A CRITIQUE OF THOMAS PIKETTY’S ‘CAPITAL IN THE TWENTY-FIRST CENTURY’ – 9

CONTAINING CAPITAL – 9

PRASANNA K CHOUDHARY

5. CENTURY TWENTIETH AND TWENTY-FIRST

 

“Your Malebranche,” said Huron to Gordon one day, “seems to have written half of his book whilst he was in possession of his reason, and the other half with the assistance only of imagination and prejudice.”

Voltaire, ‘Master Simple’.1

Twentieth century was the century of some epoch-making developments, heralding a new chapter in the history of humankind. These developments provide the key to understand the shape of things to come in the twenty-first century. A quick look into these developments, hence, will not be out of place.

  1. Mechanization and its consequences: The ‘second industrial revolution’ in the latter half of the nineteenth century led to the development of large-scale industries, to a spurt in ever-increasing mechanization, to monopoly finance capital and emergence of transnational corporations, to a new wave of colonization, and to a new class of business executives and labor aristocracy during the period, 1870-1913. These developments became the characteristic features of twentieth century capitalism. Moreover, it was in this century that the military-industrial complex in advanced capitalist countries acquired a major role in both diplomacy and domestic politics.

We can, here, briefly go into the consequences of mechanization in order to grasp the development in the latter half of the twentieth century.

“To the degree that large industry develops, the creation of real wealth comes to depend less on labor time and on the amount of labor employed then on the power of the agencies set in motion during labor time, whose ‘powerful effectiveness’ is itself in turn out of all proportions to the direct labor time spent on their production, but rather on the general state of science and on the progress of technology, or the application of this science to production (especially natural sciences, and all others with the latter, is itself in turn related to the development of material production.) .. Labor no longer appears so much to be included within the production process; rather, the human being comes to relate more as watchman and regulator to the production process itself. .. He steps to the side of the production process instead of being its chief actor. In this transformation, it is neither the direct human labor he himself performs, nor the time during which he works, but rather the appropriation of his own general productive power, his understanding of nature and his mastery over it by virtue of his presence as a social body – it is, in a word, the development of the social individual which appears as the great foundation-stone of production and of wealth. The theft of alien labor time, on which the present wealth is based, appears a miserable foundation in face of this new one, created by large-scale industry itself. As soon as labor in the direct form has ceased to be the great well-spring of wealth, labor time ceases and must cease to be its measure, and hence exchange value (must cease to be the measure) of use value. The surplus labor of the mass has ceased to be the condition for the development of general wealth, just as the non-labor of the few, for the development of the general powers of the human head. With that, production based on exchange value breaks down, and the direct, material production process is stripped of the form of penury and anti-thesis. The free development of individualities, and hence the reduction of necessary labor time so as to posit surplus labor, but rather the general reduction of the necessary labor of society to a minimum, which then corresponds to the artistic, scientific etc. development of the individuals in the time set free, and with the means created, for all of them. Capital itself is the moving contradiction, (in) that it presses to reduce labor time to a minimum, while it posits labor time, on the other side, as sole measure and source of wealth. Hence it diminishes labor time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary. On the one side, then, it calls to life all the powers of science and of nature, as of social combination and of social intercourse, in order to make the creation of wealth independent (relatively) of the labor time employed on it. On the other side, it wants to use labor time as the measuring rod for the giant social forces thereby created, and to confine them within the limits required to maintain the already created value as value. Forces of production and social relations – two different sides of the development of the social individual – appear to capital as mere means, and are merely means for it to produce on its limited foundation. In fact, however, they are the material conditions to blow this foundation sky-high. ‘Truly wealthy a nation, when the working day is 6 rather than 12 hours. Wealth is not command over surplus labor time (real wealth), but rather, disposable time outside that needed in direct production, for every individual and the whole society.

Nature builds no machines, no locomotives, railways, electric telegraphs, self-acting mules etc. These are products of human industry; natural material transformed into organs of the human will over nature, or of human participation in nature. They are organs of the human brain, created by the human hand; the power of knowledge objectified. The development of fixed capital indicates to what degree general social knowledge has become a direct force of production, and to what degree, hence, the conditions of the process of social life itself have come under the control of the general intellect and been transformed in accordance with it. To what degree the powers of social production have been produced, not only in the form of knowledge, but also as immediate organs of social practice, of the real life process. ..

The saving of labor time (is) equal to an increase of free time, i.e. time for the full development of the individual, which in turn reacts back upon the productive power of labor as itself the greatest productive power. .. Free time – which is both idle time and time for higher activity – has naturally transformed its possessor into a different subject, and he then enters into the direct production process as this different subject. ..”2

Remember, Marx wrote these lines 156 years ago. Piketty should note this passage since he writes in Chapter Six (The Capital-Labor Split in the Twenty-First Century/Back to Marx and the Falling Rate of Profit), “Today we know that long-term structural growth is possible only because of productivity growth. But this was not obvious in Marx’s time, owing to lack of historical perspective and good data. .. In Marx’s mind .. the very idea of structural growth driven by permanent and durable growth of productivity, was not clearly identified or formulated.”

  1. Revolution in science and technology: In the first decade of the twentieth century, two German scientists revolutionized our understanding of atomic-subatomic process as well as that of space-time, and thus laid the foundation of a new scientific and technological revolution that went on to radically change the way we think, read and write, research, produce and design, trade and shop, manage, communicate and campaign, save, invest and finance, spy, make war and peace, love and hate, befriend and unfriend, play and entertain, etc. in the coming decades.

One was Max Karl Ernst Ludwig Planck, born (at Kiel) in the Duchy of Holstein on April 23, 1858, who presented his Quantum Theory on December 14, 1900; and the other was, of course, Albert Einstein, born (at Ulm) in the Kingdom of Württemberg on March 14, 1879, who propounded his special theory of relativity in 1905 (and in 1916 formulated the general theory of relativity). This scientific revolution soon embraced other branches of science and led to the development of new instruments and gadgets. A continuous process of discovery-invention-innovation was ushered in. The Newtonian mechanical-deterministic world-view was replaced by a new world-view of relativity, probability and uncertainty, and this view influenced all the disciplines of humanities as well. Remember, this epoch-making revolution in science was taking place at the time when capitalism was undergoing a period of severe shocks (Piketty, as mentioned earlier, describes this period, 1913-1950, as ‘the history of Europe’s suicide, and in particular of the euthanasia of European capitalists’).

  1. Computer revolution and knowledge economy: This revolution in science led to the computer revolution of the second half of the twentieth century, and this computer revolution necessitated restructuring of production, organization and management of industrial capital, as well as it gave birth to a host of new financial instruments. Knowledge as a factor of production rose in prominence. Side by side, a new discipline of knowledge economy grew in importance.

“The knowledge economy stands on three pillars. The first: knowledge has become what we buy, sell, and do. It is the most important factor of production. The second pillar is a mate, a corollary to the first: knowledge assets – that is, intellectual capital – have become more important to companies than financial and physical assets. The third pillar is this: to prosper in this new economy and exploit these newly vital assets, we need new vocabularies, new management techniques, new technologies, and new strategies. On these pillars rest all the new economy’s laws and its profits. .. When the idea of a ‘new economy’ was controversial, economists puzzled over the seeming failure of investment in information technology to produce gains in productivity. These doubts are – or should be – laid to rest now. Since 1994, US productivity (probably underestimated) has grown at a 2.8 per cent annual clip, double the average growth rate of the previous two decades. More than half that increase is attributable to information technology, including software – though IT capital stock is just one per cent of all capital stock. Ubiquitous ever-cheaper, ever more powerful information technology has unleashed a torrent of economic good. Why so powerful? First information is a factor of production in every industry, from farming to pharmaceuticals. Improve the efficiency with which information is used, and the innovation can be applied everywhere. .. Network externalities also turbo-charge the effects of gains in the use of knowledge. In addition, the skills demanded of knowledge workers require investments in human capital – so the workforce is becoming more skilled, and is able to apply its skills in unplanned-for ways. .. Finally, .. to take advantage of information technology and to become a true knowledge company requires new organizational forms – that is, to get the most out of new technology and intangible assets, companies often have to re-think their business model and their organizational design, producing ‘a round of organizational innovation.’ Thus technical innovation feeds into social innovation, which feeds into more technical innovation, increasing the value of knowledge assets in a virtuous spiral. .. Ultimately, intellectual assets have become more important than any other because only by means of knowledge can companies differentiate their work from their competitors. Other sources of competitive advantage are rapidly drying up: geography (weakened by electronic commerce and reduced tariffs and lower barriers to foreign direct investment), regulation (which once insulated enormous sectors – transportation, communications, power, and financial services), and vertical integration (less valuable because more and more companies are finding it cheaper to buy on the open market what they once made themselves). You don’t need physical assets to gain entry into a business. The specific asset – the differentiating asset – is not the machinery. It’s the software and the wetware – the stuff between your ears. It’s the knowledge, stupid. .. In the spring of 2001, Deutsche Bank took out a big ad in the Wall Street Journal. Its headline: ‘Ideas are Capital. The Rest is Just Money.3

  1. New time: Mechanization, revolution in science, and computer revolution have led to the development of a new age in the latter half of the 20th century, particularly since the last decade of that century during which the consumption of the goods and services produced by computer revolution became a mass phenomenon. This development has been described by various thinkers and writers in different ways. Some call it ‘Capital 3.0’4, some others describe it as ‘knowledge society’, or as ‘digital age’.

That it is a new age can be well understood by its two defining characteristics. First, this new economy (while led to the restructuring of industry and finance) seeks to command and control the socially available free time through its gadgets, applications and services. (The industrial capital seeks to command and control socially available labor time, and finance capital seeks to command and control socially available savings.) Second, this new economy is changing the way we live: one of the surest ways to assess this change is to observe how we spend our time. In this age, billions of people worldwide spend a significant portion of their time on computers. “Television, computers, and smart phones compose a trifecta offering nearly constant interaction with a screen throughout the day. Human interactions in the physical world are now pushed relentlessly into the virtual world of networked devices. Recent studies suggest the adult Americans spend on average roughly half of their waking hours in front of a screen, and the figure continues to grow.”5 How this state of affairs is impacting the entire gamut of our lives is the subject-matter of a range of sociological and cultural studies. It would have been very beneficial to go into the impact of this new economy on state structure, governance, political processes as a whole, sovereignty, and on popular movements in a broader historical perspective; however, it is beyond the scope of this critique. Here, we can just have a glimpse of the world of Google.

“Google’s colorful, playful logo is imprinted on human retinas just under 6 billion times each day, 2.1 trillion times a year – an opportunity for respondent conditioning enjoyed by no other company in history. .. The success of Google’s mobile operating system Android, launched in 2008, has given Google an 80% share of the smart phone market. Google claims that over a billion Android devices have registered themselves, at a rate now of more than a million new devices a day. Through Android, Google controls devices people carry on their daily routine and use to connect to the internet. Each device feeds back usage statistics, location, and other data to Google. This gives the company unprecedented power to surveil and influence the activities of its user base, both over network and as they go about their lives. Other Google projects such as ‘Project Glass’ and ‘Project Tango’ aim to build on Android’s ubiquity, extending Google’s surveillance capabilities farther into space around their users. Google is also aiming to become an internet access provider. Google’s ‘Project Loon’ aims to provide internet access to populations in the global south using wireless access points mounted on fleets of high-altitude balloons and aerial drones, having acquired the drone companies Titan Aerospace and Makani Power. Facebook, which bid against Google for Titan Aerospace, has similar aspirations, having acquired the UK-based aerial drone company Ascenta.”6

This new economy is creating more wealth at a speed unheard-of in history, giving birth to new billionaires and new inequalities. Yet it is the least taxed sector. As Thomas A Steward writes, “Knowledge assets fly under the tax man’s radar just as they do the manager’s. .. We can look at taxation as an indication of how little attention we pay to the real sources of wealth. Take property taxes, for decades a primary tool for generating tax revenue from business. Microsoft owns a big campus, but the value of its real estate is nothing compared to the value of its un-real estate. King County, Washington, assesses Microsoft’s property at $1.05 billion, about 0.2 per cent of the market value of the company, as a whole, which is about $500 billion. Microsoft’s property tax bill? About $14 million. Neighboring Boeing has a market cap of about $40 billion, less than one-tenth that of Microsoft and a real property assessment of $5.5 billion. .. According to Ray Scheppach, executive director of the National Governors Association, “The basic problem is that our tax systems were set up for the manufacturing economy of the 1950s, not a high-tech service-oriented economy.”7

The problem is more complex. Nicolas Colin, author of a controversial report commissioned by the French Government about the tax system and the digital economy writes, “The digital revolution is old news now, yet only lately have most people begun to get a feel of its full implications. As it becomes mainstream, the digital economy gets everywhere in our lives. It permeates our days and nights. Inspiring startups or global corporations disrupt entire industries with their intensive use of IT, innovative business models, iterative design, and a powerful leveraging of data originated by user activity. And yet official statistics utterly fail to measure all this. Multi-sided business models with a predominance of free services are one reason for this failure. Our inability to add data as a primary economic category, just like goods and services, is another. The reality may be that much of the value generated by the digital economy is not captured by official statistics, and therefore leaves our countries unnoticed and ends up in the accounts of offshore companies. To better grasp this economy, we must revise many assumptions. A first step is to reconsider the role of data in value creation. In the digital economy, regular and systematic monitoring of user activity allows companies to make intensive use of data in all sorts of ways. Indeed, user data is not exploited only to target advertising. It can also be leveraged to customize a product, make purchase recommendations, maximize producer surplus by adjusting the price, better match supply and demand based on trust and reputation, measure and improve the performances of an application through A/B testing and growth hacking, fuel innovation efforts to ship new applications, and nurture entire ecosystems with platform-as-a-service business models. In short, the digital economy turns business into a Moneyball game, in which leveraging data leads to global scale development and higher profitability. Because data can be stored, aggregated and reused in many ways, user data is in effect put back into the supply chain where it creates value on the long term. As the value flowing from user data has a ripple effect on all the sides of business models, users become part of business operations, thereby blurring the line that used to separate consumption from production. As with content creation or customer support, users tend to replace employees and contractors in the supply chain. And because users are not paid like employees (and they do not want to be for fear of corrupting the product), their “free work” allows tech companies to reach the highest economies of scale and massive profitability. In our common effort to reduce public deficits and invest in the future, giant tech companies do not pay much. User activity is sustained, even enhanced, by massive public investments in education, social insurance, or broadband networks. And they didn’t build that. On the contrary, every big company in the digital economy has a very low global taxation rate. The value of their intangible assets soars because of network effects, but those assets are located in tax havens where they attract most of the profits (since these companies don’t pay dividends, they can locate their profits anywhere). Also, in multi-sided business models, it’s easy to spread the side that collects data on every domestic market while concentrating the side that makes money in a single country from where the profits are easier to transfer towards tax havens. Meanwhile, the tax law has not kept up. According to international tax laws, corporate profits should be taxed where corporations have their headquarters. In the digital economy, it’s easy to choose a headquarters’ location based on where the taxation rate is the lowest. Only when there’s a permanent establishment, can a country without a headquarters levy a corporate tax. But the definition of a permanent establishment is gravely out-dated and completely misses the digital economy.”8

Here it is not possible to go into the full implications (both positive and negative) of the development of this new economy and society, and into the contradictions inherent in this mode. However, before winding up this description a few points should be made clear.

  1. This new economy did not evolve by resolving the contradictions inherent in capital. Instead it developed along with (and besides) those contradictions. (Agrarian societies did not emerge by resolving the contradictions inherent in the tribal system, and industrial societies did not develop by resolving the contradictions inherent in the agrarian system. Contradictions inherent in the earlier societies do play their role in the evolution of new modes of production, but they are not the sole factor.)
  2. Transition from hunting-gathering tribal societies to agrarian societies was accomplished through Neolithic revolution which, according to V Gordon Childe, went on for two thousand years. Transition from feudal agrarian society to capitalist society took almost four hundred years (from 14th to 17th century) in case of England. To describe the transition from capitalist industrial society to knowledge society, I am tempted to borrow a term from Hegelian dialectics – sublation, a simultaneous cancelling and preservation of something. It best describes the current relationship between suspension and reinforcement of exchange, between free time and labor time. After Empire of Land and Empire of Capital, we are in an age that seeks to create Empire of the Mind.9
  3. Free time and ‘Logic of Rights’: If capital/income ratio (β) is 6 (that is, total capital is the equivalent of six years of national income), then it means that six years of free time is trapped in capital, and hence, there will be movement to extricate this free time from the clutches of capital. In other words, there will be demands for further reduction of labor time, and therefore, extension of free time.

Moreover, there will also be demands for bringing a number of goods and services out from the fold of exchange – in other words, for free access to a certain number of goods and services as a matter of right. Right to food, right to education, right to health, right to information, right to digital access, etc. do mean free food, free education, free health services, free internet services, etc. Acceptance of these rights means that in case of denial, people have the right to rebel for these free goods and services. Obviously, there will be demands for taking more and more goods and services out of exchange and made free. Popular movements around such rights can be witnessed all over the world.

Needless to say, that since exchange-based economy exists side by side, lots of distortions, leakages, complications, etc. arise; yet, the very acceptance of the principle of free access to a certain number of goods and services is here important. Piketty calls it ‘modern redistribution built around logic of rights’. (Part Four/Chapter Thirteen/A Social State for the Twenty-First Century)

Here, one needs to understand the nature of various ‘free’ internet services – the user, in such cases, by virtue of his very presence and his activities on the net, pays for them ‘by supplying data to be exploited by persons unknown to him, in ways that further shape the information being offered to him.’10

  1. Rise of China: “The combination of a huge population and an extremely high economic growth rate is providing the world with a completely new kind of experience: China is, quite literally, changing the world before our very eyes, taking it into completely uncharted territory. Such is the enormity of this shift and its impact on the world that one might talk of modern economic history being divided into BC and AC – Before China and After China – with 1978 being the great watershed.” It may still be premature to go with Martin Jacques’s above assessment, but there is no denying the fact that the spectacular rise of China is one of the most defining developments of our age and is sure to greatly influence the shape of things to come in the current century. Much has been written on this subject and therefore I will not go into the growth statistics of contemporary China. On the impact and implications of China’s (combined with some other emerging economies’) growth story, it will, here, suffice to quote Martin Jacques again:

“The fact that China derives from utterly different civilizational and historical roots to those of the West, and is possessed of quite different geographical co-ordinates, will greatly accentuate the Western sense of loss, disorientation and malaise. It was one thing for Britain to have been confronted with the United States – given the obvious affinities and commonalities that they enjoyed – as its rival and successor as the world’s dominant power, but it is an entirely different matter for the United States to be faced with China – with whom it has nothing in common in either civilizational or political terms – as its usurper and ultimate replacement. For the United States, the shock of no longer having the world to itself – what has amounted to a proprietorial right to determine what happens on all major global questions – will be profound. With the rise of China, Western universalism will cease to be universal – and its value and outlook will become steadily less influential. The emergence of China as a global power in effect relativizes everything. The West is habituated to the idea that the world is its world, the international community its community, the international institutions its institutions, the world currency – namely the dollar – its currency, and the world’s language – namely English – its language. The assumption has been that the adjective ‘Western’ naturally and implicitly belongs in front of each important noun. That will no longer be the case. The West will progressively discover, to its acute discomfort, that the world is no longer Western. ..”11

There are, of course, some other important developments that have been left here (Piketty discusses some of them like ecological and environmental questions).

Piketty’s book does not, in the main, consider these major developments of the twentieth century that are playing vital role in shaping the economy and society in the twenty-first century. He desists from entering new time. Hence, the content of the book does not justify the title ‘Capital in the Twenty-First Century’. Given the subject matter of the book, the appropriate title should have been ‘Inequality in the Age of Capital’.

No book is complete and free from certain inconsistencies. Some incompleteness, certain inconsistencies are part of a book – it keeps the door of fresh explorations, interpretations and explanations open for those who want to pursue the subject further. What I am emphasizing is the basic inconsistencies (in the propositions and arguments) of the book.

NOTES

  1. Voltaire; ‘Candide and Other Tales’, ‘Master Simple’, Heron Books, Geneva, 1969. Translation by Tobias Smollett.
  2. Marx, Karl; ‘Grundrisse: Foundations of the Critique of Political Economy’ (Rough Draft), Penguin Books in association with New Left Review, Harmondsworth, Middlesex, England, 1981. Translated with a Foreword by Martin Nicolaus.
  3. Stewart, Thomas A; ‘The Wealth of Knowledge: Intellectual Capital and the 21st Century Organization’, Part I, ‘The Theory of a Knowledge Business’, Currency Doubleday (a division of Random House Inc.), 2001.
  4. Rodrik, Dani; ‘Democracy and the Future of the World Economy: Globalization Paradox’, W W Norton, 2011. Rodrik writes, “Adam Smith’s idealized market society required little more than a ‘night-watchman state’. All that governments needed to do to ensure the division of labor was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods such as national defense. Through the early part of the twentieth century and the first wave of globalization, capitalism was governed by a narrow vision of the public institutions needed to uphold it. .. Let us call this ‘Capital 1.0’. ‘The mixed-economy model’ (Keynesian economy) was the crowning achievement of the twentieth century. .. (It was) ‘Capital 2.0’ with a limited kind of globalization – the Bretton Woods compromise.” Rodrik, then, enunciates principles for a New Globalization of ‘Capital 3.0’: i. Markets must be deeply embedded in systems of governance; ii. Democratic government and political communities are organized largely within nation states, and are likely to remain so for the immediate future; iii. There is no ‘one way’ to prosperity; iv. Countries have the right to protect their own social arrangements, regulations, and institutions; v. Countries do not have the right to impose their institutions on others; vi. The purpose of international economic arrangements must be to lay down the traffic rules for managing the interface among national institutions; and vii. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. .. “The key to capitalism’s durability lies in its almost infinite malleability. As our conceptions of the institutions needed to support markets and economic activity have evolved over the centuries, so has capitalism. Thanks to its capacity for re-invention, capitalism has overcome its periodic crises and outlived its critics, from Karl Marx on. ..”
  5. Kissinger, Henry; ‘World Order: Reflections on the Character of Nations and the Course of History’, Penguin Press, New York, 2014.
  6. Assange, Julian; ‘Google Is Not What It Seems’, wikileaks.org/google-is-not-what-it-seems/
  7. Stewart, Thomas A; op.cit.
  8. Colin, Nicolas; ‘Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age’, http://www.forbes.com/sites/singularity/2013/01/28/corporate-tax-2-0-why-france-and-the-world-need-a-new-tax-system-for-the-digital-age/
  9. Assange, Julian; op.cit. ‘The Empire of the Mind’ was the working title of the book written by Google Chairman Eric Schmidt and Jared Cohen, the Director of Google Ideas. The book was eventually published in April 2013. The working titled was replaced with ‘The New Digital Age: Reshaping the Future of People, Nations and Business’.
  10. Kissinger, Henry; op.cit.
  11. Jacques, Martin; ‘When China Rules the World: The End of the Western World and the Birth of a New Global Order’, The Penguin Press, New York, 2009.

[This critique is divided in eight parts, tentatively titled as: i. Apocalypse and Exuberance; ii. Data and Dialectics; iii. Capital Social and Self-Expanding; iv. Wealth Inherited and Created; v. Century Twentieth and Twenty-First; vi. Yes Marx No Marx; vii. London Chicago Paris; and viii. Thank You Mr Piketty.]

October, 2014.

CONTINUED.

NEXT: 6. YES MARX NO MARX

 

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