Money in search of money: a “capital eye’s view”

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.

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17 thoughts on “Money in search of money: a “capital eye’s view””

  1. Ah, so you’ve come round to the view that the paradox of thrift is an illusion after all. There’s hope for everyone, I see. 😉

    A healthy capitalist economy requires endless capital accumulation at a compound rate of three per cent.

    ‘Why?’ is one question, but here is another: why three percent?

    Good luck escaping capital. As Joan Robinson quipped, in a Wildean fashion, the only thing worse than being exploited by capitalism was not being exploited by capitalism.

    1. IIRC, Harvey bases that figure on a consensus from economists and financial journalists, and probably also on trend rates of growth over the long term.

      To some extent it’s a figure plucked from the air as a way of summarising how capitalism needs steady growthy over the long term, neither unduly sluggish nor excessively fast.

      “Good luck escaping capital.”

      Indeed. I almost began my post “We live (and will almost certainly die) in a capitalist society…”. But it’s an advance if we can establish that capitalism is something which is inexorable and inescapable, as opposed to “natural”.

  2. Well, that depends what you mean by the distinction between ‘natural’ and ‘inexorable and inescapable’ (and also by ‘capitalism’). Capital formation is both inescapable and natural: if you produce more than you consume directly, then capital accumulates. As capital accumulates, living standards advance; if it doesn’t, then living standards stagnate or even decline.

  3. Except he’s completely, utterly wrong. Capital isn’t money, and money isn’t capital. Barter-based societies with no money have capital. Even hunter-gatherers have a little bit of capital. “Capital” is a particular kind of economic good. There are, broadly speaking, three kinds of economic goods:

    1. Consumer goods. I think we know what a consumer good is.

    2. Capital goods. Capital goods are things that are used to produce consumer goods, ranging from physical capital like factories, to more abstract notions of capital like education.

    3. Monetary goods. Monetary goods are goods that are used as media of exchange. They include, of course, all fiat currencies. In addition, bank notes and gold are monetary goods. In the Great Depression, whiskey was often used as money in rural areas here in the States.

    If you don’t know what capital is, you can’t very well comment on capitalism, can you?

    1. Also, none of those three things “needs” anything. People have needs. The reason money keeps getting directed toward reorganizing or producing new capital (i.e., why investing in new capital continues to have returns) is that the needs and desires of people are constantly changing. If desire and need became completely static, things like venture capital would completely dry up.

    2. Not for the first time, I think we are talking in different “registers”. “Money sent perpetually in search of other money” is a colloquial and non-technical way of expressing what you express more correctly as “capital goods are things that are used to produce consumer goods”. If you try and explain that term to a layperson (like me!) then sooner or later you’re probably going to end up gritting your teeth and saying something along the lines of, “Basically it’s using money to make more money”.

      What Harvey’s definition captures is the dynamic nature of capital, whereas the technical definition can sound very “static”.

      Oh, and when I talk about “what capital needs”, then once again that is a shorthand for what the owners of capital need. But why are “the needs and desires of people” constantly changing? This constant revolutionising of human lives, societies, desires and needs does seem to be a feature of capitalist society to a far greater degree than what one might describe as “all hitherto existing societies”. (I’m not saying whether that’s good or bad – I’d far rather live under capitalism than under feudalism, and you can have my iPod Touch when you take it from my cold, dead hands 😉 – but it’s certainly an example of how our desires and worldview are shaped by capitalism at least as much as the other way round.)

      1. No, it’s not. “Money in search of other money” is a colloquial way of describing the activity of investment. Capital itself is simply “productive goods,” and no, I won’t ever arrive at a monetary description. Most people are quite smart enough to grasp that the factory which makes automobiles is quite different than the automobile itself. The factory is “capital,” and the automobile is a “consumer good.” Harvey’s definition simply doesn’t capture what capital actually is, because it confuses money with capital. Ponzi schemes are not capital. Extortion rackets are not capital. But both of those are “money in search of money.” And it simply ignores that capital is not exclusive to capitalism. The Soviet Union had capital. Medieval feudalism had capital. Barter-based societies have capital.

        The needs and desires of people have been continually changing throughout human history because life itself is not a static process. I can give multitudinous examples. Two of the biggest driving factors:

        1. Fashions and taste change. Popular styles of 1780 were not popular in 1840. The kinds of movies people liked in 1993 are not so popular in 2010. A “stylish” car in 1975 is considered ugly by most people today. There has never been a period of static tastes.

        2. Humans never run out of needs. Dealt with starvation? Oh, well, now it’s time to improve overall nutrition. Dealt with polio? Great, now we can deal with cancer. Got effective motorized transport? Great, now we can focus on making it look stylish and cleaning up its exhaust.

        These things have always happened in human history, but they can be dealt with much faster when more people’s needs are of economic importance (what a medieval serf needed or would have liked was completely irrelevant insofar as it did not increase the amount of grain he grew for the lord), and economic decisions are not concentrated in the hands of a few.

      2. I think fundamentally you and Harvey are using the word “capital” in different senses. I understand what you’re getting at with capital as “productive goods”, and yes, that’s not what Harvey is talking about as such. He’s using the term in a broader sense: “that amount of wealth which is used in making profits”, to lift a quote from Werner Sombart (hopefully in his pre-Nazi days…) from Wiki.

        I’m not going to pretend to have the technical knowledge to map one meaning onto another, so will say no more than that. But “money used to make money” is a fair popularisation of “that amount of wealth which is used in making profits”, even if that’s not what is meant by “capital” in classical economics.

    1. From Harvey’s point of view though, the lending of money to consumers would be seen as a means by which capital flows (and indeed, in his account, the creation of consumer demand through advertising, innovation etc is then an important means both of utilising surplus capital and of maintaining and increasing the flow of capital). Again, this points up the different usages of the word.

      1. Well, Harvey’s view is unhelpful, then. By the way, money and wealth are *also* different. Confusing money and capital is simply sloppy economic thinking, as is confusing money and wealth. The latter is behind all the great inflations of history–the Spanish Empire is one major example (the British were probably lucky that they *didn’t* find much gold in the New World). But since reading your blog, I’ve read a little bit about and by this guy, and he is an extremely sloppy economic thinker. He’s incredibly muddled about basic economic concepts such as “value.” He doesn’t even really seem to understand what money and interest are.

        An advertisement or a new invention are both examples of capital, since they’re both part of the production chain. But a consumer loan, such as when you use your credit card to buy a meal at the pub, simply is not. A loan is money, neither capital nor a consumer good. And a consumer loan is used not to develop capital, but to obtain consumer goods. This is important, because a consumer loan is, economically speaking, paying for increasing today’s consumption by decreasing tomorrow’s. By contrast, a capital loan is used to increase *production* (for example, by opening a new store, or buying more productive machinery, etc), and the increased production itself is the source of the repayment. That is, I pay for today’s increased production with tomorrow’s profits, profits I was only able to make because of today’s increased production.

        From the standpoint of the banker, of course, interest is interest, and money is money, but economically, consumer and capital loans are completely different.

      2. Yes, from the point of view of the borrower, the two are very different. Harvey’s point is that from the point of view of the lender, it is still a way to utilise surplus capital (in Harvey’s sense) and to achieve compound growth.

        More broadly, changes in government policy and social attitudes which have greatly increased levels of consumer debt over the past 30-40 years can be seen as a means by which demand for goods and services have been maintained over a period in which wages (and thus relative spending power of the waged) have decreased as an overall share of the economy. This in turn has the effect of making “capital” more effective in maintaining its growth etc.

  4. But the lender isn’t using surplus capital. He’s using surplus money. And this is important because from the macroeconomic viewpoint, they’re quite different. This is because when society loads up on consumer debt, it boosts the standard of living (aka “consumption”) today at the cost of impoverishing us tomorrow. By contrast, capital loans, by increasing production, enrich us tomorrow. So it’s rather important to distinguish between using excess money reserves to grow capital, and using them to grow consumption.

    BTW, you’re right about what you said in general. I just don’t like the use of the term “capital” when “money” is a perfectly good and more accurate word.

    1. Fair enough. Like I said, I suspect Harvey is using the word “capital” within a different framework (*cough* Marxist *cough*) and I was just passing on his use of the terminology. I accept that terminology may cause problems within other frameworks.

      Even on your terminology, though, I wonder if the distinction between consumer debt and capital loans is quite so simple. Capital investment is, to a very large extent, dependent on consumer demand – which in turn is dependent, to a distressingly large extent I think we can both agree, on the availability of consumer credit.

      1. Oh, I know Harvey’s using the phrase in a Marxist framework. And therein lies the problem–the Marxist framework is grounded in largely false ideas, as Marx believed that knowing Hegel was a valid substitute for knowing anything else. For example, Marxism, since it’s materialistic, takes value as intrinsic to a good. To some extent, Marx can’t be entirely faulted, since the classical economists came up with the labor theory of value in the first place. The difference is that the major useful insights of classical economists weren’t dependent on the LToV, so when that ship ran aground in the late 19th century (LToV ends up being woefully insufficient for describing a large range of economic phenomena) and everyone got on board the subjective theory of value, economics moved on. But if you replace LToV with SToV, if things don’t have “intrinsic” value and the human individual becomes of tantamount importance, Marxism isn’t Marxism any more. Marxian analysis–when it actually is analysis and not just accusing people who disagree of having insufficient proletarian sympathies–positively depends on this notion of intrinsic value. LToV also makes Marxists useless on the subject of money.

        Regarding the distinction, yes, it is that simple. A consumer loan is a consumer loan, not a capital loan, regardless of the second-order economic effects (like capital investment in response to consumer demand). If you loan your friend a few pounds to go buy some beer, and he does so, and the liquor store responds to the increased business by buying an extra case of beer, you don’t say “I loaned a few pounds to the liquor store to expand its business.” You say, “I loaned a few pounds to my friend to buy beer.” It should be obvious why.

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