Is capitalist power built on social sabotage?

Blair Fix

James McMahon and Blair Fix


 The most important feature of private ownership is not that it enables those who own, but that it disables those who do not.

— Jonathan Nitzan and Shimshon Bichler A key aspect of Jonathan Nitzan and Shimshon Bichler’s theory of ‘capital as power’ is that it treats property not as a productive asset, but as a negative social relation.

In Search of Sabotage

I discuss the ongoing research into the capital-as-power model of the stock market.

Over the last year, I've watched with horror and amusement as health
agencies around the world flip-flopped their advice on how to deal with
COVID.

My horror comes from knowing this flip-flopping breeds mistrust in
science. But I am (morbidly) amused because I know that uncertainty is a
basic part of real research. For the public, 'science' tends to mean
authoritative knowledge. But for researchers, 'science' is an iterative
process, filled with wrong turns, new evidence, and revised ideas.

With COVID flip-flops in mind, I thought I'd tell you a story about
science in progress. It's a story about how we should understand the
stock market.

### Three stories about the stock market

Here are three stories about how the stock market works.

The first story says that the stock market reflects the productivity of
the underlying economy. When stocks go up, the thinking goes, everyone
should celebrate because the tide of productivity is rising. This is the
story that neoclassical economists believe.

The second story is that the stock market is actually disconnected from
the 'real' economy, fluctuating in ways that have nothing to do with
actual productivity. Stock prices represent 'fictitious capital'. This
is the story Marxists believe.

The third story is that stock prices are neither about productivity nor
are they 'fictitious'. They are about *power*. This is the hypothesis
proposed by Jonathan Nitzan and Shimshon Bichler. The basic idea is that
what capitalists really care about is not productivity. They care about
*income*. Capitalists look at their income and then, through the [ritual
of
capitalization](https://economicsfromthetopdown.com/2021/06/02/the-ritual-of-capitalization/){target="_blank"
rel="noopener"}, turn it into a lump sum --- the capitalized value.

What's important, Nitzan and Bichler argue, is that capitalist income is
a function of power --- the power to wield property rights. Hence patent
trolls earn income not by doing anything useful, but by enforcing their
intellectual property. Likewise Microsoft earns income not by creating
software, but by restricting its use. Of course you *can* produce things
if you want. But unless you enforce your property rights, you won't earn
income.

Back to the stock market. Bichler and Nitzan propose that we should
understand the stock market in terms of capitalist power. When stocks go
up relative to wages, that's a sign that capitalists have grown more
powerful. Conversely, when stocks fall relative to wages, that's a sign
that workers are winning the class struggle.

With this thinking in mind, Bichler and Nitzan propose a metric they
call the 'power index' --- the ratio of stock prices to the average
wage:

::: {style="text-align:center"}
[ \displaystyle \text{power index} = \frac{\text{stock
index}}{\text{average wage}} ]{.katex-eq katex-display="false"}
:::

Figure [1](#fig-power-index) shows the oscillations of the power index
in the United States. (For an analysis of the trends, see ['Stocks are
up. Wages are down. What does it
mean?'](https://economicsfromthetopdown.com/2020/09/04/stocks-are-up-wages-are-down-what-does-it-mean/){target="_blank"
rel="noopener"})

[]{#fig-power-index}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/power_index_eras.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 1: Eras of capitalism, oscillations of
power. The blue line shows the power index in the United
States. The red line shows the smoothed trend. The oscillations of the
power index correspond with different eras of capitalism. Sources and
methods are <a
href="https://economicsfromthetopdown.com/2020/09/04/stocks-are-up-wages-are-down-what-does-it-mean/"
target="_blank" rel="noopener">here</a>.</figcaption>
</figure>

### The corollary of power is fear

When Peter Parker became Spider-Man, his Uncle Ben remarked:

> With great power comes great responsibility.

That may be true. But Bichler and Nitzan think that something else also
comes with great power: great *fear*.

Bichler and Nitzan hypothesize that as capitalists grow more powerful,
they become more fearful about losing their grip on power. After all, if
you are at the apex of power, there is nowhere to go but down.

The idea that capitalists fear for their fortunes is nothing new. But
what is new is that Bichler and Nitzan propose a specific way of
*quantifying* this fear. The way to measure capitalist fear, they argue,
is to look at how capitalists apply their ritual of capitalization.

The principle of capitalization is to put a present value on *future*
income. To get capitalized value, we take (expected) future income and
'discount' it by some agreed-upon rate:

::: {style="text-align:center"}
[ \displaystyle \text{capitalized value} = \frac{\text{future
income}}{\text{discount rate}} ]{.katex-eq katex-display="false"}
:::

The immediate problem for capitalists is that future income is unknown.
So what should they do? Their answer is to invert the capitalization
formula so that it looks at the *past*. With this inversion, capitalists
calculate present value by discounting past incomes:

::: {style="text-align:center"}
[ \displaystyle \text{capitalized value} = \frac{\text{past
income}}{\text{discount rate}} ]{.katex-eq katex-display="false"}
:::

Noting this inversion, Bichler and Nitzan propose that it can be used to
measure capitalists' fear. The more fearful capitalists are, the more
they will cling to the past rather than look to the (increasingly
uncertain) future.

The way to measure capitalist fear, then, is to see how strongly stock
prices correlate with past income. More specifically, Bichler and Nitzan
correlate stock prices with earnings per share over a rolling window.
They call the result the 'systemic fear index':

::: {style="text-align:center"}
[ \displaystyle \text{systemic fear index} = \text{stock prices} \sim
\text{earnings per share}]{.katex-eq katex-display="false"}
:::

Since the resulting correlation fluctuates wildly in the short term,
Bichler and Nitzan then take the rolling average to better see long-term
trends.

If great (capitalist) power does bring great fear, the systemic fear
index ought to rise and fall with the power index --- Bichler and
Nitzan's measure of capitalist power. Looking at the United States,
Bichler and Nitzan find that this is exactly what has happened.

[]{#fig-baines}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/bichler_power_fear.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 2: The power index and systemic fear index in
the United States. This figure is from Bichler and Nitzan’s
paper <a
href="https://bnarchives.yorku.ca/493/2/20161100_bn_a_casp_model_of_the_stock_market_wpcasp.pdf"
target="_blank" rel="noopener">‘A CasP Model of the Stock
Market’</a>.</figcaption>
</figure>

### Perhaps capitalist fear is not systemic

Impressed by Bichler and Nitzan's findings, political economists Joseph
Baines and Sandy Hager wanted to know if the results generalized beyond
the United States. They assembled data to calculate both the power index
and the index of systemic fear in France, Germany, Great Britain and
Japan. Their results poured cold water on the concept of 'systemic
fear'.

Baines and Hager found that in the countries they studied, the link
between capitalist power and systemic fear was not nearly as strong as
in the US. Figure [2](#fig-baines) shows their data. Baines and Hager
conclude that 'systemic fear' may not actually be 'systemic', meaning
the concept may be less useful than Bichler and Nitzan claimed.

[]{#fig-baines}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/baines_hager_power.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 2: The power index and systemic fear in
France, Germany, Japan and the UK. This figure is from Baines
and Hagers’s paper <a
href="https://www.econstor.eu/bitstream/10419/196607/1/21090100-baines-hager-critique-casp-model-preprint.pdf"
target="_blank" rel="noopener">‘Financial Crisis, Inequality, and
Capitalist Diversity’</a>.</figcaption>
</figure>

### Systemic fear gets another look

Intrigued by Baines and Hager's results, James McMahon (who cut his
empirical teeth [researching
Hollywood](https://capitalaspower.com/2013/10/the-rise-of-a-confident-hollywood-risk-and-the-capitalization-of-cinema/){target="_blank"
rel="noopener"}) recently took another look at the idea of 'systemic
fear'. He was able to assemble a dataset that was both wider in scope
(including 12 countries) and had greater historical depth than anything
used before. With this more expansive dataset, McMahon subjected the
idea of systemic fear to a bevy of tests.

First up was the idea that systemic fear might not be 'systemic'. To
test this possibility, McMahon looked at how systemic fear correlated
across countries. Figure [4](#fig-mcmahon-cor) shows his resulting
'correlation matrix'. Each box shows the systemic-fear correlation
between the respective countries on the *x*--*y* axes. Dark red
indicates that the two countries 'co-experience' systemic fear. Dark
blue indicates that they do not. Despite a few blue squares, what's
clear is that systemic fear seems to be correlated across countries. In
other words, it does appear to be 'systemic'.

[]{#fig-mcmahon-cor}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/mcmahon_corr_table.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 4: Cross-country correlation in the trends in
systemic fear. This figure is from McMahon’s paper <a
href="https://capitalaspower.com/2021/08/mcmahon-reconsidering-systemic-fear-and-the-stock-market/"
target="_blank" rel="noopener">‘Reconsidering Systemic Fear and the
Stock Market’</a>. Each box shows the systemic-fear correlation between
the respective countries on the x–y axes.</figcaption>
</figure>

Next, McMahon looked at the correlation between systemic fear and the
power index. As with Baines and Hager, he confirmed that the correlation
varies across countries. Still, all countries (for which data was
available) had a positive correlation. In other words, as capitalists
become more powerful, they seem to become more fearful.

[]{#fig-mcmahon-power}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/mcmahon_corr_s1_p1.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 5: Correlation between systemic fear and the
power index. This figure is from McMahon’s paper <a
href="https://capitalaspower.com/2021/08/mcmahon-reconsidering-systemic-fear-and-the-stock-market/"
target="_blank" rel="noopener">‘Reconsidering Systemic Fear and the
Stock Market’</a>. Bars indicate the correlation between the systemic
fear and the power index. Because McMahon tests multiple versions of
these metrics, he calls the original metrics S_1 (systemic fear) and P_1 (power
index).</figcaption>
</figure>

McMahon's last step was to see how the average trend in capitalist power
(across countries) related to the average trend in systemic fear (again,
across countries). Here he found a strong correlation, shown below.
Interestingly, the correlation remained (albeit at lower levels) when he
experimented with different ways of measuring systemic fear and
capitalist power.

[]{#fig-mcmahon-expected}

<figure class="wp-block-image size-large">
<img
src="https://i0.wp.com/economicsfromthetopdown.com/wp-content/uploads/2021/08/mcmahon_expected_power.png?w=723&amp;ssl=1"
decoding="async" data-recalc-dims="1" />
<figcaption>Figure 6: Relation between ‘expected’ systemic fear
and ‘expected’ capitalist power for all combinations of indices
This figure is from McMahon’s paper <a
href="https://capitalaspower.com/2021/08/mcmahon-reconsidering-systemic-fear-and-the-stock-market/"
target="_blank" rel="noopener">‘Reconsidering Systemic Fear and the
Stock Market’</a>. Each panel plots the relation between the
cross-country average of the power index and the cross-country average
of systemic fear. McMahon calls these two averages the ‘expected’
values. Each panel shows a combination of different metrics (power
indices P_1 ,
 P_2 , and
 P_3 ; systemic
fear indices S_1
, S_2 ,
and S_3 ). See
McMahon’s paper for details.</figcaption>
</figure>

### Science in progress

Back to COVID shenanigans. Public health scientists are in the
unenviable position of having their research subjected to intense public
scrutiny. As the evidence changes, officials revamp their story, and the
public balks. But unbeknownst to most people, this flip-flopping is how
science always works. It's messy. It's uncertain. It's a work in
progress.

Unlike COVID research, the study of how capitalist power relates to
systemic fear is conducted largely in obscurity. In a sense, that's
good, because it means that when the facts change, researchers can alter
their opinions without facing public ridicule. The downside is that this
research cuts to the heart of our understanding of capitalism. And that
ought to interest everyone.

Whether the corollary of capitalist power is systemic fear (and whether
this fear is actual 'systemic') is an open question. Maybe you'll be the
next one to roll up your sleeves and see what you find.

(And if you do roll up your sleeves, consider submitting your findings
to the [*Review of Capital as
Power*](https://capitalaspower.com/recasp/){target="_blank"
rel="noopener"} (RECASP), a non-disciplinary journal committed to
fostering debate about these types of ideas.)

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### Further reading

Baines, J., & Hager, S. B. (2020). Financial crisis, inequality, and
capitalist diversity: A critique of the capital as power model of the
stock market. *New Political Economy*, *25*(1), 122--139.

Bichler, S., & Nitzan, J. (2016). A CasP model of the stock market.
*Real-World Economics Review*, (77), 119--154.

McMahon, J. (2021). Reconsidering systemic fear and the stock market: A
reply to Baines and Hager. *Review of Capital as Power*, *2*(1), 30--70.

Over the last year, I’ve watched with horror and amusement as health agencies around the world flip-flopped their advice on how to deal with COVID. My horror comes from knowing this flip-flopping breeds mistrust in science. But I am (morbidly) amused because I know that uncertainty is a basic part of real research. For the public, ‘science’ tends to mean authoritative knowledge.

With Great Power Comes Great Fear

The US is in uncharted territory. Never before have stocks been so high relative to wages. Here’s what it means.

If you listen carefully, you can hear Jeff Bezos getting richer. There’s the sound again. Another billion in Bezos’ coffers. Let’s put some numbers to this sound of money. Since 2017, Bezos’ net worth has grown by about $4 million per hour — roughly 500,000 times the US minimum wage.

 1

This accumulation of wealth would be absurd during normal times.

Messaggi di Rogue Scholar

In Search of Sabotage

With Great Power Comes Great Fear

Stocks Are Up. Wages Are Down. What Does it Mean?