Political Economy in One Lesson

R. Salisbury

Economics in One Lesson by Henry Hazlitt is the de facto standard textbook for right libertarians. It is quite an illuminating book, not because Hazlitt is an expert on the subject, makes good points, or writes well, but because you have probably heard every argument from it before from a white guy who runs a photography business, told you to learn economics and complained about the oppression of seatbelt laws. I would not recommend wasting your time or money reading it; I got a copy from the used book store to see what it was all about; what started with me calmly reading and writing counterpoints in the margins quickly progressed to me writing snarky insults, then yelling at the dead author and spilling beer all over it. Despite being garbage, the book is quite popular among the right. I think it is time something similar exist for the left: a primer for a modern understanding of political economy, going beyond Marx without being a thousand pages long.

Like Hazlitt, I will begin my primer on political economy by blaming the poor understanding of the subject on someone. I will also follow his format of laying out some common fallacies that people make. However, from there, I am going to depart from it, because he proceeded to base his entire book on "a hoodlum [who] heaves a brick through the window of a baker's shop," and I like to think that the subject deserves a bit more serious consideration than imagining a pretend situation that has little to do with the enormous scale and consequences of political economy.

Before going further, I should clarify: The title of the article is just a parody. You shouldn't presume to have a good understanding of political economy after just one lesson. This is just a high-level overview of some basic concepts with some supporting evidence. Concepts, including those in this article, are always subject to change or invalidation; we should always consider evidence more correct than concepts and be prepared to have our concepts falsified by contrary evidence. Therefore, if you know of any contrary evidence to the concepts in this article by the time you read it, I hereby declare myself (not the concepts) exempt from all criticism. If you accept these ironclad and legally-binding terms, read on.

Political economy, as it was known by its earliest authorities, until the political dimension was swept under the rug, is often complex and it is easy to commit fallacies. I will give a few examples:

The first and second of examples I will give represent the bulk of Hazlitt's arguments. The first is making implicit assumptions that are not true; e.g., "X may displace jobs, but it will also create an equal or greater number of jobs." No real argument is made as to why X would create an equal number of jobs, it is merely assumed to be true. You can hear this one in any conversation about technological unemployment, where robotic factories are compared to automobiles displacing buggywhips. Automation will displace jobs, but it will also create just as many jobs. Using the same example, the second fallacy is false equivocation. Even if we accept that automation will create more jobs than it displaces, anyone who has worked two or more jobs knows that "job" is not a unit of measure and two jobs are not necessarily equivalent. This fallacy shows up everywhere, even in more scholarly economics, where it is assumed that goods can just be freely substituted for one another, or that two companies are competing over market share for exactly identical products.

The third fallacy is ceterus paribus sophistry—if you have never heard the term, ceterus paribus is "all else being equal." The fallacy is when someone (who is usually explaining why capitalists need to screw workers) holds some value in an equation fixed as if it could or should not change. The example here, as I just implied, is "paying workers more, ceterus paribus, will lead to higher prices for consumers." The fallacy is assuming that no other factors could or should change. The fixed value here is profit; as you have probably realized, saying that higher pay leads to higher prices assumes higher pay has to come out of consumers' pockets rather than highly-paid upper management's pockets.

There are some fallacies more common with neoclassicals; neoclassical economics is what you have probably learned if you ever took an economics class or listened to a boring old man from Praeger U drone on about capitalism on Youtube. Neoclassical economics can be best characterized by its Newtonian view of the economy. They consider the economy a machine, so much so that they use mechanical terms to refer to it, like "equilibrium" and "elasticity", and describe various "laws" of economics. The first fallacy here is economic determinism—the belief that if X happens, then Y will definitely happen. Economies are social systems, composed of humans and human organizations, so taking it as a given that something will definitely happen is an easy way to look like a fool. The example for this is "an increase in demand will lead to an increase in price." This might be true, but it could also just lead to an increase in sales, or no change at all. People are not infallible, they are not perfectly rational, and they are not perfectly informed, so there cannot be any real laws of economics because they could easily be violated.

The second fallacy for neoclassicals is more of a category, which is fallacies of aggregation, yet so major it undermines that basic neoclassical understanding of how prices work. However, in classical neoclassical fashion, the neoclassicals have basically ignored this fallacy and proceeded to act as if nothing was wrong 1. The most major of this category is the idea that you can take a rule that applies to a very specific, limited circumstance, and just act as if it behaves the same way in aggregate. Neoclassicals created a mechanical model of prices, what we all know (and definitely love) as the supply and demand model, which assumes a single person and a single commodity, and they simply assume that things work the same way in aggregate. Less egregious, but probably more common, is examining the effect of a policy only in aggregate, and assuming that because nothing changed in aggregate, nothing changed at all. This is similar and tied to "in the long run"-ing problems away. Hazlitt repeatedly creates these fallacies, for example, by saying that labor-saving technology doesn't lead to "net" unemployment. He throws a cloth over those who suffer from unemployment in the short-term/individual level; that doesn't show up in aggregate, long-run statistics, so it doesn't matter.

Finally, for neoclassical fallacies, there is almost certainly the single most common economic fallacy, which is simply treating any arbitrary thing as if it is governed by supply and demand. This requires two assumptions to be true: the seller is pricing their good according to supply and demand (or has no control of the price), and the good is equivalent to similar goods. This is also popularly used to argue against improvements for workers: "If we raise the price of labor, then the demand for labor will fall, so you'll create unemployment." Everyone has heard this before. Another very popular use of this fallacy is describing the effects of introducing more money into the economy, otherwise known as quantity theory of money. The argument here is that printing more money lowers the "value" of money; this makes no sense, however, because as I will discuss later, money is the unit that's supposed to measure value. Adding more dollars into the economy doesn't change the value of a dollar just as adding more rulers into the economy doesn't change the length of a foot.

What is Money?

The most important part of any economy is money. Without understanding money, there is no understanding the economy. The most basic understanding of any science would start with its most basic elements; if you want to understand physics, you should start with mass, velocity, and acceleration. If neoclassicals taught physics, they would skip over all that and start talking about the laws of motion. If they taught biology, they would skip over molecular and cellular biology and start talking about meiosis and respiration. Rather than starting with the "law" of supply and demand or the lamest story ever about window-smashing, we need to start with money.

What is money? it is a rather more complex topic than we might think, and Debt by David Graeber covers a lot of ground on it (it looks long but it is an easy read). Money in the context of this lesson is a few things:

  1. A unit of measure. The thing it measures is not "value", but cost. The cost that it measures is related to its second function.
  2. A tool to mobilize (or demobilize) people. If people are compelled in some way to get money, then people can compel others to perform tasks for them for money.

While many believe that money measures "cost" as in value, or as in resources, or as in labor, the cost is more like mobilization potential. Another way to think of it is measuring a specific form of political power. We have a common cliché, "money is power," but it is not just metaphorically true, it is literally true. States create money to exert power beyond their direct reach; in Debt, Graeber points out the difficulty for a state to set up logistics for a standing army. You would need many loyal people with a wide variety of skills in a large territory to organize provisions for the soldiers. However, should you give the soldiers money, demand taxes from people, and tell the soldiers to pay people the money to get provisions from them, the people will have to do the work and organization needed to get their tax money from the soldiers, by doing work for them. Historically, states were most often formed out of cities, which issued currencies in order to mobilize soldiers, bureaucrats, and other members. In order to ensure that the members of the state were adequately provisioned, taxes were levied on populations within their political control. This decentralized the process of provisioning to interactions between state members and those within the political influence of the state.

Today, things are not as simple. Whereas in the past, the same governing body made laws and issued currency, today the two functions are increasingly separate. Starting with the first central bank, the Bank of Amsterdam, the power to issue currency has gradually migrated to banks. In the U.S., we have the Federal Reserve, which is a semi-independent body created through federal legislation. As a result, money is created as debt on top of being subject to taxation. There is also so-called "endogenous money", private money created by banks through lending. Contrary to the conventional wisdom of fractional reserve banking or money multipliers, in reality banks do not loan deposits; they simply create an entry in a balance sheet representing a liability to the borrower. The reason banks maintain fractional reserve levels is not because they systemically have to, but because they legally have to. Banks today have a similar power to the states of long ago; they are able to mobilize people and organizations through lending. The primary difference between lending & repayment and issuing & taxation is that the borrower both receives the money (or it is paid on their behalf) and pays it back, whereas currency given to a government employee is given back to the issuer by a different person, who receieved it from a government employee.

The currency creators, both the government and the banks, have no actual need to collect revenue to balance their spending. The government because it has the sole legal authority to print U.S. dollars (USD), and the banks because their "spending" is just a promise to pay entered into a balance sheet. Both have politically-imposed limits on their spending. Governments pay interest on their spending to the central bank and have political factions fighting over its distribution, and banks collect enough revenue to maintain a legally-mandated reserve rate.

A currency issued by the government that uses it is a sovereign currency. By using a sovereign currency, the government has significant power to carry out large-scale organization. A government without a sovereign currency is subject to the political economic demands of foreign powers: it needs to trade in order to obtain the currency it uses. For the sovereign, this means its ability to mobilize people extends beyond its official political borders; the U.S.'s influence therefore extends far beyond the 50 states. On the converse, many poor countries such as Ecuador and Zimbabwe (which actually officially uses eight currencies) trade in the USD, and so must trade with the U.S. in order to obtain enough dollars for their own use. Currency sovereignty is not absolute—many countries have trade that occurs in USD despite having a national currency, such as Venezuela. The degree to which a currency is sovereign is based on the balance of power between the government and the polity and between the government and other economies that interact with it.

If we want national social programs as part of a pragmatic liberatory strategy, we should try to increase currency sovereignty, so the funding of those programs doesn't depend on collecting enough revenue. In other words, the people that say "End the Fed" are right, but for silly reasons, such as thinking gold is magic and no other money in history has been fiat. The real reason we should end the Fed is because it reduces capitalist control of the social fabric. An example of how this could be done is H.R. 2990, introduced by representatives Conyers and Kucinich:

Instructs the Secretary of the Treasury to originate United States Money to address any negative fund balances resulting from a shortfall in available government receipts to fund government appropriations.

Subjects to criminal and civil penalties any person who creates or originates United States Money by lending against deposits through "fractional reserve banking."

This bill, in other words, would not only transfer the ability to create U.S. dollars from the Federal Reserve back to the Treasury, it would also attempt to take away the banks' ability to create endogenous money and force them to collect revenues in order to make loans. This would represent a major political power shift away from capitalism towards a political organization that is at least somewhat controlled by the public. Banks, as a business, should be required to have money in order to spend it (or just not exist). The government is not a business. There is no reason for it to need a revenue surplus or even a balanced budget. It is the acceptance of the money by workers and organizations that matter from the perspective of the issuer of the currency. We accept our local currency because we have to pay taxes with it, we have to buy stuff with it, and we can get drugs and toys with it. There is no danger to the government for spending more than it earns, because it runs the printing press.

On the state or local level, there will almost certainly not be a local sovereign currency, so the government actually will depend on raising revenue through taxes.

How should we analyze money?

Money is a unit of measure. That means it doesn't become more or less "valuable"; in other words, the idea that inflation is the supply and demand-based "value" of money is nonsense. $1 is $1. The "value", as in usefulness of money to us, is affected by inflation, but inflation is not the existence of too many dollars, it is the increase of prices in general over time. It does measure demand, as in how much money capitalists demand from you for food and shelter and clothing. Treating inflation as if it is caused by too many dollars is one of many examples of pro-capitalists (pro-caps) inverting reality in order to shift the blame for the problems of capitalism away from capitalists. Printing money does not cause inflation—not increasing the money supply slowly, not increasing the money supply rapidly3. Capitalists do not care what the money supply is, their only real concern is beating other capitalists at accumulating revenue.

This also means that deflation is when prices are falling over time, when businesses and sellers are losing power to workers and buyers. Conventional economists consider the "deflationary spiral" to be apocalyptic for an economy. With that level of fear from capitalists, I can only imagine that it would actually be great for regular people, as long as we respond to the failure of businesses with the spirit of the anarchist entrepreneur, the squatter. Plus, old people are always complaining about how the price of things goes up, so a deflationary spiral would get them to be less crotchety.

The most important implication of inflation being price change is that it is a redistribution of wealth upward to capitalists. The capitalist charges you more money while giving you the same thing. Again, pro-caps invert reality here and claim that inflation is a redistribution of wealth from the rich to the poor4. They will also claim that it is good for borrowers, because it "reduces the value of the money paid back". Again, this is nonsense. The only thing that makes debt less burdensome is growth in your buying power. If you earn more, a smaller proportion of your income is going toward your debts. If prices deflate, then you're spending less overall, so your debt is less burdensome to your income. It doesn't matter to you how much stuff the capitalist can buy with the money you're giving to him. If your wages don't keep pace with inflation (subinflationary), you're losing buying power and your debts become more burdensome. Again, not because your dollars are "less valuable", but because capitalists are charging you more.

Money comes from somewhere. It does not just materialize out of the ether into the economy, someone gets it from a money issuer. Every dollar has to be given to someone on some condition. We can improve our understanding of the power of the public vs. the capitalists by looking at how much of the money being spent by the government goes to capitalist businesses vs. how much goes to social programs. We can also add on top of the former the amount of endogenous money, which represents a claim on someone's income by the bank. It can be difficult to do this well: There are lots of ways that an increase in spending on social programs can actually represent more money going to capitalists, such as increased healthcare spending as a result of the price of healthcare increasing, or on mandatory programs, which are funded by the people who later use them (e.g. social security). Money spent on government employees, rather than businesses, means there is more going to individuals and less going to executives and investors.

What we call the neoliberal period would be characterized by subinflationary income growth, a reduction in discretionary spending on social programs, and the co-optation of discretionary social programs by capitalists, such as SNAP, to offer less to their workers without causing major social unrest.

There are better and worse ways the government can spend the money it creates. The largest government employer in the U.S. is the Department of Defense, with 1.3 million employees, or 0.4% of the U.S. population. Its primary legacy has been creating a Hell on Earth in dozens of countries from its inception to today, creating al-Qaeda and ISIS, causing birth defects with depleted uranium munitions, being the largest single consumer of energy on the planet, and employing millions of lanyards whose political ideations could be in the 2050 edition of The Banality of Evil. To contrast, at its peak, the Works Progress Administration (WPA) employed 2.5% of the population. Its legacy includes LaGuardia Airport, Griffith Observatory (image search it), Louisville Fire Department Headquarters, New Orleans Public Library, Schenley Park, McCoy Stadium, and Jenkins Culvert. My favorite part about the WPA is that some of its major criticisms were having far-left elements playing a major role, being a "hotbed of communists", and having lazy workers with poor work habits. If we are going to have a government and it is going to employ millions of people, it's clearly better to build airports, bridges, fire stations, theaters, schools, libraries, and parks, than guns, bombs, missiles, tanks, jets, drones, and security theater.

A major misconception by pro-caps when analyzing money is that rich people are better with money, and we want them to have more of it so they can create jobs or something. In reality, poor people are far better at using money than rich people. Poor people spend almost all of the money they get. They spend it entirely on things they need or want to use. Rich people spend their money on dumb shit like yachts with submarines, car collections, mansions that require full-time staff, gold toilets, etc. They also use money to acquire political power and fuck everyone else to enrich themselves. Finally, they stash it away in secret hiding places like fucking raccoons. Giving money to a poor person is, objectively, a better way to spend it, because they will use it for things that they need, and it will be put right back into circulation, instead of being used to buy a million dollar pen or a politician.

It's important to remember that money does not go away once it is spent. Hazlitt frequently uses this trick, where he acknowledges this only until the money goes somewhere that proves some point he's trying to make. For example, when the government does X, it is just taking money from A and giving it to B. This is not untrue, but neither is it a good argument against doing X. Especially when A is the rich and B is the poor, X is an excellent idea.

Another important concept when analyzing money is that it is a flow of power. This fact is clearer the larger the amount of money becomes. Once you're in the tens of millions magnitude, you are talking about investment, the nature of which is quite clearly political, and the etymology of which comes from "to clothe in the official robes of an office." 56 In our current political economic reality, power flows mostly to the top. The most powerful people spend money on mobilizing the less powerful, but only on the expectation that more power will flow back to them. A capitalist who employs you expects that paying you $10 an hour will earn him $100 an hour. He is using his power to mobilize you, a worker that needs money, to bring customers, who need access to goods, to give him more than he gave to you. The flow can also be compelled in more forceful ways, such as a company towing your car and demanding you pay to get it back, or a government charging you and pushing you into prison labor because you had some crack.

Money flows can also represent a shift of a different sort of power than simply liquid money's ability to mobilize workers. As an example, a study used land purchase databases to analyze the global flow of control over land. Unsurprisingly, the wealthy Global North does the majority of acquiring land, while the poor Global South does the majority of exporting. This is interesting, for one, because no power flows follow the same pattern on many levels of organization within capitalism. Two, it represents an invisible conquest of land on a global scale. Again, it is not quite the same as pre-capitalist history, where control over land meant political and industrial control; land in other countries acquired through trade is subject to the political control of the host country (to the degree the country has it, at least) but control of the revenue collected from any industrial use of the land goes to the country that owns it.

The flow of money as power can illuminate realities that we usually ignore because of our preconceived theories of capitalism. An important example is that where Marxist theory says that capitalist power is based on ownership of the means of production, the reality is that the real power is rooted in control over the mobilization & intent of society. David Ellerman's conception of firmhood explains this further7:

Corporations are owned; that is no myth. But corporate [means of production] can be hired out just as labor and other factors can be hired in, so the corporation is not necessarily the firm (i.e., the party undertaking production) even with respect to its own plant and equipment. It is the pattern of those hiring contracts that determines who is the firm.


A major oil company might own the facilities of a gas station but not operate the station as a business. The gas station facilities would be leased to an individual who would run the station as an independent operator. In other cases, an oil corporation might operate the station by hiring in the people to run it. Following the Mideastern oil crisis of a few years back, gas prices escalated and the profit potential of gas station operation increased. Some major oil companies which had previously leased out their stations decided to reverse the contracts and hire in the labor. The independent operators were notified that their leases would not be renewed when they expired. However, the oil company would be happy to hire them as employees to continue running the gas stations.

On a global scale, we could say that China dominates ownership of the means of production; it has an enormous industrial sector and therefore the means to produce. However, despite owning the means of production, they are often not the ones who decide what to do with it. The power to hire, and the power to shape the social fabric, those are the real forms of capitalist power. It makes little difference who actually owns the means of production if it requires investment (permission from the upper class, essentially) to use them anyway. Some small company could run a factory but not actually have the liberty to use it in any way they wish; they may be constrained by rents and financial realities that require them to hire it out as much as possible. It isn't ownership or control of the means of production that offers the most power, it is control over the money (capital) that has to flow through human hands in order to perform any social activity. Less abstractly, capital is control of human organization.

What is a Price, and How is it Formed?

A price is a value (as in an assigned quantity) measured in the money of account. It functions as an interface between a payer, a payee, and an object. The object is the thing that is priced, which can be a good or service, but also permission to do something, or the withholding of force by the payee. In other words, prices aren't simply limited to goods, they also include fines, bribes, taxes, and so on. Whereas conventional economics restricts a price to payment for goods and services, a more general understanding of political economy broadens the definition of a price to be any nominal amount of money in the payer-payee-object relationship.

Prices are formed with many possible logics; no "theory of value" can explain how all prices are formed. The first strike against a theory of value explaining a price is that there's no reason to believe prices represent value at all. Most obviously, we could consider the popular example to explain the "paradox" of value, diamonds and water. The paradox is that diamonds, something largely useless, command a higher price than water, something infinitely useful and critical to survival. Rather than taking this as evidence that a price doesn't measure value, many economists trouble themselves with explaining how prices actually do represent value and we just need to figure out how, exactly. While prices are influenced by value, they are much more strongly influenced by power. Consistent, continual inflation in nearly every capitalist economy also contradicts the idea that prices are value. Everything is not becoming more valuable, and pay for most is lagging behind. The only thing that explains this, is that price is fundamentally about power.

We typically think of all prices as market prices. In other words, we think of supply and demand above all else governing the market. An influential empirical study conducted by Gardiner Means and Adolf Berle in the 1930s on corporations found that not all prices were market prices. In subsequent studies, no more than 60% of prices (usually more like 25-30%) were found to obey market price rules. The majority of prices are "administered prices", also known as "mark-up" or "cost-added" prices. The price does not depend on supply or demand, it depends on the cost of the item, plus some markup. Corporations hold prices steady, varying the production of the product, rather than the price of the product.

Then, of course, there are less-formal prices, such as prices set in peer-to-peer sales, like on Craig's List; this is based more on precedent, estimation, and desperation. If you're going to sell something on Craig's List, you try to figure out what other people might be selling it for, so you don't screw yourself or fail to sell it. Your thing will probably be different, which will require estimating a difference from the precedent, or to estimate a price from scratch if no one else is selling the same thing. If you really need money, and someone offers to buy it for less than what you're asking, you may let it go for that amount just to get the money in time, if you don't have other options. The reason I choose this example is not because it is especially relevant to political economy, but to highlight the power relationship in the process of setting a price. Your desperation and the number of alternatives you have are both factors in the balance of power between you and the buyer. Between this example and the price a corporation charges you for a product, the only real difference is the balance of power.

The balance of power determines the extent to which the payer's logic or the payee's logic determines the price. When you're buying a bike on Craig's List, you often have near equal bargaining power to the seller. You can haggle the price with them. The reason you can't haggle the price of your phone is because corporations wield vastly more bargaining power than a person on Craig's List. In fact, there are two immensely different price "clusters" depending on the terms of the sale: You can buy the phone as part of a contractual agreement for around $0-200, or buy the phone unlocked for closer to $700-1000. The logic behind the high price is simply cost plus margin. The logic behind the lower price is it gives them a guaranteed, risk-free revenue stream much greater than the $600-800 discount they give you on the phone. In both cases, the only power you have in the negotiation is which of the two choices you will take, if any.

Now, what determines the cost of a good or service? There are two main subcosts: materials and labor. The cost of materials is based on the cost of any materials that went into the resulting material, as well as labor. Hypothetically, this relationship would continue until we hit some base cases with just labor. Really, though, today we don't do anything without some material cost, so there are circular relationships. What this means is that the labor theory of value is, in part, correct. Prices are essentially based on labor. However, they also contain markup, and that's where other factors come in. Subjective theory of value is also, in part, correct, since corporations can charge more if the perceived value of a product is pushed higher.

Prices not for goods also obey this relationship. The government, wielding the power of legitimized physical force as well as legal force, has the power to put a price on avoiding retribution for being caught violating a rule. If you are an ordinary prole, you rarely have the power to do anything but give them what they want. However, if you're a capitalist, you may have the ability to hire a legal team to go to court and change either the perception that you broke a rule, or the price you have to pay to avoid an escalation of force. Capitalists can also decide that the price they would have to pay for getting caught breaking a rule is less than the increase in revenue they would get out of breaking the rule.

What is Capital?

Capital is commonly thought of as a "means of production" (MoP). This comes from the contemporary Marxist understanding of capitalism as "a socio-economic system based especially on private ownership of the means of production and the exploitation of the labor force."8 The neoclassical definition of capital is quite similar to "means of production":

In the business world the word capital usually refers to an item in the balance sheet representing that part of the net worth of an enterprise that has not been produced through the operations of the enterprise. In economics the word capital is generally confined to “real” as opposed to merely “financial” assets. Different as the two concepts may seem, they are not unrelated. If all balance sheets were consolidated in a closed economic system, all debts would be cancelled out because every debt is an asset in one balance sheet and a liability in another. What is left in the consolidated balance sheet, therefore, is a value of all the real assets of a society on one side and its total net worth on the other. This is the economist's concept of capital.

While this makes sense as a glib statement about "real" value as opposed to "nominal" value, in the business world, capitalists care far more about that balance sheet than they do about their "real" assets. It is the balance sheet, not the real stuff, that the success of the business is judged on.

Capital goes far beyond "means of production," and again I will use Chinese manufacturing as an example: China has a larger share of the world's "means of production" than the United States9, but still its economy is considered less-developed, its economic power subordinate to the United States. If we were to accept conventional conceptions of capital, then China would have the most capital by far, and thus should be the dominant economic power. Why are they not? Because it is not ownership of the means of production that determines economic power, nor is capital means of production. As previously mentioned, it is the flow of social control that determines economic power, and that defines capital. Capital is fundamentally financial, and finance is what controls the process of shaping the social fabric. It's not that means of production cannot be capital—they often are—but means of production is only capital when it is represented by a capital asset.
Bichler and Nitzan's excellent work on capital explains it well:

The modern corporate owner does not view capital as comprising tangible and intangible artefacts such as machines, structures, raw materials, knowledge and goodwill. Instead, he or she is habituated to think of capital as equivalent to the corporation's equity and debt. The universal creed of capitalism defines the magnitude of this equity and debt as capitalization: it is equal to the corporation's expected future profit and interest payments, adjusted for risk and discounted to their present value.
[The] elements of corporate capitalization – namely the [corporation]'s expected earnings and their associated risk perceptions – represent neither the productivity of the owned artefacts nor the abstract labour socially necessary to produce them, but the power of a corporation's owners. In the capitalist order, it is power that makes the owned artefacts valuable to begin with. Moreover, the power to generate earnings and limit risk goes far beyond the narrow spheres of 'production' and 'markets' to include the entire state structure of corporations and governments.

Not only are means of production capitalized, businesses themselves are. A publicly-traded corporation has a present value, an expectation of future earnings, a certain amount of risk, and it can be bought or sold, both in part (by buying/selling shares) and as a whole (through mergers and acquisitions). A business isn't really a "means of production"; in order to produce a microprocessor, you need a chip fab, but you don't need a multinational tech company. Fab 32 is a "means of production", Intel is not. We could expand the scope of the definition of "means of production" to include businesses in order to preserve the "capital is means of production" concept, but this makes the term "means of production" less meaningful and the definition circular: capital is means of production, and means of production is whatever capital is.

Capitalist businesses grow their revenue, and thus increase the value of their capital in four ways defined by Bichler and Nitzan:

  1. "Green field growth": creating new revenue streams by creating new products, services, markets, or increasing sales of current output.
  2. Reducing costs: making existing revenue streams more efficient, by cutting costs.
  3. Increasing "depth": making existing revenue streams larger, by inflating prices.
  4. Increasing "breadth": acquiring or integrating others' revenue streams through mergers and acquisitions (M&A).

Ordinarily, we think of green-field growth and cost-cutting as the primary means for capitalists to increase their profits. However, these are actually less effective than inflation or M&A at increasing revenue. Cost-cutting is highly-competitive and generally depends on technological or social changes that make lower costs possible, which are commonly adopted by all capitalists. Green field growth is difficult and risky. Better than both of these methods is charging more for what you're already selling, which cumulatively causes what economists call "inflation". The best method by far is acquiring an existing business, with its organization and revenue streams intact. Some of the world's largest corporations are conglomerates formed through extensive M&A, such as Berkshire Hathaway, Dow, or Comcast. The most successful capitalists use both inflation and M&A to differentially accumulate (that is, accumulate faster than other capitalists, as opposed to "maximizing" profit, which is impossible in practice) the most. In fact, as capitalism has progressed, inflation and M&A have developed into countercyclical trends.

Money is a tool of power, and capitalization is the most effective means of accumulating monetary power. Prior to the advent of capitalization, the only understanding of increasing monetary power was mercantilism: Maximizing exports of finished goods and accumulating stocks of money on the national level at the expense of foreign nations. Mercantilism looked only at present value. Capitalism looks at future value; by trying to look ahead at what the value will be later, capitalists can acquire assets and earn revenue from their appreciation. Bichler and Nitzan believe the earliest capitalists were German woodcutters, who valued woodlots based on the amount of wood that would be there, rather than the amount of wood that was presently there. By doing so, they could purchase land at a discounted value, the lower value that it presently had without wood, then profit from the wood that later grew there. Mercantilists view political economy as a collection of stocks and the acquisition of monetary power as a zero-sum outcome in the present; capitalists view political economy as a shifting collection of flows and the acquisition of monetary power as a differential process that extends into the future.

There are several reasons why capitalization is the most effective means of accumulating monetary power. First, due to the growth of money and inflation, securing a dominant position means accumulating revenue faster than your competitors. If you fail to look into the future for the value of what you acquire, you could overspend and your assets could underperform. Second, capitalization makes sense out of different ways to accumulate revenue. When both risk and future value is considered, it becomes apparent that trying to establish new revenue streams is risky, while acquiring or increasing extraction from existing ones is relatively safe. Third, capitalization allows for the creation of complex financial instruments, some of which (credit default swaps) famously crashed the global economy in 2008-09.


To restate the major important points covered thus far:

  1. Money is actual power. It grants the ability to mobilize workers to arbitrary ends.
  2. Firmhood is a social role, in which the firm mobilizes industry toward its own ends.
  3. Prices are the outcome of a power process between buyers and sellers.
  4. Capital is not the means of production, but financial management of the continuous process of reshaping the social order.
Each of these are topics in their own right that could be written about extensively. Post-Scarcity Anarchism Vol. 3 had an article giving a slightly more comprehensive overview of capital as power. I highly recommend reading Capital as Power, the Bichler and Nitzan book. Neighbor Science episode 3 goes more in depth on prices. Ellerman's essays describe firmhood more thoroughly. Debt by David Graeber and modern monetary theory go further into money.

Considering these points together, it is apparent that the Marxist narrative of capitalism is lacking in its descriptive power. Domination by capitalists goes far beyond the employee-employer relationship and ownership of the means of production. Capitalists in control of firms exercise control of hierarchies, both within their own corporate dominion and through control of hierarchies of other organizations. Capital, or finance, is the organizing logic of these hierarchies, and prices are the way power balances are quantified. Hopefully with these concepts, you will be able to make more sense out of the increasingly complex and tumultuous world we live in.