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    Jan 2007

    Default Jonathan Nitzan interview: Hudson-ian economic history from a different viewpoint

    This is an amazing dense amount of information - I cannot recommend this enough.

    Some excepts:

    In my view, terms such as the “economic system” and the “market system” are misnomers. They are irrelevant and misleading. Nowadays, they are employed more as ideological slogans than scientific concepts. Those who use them often end up concealing rather than revealing the capitalist reality.

    Of course, this wasn’t always the case. In the seventeenth and eighteenth centuries, when capitalism was just taking hold, there was nothing apologetic about the market. On the contrary. The market was seen as the harbinger of progress – a powerful institution that heralded liberty, equality and tolerance. “Go into the London Exchange,” wrote Voltaire, “a place more dignified than many a royal court. There you will find representatives of every nation quietly assembled to promote human welfare. There the Jew, the Mahometan and the Christian deal with each other as though they were all of the same religion. They call no man Infidel unless he be bankrupt.” {c1ue: God's Work}

    The market has had a dramatic impact on European history, partly because it emerged in a seemingly unlikely setting. After the nomadic invasions and the fall of the imperial civilization of the first millennium AD, Europe developed a highly fractured social regime we now call feudalism.

    This regime was based on self-sufficient rural estates, cultivated by peasant-serfs an
    d ruled by a violent aristocracy. Technical knowhow during that period was limited, the agricultural yield meager and trade almost non-existent. The power relations were legitimized by the sanctified notion of a “triangular society,” comprising prayers, warriors and tillers (or, in a more political lingo, priests, nobles and peasants). Merchants and financiers had no place in that scheme.

    But not for long. The feudal order began to disintegrate during the first half of the second millennium AD, and this decline was accompanied – and to some extent accelerated – by the revival of trade and the growth of merchant cities such as Bruges, Venice and Florence. These developments signaled the beginning of a totally new social order: an urban civilization that gave rise to a new ruling class known as the “bourgeoisie,” an unprecedented civilian-scientific revolution and a novel culture
    we now call “liberal.”

    Because of the specifically European features of this process, the market came to symbolize the negation of the ancien régime: in contrast to the feudal order which was
    seen as collective, stagnant, austere, ignorant and violent, the market promised individualism, growth, well-being, enlightenment and peace. And it was this early conflict between the rule of feudalism and the aspirations of capitalism that later galvanized into what most people today take as a self-evident duality: the contrast between the state, or “politics,” and the market, or the “economy.”

    According to this conventional bifurcation, the economy and politics are orthogonal realms, one horizontal and the other vertical. The economy is the site of independence, productivity and well-being. It is the clearing house for individual wants and desires, the voluntary arena where autonomous agents engage in production and exchange in order to better their lives and augment their utility. By contrast, the political system of state organizations and institutions is the locus of control and power. Unlike the flat structure of the free economy, politics is hierarchical. It is concerned with coercion and oppression and driven by command and obedience.

    In this scheme, the economy – or more precisely, the “market economy” – is considered productive (generating wealth), efficient (minimizing cost) and harmonious (tending toward equilibrium). It is competitive (and therefore free). It seeks to increase well-being (by maximizing utility). And if left to its own device (laissez faire), it augments the welfare of society (by sustaining economic growth and increasing the wealth of nations). The political system, by contrast, is wasteful and parasitical. Its purpose is not production, but redistribution. Its members – the politicians, state officials and bureaucrats – seek power and prestige. They eagerly “intervene” in and “monopolize” the economy. They tax, borrow and spend – and in the process stifle the economy and “distort” its efficiency. Sometimes, “externalities” and other forms of “market failure” make state intervention necessary. But such intervention, the argument goes, should be minimal, transitory and subjugated to the overarching logic of the economy.


    The portrayal I’ve just painted owes much to Adam Smith, the eighteenth-century Scotsman who turned the idea of “the market” into the key political institution of capitalism. Smith’s invention helped the bourgeoisie undermine and eventually topple the royal-princely state, and that was just for starters.

    Soon enough, the market became the chief ideology of the triumphant capitalist regime. It helped spread capitalism around the world, and it assisted in the fight against competing regimes, such as fascism and communism. In the Soviet Union, where production was besieged by chaotic planning and accompanied by tyrannical rule, organized violence, open corruption and restricted consumption, the market symbolized the “other life.” It was the alternative world of freedom and abundance.

    And this perception is still hammered home by the ideologues of capitalism. In the final analysis, we are told, there are only two options: the market or the Gosplan. If we don’t choose egocentrism and liberty, we end up with planning and tyranny. And that is it. There is no other alternative, or so goes the dogma. {c1ue: Libertarians, this means you}

    The ideological basis of these arguments was bolstered in the late nineteenth century by the official split of classical political economy into two distinct academic disciplines – political science and economics. The term “economics” was invented by Alfred Marshall, the Cambridge University don who coined it to denote the new “marginalist,” or neo-classical, doctrine of political economy. Marshall, who wanted economics to be a real science, gave it the same suffix as that of physics and mathematics. He also wrote the first economics textbook (the definitive edition of which was issued in 1890), where he set the rigid boundaries of the discipline, elaborated its deductive format and articulated many of the examples that are still being used today.

    Despite its aspirations, though, economics never became a real science, and for a
    simple reason: it couldn’t. Science is skeptical. Unlike organized religion, which is infinitely confident, science thrives on doubt. It relies not on static ritual and unchanging dogma, but on seeking novel explanations for ever-expanding horizons. It tries to understand, not to justify. Now, none of this could be said about economics.

    If anything, we can say the very opposite: the latent role of economics was not to explain capitalism, but to justify it. When economics first emerged in the late nine
    teenth century, capitalism was already victorious. But it was also highly turbulent and increasingly contested by critiques and revolutionaries, so it had to be defended; and the ideological part of that defense was delegated to the new priests of liberalism: the economists. In order to perform their role, the economists have elaborated an intricate system of mathematical models. This system, they claim, proves that a free, totally unregulated economy – if we could ever have one – would yield the best of all possible worlds, by definition.

    The conventional counterclaim, marshaled by many heterodox critiques, is that neoclassical models may be elegant, but they have little or nothing to do with the actual world we live in. And there is certainly much truth in this observation. But the “science of economics” is besieged by a far deeper problem that rarely if ever gets mentioned: it relies on fictitious quantities.

    Every science rests on one or more fundamental quantities in which all other
    magnitudes are denominated. Physics, for example, has five fundamental quantities – length, time, mass, electrical charge and heat – and every other measure is derived from those quantities. For instance, velocity is length divided by time; acceleration is the time derivative of velocity; and gravity is mass multiplied by acceleration. Now, as a science, economics too has to have fundamental quantities – and the economists claim it does. The fundamental quantity of the neoclassical universe is the unit of hedonic pleasure, or “util.”


    Piotr Dutkiewicz:

    Some say that the 2007-2009 crisis was indeed a trigger for such a reevaluation, but are we actually seeing any real change in the way the economy is perceived?

    Shimshon Bichler:

    I don’t think so. One would have expected a revival similar to that which followed the Great Depression in the current crisis, but so far the signs of such a revival are nowhere to be seen. A small chorus of mainstream economists such as Nouriel Rubini, Joseph Stilglitz and Paul Krugman have criticized their discipline. But besides moral indignation and contrarian predictions, their critiques offer nothing that is fundamentally new. The real disappointment, though, is the theoretical weakness of the left. During the 1930s, radical movements and organizations were energized by novel theories of capitalism and detailed platforms for its replacement. That isn’t the case today. The anti-globalization, ecology and Occupy movements lack this source of energy. They don’t have a new theoretical foundation to build on – and without such a foundation, they find it hard to develop an effective critique of capitalism, let alone a clear alternative that would come in its stead.

    This weakness creates a vacuum that is increasingly filled by religious and radical right movements. And with the global crisis ongoing and the ruling class tittering on the verge of panic, there is a real possibility of a massive shift to the right, not unlike that of the 1930s.
    I think that such a shift will be difficult to prevent, let alone counteract and reverse, without a totally new theoretical alternative.


    Piotr Dutkiewicz:
    So does that mean that capitalism has somehow become a misleading slogan?

    Jonathan Nitzan:

    Not at all. The term still represents the world we live in. When Marx invented the notion of the “capitalist regime,” he referred not to the narrow economic domain or even to liberal ideology more broadly. For him, the capitalist regime denoted a new totalizing logic, a material-ideal system that dominates society and governs its historical trajectory. Individuals in this scheme, whether they are workers or capitalists, are secondary. Regardless of where they are situated in society, they all obey the same supreme subject: capital itself. The logic of capital affects everything. It dictates the nature of ownership, power and authority, it influences the technological process and it shapes human consciousness. It seems to me that this broad description of the rule of capital, a condition that Marx was the first to identify and describe, is more valid today than it ever was.

    Piotr Dutkiewicz:
    So is capitalism a constant, making evolution a frivolous concept?

    In the dynamic picture of European politico-social systems you have written about with Bichler, is capitalism the only “unchangeable element”?

    Jonathan Nitzan:
    What has changed, I think, and dramatically so, is the specific nature of capitalism. Marx’s science and the bourgeois political economy he criticized were creatures of their time. Both were informed by the apparent separation of the sweatshops, factories and “civil society” of merchants and industrialists on the one hand from the ancient statist-political regime on the other. Both were impressed by the atomistic nature of capitalism, its anarchic competition, the disciplinary role of technology and the apparent automaticity of the system’s cyclical gyrations and long-term tendencies. And both were marked by the scientific revolution from which they emerged: the demand and supply of the liberals reproduced Newton’s forces of attraction and repulsion, while Marx’s historical laws of motion paralleled the new cosmology of the heavenly bodies; their equilibrium and disequilibrium tendencies replicated Newton’s duality of inertia and force; and their analytical methods employed the new techniques of calculus, probability and statistics.

    However, by the late nineteenth and early twentieth centuries, the classical portrayal and analysis of capitalism no longer seemed valid. There were several reasons for this growing mismatch. First, the rise and expansion of large organizational units – from big business to big government to big unions – made it difficult to speak of an atomistic society, let alone of its automatic regulation. Second, there emerged a whole slew of new processes – from total war and the permanent war economy, through large-scale government policies, to the growth of a “labor aristocracy” and leisure time, corporate management, inflation and large-scale financial intermediation – that the classical political economists were completely unfamiliar with and that their old theoretical schemes could not accommodate. Third, with the rise of fascism and Nazism, the primacy of class and production was challenged by a new emphasis on masses, power, state, bureaucracy, elites and systems. And fourth, the objective/mechanical cosmology of the first political-scientific revolution was undermined by uncertainty, relativity and the entanglement of subject and object. Science, including the science of society, was increasingly challenged by anti-scientific vitalism and postism.

    These developments resulted in a deep rupture: while capitalism has become ever more universal, the unified theory that once explained it has disintegrated. Bourgeois political economy has been divided and subdivided. Instead of a single study of capitalism, we now have a multitude of distinct disciplines – economics, politics, sociology, psychology, anthropology, international relations, management, finance, culture, gender, communication and what not – all trying to barricade their own turf and protect their proprietary categories. The same has happened with classical Marxism: what once stood as a totalizing critique of capitalism has been fractured into a tripod of neo-Marxian economics, a neo-Marxian critique of culture and neo-Marxian theories of the state. And if this wasn’t bad enough, in between all the cracks emerged the rapidly multiplying anti-science dogmas of “post-modernity” that deny the possibility of a universal logic altogether.


    This massive increase in differential accumulation quantifies the growing power of U.S. dominant capital; the other side of this trend is the qualitative power processes that differential accumulation quantifies and distills into a single magnitude.

    Much of our work over the past three decades has been devoted to examining this quantitative-qualitative underpinning of power, in the United States and elsewhere.

    Piotr Dutkiewicz:
    Can you illustrate this type of analysis? How do its conclusions differ from those of conventional social science?

    Jonathan Nitzan:

    Let me take an example from the work Shimshon Bichler and I did on the global political economy of the Middle East.

    Figure 1 depicts the differential performance of the world’s six leading privately owned oil companies relative to the Fortune 500 benchmark. Each bar in the figure shows the extent to which the oil companies’ rate of return on equity exceeded or fell short of the Fortune 500 average.

    The gray bars show positive differential accumulation – i.e. the percent by which the oil companies exceeded the Fortune 500 average. The black bars show negative differential accumulation; that is, the percent by which the oil companies trailed the average. Finally, the explosion signs in the chart show the occurrences of “energy conflicts” – a term we use to denote regional energy-related wars.

    Figure 1
    The Petro-Core’s Differential Accumulation and Middle East “Energy Conflicts”

    petrocore differential accumulation.png

    * Return on equity is the ratio of net profit to owners’ equity. Differential return on equity is the difference between the return on equity of the Petro-Core and the Fortune 500, expressed as a per cent of the return on equity of the Fortune 500. For 1992-3, data for Fortune 500 companies are reported without SFAS 106 special charges.

    NOTE. The Petro-Core consists of British Petroleum (BP-Amoco since 1998), Chevron (with Texaco since 2001), Exxon (ExxonMobil since
    1999), Mobil (till 1998), Royal-Dutch/Shell and Texaco (till 2000). Company changes are due to merger. The Energy Conflicts include: the 1967 Arab-Israel war, the 1973 Arab-Israel war, the 1979 Iranian Revolution, the 1979 first Israeli invasion of Lebanon, the 1979 Soviet invasion of Afghanistan, the 1980 Iran-Iraq war, the 1982 second Israeli invasion of Lebanon, the 1990-1 first Gulf War, the 2000 second Palestinian Intifada, the 2001-2 U.S.invasion of Afghanistan and the launching of the “War on Terror” and the 2002-3 second Gulf War.

    Fortune; Standard & Poor’s Compustat

    Now, conventional economics has no interest in the differential profits of the oil companies, and it certainly has nothing to say about the relationship between these differential profits and regional wars. Differential profit is perhaps of some interest to financial analysts. Middle East wars, in contrast, are the business of international relations experts and security analysts. And since each of these phenomena belongs to a completely separate sphere of society, no one has ever considered linking them in the first place. And yet, as it turns out, these phenomena are not simply linked. In fact, they could be thought of as two sides of the very same process – namely, the global accumulation of capital as power.

    To get a sense of this process, consider the following relationships evident in the chart. First, every energy conflict was preceded by the large oil companies trailing the average. In other words, for an energy conflict to erupt, the oil companies first had to differentially decumulate– a most unusual prerequisite from the viewpoint of any social science.

    Second, every energy conflict was followed by the oil companies beating the average. In other words, war and conflict in the region – processes that social scientists customarily blame for “distorting” the aggregate economy – have served the differential interest of certain key firms at the expense of other key firms.

    Third and finally, with one exception, in 1996-7, the oil companies never managed to beat the average without there first being an energy conflict in the region. In other words, the differential performance of the oil companies depended not on production, but on the most extreme form of sabotage: war.


    Let me take for a moment the viewpoint of the capitalists. As they see it, the key barometer of success and failure is not the growth of production or the level of employment, but the movements of the stock market. The stock market capitalizes their expected future earnings – and by so doing distils and reduces their collective view on the future of capitalism down to a single number.

    Now, if we examine the history of the U.S. stock market, measured by the S&P 500 price index, we see that, over the past century or so, capitalists were besieged by four “major bear markets.” Each of these major bear markets was characterized by a massive drop in prices, ranging between 50% and 70% in “constant dollars.”

    Note, however, that these declines, although roughly similar in quantity, were very different in quality. Each of

    them signaled a major – and unique – creordering of capitalist power:

    1. The crisis of 1906-1920 (–70%) marked the closing of the American frontier, the shift from robber-baron capitalism to large-scale business enterprise and the beginning of synchronized finance.

    2. The crisis of 1929–1948 (–56%) signaled the end of “unregulated” capitalism and the emergence of large governments and the welfare-warfare state.

    3. The crisis of 1969–1981 (–55%) marked the closing of the Keynesian era, the resumption of worldwide capital flows and the onset of neoliberal globalization.

    4. And the current crisis – which, as I noted, began not in 2008, but in 2000, and is still ongoing (–50% from 2000 to 2009) – seems to mark yet another shift toward a different form of capitalist power, or perhaps a shift away from capitalist power altogether.


    In a capitalized world, the inability to capitalize is a mortal threat. So capitalists, desperate for something to hang on to, abandon their sanctified reliance on the expected future and latch onto the present. Numbed by systemic fear, they discount not the eternal long-term trend of profit, but its day-to-day variations. And that is exactly

    what we observe in the current crisis: since 2000, equity prices, instead of moving independently of current profits, have tracked those profits remarkably closely.

    This type of panic-driven breakdown is not unprecedented, though. It also happened in the 1930s. Much like today, capitalists in the 1930s were struck by systemic fear; and much like today, they abandoned the capitalization ritual. Moreover, and crucially, the reason for the breakdown was pretty much the same: in both periods, capitalist power had become so great that capitalists lost confidence that they could retain that power, let alone increase it.

    Last edited by c1ue; 07-13-13 at 12:28 PM.

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