We live in a capitalist society, but what is capital and how does it work? How can we understand its effects in remodelling and transforming society? I’m currently reading David Harvey’s The Enigma of Capital, which aims to answer these questions.
Prof Harvey defines capital as follows:
Capital is not a thing but a process in which money is perpetually sent in search of more money.
The aim of his book is to improve our understanding of this process of capital flow, “the lifeblood that flows through the body politic of those societies we call capitalist”. To put it another way, it’s a “capital’s eye view” of economic processes, showing how many social and political phenomena can be understood from the perspective of capital flow and accumulation.
Two key points which Harvey reiterates throughout his book are:
- Capital creates a problem of capital surplus absorption: in other words, capital is accumulated that needs somewhere to go, something to do with it, somewhere to reinvest it.
- A healthy capitalist economy requires endless capital accumulation at a compound rate of three per cent. Why? A number of reasons, but partly because a capitalist whose enterprise ceases to grow is unlikely to remain a capitalist: they will be overtaken and eventually driven out of business (or bought out) by their competitors. A pension fund whose assets fail to grow will go out of business. Similarly a capitalist country that ceases to grow will be left behind and ultimately exploited by its competitors.
These imperatives of capital surplus absorption and compound growth at a rate of three per cent are what drive both the creativity and destructiveness of capitalism, its relentless expansion into new areas of life and human activity. Capitalism requires continuous compound growth at 3 per cent in order to survive (like the proverbial shark that cannot stop swimming), and builds up surpluses that require reinvestment. Together these factors operate to turn what were previously absolute limits for capital into barriers that must be, and soon enough are, overcome.
This then explains many of the economic and political developments of the last few decades, as capital finds new areas in which to expand: through investment in what were previously state-operated areas of activity (privatisation of state enterprises, PFI projects), through the expansion of financial markets, through deregulation, and perhaps most significantly through the transformation of economies such as China’s.
What I’m finding illuminating about Prof Harvey’s thesis is this. We tend to see capital’s role as one of responding to other needs or desires: a family need a mortgage to buy a home, an entrepreneur needs venture capital for her start-up company, a government wants to build a new hospital without raising the money in advance through taxation, and so on. The role of capital is then perfectly symbolised by the “Dragons” in Dragon’s Den: intimidating, critical but ultimately benevolent, at least to those of their supplicants who show they have “the right stuff”.
Prof Harvey turns this on its head, however: it is capital whose needs are primary. Capital needs somewhere to flow, in order to use up surpluses and maintain compound growth.
This then helps us understand the pressures to open up new areas to private investment and commercial activity. As has been pointed out, while many of the new government’s “reforms” – such as to education and the NHS – may keep services nominally in the public sector, “free at the point of use” and so on, in practice the newly “freed” schools and GPs will find themselves dependent on private-sector providers to provide services previously carried out by local education authorities and primary care trusts.
Other actions are more nakedly a transfer to private capital, for example the abolition of the Audit Commission, whose auditing functions are likely to end up being carried out (at higher cost) by accountancy firms.
This “capital’s eye view” also helps provide a different perspective on many areas of deregulation, particularly in the professions. I’ll come to this in my next post.