The magnitude of capital

Begin with the monetary magnitude of capital. This magnitude is readily observable. We know how much it costs to buy existing capital on the stock and bond markets, just as we know how much it costs to set up a new company, or to put in place new plant and equipment.

But what determines these monetary magnitudes? What are the forces that lie beneath the earthly appearance of capital? Why is Microsoft worth $300 billion and not half that much? Why does Toyota pay $2 billion rather than $4 billion for a new car factory? Why do these magnitudes tend to grow over time? What sets their pace of growth?

Economists – both liberal and radical – claim to have answered these questions. Capital, most would say, is an economic category anchored in material reality. In the final analysis, the monetary value of capital derives from and reflects the underlying processes of consumption and production.

The Mainstream view

Mainstream neoclassical economists view this determination from the output side. Capital for them is made of tangible capital goods (and now also of intangible knowledge or technology). The magnitude of capital in money terms is proportionate to its productivity – namely, to its ability to produce goods and services that satisfy human wants and generate happiness. This transmutation is meaningful because both capital and its productivity are counted in the same universal unit, the elementary particle of economics: the ‘util’.

The Marxist view

Marxists see things rather differently. Capital for them is not a material substance per se, but a social relation embedded in productive, material entities. In order to understand capital, they argue, we have to look behind the hedonic veneer of liberal ideology and examine the industrial essence of the system. From this viewpoint, the key issue is not the utility that the capital produces, but the social process by which capital itself gets produced. Consequently, the proper way to approach capital is not from the output side, as per the neoclassicists, but from the input side – the side of labour.

Marxists, too, count capital in universal units: the units of ‘abstract labour’. This is the elementary particle of Marx’s cosmology. Quantitatively, the dollar value of capital in the Marxist scheme is proportionate to its cost of production, and, specifically, to the amount of abstract labour socially necessary to produce that capital [4].

The failure of Neoclassists and marxists

Unfortunately, both explanations fail. In the end, neither the neoclassicists nor the Marxists are able to answer the question of what determines the magnitude of capital and its rate of accumulation.

Many reasons conspire to produce this failure, but the most important one concerns the basic units of analysis. As we shall see, utils and abstract labour are deeply problematic categories. They cannot be observed directly with our senses, and they cannot be examined indirectly through intermediation. Their ‘quantity’ cannot be calculated, even theoretically. In fact, they are not even logically consistent entities. These shortcomings are very serious, and the last one potentially detrimental.

The economic particles and the scientific method

It is of course true – positivism notwithstanding – that a scientific theory does not require all of its elementary particles to be observable, whether directly or indirectly. To mention the obvious, atoms were deemed unobservable till the early twentieth century, many subatomic particles are still elusive, and entities such as strings will perhaps stay so forever (or at least for a while longer). Yet the ‘invisibility’ of these elementary particles has hardly diminished the scientific footing of modern physics [5].

Indeed, one may argue that, since Galileo, the strength of science lies precisely in its ability to explain observed magnitudes by unobserved ones [6].

The situation is quite different with neoclassical utils and Marxist abstract labour. These units are unlike atoms, electrons, or strings. The latter may be unobservable to us, but that shortcoming – at least in principle – could be attributed to our own limitations. Theoretically, atoms, electrons and strings are logically consistent entities with a definite set of quantities, whether deterministic or probabilistic. By contrast, utils and abstract labour are invisible not because of our own shortcomings, but because they do not – and cannot – posses a definite magnitude in the first place. They have pseudo-quanta. Even if we could somehow ‘see’ them, there would be nothing to measure. And ‘quanta’ that cannot be measured – no matter how important they might be otherwise – cannot form the basis for quantitative analysis.

The consequence is that neoclassical economics and Marxist political economy lack a basic unit. And without a basic unit, we remain right where we started. We know the price of capital in dollars and cents, but not how many utils or hours of abstract labour this value supposedly represents.

We know that capital accumulates, but not why it accumulates or what this accumulation means.