is that capitalism IS anti-market. I literally only came to this understanding in the last say 5 years after reading Anarchists from both today and the 1800’s.
To understand this you have to understand, historically and factually, what capitalism is. Capitalism is a system in which government grants “title” to assets and enforces that title with guns, allowing an asset title holder complete dominion over the utilization of that asset (historically, either a natural asset such as land or minerals or in more modern times say spectrum licenses or whatever or a capital asset… some machinery or in modern times some copyrights or patents).
Given this monopoly on assets enforced by the violence of police, the capitalist “collects rent” which is to say, payments which come to the capitalist exclusively because of their ability to mobilize the police to kill or jail people who fail to pay the rent to use the capital assets. Historically quite a bit of killing workers has actually occurred, that’s not hyperbole. Just one example is https://en.wikipedia.org/wiki/Harlan_County_War
Historically, in England, this “capitalist wealth transfer” occurred as an actual legal process through the “inclosure acts” https://en.wikipedia.org/wiki/Inclosure_act in which common land was stolen from commons ownership among communities, and given to rich people. Hence Proudhon’s slogan “Property is Theft”
If you understand capitalism to mean what it obviously did mean and has always really meant: the privileging of certain classes of people through government granted “title” to what would otherwise be common assets then yes, capitalism and free markets are opposites.
https://c4ss.org/
has many articles on the topic, but this book length thing is one of the best summaries https://c4ss.org/content/59416
The c4ss people are notable in that they are PROPONENTS of markets and ANTI-CAPITALIST which is I think a completely un-parseable position for a typical economist today but is exactly my own position.
“The trouble here is that this terminology is neither new nor idiosyncratic. This is essentially how the terms capital and capitalism were used when they were essentially coined and popularized by Marx and his contemporary political economists.”
That was my impression as well. Apparently modern economists get angry when we fail to append “for the good of society” to any definition of capitalism.
Daniel,
If squatters commandeered your house and kicked your family out of it, would you use legal system/police to enforce your property rights?
Anonymous, in todays system I would be forced to do that yes. In an Anarchist system this would become a matter between me, my neighbors and supporters, a regional volunteer militia, the squatters, whoever they had in support of them etc. Importantly, in the absence of capitalism monopolizing the use of assets such as land and building equipment and etc the claim is there would be little point or purpose to squatting on someone elses house. It is the legal system we have in place today which makes houses scarce with zoning, building permits, and NIMBY politics, much of which is itself aimed at privileging current homeowners by making their house a financial asset.
Anarchists importantly make the distinction between personal property (which one can possess, such as a house you can live inside, a computer you can put under your desk, some jewelry in your own safe, books on your bookshelves etc) and large scale property where it is completely impossible. Bill Gates is the largest owner of farms in the country last I read. There is no way for Bill Gates or even him and his immediate associates that he has direct relationships with to claim exclusive use over the millions of acres of farmland he “owns” without such “title” systems. It’s those systems of “title” which enable one person to claim ownership over vast geographically widespread assets which are at issue in the Anarchist tradition because they fundamentally don’t exist without police, whereas personal property fundamentally does by virtue of its “possessibility”. The basics of Anarchy is to spread power out evenly across the population, with each person limited to that economic power they can negotiate with their direct physical community, and not centralized and aggregated through legal systems.
These kinds of questions are by the way very basic questions in Anarchy theory and can be answered by reference to some of the basic readings on the topic, so I’ll point you to the FAQ for reddit r/Anarchy101 which contains a wealth of books you can read rather than me filling these comments with redundant stuff
https://www.reddit.com/r/Anarchy101/wiki/canon/
“In an Anarchist system this would become a matter between me, my neighbors and supporters, a regional volunteer militia, the squatters, whoever they had in support of them etc.”
That sounds pretty bad!
Phil,
It sounds like Somalia.
Daniel
In your anarchist system, what neighbors, volunteer organizations, squatters, etc. would you work with to limit worldwide carbon emissions, to control whaling, to preserve habitats for endangered species, to provide GPS services, or respond to humanitarian crises after natural disasters? I’m not saying we have a good system now, but I’m having trouble seeing how your desired system can possibly fit into the world we live in (other than in a few small scale local cases – I am reminded of Small is Beautiful, and book that had an important influence on me but seemed out of touch with reality).
Dale, as I’ve said in other forums, people always have this question “how could you possibly have the modern world under anarchy?” I’m happy to admit you can’t. But you can’t have the modern world under capitalism and states either, not long. The modern world is a one time event that will end in anywhere from 50 to 200 years depending on whether we have another global war or things like that.
Global energy use hasn’t just been increasing exponentially with population, per capita energy use has been increasing exponentially. Of course those extrapolations are ridiculous, that’s the point. They must stop. And when they stop the world is a very different place. Even if population and per capita energy use froze in place today, as Andrew has said, that means demographics change a lot. Everyone becomes much older and theres no exponentially growing youth to do much of the labor weve relied on in the past. All those 19 year old Chinese factory workers disappear.
And there’s no going back because the energy cost of energy extraction has been increasing forever. You’ll simply not be able to get the fossil fuels even if it made sense to try to burn them. If we do a good job we could maybe crash back to a soft landing on solar and wind and such, but it’ll still be a different world with much less global trade and electric power that might not be on all day long etc. We can try to use batteries but they simply dont have infinite lifespan and there isnt a way to replace them continuously forever. If we don’t do a good job we could find ourselves in the 1100s again.
Most of the questions you have, about whaling, or carbon emissions, are problems *created by capitalism* that is, resource extraction creates net profit for the owner class and net costs for the rest of humanity. Since the owners control the scenario through govt violence the extraction continues no matter how much the people badly affected want it to stop. We’ve seen this at the pipeline protests a few years ago in the US.
Elinor Ostrums Econ Nobel was about exactly this question so perhaps start there, I know much less than she did about the question. Her thesis appears to be from my indirect reading that the “tragedy of the commons” was complete propaganda to justify the inclosure acts. Groups come up with cooperative protocols to manage scarce resources because they have skin in the game. External extractors dont they suck things dry and move on.
As for failed states, they simply aren’t anarchy no matter how much people want to believe that. The Zapatistas in Mexico are a better comparison. They went from ultra poor to having their own hospitals, schools, doctors, markets, publishing etc something that never happened under the state of Mexico who saw them as a resource to be extracted and not supported. People who are deep into this theory could quote you any number of small scale examples. Somehow the zapatistas don’t go around raiding each other with gunfire in the streets and bodies all around the way fantasists imagine anarchy must be.
https://youtu.be/bQaJYlgKp_A?feature=shared
Skip the beginning and shuttle to 13 minutes and tell me if you see people blowing each other up, or people selling books at a market and interviews with women who believe that their community benefitted and has done better since 1994.
Its so easy to do a lazy analysis and arrive at Somalia, a failed state. Zapatistas and Anarchist Catalonia in the 1930s are major counterarguments. Catalonia didn’t fall apart it was crushed by a state.
Daniel
Counterfactuals are always somewhat speculative. They can be valuable in that they suggest alternative realities, some of which may be desirable and worth pursuing. But they can also be problematic. I’ll offer the Trump case. Faced with any difficult problem, his response is that it wouldn’t have happened if he had been president and/or the previous administration had not been so inept. Among the problems with that argument, I find the most serious is that it offers an escape from real alternatives. I find your anarchist solutions like that – the modern world would not look like it does if we had followed a different path. That is no doubt true – but we are here with a world population of 8 billion+ people, modern technologies, energy intensive eating and living habits, global effects, and many power structures (which I wish we did not have). Given these realities, I don’t see the path of undoing these things as realistic alternatives – and the act of undoing is fraught with great hardship and suffering.
As you say, there are physical realities. Energy use and population cannot increase without limit. Under our current systems, some limits will provide reasonably smooth transitions (e.g., as energy prices rise, a number of responses can be predicted, and these may be fairly benign – except for the world’s poorest). Some limits may produce more severe impacts (I personally worry more about species loss than rising sea levels, except for the ways these problems are connected). It is important to study alternative mechanisms for social decision making, as Ostrums did. Even small scale alternatives that work in tribal societies can suggest ways forward that could be implemented at larger scale. Even recognizing the challenges posed by scale can be an important step forward. Thus far, I haven’t found the anarchist solutions particularly useful. This may simply reflect my ignorance and I’m willing to reconsider as I learn more. But I do know a fair bit about less extreme alternatives: cooperative enterprises, employee-owned businesses, and alternative forms of ownership. I think those models have a lot of attractive features, but are unlikely to be successful if applied universally – they each have had successes in particular niches where they “work.”
The one area where I think we will largely agree is that powerful interests will always act to preserve and enhance their power. To the extent that any alternative seems attractive but alters the balance of power, we can expect those in power to resist and thwart change. Concentration of power is something I find most disturbing. Is it the inevitable result of a capitalist system? I simply don’t know. I wish I had studied more sociology (though it is painful to read, mostly absent of any equations), more anthropology, and at least read Marx and George et al (having attended a top Econ graduate program, no such things were on our syllabi).
Dale, thanks for your words, respectful as always. I don’t think Andrew wants this to become the debate anarchism Reddit so I’ll stop here. Anyone who feels a need to debate anarchism can go to r/DebateAnarchism and post where people much more well read than me can provide further info. Or if you’re just interested in anarchy as an idea r/Anarchism101 is a place to ask questions.
If you want to talk to me about modernity and the end of exponential growth I’m on Mastodon @[email protected]
I think Daniel made the right call in suggesting that this discussion, if it continues, should probably move to another forum. But Daniel, if there is a way you can _briefly_ answer a couple of questions from an anarchist perspective, I think some of us would appreciate seeing that summary here.
Still focusing on: “In an Anarchist system this would become a matter between me, my neighbors and supporters, a regional volunteer militia, the squatters, whoever they had in support of them etc.”
Slightly upthread you said “Capitalism is a system in which government grants “title” to assets and enforces that title with guns…”, and from the way you said that I thought you were intending to imply that that’s a bad thing, although I realize that already I’m unclear on whether you think:
1/ the concept of “title [to assets]” is a bad thing — maybe nobody should own anything?
2/ ownership is OK but no government should rule on it — maybe it’s the idea of a government that is bad?
3/ enforcing that title with guns is a bad thing — maybe there should be some method of enforcement that doesn’t involve the use of lethal force even in extreme cases?
I guess if the answer is that to an anarchist there is no such thing as ownership — if I hang some laundry up to dry, someone else is welcome to take it — then OK, I can’t get behind that but at least I understand the concept.
But if people are allowed to own things, then someone needs to decide who is the actual owner of something, and, if that ownership is to mean anything, someone needs to enforce that ownership. And this is where I am really perplexed by the response that having my supporters and militia fight your supporters and militia — and I note that presumably at least some of these militias will have guns — is a better answer than having a government make the decision based on codified laws, and enforce the decision with a government police force. In the latter, there are still people deciding who gets to own something: it’s whatever coalition of armed militias is the stronger in any given case. If that’s the idea then… well, I can’t get behind this either but at least I understand the concept.
If you could write a two- or three-paragraph answer that covers whether private ownership is still allowed, and, if so, why you think it’s better to have one set of neighbors, supporters, and militia battle another set in order to settle ownership issues than to have a government do it, I think I would find that very instructive. Then I can decide whether I want to visit another forum for a deeper dive.
I agree with Dale and Will. Marx and Milton Friedman defined capitalism as private ownership and control of the means of production. This definition presumes markets for private owners to acquire and operate those businesses. But it does not require competitive or free markets in publishing or anything else.
Furthermore, Braudel’s description is ahistorical. Primitive societies typically had communal control of resources, not decentralized free markets. Guilds and cartels are ancient inventions.
I’ll add this, after reading Davies’ book review (of the book, The Price is Wrong): I find the notion that capitalism will prevent a necessary energy transition (which seems like the gist of that book) unconvincing. I believe that the price signals attached to different energy sources are distorted and pose an obstacle to moving from fossil fuels to renewable energy (although there is plenty of dispute over what the appropriate price signals would look like). I also believe that energy markets stray far from textbook perfectly competitive markets – the nature of energy goods (capital intensive, long investment horizons) has not produced intensely competitive markets. I also believe that the nature of political and economic power is vital to understanding how the energy transition will and won’t unfold. But all of these factors fall short of establishing the case that capitalism will prevent a necessary (itself somewhat in dispute) energy transition. In fact, I suspect that evolving energy prices (particularly with even halfway sensible environmental policies) will do more to spur that transition than any attempt to overhaul economic systems. But perhaps I am just not able to be as revolutionary as I once was.
Dale, one issue is that you can’t fool mother nature. Physics just provides fundamental limits to what we can do. Tom Murphy on his Do The Math blog did an excellent job of discussing some of this already over a decade ago https://dothemath.ucsd.edu/2012/04/economist-meets-physicist/ and he discusses how we knew the system-behavioral expectation already in the 1970’s when Limits to Growth came out: https://dothemath.ucsd.edu/2011/09/discovering-limits-to-growth/ in that post he also links to a comparison paper of LtG output and the following years of real data https://web.archive.org/web/20080824035207/https://csiro.au/files/files/plje.pdf
our energy use trajectory *simply must* change in the future (otherwise by 1400 years out we’d have to use the entire output of all stars in the galaxy to make it continue. It’s already basically ridiculous to think we can do about 100-200 yrs of our current growth rate, things like thermodynamic waste heat become a bigger problem than climate change already is). the exponential growth rate, which has been around 3%/yr for hundreds of years will need to become sub-exponential, and then flat… Except the final flatness likely needs to be well below the current usage level. So we have already likely overshot and will decrease from there. The point is we need to plan for a way to come to an equilibrium that is semi-industrial, and there’s no such plan. For as long as capitalism concentrates the profits to a tiny minority of owners and socializes the losses to everyone else, there will be little capacity to come up with that alternative. We are stuck asking permission from “owners” to reduce capitalist profits or even induce capitalist losses to produce the alternative energy and food sources we will need. And in case you haven’t noticed, capitalists are pretty well against that!
Even if through careful calculations we decide it’s possible for the globe to continue using power at exactly the level we are today through a particular set of technical modifications, there is virtually no reason to believe that the overshoot which must needs occur (since todays trajectory is still upwards) would fall back and equilibriate to something like what we have today. Those technical changes must cost both energy themselves and time. The payoff time on those things is typically a century or more. short term profits override the long term ones given the discounting factors that will apply.
There’s much more than energy usage that affects modernity. Land use, mineral extraction, climate change, and soforth all provide their own limits. It was extremely hard for the LtG people to stabilize their system at something like a developed global economy (say even $10k/yr median income globally in todays dollars).
So, the question isn’t “will the economy eventually provide sufficient price signals to get people to switch” it’s more along the lines of “even if it did, today, strongly, could we physically do it?” It’s a little like saying eventually we’ll see the brake lights in front of us and slam on the brakes… but that might not help, the coefficient of friction etc will ensure we can’t come to a stop in time to avoid the pileup.
Tom Murphy has hundreds of posts and has also linked to his free access textbook, there’s a good index of posts here https://dothemath.ucsd.edu/post-index/
Daniel, setting aside the fact that as soon as the population stops growing exponentially those exponential growth forecasts are absurd, how exactly is an anarchist system going to enforce behaviors that protect the global environment without using force?
Are you going to get your “regional volunteer militia” to do it? The same ones who couldn’t stop the squatters from stealing your house? Oh wait, I forgot everyone has a house in an anarchist society, so since we’re just making up fantasies we might as well throw in that the houses have no environmental impact.
Dale, Will:
Thanks for the comments. This is helpful. Some of the points that Davies made were new and interesting to me; I can also believe that he’s using terminology in ways that are counterproductive. My post is not intended as an endorsement of everything Davies wrote; rather, it’s an exploration, inspired by what Davies wrote, on the limitations of the usual (to me) framing of “capitalism = market and cooperative being the opposite of a market.” My point is not just that markets and capitalism have imperfections–the idea of market failure is commonplace–but rather some of the more subtle differences between capitalism and markets, as demonstrated by the story of the Berkeley Electronic Press.
“This, as Braudel sees it, is the zone of the ‘antimarket’: a world of opacity, monopoly, concentration of power and wealth, and the kinds of exceptional profit that can be achieved only by escaping the norms of ‘economic life’.”
I am not now and never have been an economist, but whether you call it capitalism or not, this seem like a pretty description description of the state of affairs.
How “capitalism” relates to “markets” is an old, much debated question. The notion of an anti-market super-layer associated with capitalism or monopoly or some similar usurpation has a long history; see, for instance, Henry George. Adam Smith, of course, said that business people never meet without the topic of conversation turning to how to organize a conspiracy against the public.
There has to be something to this or it wouldn’t be so persistent. Still, I think it’s less a general theory than an expected consequence of the accumulation of power wherever it occurs.
For a general approach, my go-to over the past 40-plus years has been what you might call the adding-up problem. Markets in themselves simply aggregate individual choices, with a regulatory adjustment mechanism, price responses, that operates homeostatically on surpluses and shortages. But interaction effects, not captured in markets, are ubiquitous and make simple adding up problematic. This is why there are firms: there are many ways to group together the separate operations of a business enterprise, and some mechanism is needed to choose a collation that promises a more successful outcome. Technically, choice and production sets are typically nonconvex, and markets alone select only local optima.
From this perspective, markets are essential but incomplete, and one way or another further decision layers are required. The rest is all policy and ultimately comparative systems.
The example of BEP, which I used to make use of (thanks!), is interesting. It seems like an early attempt at a purpose-based organization or B-corp, but without the sort of structure (like a dedicated trust) that would allow it to scale up without undermining its mission. Since purpose trusts are a focus of my work at the moment, I’m interested in learning how far my intuition wanders from the actual history.
I think there’s something more specific in that competition naturally erodes profit margins so in the absence of productive innovation entrenched market participants often resort to creative anticompetitive practices. This is similar in consequence to Marx’s ideas about the falling rate of profit, though I think Marx’s argument is completely bogus
There are two drivers of profit. On the one hand you’ve got the production of goods and services that people want badly, in ways that are cheaper than other producers and allow you to outcompete those producers while creating value for customers.
This is a “good kind of profit” sort of. For example its a kind of profit that could exist in an anarchist system with say a coop business run by its own workers and not reliant on patents or copyrights or titles to sustain it (at least for a while). Its sustained by virtue of creative innovation.
The other kind of profit is rent. For example despite Winnie The Pooh being a very old book and the author being long dead, my father in law died at age 97 never being able to publish his whimsical translation into Italian that he wrote when my wife was a child. Because the Italian translation had an exclusive license associated with an existing translator. The copyright owner collects rent, the other Italian translator collects rent, and both do so by virtue of having destroyed the economic value of my father in laws labor.
Measured properly, I think real economic growth to median households has been negative for decades in the US. At best its a percent or two per year, while the top 0.1% have grown crazy amounts… All through rent extraction schemes that have been massively destructive of everyday peoples welfare.
The thing is, there are many opportunities for productivity which are excluded by the schemes used to collect rent. David Graeber wrote “Bullshit Jobs” and had a massive outpouring of people who wrote to him to say how their own personal job was one of these destructive or nonproductive types. Its not even that they’re doing something destructive or nonproductive that’s the huge problem… Its that in filling their time with that BS job the world loses the value of whatever alternative productivity they would have done. Even if that were childcare and afternoons spent playing folk music or curating display aquariums or something the world would have been that much better off instead of filing lawsuits about rounded rectangular UI features in Samsung phones or filling out thousands of pages of compliance reports that noone ever reads.
Marx’s falling rate of profit was notoriously based on an algebraic error (he didn’t apply the reduction in labor input to the production of capital goods, only to final output), but it had the advantage, if you want to think of it that way, of hypothesizing a secular trend leading inexorably to crisis. The tendency of the rate of profit in a competitive system to stabilize at some sort of “natural” return to capital is, if it exists, a theory of capitalist stability. Of course, as Keynes helped us understand, the rate of return on illiquid assets reflects the value of liquidity — which fluctuates.
In real life, however, events are constantly upsetting the stable state of textbook competitive markets; this will occur with or without rent-seeking, monopoly or other “imperfections”.
From the context, he is claiming corporate law/regulation obligates conspiracies.
https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/Chapter_10
Anyway that conspiracy term is so funny now. Open a history book and you’ll find its essentially a list of times people conspired against each other.
Insider trading is the ultimate in antimarket forces. From various direct and indirect channels, I’ve come to understand that insider investing is the norm, not the exception, among so-called “elites.” Academics tend to be hesitant to talk about it, and the evidence available from open sources is often too subtle to draw clear conclusions.
I have a personal anecdote. I once got to know one of the wealthiest individuals in the UK because our children attended the same private school near Monaco. One day, through our wives, I was invited to his home. Instead of bringing a bottle of wine, I offered him my book. He smiled and said, “My friend, I don’t need this.” He went on to explain that he had just spoken with the Chief of the Pentagon, who had attended an extravagant supercar exhibition he had organized in Monaco—each car worth millions (a Ferrari, he joked, is for commoners). From that conversation, he already knew which defense contracts were coming next. He didn’t need a theory—he had access.
That story undermines decades of theories about efficient markets and black swan events.
As a young researcher straight out of college at a financial risk model vendor in the 90s I was tasked with finding the effect size of different kinds of news stories as they came across the s&p Comstock ticker feed. I classified these into various types of announcements and calculated the observed variation in prices for every day for a week before to a week after the announcement and divided the observed standard deviation by the predicted one for the assets from our model. I found that there was notable increase in volatility associated with news events. The volatility occurred between -2 and 0 days from date of announcement and was completely gone the day after (the first day where we could incorporate the effect in our data product). So, announcements were already traded on 1 to 2 days before they were made public. This was 1998 ish.
Its easy to web search articles about how prominent politicians outperform the best actively managed hedge funds etc. Trading on privileged information is common and has been for decades, probably forever.
Correct me if I’m wrong, are you saying that it’s possible to predict insider trading?
It’s certainly possible to predict that there will be insider trading!
No it was possible after-the-fact to observe the effect of insider trading in the past, in terms of its increasing volatility of stock prices a few days before the announcement that triggered the trades.
An alternative explanation is that liquidity dries up in anticipation of an announcement, which leads the remaining active traders driving large price changes, even if they don’t have advance notice of the news to be disclosed. This happens before predictable events like earnings announcements.
Yes, you’re right that there may be multiple things going on. But the signal was clear for all forms of news not just fully predictable ones, like retirement of C level officers or announcement of new products or whatnot. Its been over 25 years so i don’t remember which particular categories we had defined.
You make it sound like mainstream economic theories not only assume there’s no “insider trading”, but that its even a key assumption.
Difficult to believe.
Eg, check out stocktwits comments. Its a pretty standard assumption that rich/famous/work-at-the-company trade on inside info and part of the game is figuring that out: https://stocktwits.com/symbol/MULN
“The profit margins of the big scientific publishers run as high as 40 per cent, enough to make the boss of Shell blush.”
As if there’s a profit margin that would make the boss of Shell blush!
“The profit margins of the big scientific publishers run as high as 40 per cent, enough to make the boss of Shell blush.”
The average profit margin on a patented pharmaceutical drug, in the US, is 77%:
https://jamanetwork.com/journals/jama/fullarticle/2762308#:~:text=In%20bivariable%20regression%20models%2C%20the,to%20make%20medicines%20more%20affordable.
And that report says the _average_ S&P 500 profit margin was over 37%. That hypothetical Shell boss is definitely not blushing. Probably having people flogged for not working hard enough!
Well yeah, when you have to cover large fixed expenses (R&D in this case) the only way to do so is to have a high profit margin. Profit margin (Revenue – COGS) isn’t a great way to compare companies across industries. Though perhaps this is your point?
+1
What they call “profit” does not consider many costs. For example, it excludes R&D and the cost of drug trials. “Profit” is gross revenue minus the cost of manufacturing the drugs. Those costs do not include the cost of building the factory.
What they call “net income” represents the money available for dividends or reinvestment. Net income greater than zero is what most of us think of when we hear that a firm is profitable. The proper quantities to examine are things like return-on-investment (ROI) or market-to-book ratio (sometimes called Tobin’s-Q) rather than the ratio of revenue to cost of goods sold.
Looking at the numbers for Merck for FY 2024 the Gross Profit is $48.8 billion (76% of sales) but the net income available to stockholders is much smaller ($17.34 billion or 27% of sales).
Market to book for four firms (from Yahoo Finance)
Tesla 14.64
Merck 4.03
Ford 2.84
Stellantis 0.31