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Di Muzio on ‘Sabotage’

Published by Anonymous (not verified) on Tue, 28/09/2021 - 12:28am in

In a series of essays published in 2013 and 2014 on, political economist Tim Di Muzio explored the concept of ‘sabotage’ as it applies to capitalist power. I recently rediscovered these essays and was so impressed by them that I have reposted them here as a single piece.

About the author: Tim Di Muzio is a researcher at the University of Wollongong. He is the author of numerous books, including Debt as power, Carbon capitalism, and The 1% and the Rest of us.

Di Muzio on ‘Sabotage’

Tim Di Muzio

  1. The meaning of ‘sabotage’
  2. The poverty of liberal history
  3. Sabotage and ownership
  4. Royal authority and private property
  5. The constitution of the United States of America
  6. The capitalization of money creation: The greatest sabotage in human history?
  7. The privatization of money: The greatest sabotage in human history? Part II

1. The meaning of ‘sabotage’

Welcome to a weekly investigation into the fascinating world of corporate sabotage where human creativity, cooperation, mutual aid and well-being are all held ransom for the profit and power of dominant owners.

Every week this column will explore various aspects of what Veblen called ‘strategic sabotage.’ But first, a bit of context.

It appears that the English word ‘sabotage’ was at first associated with an emerging working class in the throes of being transformed into docile bodies for capitalists. The origins of the term are a bit fuzzy but it seems like it stems from the French — sabot — meaning wooden shoe or clog.

Popular history has it that workers would use their ‘sabots’ to ‘sabotage’ production in order to safeguard their livelihoods from machine replacing labor or win better working conditions from their masters. Eventually ‘sabotage’ could also mean workers deliberately performing poorly at their respective employments or willfully destroying tools or machinery. According to the Oxford English Dictionary (OED) ‘sabotage’ enters the English language in 1910 and can be defined as:

The malicious damaging or destruction of an employer’s property by workmen during a strike or the like; hence gen. any disabling damage deliberately inflicted, esp. that carried out clandestinely in order to disrupt the economic or military resources of an enemy (my emphasis).

Clearly, sabotage was both a working class phenomenon and a tactic used in elite European geopolitics in their Darwinist conceived nationalist ‘war of all against all.’ However, sabotage seemed to apply more to the activity of disempowered workers struggling for rights and better working conditions than it did the powerful and ‘productive’ capitalists.

It seems a bit strange then, that the term came to be applied to the modern business enterprise by the American born Norwegian political economist Thorstein Veblen. Veblen argued that in its quest for profit, business had to strategically sabotage industry. A free run of production — allowing workers to cooperate to meet the needs and maybe even demands of their communities — would be ruinous for business profit. In Absentee Ownership, Veblen argued that the practice of sabotage had more or less been normalized by modern business ownership:

This line of least resistance and greatest present gain runs in the main by way of a vigilant sabotage on production. So true is this and so impassively binding is this duty of businesslike sabotage, that even in a crisis of unexampled privation, such as these years since the War [World War I], the captains of Big Business have been unable to break away and let the forces of production take their course; and this in spite of their being notably humane persons …

(Veblen, 1923: 217)

Put simply, sabotage knows no mercy in pursuit of profit. But the idea that business could sabotage industry was hardly new. Marx understood this back in the nineteenth century:

It is enough to mention the commercial crises that, by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce.

(Karl Marx & Engels, 1848: 7)

And Marx was right. In a world where the majority just struggled to meet their daily caloric intake, no one would have complained about the ‘overproduction’ of food or material comforts. But the difference between Marx and Veblen is that where Marx saw acts of sabotage as periodic responses to economic crises, Veblen argued that it was a permanent feature of capitalist controlled industry. Business has to sabotage human creativity for profit. In fact, he argued that sabotage would be difficult for a small firm to carry out and much easier for large corporations to perfect.

Some have it that the modern corporation was born to minimize transaction costs. This is a charitable view unconcerned with organized power. Others building on Veblen’s more critical stance have demonstrated that the birth of the corporation was all about subjecting human creativity to the pursuit of power measured in money (Nitzan & Bichler, 2009). The corporation is not born to minimize costs, it is born to exert power.

Veblen’s analysis of the political economy of capitalism was a radical divergence from neoclassical economics — a pseudo-science that would steamroll over all independent, critical and creative thought in the twentieth century. As James Cornehls put it:

[Veblen’s analysis of the business corporation] stood in sharp contrast to the genial, socially productive behaviour of the capitalist envisioned by neoclassical economic theory. Neoclassical economics depicted business people, under the guidance of a benign market, producing as much as they could and striving to lower costs and bring the most cost-effective products to consumers. In Veblen’s system this same group of business people would as soon sabotage production as enhance it, in order to obtain a financial gain.

(Cornehls, 2004: 34)

So from working class origins, sabotage comes to be associated with organized business in Veblen’s political economy. Next week, we’ll take a closer look at how the capital as power approach conceptualizes sabotage with a view to a weekly investigation into corporate sabotage around the world.

2. The poverty of liberal history

Last week we looked briefly at the origin of the term ‘sabotage’ and found that it was more associated with the working class than it was with elite power — those who largely shape and reshape the terrain of social reproduction. In this formulation, workers sabotage while businessmen build useful industry for the community. In this view, there is no question of how ‘workers’ appear on the scene of word history intent on working for other people rather than themselves and their families. This is the poverty of liberal history.

In some sense, the old term ‘sabotage’ is similar to the modern term ‘terror.’ Originally associated with the murderous policies of the French revolutionary state, in the 20th century, terror no longer applies to the state in mainstream ‘common sense’ political analysis. Now, terror is always the work of the weak — or the politically deranged — no historical explanation of grievances necessary. Sub-state actors commit terror, states go to war for the ‘national interest.’ Business is now read in the same way. It’s in the national interest.

Yet last week we saw how the recalcitrant Thorstein Veblen applied the concept of sabotage primarily to business rather than workers. This week, we want to consider how the capital as power approach builds on Veblen’s application of sabotage to business. To do so, we have to briefly consider Veblen’s conceptual split between business and industry.

For Veblen, the industrial system represents a matrix of interdependent points, each reliant to a greater or lesser degree on other points or branches in the industrial system. As the industrial process matures (becomes more complex or networked in contemporary language), Veblen claimed, there results a tendency towards standardization, itself a concomitant of the fact that mass industry requires planning and co-ordination. Without this uniformity of co-ordination and planned synchronization of industrial activity, the industrial system could not develop with any degree of sophistication. In other words, a break or major factor difference in any one branch of the industrial process threatens the entire system, or a great part of it, with collapse.

Left to its own devices, however, the industrial system, Veblen argued, would be extremely productive and has the capacity to flood the world market with a diversity of goods and services. The livelihood of the community then, is best served by an uninterrupted and balanced functioning of the industrial process. But when we think of industry we shouldn’t just have in mind industrial machine production. Industry can be simply conceptualized as human potential or capacity — what is possible to achieve in any given age.

This creativity and potential is the necessary base upon which the business enterprise is erected. While the industrial process is materially and structurally prior, it is not in the ascendancy. Business enterprise, with its motives, methods and aims has come to drive the industrial or creative process in pursuit of ever-expanding pecuniary gains — gains determined primarily by the expected or future earning capacity of each individual firm (adjusted for ‘risk’ for sure). The businessmen in control of each individual firm have this goal in common, though they find themselves in competition to redistribute a limited yearly income to their business empire or corporation.

The competition for market share and profits combined with the growing complexity and interconnectedness of the industrial system and compound human knowledge forces each business enterprise to seek out differential advantages. For Veblen, this process manifests itself chiefly through the strategic control of industry and this involves sabotage as a going business concern. In other words, profit cannot exist without sabotage.

From this perspective, it is not that firms produce for the sake of production, which would be in the interests of the community, but rather, for the sake of profit. The production of material goods and services will be supplied to the community only insofar as the businessman can calculate the vendibility of his product and realize a reasonable rate of profit. This power is rooted in ownership — the legal right to exclude others from use of certain ideas and material artefacts. As Veblen put it:

By virtue of this legal right of sabotage which inheres as a natural right in the ownership of industrially useful things, the owners are able to dictate satisfactory terms; so that they come in for the usufruct of the community’s industrial knowledge and practice, with such deductions as are necessary to enforce their terms and such concessions as will induce the underlying population to go on with the work.

(Veblen, 1923: 67)

The relationship between the two can be stated thus: business needs industry, industry does not need business. Business profit, rooted in ownership, requires sabotage. With these two conceptualizations in mind we can now start to consider how the capital as power framework thinks about sabotage (the relevant reference here is Chapter 12 of Capital as Power).

Veblen never had a detailed theory of sabotage, but the capital as power approach tries to make a conceptual distinction between two different forms of sabotage. The first is what could be called ‘universal’ or ‘general sabotage’ — the idea that all business firms must actively direct, control and limit human creativity and potential. It does so not for human betterment but for business gain, two opposed metrics.

We will consider copious examples in the weeks to come. But to provide one here, consider two very different firms: a telecommunications company and a home construction firm. Both companies have the capacity to do many things. The telecommunications firm likely has the ability to provide open internet access to the communities where it operates. The home construction firm certainly has the ability to build homes for the community. But neither company will unleash their full capacity to do so because to do so would be too ruinous to their profit margins. They both must, as a strategic necessity, restrict the capacity of the workers they control.

Internet access will only be provided to paying customers despite the fact that it can be provided at cost for all who want to get connected. Homes will be built for paying customers, not for the homeless, the jobless or those in need of shelter or a dwelling. This does not mean that the home construction firm somehow loses the ability to make homes when there are no customers to sell to. It merely means that there are no profitable paying customers — who are likely creditworthy enough to get a capitalized loan from a bank. Both have to restrict capacity pure and simple in order to make a profit.

A free run of production or in our case, allowing workers to provide internet services to the people or builders homes for the homeless would be antithetical to businesses concerns. ‘Free is not a business model’ (a rep of eBay China quoted in Nitzan & Bichler, 2009: 233). This, Veblen, argued, was the true meaning behind private property:

Without the power of discretionary idleness, without the right to keep the work out of the hands of the workmen and the product out of the market, investment and business enterprise would cease. This is the larger meaning of the Security of Property.

(Veblen, 1923: 67)

So to be clear, the first form of sabotage is one that all businesses have to engage in to remain profitable — the ability to restrict, limit and exclude. This closely follows Marx’s observation that demand must be backed by the ability to pay under capitalism or simply put, capitalists are concerned with profit, not the community. The second form of sabotage, if not general or universal, is ‘particular’ or ‘differential sabotage’ (Nitzan & Bichler 2009: first mentioned on 246).

What this means is that individual firms engage in different types of sabotage to gain an advantage over their rivals. Again, examples abound, but to provide one here, consider the new Microsoft Surface tablet introduced to compete with Apple’s iPad. Microsoft was late to the cloud storage game but later developed SkyDrive — its own version of iCloud or perhaps the more popular Dropbox. Dropbox has about 200 million users worldwide and their service allows users to store their data on a cloud server so that they can access their files from any device (tablet, computer, phone) they own.

With Surface, Microsoft has sabotaged their new competitor Dropbox — among a host of other software and app providers. While Surface users can download Dropbox as an application, it cannot sync files with the user’s Dropbox account rendering it near useless for Surface users. This is differential sabotage in broad daylight.

There is little secret that Microsoft would prefer everyone to move from Dropbox to SkyDrive and force users to shop at its company store — a move it largely copied from Apple’s own company store model. There is no technological reason why the Surface tablet cannot support Dropbox on its hard drive. The only reason for this sabotage is Microsoft’s profit margin. So one of the greatest saboteurs in human history — Bill Gates — will enrich himself further by creating a noose-like monopoly over newly minted Surface users (provided customers do not become exceedingly irate at the control Microsoft exerts over how they use their newly purchased devices).

The company store is always open and it’s the only store.

So in the capital as power framework, there are two forms of sabotage: universal and differential. Next week we’ll take a deeper look at the historical relationship between ownership and sabotage with a view to examining business sabotage in more depths as the weeks go by. As we shall come to see, ownership, capitalism and sabotage are born together: the triplets of modernity. But there will be a fourth born: racism.

3. Sabotage and ownership

Last week we considered how the capital as power framework seeks to conceptualize two different forms of sabotage:

  1. a general sabotage that limits the potential of humanity in which all business participates and;
  2. a particular or differential form of sabotage that is relatively unique to each individual firm.

It should also be noted here that we are primarily concerned with what Nitzan and Bichler call ‘dominant capital’ or those firms with the highest levels of capitalization and the government organs that facilitate their profitability in one manner or another (for example, protecting patents). In other words, while certain small business owners may have some power to sabotage the potential of human creativity, this power is likely minimal in comparison to the giant saboteurs like Microsoft, Apple, Exxon Mobil and other highly capitalized companies.

This week we take a closer look at the relationship between sabotage and ownership and to do so we must briefly address the transition to capitalism debates. Mainstream theorists or liberals typically read capitalism back into history and argue that capitalist tendencies are more or less hard-wired into the human species. Capitalism is in our genes so to speak. In this way, capitalism is read as a transhistorical phenomenon. It was always with us, but its true flourishing only occurred once barriers to private property and individual ownership were removed through the struggle against kingly and religious authority.

More radical scholars of a Marxian or institutionalist variety argue that this view is ahistorical; that capitalism was a radical break with past practices of human economy and social reproduction and that its origins can be found in one of two places:

  1. the changing social property relations of the English agrarian country-side or
  2. in merchant trade which allowed commercial agents to accumulate a stock of wealth. They could then plough this additional capital or stock into new production facilities, risking their profit from one trade by investing it in industrial manufacture — the ‘real’ capitalism for Marx and his followers.

Oddly, rather than form somewhat of a synthesis of the two views, most scholars have tended to keep these two approaches conceptually distinct: it’s either one or the other. Moreover, these approaches tend to offer interior explanations that focus on England in particular and Europe more widely, forgetting or ignoring how far broader international relations impacted upon the development of capitalism in Europe. But since these are mainly Marxist accounts, there is a focus on social property relations and the development of industrial production — which, not to put too fine a point on it, Marx identified as the one ‘true’ capitalism.

But in the capital as power approach, capital is understood as the commodification of differential power rooted in ownership. So instead of looking for a ‘true’ capitalism in the industrial revolution, we should be more concerned with social property relations in general and the creation of private property or ownership in particular. Where does ownership come from and how did it develop historically? Here both Marx and Veblen are helpful and we will consult them both below. But before we do, let me stress that the main point this week is that we can conceive of private property ownership as the first sabotage that laid the basis for the emergence of the capitalist mode of power.

To be sure, a mode of power that has produced tremendous goods and services and made many advances since the time of organic economies tied the rhythms of photosynthesis. But to only recognize its many achievements is to miss how capitalists are in fact capitalizing the sabotage of human potential — what we could do and be versus what we have become and where we are headed. And if present trends are any indication, we ought to be very worried about which path we are being lead down. From a certain perspective, industrial civilization may be assessed as a giant human catastrophe.

There are no definitive historical records on the origins of ownership. Its origins remain obscure. However, in the capital as power framework, our most promising hypothesis is that ownership must have something to do with the exercise of power. Veblen suggested as much in his essay on the beginnings of ownership. Veblen argued that the mere possession of goods by our ancient human ancestors is an unsatisfactory response to the origins of ownership. Why? The primary reason given is that whatever meagre possessions primitive people may have had, they considered them to be part of their persons — not alienable possessions.

This might seem an odd claim to make but it makes much more sense when contrasted against modern absentee ownership. Modern capitalists do not physically own what they have — for example Bill Gates does not have Microsoft software packages hanging in his home office, the railway cars of the Canadian National Railway in his garage (his second largest public asset) or Deere tractors and engines parked on the lawn of his Seattle mansion (his third largest public asset).

What Bill Gates owns is legal claims on the expected future profit of these firms — not their physical goods. So, Veblen says, the origins of ownership cannot be found in the mere possession of certain artefacts — particularly in a time of dearth when hoarding goods may have been more likely than trading them or giving them as gifts. To quote him directly:

… in an earlier, non-commercial phase of culture there is less occasion for and greater difficulty in applying the concept of ownership to anything but obviously durable articles.

(Veblen, 1998: 46)

Where then, does he locate ownership? Veblen argues that it first originates with the turn from a relatively peaceful community to one with a predatory habit of life — of which there is considerable historical evidence from crusades to conquests. But even in the predatory mode where one community may invade another, the seizure of their goods, asserts Veblen, is not enough to explain ownership. However, the seizure of persons, argues Veblen, does offer a more convincing explanation for the institution of ownership.

In particular, he argues that the taking of women as trophies by early barbarian tribes are the roots of ownership. First in that these persons are seized as possessions who must obey their master’s command; second in that the fruits of their labor go to comfort their owner-master and; third in that possession of one or many women is evidence to others of superior force. For Veblen this relationship of force is eventually institutionalized in the ownership-marriage — the origins, for him, of patriarchy and private property. And indeed, where the institution of marriage did take hold, the wife was typically regarded as the property of the husband. So for Veblen, the birth of ownership results mainly in the sabotage of women or put another way, half the species.

There is some considerable evidence for Veblen’s claims but thinking deep back into a primitive human past also relies on a considerable amount of conjecture and logical reasoning based on present knowledge. It also largely fails to appreciate historical changes in patterns of ownership and tenure.

What of Marx?

Marx also had some words to say about ancient primitive societies — also largely conjectural. For Marx, the real historical break comes with the establishment of a simplified class society between workers and capitalists as the means of production are developed and the demographic shift to cities starts to emerge as a key trend. He is less concerned to trace the idea of ownership as a general category stemming from some primitive human past and wants to explain the origins of capitalist private property in England — his major test case.

So the birth of capitalist private property is one of Marx’s central concerns in both his early and mature political economy. Consider some representative quotes from as early as 1844 in what has become known as his Economic and Philosophical Manuscripts:

Capital is thus the governing power over labor and its products. The capitalist possesses this power, not on account of his personal or human qualities, but inasmuch as he is an owner of capital. His power is the purchasing power of his capital, which nothing can withstand.

The domination of the land as an alien power over men is already inherent in feudal landed property. The serf is the adjunct of the land. Likewise, the lord of an entailed estate, the first-born son, belongs to the land. It inherits him. Indeed, the dominion of private property begins with property in land — that is its basis.

Political economy starts with the fact of private property; it does not explain it to us. It expresses in general, abstract formulas the material process through which private property actually passes, and these formulas it then takes for laws. It does not comprehend these laws — i.e., it does not demonstrate how they arise from the very nature of private property.

Wages are a direct consequence of estranged labor, and estranged labor is the direct cause of private property. The downfall of the one must therefore involve the downfall of the other.

(Karl Marx, 1844)

And from Capital, Volume 1:

Political economy confuses on principle two very different kinds of private property, of which one rests on the producers’ own labor, the other on the employment of the labor of others. It forgets that the latter not only is the direct antithesis of the former, but absolutely grows on its tomb only.

(K. Marx, 1867)

These quotes all point in one direction: expropriation. In order for some to become the owners of capital — first in land — others have to be completely dispossessed of any access, tenure or relationship they may have had with the land outside of monetary relationships. And indeed, Marx called this process of expropriation primitive accumulation.

Unlike early liberals who viewed primitive accumulation as the accumulation of money for investment, Marx understood it as the forcible movement in late feudal Europe to dispossess peasants of their commons and customary rights to land. Commonly referred to the enclosure movement or the agricultural revolution, the expropriations contributed to growing pauperism and poverty. The enclosure movement did not create wage-workers. It created paupers who could then be employed as wage workers.

Thanks to David Harvey and others, there has been a bit of a revival of the concept of primitive accumulation. It turns out that expropriation did not end with the enclosures of land. But from the capital as power framework, there is no ‘primitive accumulation.’ There is simply accumulation — the attempt by the few to accumulate monetary wealth regardless of the means employed. But whether we want to keep or jettison ‘primitive accumulation,’ Marx’s focus on social property relations (and their transformations) is important.

For Marx, modern capitalist private property is founded upon the sabotage of the commons and customary right. In order for the great English landlords to become obscenely wealthy, the majority of peasant workers not only had to be made non-owners but far worse, non-tenured paupers. As Polanyi (1964) suggested in his major work, political economy and pauperism are born together. But capitalism would require one more thing. To safeguard private property, royal authority itself would have to be sabotaged.

Next week we’ll take a closer look at how exclusive ownership to private property was born in a struggle against princely power.

4. Royal authority and private property

Last week we considered the concept of ownership though the work of Veblen and Marx. We noted that the establishment and protection of private property involved the dispossession of the many by the few and that this tendency begins with the appropriation of humans (slavery) and land for private profit.

Keeping with Marx’s recognition that we ought to be concerned with a transformation in property relations when considering the emergence and development of capitalist private property, this week we consider how royal authority in England was challenged and largely incapacitated by an emerging ruling class of capitalists. The old feudal strictures could not hold under the weight of newly organized capitalist power.

We are concerned with England primarily because it is on this tiny island where we first see the most systematic transformation of social property relations towards exclusive private property for the few (at least in practice). Moreover, it is an interesting case to look at because a body of political theory will develop to not only justify private property but to challenge the idea of a monarchy altogether. Many writers, such as Algernon Sidney, would lose their heads for advancing such ideas.

But where to begin?

The Norman Conquest of England in the Battle of Hastings of 1066 is a key point of departure for two reasons. First, because the conquest established that all the land of England was now the private title of William the Conqueror or William I. After having won England through a violent invasion that dispossessed Saxon leadership, William and his soldiers pacified rebellious populations and created many castles to fortify his newly won kingdom. In return for military service William granted large tracts of land to his soldiers. These men became barons or lords of manors but they did not own their lands. They held them as grants or privileges extended by the monarch. Indeed, even in Hobbes’ Leviathan we find that whatever liberty and property a subject of the kingdom may have, he enjoys it at the pleasure of the monarch (Hobbes, 1980).

In other words, the lords of manors did not have absolute private ownership over the lands they were granted. They used this land at the pleasure of the William I and successive kings. Of course in practice the lords of manors did have ‘possession’ of their granted lands as did others who were granted diverse forms of feudal tenure. However, in theory, since all of England was the King’s land by allodial right gained through conquest, the land or the proceeds of it could be confiscated by the King though direct seizure or through the introduction of new taxes. One of the major reasons why royal authority might engage in such practices was to fund wars waged to advance the power and riches of the monarch and his merchant and landowning supporters.

The second reason why we begin with the Norman Conquest is because it is the primary reference point for virtually all contending parties during the English Civil War (1642-1651). To summarize a complex historical debate, there were largely three contending forces that all used the memory of the Norman Conquest in their attempts to advance their desired political positions. All of their discourses were steeped in religious language that we will largely ignore here.

The first were the social forces of royal authority — the King (Charles I 1600-1649), his court and his supporters in Parliament and elsewhere. One line of argumentation ignored the Norman Conquest altogether and contended that Charles I ruled by divine right. Legitimacy or rule, as it were, was conferred by God’s will and therefore the King was not subject to any other earthly authority.

This line of reasoning, however, did not go down well with Charles’ wealthy subjects who were challenging a royal prerogative free from Parliamentary consent. The forces of royal authority will not totally abandon this line of reasoning but they will also advance a further claim: the right to rule is rooted in the original Norman Conquest. Why does Charles I have absolute authority? The answer: by right of conquest, just as the King’s sovereignty was extended to newly conquered lands in North America. Since elite social forces would be familiar with this justification, those who opposed the royal prerogative would have to tread very carefully indeed.

The answer of the second group of social forces — in short hand called here the Parliamentarians — was that the Norman Conquest never took place. Instead, William I was no conqueror but heir to the throne of England. In this way, the conquest was disavowed. If William I was heir to the throne of England, and not its conqueror, then a new position opens up: William I ruled by respecting the rights and privileges granted to Englishmen by the ancient Saxon constitution. Such a constitution did not allow for arbitrary rule since the King had always — since time out of mind — ruled with Parliament. Whether convincing or not from a legal point of view, this was the line of argumentation that would ultimately be victorious, if only because the argument was backed up by the decisive force of arms required to win the Civil War. The Royalists were defeated and King Charles I lost his head.

The monarchy would be restored about ten years later and by 1688 when William of Orange was invited to the throne, the monarch was made subordinate to Parliament. With the royal prerogative now in a shambles, the men of property were now in control of the English state or as Polanyi put it, ‘the government of the Crown gave way to the government of a class’ (1964). It is not that these men lacked possession of land or wealth when monarchs reigned. They did. But possession was not enough. With the threat of royal prerogative their property could be confiscated by the decision of the monarch. This is what was ultimately at stake for those wealthy Parliamentarians that fought and financed the war against royal power: a say in their own governance and the protection of their fortunes.

And this is where liberal historiography ends: with the triumph of Parliament over an arbitrary monarchy. But the struggle to sabotage princely power and subject it to the will of a newly propertied class was not just a struggle that looked upwards towards the King. It was also a struggle directed at the social forces from below — those without significant property or power.

In the tumultuous times of the Civil War, more radical social forces emerged that not only questioned royal authority but the entire structure of society. They can roughly be divided into two camps: the Levellers and the Diggers. Both will argue, like the Royalists, that a conquest did indeed take place in 1066. From this point, the rights and privileges of Englishmen were increasingly usurped not only by the monarch but by the lords of estates. Great wealth in the hands of the few is the result of the conquest and government is little more than a war waged against the poor. Politics is the extension of war by other means.

The Levellers wanted an extension of the franchise but in the Putney Debates, Cromwell’s son-in-law argued that the unequal distribution of property would be challenged if all men in England could vote. They would vote, it was imagined, for a more just distribution of property. Whether or not this be true, the threat was real enough. The debate was not solved by reason. It was settled by murdering the Leveller’s leadership.

The Diggers were even more radical. They did not believe in laboring to enrich a master and abhorred wage-labor. Instead, they were concerned to work the land in common for the benefit of the community. Private property, their leader reasoned, was the chief reason for political faction and violence in support of the powerful. Common property and working collectively could solve these problems. This was heresy to the powerful and the Diggers were chased from the land they had so carefully tended during those years where ‘everything was turned upside down.’

So arbitrary royal authority was a threat to the men of property just as much as democracy. Or, if we want to put it in a slightly different way: popular democracy would (not could – would) sabotage the privilege of a small minority of property owners by calling the unequal distribution of property into question. The so-called founding fathers of the United States would fear much the same.

Could the constitution of the United States be considered a form of sabotage? We’ll discuss this next week.

5. The constitution of the United States of America

It is by now fairly clear that the Congress of the United States is a ‘do-nothing’ Congress populated by 268 millionaires (out of 534 lawmakers). The job approval rating, depending on which poll we consider, hovers around 9-14%. This is perhaps hardly surprising given that the Republican Party vowed to sabotage Democratic and presidential initiatives as soon as Obama became President of the United States. But are there deeper structural roots to this inertia? Why does Congress seem so incapacitated? How far and in what ways could we consider the Constitution of the United States an act of sabotage by its promoters?

At first this may seem like a strange question, but if we return to the context in which the document was written we may gain some greater clarity and find out why the federal system of government is hardly responsive to the needs and desires of the majority of American people. In fact, the Princeton political scientist Martin Gilens found that ‘influence over actual policy outcomes’ in the United States ‘appears to be reserved almost exclusively for those at the top of the income distribution’ (Gilens, 2007). This was not always so, but since the 1980s the United States has, for all intents and purposes, become a plutocracy.

The first thing to remember is that the so-called ‘founding fathers’ were not debating the establishment of a democracy. Rather, their primary concern was how to found a republic, or a state without a monarch. According to Ellen Meiksins Wood’s Democracy against Capitalism, the very concept of ‘representative democracy’ that the American constitution eventually guaranteed was historically new and contrary to earlier forms of direct democracy that did not alienate political power. As she reminds us:

We have become so accustomed to the formula, ‘representative democracy’ that we tend to forget the novelty of the American idea. In its Federalist form, at any rate, it meant that something hitherto perceived as the antithesis of democratic self-government was now not only compatible with but constitutive of democracy: not the exercise of political power but its relinquishment, its transfer to others, its alienation.

(Wood, 1995: 216)

So our question must be why direct forms of democracy were incapacitated and representative democracy on a federal scale implemented?

The answer to this question can be gleaned by considering the social forces at play when the Federalists took up their pens to advocate for federal government. They were opposed by the anti-federalists who argued that the new constitution would centralize power and jeopardize the rights and liberties of individuals, localities and states. We also have to recall that there were really two American revolutions — the first was directed at power from above — that is to say, against King George III and his parliament of propertied men. The list of grievances against the King can be found in the American Declaration of Independence.

Yet according to Benjamin Franklin, one reason stood out (Greene & Jellison, 1961: 492). The main reason for the revolutionary war was not so much taxation without representation but the fact that George III and the Bank of England largely forbade the use of Colonial script — paper currencies popular in the colonies. The Currency Act of 1764 sabotaged the domestic currencies and apparently caused recessionary conditions in the colonies because it restricted the money supply. Just over a decade later, leading colonists would form the Continental Congress. With borrowed money from France and the Netherlands, the rebellious colonists waged war against imperial Britain and by 1783 declared victory.

That was the first American Revolution.

The second American Revolution followed soon after. It was a counter-revolution directed at the people themselves by the ruling social forces of slavery and capital. From the perspective of the ruling class, the decades of resistance and revolution generated new threats to the social order from below — threats that made Federalists realize that the Articles of Confederation were inadequate for the task of encoding their power in institutions after the revolution.

The major fear here was that the people had become too involved in their own governance, and often initiated legislation that harmed the minority of affluent property owners. Debt and tax relief, as well as emissions of paper money threatened the accumulation strategies of wealthy citizens. And where state legislatures were not responsive to popular demands for relief, aggrieved citizens often took up arms in open rebellion, regularly justifying their resistance by appealing to the language of liberation spawned by the revolution. What made matters worse, however, was the realization, articulated most forcefully by Madison, that an impending class war was perhaps inevitable.

In devising the national government of the United States, James Madison was careful to inform the delegates at the Constitutional Convention that they were not only deciding the design of republican government, but also its fate. Whilst Madison identified a number of threats to republican government, he identified and stressed one ultimate danger: ‘the violence of faction.’ For Madison, factions were inevitable if liberty was to be preserved. He feared, however, that ‘the superior force of an interested and overbearing majority’ might ultimately threaten the rights of the minority (Madison, 1787a).

Whilst he identified a number of sources of faction, he argued that ‘the most common and durable source of factions has been the various and unequal distribution of property.’ Here, Madison was certainly concerned with the diversity of property ownership and the possibility that there would be conflicts between men of property in regards to policy. What Madison was more concerned about, however, was the unequal distribution of property and the fact that ‘those who hold and those who are without property have ever formed distinct interests in society.’

In this context, we do well to recall that Madison and others not only had access to political theory, but also the historical experiences of other class divided societies. In designing the constitution, Madison realized that whilst the present distribution of property in the United States bore directly on the design of the national government, the future was perhaps more important. He remarked that whilst ‘the United States have not reached the stage of Society in which conflicting feelings of the Class with, and the Class without property, have the operation natural to them in Countries fully peopled,’ the future would be different:

In future times a great majority of the people will not only be without landed, but any other sort of, property. These will either combine under the influence of their common situation; in which case, the rights of property and the public liberty, will not be secure in their hands: or which is more probable, they will become the tools of opulence and ambition, in which case there will be equal danger on another side.

(Madison, 1787b)

Thus, whilst the special circumstances in the thirteen newly independent states served to suppress ‘conflicting feelings’ that were ‘natural’ to the propertied and propertyless, Madison certainly anticipated a future were these conflicts would inevitably surface. However, in perhaps one of the most telling passages in the records of the Federal Convention — records that were not released for public scrutiny until 1840 — Madison admitted that the germs of class conflict were already blossoming in post-revolutionary America:

It ought finally to occur to a people deliberating on a Government for themselves that as different interests necessarily result from the liberty meant to be secured, the major interest might under sudden impulses be tempted to commit injustice on the minority. In all civilized Countries the people fall into different classes having a real or supposed difference of interests. There will be creditors and debtors, farmers, merchants and manufacturers. There will be particularly the distinction of rich and poor. It was true as had been observed, by Mister Pinkney, we had not among us those hereditary distinctions, of rank which were a great source of the contests in the ancient Governments as well as the modern States of Europe, nor those extremes of wealth or poverty which characterize the latter.

We cannot however be regarded even at this time, as one homogeneous mass, in which everything that affects a part will affect in the same manner the whole. In framing a system which we wish to last for ages, we should not lose sight of the changes which ages will produce. An increase of population will of necessity increase the proportion of those who will labour under all the hardships of life, and secretly sigh for a more equal distribution of its blessings. These may in time outnumber those who are placed above the feelings of indigence.

According to the equal laws of suffrage, the power will slide into the hands of the former. No agrarian attempts have yet been made in this Country, but symptoms, of a leveling spirit, as we have understood, have sufficiently appeared in a certain quarters to give notice of the future danger. How is this danger to be guarded against on republican principles? How is the danger in all cases of interested coalitions to oppress the minority to be guarded against?

(Madison, 1787c, emphasis added)

What this passage reveals is not only a concern to secure the minority against the majority in the present, but also in the future. In other words, the politico-strategic rationality that informed the constitution was not a provisional consideration of the present but a going concern to be operationalized in the very design of the national government.

Given the likelihood of a protracted class war and the possibility that more propertyless people would be enfranchised over time, answering the question of how to guard the minority of property owners against the majority of propertyless became the ultimate security problematic. Indeed, as one student of the Constitution has noted:

… the original focus on property placed inequality at the center of American constitutionalism. For the Framers, the protection of property meant the protection of unequal property and thus the insulation of both property and inequality from democratic transformation … Effective insulation, in their view, required wealth-based inequality of access to political power … The inherent vulnerability of all individual rights became transformed into a fear of ‘the people’ as a threatening propertyless mass whose power must be contained.

(Nedelsky, 1990: 2)

Building on his theory of inevitable class conflict, Madison argued that only a larger political union could suppress majority rule and protect what he called the ‘public liberty.’ As many Anti-Federalists recognized, this was a complete reversal of republican political theory which argued that only small governmental units could protect the liberty of the people. With the experience of some of the state legislatures in mind, Madison, however, reasoned that small governmental units were vulnerable to majority rule and factious combination.

As Holton (2005) has suggested, Madison’s strategy was to divide the population by extending the scale of government so that the minority, who could more effectively organize around issues and candidates, could rule it. In this way, Madison argued, ‘a rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project’ would be frustrated by the electoral system spanning the entire voting population (Madison, 1787a). However, the attempt to drown out popular voices was only one way of answering the question of how ‘interested coalitions to oppress the minority’ could be guarded against by a national government.

Another mechanism which proved to be of crucial importance was the creation of a national army to suppress rebellious activity domestically. For the early liberals that informed the American political debate, standing armies were always identified with despotism. But a standing army is exactly what the men of property wanted. Today, they have the largest military force on the planet.

In this light we can assess the constitution of the United States — particularly given that there were more democratic options. We can suggest that the constitution was not designed to facilitate democracy. It was designed to incapacitate it. It is not that democracy was a threat to property per se. It was more the case that democracy was a threat to radically unequal property and therefore radically unequal political power.

Today, 1% of citizens in the United States own 35.4% of all net worth. The next 19% own 53.5%. The remaining 80% collectively own 11%. In other words, about 45.6 million adults own 89% of all the wealth in the United States. The remaining 182,545,600 adults have 11% to split between them.

With this in mind, we might conclude with the progressive historian Vernon Parrington’s apt observation:

… the drift toward plutocracy was not a drift away from the spirit of the Constitution, but an inevitable unfolding from its premises; that instead of having been conceived by the fathers as a democratic instrument, it had been conceived in a spirit designedly hostile to democracy; that it was, in fact, a carefully formulated expression of eighteenth century property consciousness, erected as a defense against the democratic spirit that had got out of hand during the Revolution, and that the much-praised system of checks and balances was designed and intended for no other end than a check on the political power of the majority — a power acutely feared by the property consciousness of the times.

(Parrington, 1930)

(Some of this post is excerpted from my ‘Empire of Liberty and Domination’ now published in Gill and Cutler’s (eds) New Constitutionalism and World Order.)

6. The capitalization of money creation: The greatest sabotage in human history?

Every year in my course on Political Economy in the New Millennium I ask my students to do an exercise. The task is for them to ask three members of their friends or family how money is created. As you can imagine, the answers diverge widely from ‘the government prints it’ to the ‘central bank makes it.’ Some just throw their hands up in the air and say they don’t really know. And the vast majority of us do not.

But I’m also guilty. My entire post-secondary degree I could not have really answered the question with any accuracy. I might have been able to rattle on something like this: someone who wants to save money goes to a bank and deposits it. Since the depositor will not likely take out all of their money at once, the bank can then lend a portion of the deposit to customers who want to borrow. For this service, the bank makes a profit by paying less in interest to the depositor than it receives from the debtor taking out the loan. I would also have been able to tell you that the money supply can expand in this way thanks to fractional reserve banking.

How does this work?

The key to understanding it is to consider the idea of a reserve ratio. The story goes like this: the central bank tells commercial banks that they must hold a certain percentage of cash on hand. Supposedly this is to ensure that there is some cash in the bank and that it isn’t all loaned out. After all, if everything was being lent out, there would be no cash for depositors to withdrawal! And here’s where the expansion bit comes in. Let’s take a look at it in stages.

First, I go to the bank and deposit $100 dollars.

Let’s suppose the central bank has asked my bank to keep a reserve ratio of 10%. In other words, the bank only holds a fraction of the deposit as a reserve: hence, fractional reserve.

That means the bank has to keep $10 on deposit but can use the other $90 for loans.

Sam comes to the bank and takes a loan out for $90 and deposits this into an account.

The bank must hold back 10% of $90 or $9 but can loan out a further $81.

Let’s now check in and see how much money has been created:

So far, out of my initial $100: $90 + $81 = $171 has been created.

This process can continue until the initial $100 dollars is worn out by reserve requirements as banks make more loans.

That much I could have told you. And I would have been completely wrong! In fact, most students of economics would repeat something like the above because this is pretty much what modern neoclassical economics teaches. It is incredibly misleading.

So why is it that most of us are so bad at being able to explain how money is created let alone what it is? The first reason might be because the fractional reserve thesis has managed to convince the ones who care to ask the question in the first place. But since the vast majority of us would not be able to answer the question, a second hypothesis should be considered: that finance is the language of the minority in power and that those who profit from the current monetary system have a keen interest in making sure the population remains confused on the issue. This would help to explain all the secrecy surrounding the banking industry, the second largest capitalized industry on the planet after oil and gas (if we include the estimated market value of state run oil and gas firms — see DiMuzio, 2012 for further clarification).

One of the chief edicts of many of the Slave Codes was that slaves should not be allowed to read or write. It was thought that if they gained this capacity it would be easier for them to communicate, organize and overthrow the slave mode of power. And we all know what literacy and the printing press did for the unity of the Catholic Church! In the same way, so long as we remain financially illiterate we will have little chance to communicate, organize and overthrow the capitalist mode of power let alone offer a workable and sane alternative.

So how is money actually created?

In the majority of the world — and particularly the OECD – about 97% of all money is created through digital loans by commercial banks. They do this by entering numbers into a computer when someone takes out a loan. So for example, if I go take a personal loan for $1000 from a commercial bank, the bank records the $1000 as a liability for me and as an asset for the bank. This means that our money is created as debt bearing interest.

The other 3% is created in physical notes and bills by the government — typically by what is called a Mint. The government sells these notes and bills to banks at face value. So for example if the government prints $1000 worth of $100 dollar notes, a commercial bank will by those notes for $1000. But, since it typically costs the government less money to print money and forge coins, the government can turn a profit on the difference between the face value of the notes and the actual cost of producing the notes. So for our $1000 face value example, consider it only costs the government $1 dollar to make. Profit would be $999 and this would go into the government treasury to fund operations and help service the so-called ‘national’ debt.

To many, this revelation is rather shocking but it has more or less been the way our capitalist societies have been creating money since the increasing use of computers and abandoning the gold standard in the early 1970s. (For those who want to learn more by using the UK as an example there are a series of videos at Positive Money that explain the process in a relatively straightforward way.)

Our concern in the capital as power framework, however, is not simply with how money is created, but its very capitalization. Since commercial banks produce most of the world’s money as interest bearing debt and the banks are owned by a small minority of people worldwide, how, we might ask, did this relationship come to be? Creditors with the power to create money out of thin air and a world filled with debtors drowning in interest payments.

We’ll consider this history next week and perhaps strangely, the story actually begins with a dearth of money in England, before the Glorious Revolution of 1688. What transpired could be considered the largest sabotage in human history.

7. The privatization of money: The greatest sabotage in human history? Part II

Last time we found out that modern money is created when commercial banks make loans to people and businesses. They are not loaning out other people’s money at all, but effectively creating it by entering numbers into a computer. Between Part II and the last article I wrote, a further revelatory article was published in the Guardian by David Graeber of Debt: The First 5000 Years fame. The article (Graeber, 2014) is worth considerable thought for anyone who wants to understand modern capitalism. As I hinted at last week, even the capital as power framework has been silent on the issue of money and its creation as interest bearing debt.

This week, I want to share some of my new research with you on the history of money, how the creation of it was privatized and why this act can be considered the greatest sabotage in human history. As this is a blog post and not an academic paper, my history will be somewhat stylized.

One of the key questions the capital as power approach asks is: what are investors capitalizing when they invest in or come to own income-generating assets? Since we are concerned with money created as debt, in this article we ask what are bank owners capitalizing? The simple answer to this question is that they are capitalizing the bank’s power to create money as debt by extending loans to businesses and people in need of money. This requires exclusion and therefore sabotage to function: counterfeiting must be made illegal and punishment swift if banks are to have this exclusive power. For example, the maximum sentence for counterfeiting in Australia (where I write from) is 14 years in jail. In the United States it’s 15 years in the slammer.

Since everyone needs money to transact in a market economy — including governments — this gives the owners of banks and their directors tremendous power over human life and patterns of investment, development and differential accumulation we experience. The creation of money by banking corporations is also a wonderful system for ensuring that a tiny minority (the owners of the banks) continue to grow ever wealthier from interest payments, dividends and rising stock prices. There’s a reason why most bankers at the top of the food chain are wealthy and their banks are the second most heavily capitalized industry on the planet: the demand for money is both high and constant.

How did this happen?

It has been well documented by numismatists (people who study money) that diverse historical political communities used a variety of materials as early forms of money. For example, the Aztecs used the cocoa bean as a form of currency. But since we are concerned with the creation of modern money we can skip a deeper history of money and move to our major turning point: the establishment of the Bank of England in 1694.

The first thing we have to recognize is that in Europe, the most coveted form of money came to be silver or gold coins. This was largely a legacy of the Roman Empire in Britain but the history stretches all the way back to Lydia (a part of Turkey) and King Croesus’s creation of coins (560 to 547 BC). Gold and silver coin were also highly coveted because they appeared to be universally admired and the only main currency in international trade. An absence of gold and silver coins effectively meant you could not participate in trade — and for Europe, which coveted the riches and luxuries of Asia, this meant a race to find more gold and silver to pay for imports. Since gold and silver were the only things that could technically act as money, the only way the money supply could increase was by producing more gold and silver, trading goods with other nations, or stealing/confiscating/pirating it from others.

In England, the dominant form of money was silver coin and its production was the purview of the sovereign or monarch. Gold was also used and in circulation but England in the 1600s did not have a considerable amount of gold and did not move to a gold standard until the next century. Lacking any significant gold mines, the English relied on trade to bring gold into the country. Much later, it would extract considerable amounts of gold from its colonial possessions such as Australia. However, the key problem in England in the 1600s was the scarcity of money.

A bevy of pamphlets on the money situation of the country clearly identify this problem. It was a major problem because leading thinkers of the time understood that England was becoming more productive and the dearth of money would not allow for the full circulation of goods. Like today, people complained for a want of money. Part of the reason (we won’t go in depth about this here) England was becoming more productive was its use of coal energy — the result of Britain denuding its forests rather rapidly. Since energy means the capacity to do work, with more energy coming online, England could become more productive. Over time, Britain became the first country to achieve sustained economic growth (Wrigley, 2013).

So in modern parlance, England’s economy was running far below its capacity for want of money. Recognizing the situation a number of interested parties set forth to find a solution. The most decisive was the Hartlib Circle (a network of friends interested in improvement and science) who operated from 1630-1660. This group arrived at the conclusion that money did not have to be metallic coins. For many, this was hearsay, but necessity forced the idea that money was not necessarily a material thing but a medium of some kind founded on trust. This idea made it possible to conceive of money as credit — as something beyond gold and silver coins. Of course credit in the form of paper notes had long been in existence but it was highly personal, largely untransferable and as such, could not expand the money supply, which was the identifiable problem.

So the key problem was how to expand the money supply. There were many banking precursors Hartlibians and other thinkers could rely on — particularly Italian and Dutch banking practices — but neither would suffice to solve the problem of expanding the money supply. As Wennerlind notes of the Dutch experience:

In fact, England was largely self-sufficient when it came to ideas about credit. While political economists sought inspiration from the Dutch on all matters commercial, their financial innovations were considered inadequate to answer England’s needs and were thus rarely given serious consideration in the English debates. More precisely, because the Dutch did not develop a national debt backed by the nation-state, did not enjoy a liquid secondary market in public debt instruments to complement its stock market, and, most importantly, did not issue a generally circulating credit currency, Dutch finance did not constitute a model that the English sought to emulate directly.

… On the continent, banks had already transcended the disadvantages associated with the lack of quality coin. The Bank of Amsterdam, founded in 1609, provided traders in the Dutch Republic with a convenient and secure paper currency. However, because the paper currency was fully backed by coin in the vault, the Bank of Amsterdam did not augment the overall money stock, at least not in a significant way.

(Wennerlind, 2011: 8 and 69)

But while the Hartlibians were concerned to stimulate the economy by introducing more money into the economy, the real innovation of credit money derived from the need of William III and his Parliament to fund a war with King Louis the XIV of France. Traditionally the monarch was responsible for funding all wars out of the royal estate and whatever customary taxes were owed to the sovereign. Hence, there were strict limits imposed upon the monarch in regards to finance, often forcing the Crown to borrow from private subjects to finance war-fighting exploits. This typically meant the accumulation of debt and the alienation of more of the royal estates by sale to private persons. An additional alternative was the leasing of royal lands for a fee or forcing loans — a practice disdained by merchants and moneylenders. Since ordinary people were largely outside of the money economy until the money supply grew and new taxes were issued, the tax burden fell most heavily on merchants and the propertied.

What this amounts to is the simple fact that finding a way to finance war was a key factor in England’s monetary and financial revolution. The answer to the problem was twofold: the creation of the Bank of England and the long-term ‘national’ rather than sovereign debt. Both would arrive on the scene once the propertied of England made the Crown subordinate to Parliament in 1688.

A Scot, William Paterson introduced the scheme for the Bank of England which was chartered in 1694. The bank was given the exclusive right to extend credit to the government at interest. In turn, the government promised to finance the interest on its loans by providing creditors with a portion of its tax revenues. The creation of money was no longer the prerogative of the sovereign but of private social forces interested in the accumulation of evermore money. From the point of view of capital as power, investors in the Bank of England were capitalizing the state’s power to wage war and tax its subjects.

After the creation of the Bank of England, taxation exploded in Britain to cover the interest on the so-called national debt — a debt owed to the 1% of bank owners. The British became the most taxed in history. An article appearing in 1820 captured the automatic progression in taxation:

Taxes upon every article that enters the mouth, or covers the back, or is placed under the foot — taxes upon everything which is pleasant to see, hear, feel, smell or taste — taxes upon warmth, light, locomotion — taxes on everything on earth, and the waters under the earth — on everything that comes from abroad or is grown at home — taxes on the raw material — taxes on every fresh value that is added to it by the industry of man — taxes on the sauce which pampers a man’s appetite, and the drug that restores him to health — on the ermine which decorates the judge, and the rope which hangs the criminal — on the poor man’s salt and the rich man’s spice — on the brass nails of the coffin, and the ribands of the bride — at bed or board, couchant or levant, we must pay. The school-boy whips his taxed top; the beardless youth manages his taxed horse with a taxed bridle, on a taxed road; and the dying Englishman pouring his medicine, which has paid seven per cent, into a spoon that has paid fifteen per cent, flings himself back upon his chinz (299) bed, which has paid twenty-two per cent, makes his will on an eight pound stamp, and expires in the arms of an apothecary, who has paid a licence of £100 for the privilege of putting him to death. His whole property is then immediately taxed from two to ten per cent. Besides the probate, large fees are demanded for burying him in the chancel. His virtues are handed down to posterity on taxed marble, and he will then be gathered to his fathers to be taxed no more.

(Davies, 2002: 300)

Heavy taxes are the necessary corollary of a monetary system based on money as interest bearing debt owed to the few.

But how was the money supply eventually increased?

Paterson himself was a banker and there is little doubt that he understood precisely what merchant bankers were up to before the creation of the ‘national’ debt and the Bank of England. Like goldsmiths and other bankers, he understood that the gold and silver received on deposit would largely remain at the bank for reasons of security and the convenience of handling paper notes rather than heavy coins. The depositor would simply deposit gold, silver or both and receive a note of receipt. This receipt could then be used for making transactions without bothering with metallic money. As long as depositors were confident they could exchange their notes for their coins, all would be well.

Paterson suggested that the Bank of England could do the same but on a far larger scale. He ensured that the credit money issued was backed by reserves of good quality silver coin. He reasoned that the Bank would only have to keep 15-25% of silver in reserve and on this basis, start extending credit. The fact that the notes in circulation were not backed by an equivalent amount of silver coin, of course, was not broadcast to the public. But to shore up trust among the people that mattered to his scheme, Paterson also reasoned that investors/depositors in the Bank could feel secure in receiving payments since Parliament had the right to tax its subjects for payment of interest on the ‘national’ debt. This, in short, was the original means by which the money supply was extended through debt. As one historian of money noted:

When the government established a royal commission to inquire into the activities and reserves of the bank, the bankers would only respond that the reserves were “very, very considerable.” When asked to be a bit more specific, they said that they would be “very, very reluctant” to add to what they had already said.

(Weatherford, 1997: 160)

But to make this sleight of hand system work, investors were capitalizing far more than the ability of the Bank to profit off the ‘national’ debt. As Wennerlind has demonstrated, the new system of debt money required the death penalty for counterfeiters. In other words, the exclusive right to create money demanded the violence of the state. Dozens were put to death at the hands of Sir Isaac Newton — who accepted the responsibility for catching counterfeiters as the Master of the Mint.

This was not necessarily a new practice. Historically, people found counterfeiting were subject to all kinds of gruesome torture and often death (true as well in China). But it was difficult to know the true source of counterfeiting and thus it was difficult to punish and thus create deterrence by providing a symbol to others. The creation of debt money reinforced the impetus to find and punish counterfeiters. In this sense, early investors in the Bank of England were capitalizing the state’s power to command the death of its subjects.

But killing counterfeiters was not enough to ensure the monetary revolution and the security of the new organized creditors. Since excessive taxation was unpopular, the national debt could be funded in another way: the transatlantic slave trade, the trafficking of human beings from West Africa to Spanish America and ultimately the British colonies. Towards this end, the South Sea Company was established to help fund the national debt and service the interest owed to investors in the Bank of England. The company had the ‘right’ to transport and sell 4,800 slaves to the Spanish colonies per year. In effect then, investors in the Bank of England capitalized one of the most reprehensible practices in all of human history.

Guarding the exclusive right to creating money as debt also meant sabotaging colonial currency in what we today call the United States. The British colonies also suffered from a dearth of silver and gold to facilitate their trade and repay their debts — many of which were owed to British merchants. The scarcity of money problem was solved — however imperfectly — by issuing debt-free paper currency in relatively controlled amounts. The debates are more complex than I can allow for here, but one thing is certain: the Bank of England wanted to extend its power to the colonies and could not permit the colonists to issue their own currency.

This was viewed as a key challenge to the bank’s monopoly on money creation through debt. I do not want to oversimplify or suggest that the origin of the American Revolution is monocausal, but the Currency Act of 1764 goes a far way in explaining why colonists would take the massive risk of taking up arms against their perceived oppressors. Indeed, upon being interviewed by the House of Commons in 1766, Benjamin Franklin said the following when asked why colonists had lost respect for Parliament:

To a concurrence of causes: the restraints lately laid on their trade, by which the bringing of foreign gold and silver into the Colonies was prevented; the prohibition of making paper money among themselves, and then demanding a new and heavy tax by stamps…

(Franklin, 1766)

The tax was disliked because everyone was forced to pay it and Franklin reasoned that there was not enough gold and silver in the Colonies to pay the tax. He argued that to pay the tax, the colonists would have to be compelled by arms. In this way, investors in the Bank of England were also capitalizing the attempt of Britain to enforce its rule over the recalcitrant colonists once they finally rebelled. After the victory by the colonists, the money problem as well as the debt contracted by the war loomed large in the debates on how to establish a new republic. We cannot entertain these debates here, we only note their importance for the history of banking, state-formation and the creation of money in the United States.

Eventually, states started to adopt (or were forced to adopt) a silver or gold standard — for example Japan adopted a gold standard to participate in international trade. But as I mentioned last week, by the 1970s, this system had proved too restrictive (as it had done so before) and the monetary system known as Bretton Woods was effectively abolished by the United States when it no longer backed its paper currency with gold. Thanks to the massive demand for oil and the fact that other commodities were denominated in US dollars, the Nixon administration could be sure of continued demand for dollars.

In most of the world we now have fiat debt money backed only by the force of the government. As already stated, most of this money is lent into the economy when people take out mortgages, credit cards, car loans, student loans, personal loans etc… The more in debt we are, the more money there is and the more bank owners stand to make off interest and fees. This helps us explain why the richest countries on the planet are also the ones with the most ‘national’ and personal debt loads.

But the important thing to know is that the very few capitalize the power to create money as debt and so long as we continue with this system, we can expect many, many morbid symptoms.

It doesn’t have to be this way.

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The cover image (from Wikimedia commons), is a CIA manual from 1944 that gave advice for how sympathetic citizens in occupied countries could sabotage their regimes. Details here.


Cornehls, J. V. (2004). Veblen’s theory of finance capitalism and contemporary corporate America. Journal of Economic Issues, 38(1), 29–58. Taylor & Francis.

Davies, G. (2002). A history of money: From ancient times to the present day. University of Wales Press.

DiMuzio, T. (2012). Capitalizing a future unsustainable: Finance, energy and the fate of market civilization. Review of International Political Economy, 19(3), 363–388. Taylor & Francis.

Franklin, B. (1766). Examination before the committee of the whole of the House of Commons. The Papers of Benjamin Franklin, vol. 13, January 1 through December 31, 1766.

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The post Di Muzio on ‘Sabotage’ appeared first on Economics from the Top Down.

The Quant Case for Open-Access COVID Vaccines

Published by Anonymous (not verified) on Wed, 09/06/2021 - 7:51pm in

Around the world, rich countries are celebrating as their COVID numbers fall. Their success is no mystery — it’s because of a massive rollout of COVID vaccines. While we should celebrate the development of these vaccines, their deployment highlights the tyrannies of capitalism.

Most of the basic research for COVID vaccines was funded by the public. Yet their manufacture is controlled by Big Pharma. The predictable result is that vaccines flow to the highest bidder and Big Pharma reaps the profit. Thus, the world is now ‘blessed’ with 9 new pharma billionaires.

Since we’re stuck with COVID for the long haul, we need to end the privatized vaccine model. The alternative is surprisingly simple. Let governments continue to fund basic science. And let private companies continue to manufacture vaccines. Just don’t let these companies have a monopoly on property rights. Instead, put vaccines in the Creative Commons. The result will be cheap vaccines, available to all.

To make the case for open-access vaccines, it helps to run the numbers. To date, the vast majority of COVID vaccines have gone to rich nations. It’s plutocratic healthcare in action: more money = more vaccines.

Let the data speak.

The global distribution of COVID cases

We’ll start by looking at how the global distribution of COVID cases has played out since the beginning of the pandemic. Figure 1 shows the global share of cases by continent since February 2020.

Figure 1: Share of world’s COVID cases by continent. [Sources and methods].

When the pandemic started in late 2019, Asia had 100% of all COVID cases — obviously because the virus arose in China. In March 2020, Donald Trump bemoaned the spread of the ‘Chinese virus’. But by then the vast majority of cases were in Europe, which had refused to lock down until it was too late.

After the early European (and then American) debacle, the spread of the virus slowed in these regions, but sped up in Asia and South America. By September 2020, the majority of cases were in the ‘Global South’. Then in the fall of 2020, the US and Europe brashly reopened and cases there skyrocketed. And so at the start of 2021, most COVID cases were again in the ‘Global North’.

Figure 2 shows this ‘North-South’ dynamic. I’ve plotted here the Global North’s share of world COVID cases since February 2020. (Remember that ‘North’ is code for ‘rich countries’. Here it consists of North America, Europe and Oceania.)

Figure 2: Share of world’s COVID cases in the ‘Global North’. [Sources and methods].

I’ve marked in Figure 2 the approval dates of the 4 major COVID vaccines. Shortly after these vaccines went on the market, COVID numbers in the Global North plummeted. Today, COVID is overwhelmingly a disease of the Global South. In other words, the pandemic is now a poor-country problem.

The global distribution of COVID vaccines

Let’s switch gears now and look at the global rollout of COVID vaccines. The most ethical way to distribute vaccines would be to send them where they are needed most. If we followed this principle, regions with the most cases would get the most vaccines. In other words, the vaccine rollout would mirror the COVID case load.

That’s not how things have played out.

COVID vaccines haven’t chased cases … they’ve chased dollars. As Figure 3 shows, vaccines have gone overwhelmingly to rich buyers in Europe and North America.

Figure 3: Share of the world’s fully vaccinated people by continent. [Sources and methods].

Figure 4 simplifies things by looking at the vaccine rollout in terms of a North-South dynamic. I’ve plotted here the share of fully vaccinated people who live in the Global North. In January 2021, when vaccines first rolled out in the UK and the US, this share was 100%. Thankfully, it declined thereafter, meaning some vaccines did make it to the Global South. But outside rich countries, the pace of vaccine distribution has been slow. As of June 4, 2021, 65% of all fully vaccinated people live in the Global North.

Figure 4: Share of the world’s fully vaccinated people who live in the Global North. [Sources and methods].

The truth is that the rollout of COVID vaccines has followed a simple plutocratic formula:

more money = more vaccines

My guess is that you can see this formula at many different scales. For instance, in Toronto (where I live) the vaccine rollout has been slower in low income neighbourhoods. And as we’ve seen above, at the global level vaccines have gone overwhelmingly to rich regions.

The same formula also holds at the national level, as shown in Figure 5 and 6. Across countries, the portion of people who are fully vaccinated is proportional to GDP per capita. In other words, the greater your income, the more vaccines you get.

Figure 5: COVID vaccination rates vs. GDP per capita. Each point shows the most recent data for vaccination rates by country, plotted against GDP per capita in 2019. [Sources and methods].

Figure 6: COVID vaccination rates vs. GDP per capita, January 2021 to June 2021. [Sources and methods].

If you’re familiar with global health statistics, the above trend won’t surprise you. Pick any health indicator (including other vaccination rates) and you’ll find that it gets better as per capita income grows. That’s because we live in a plutocratic world where money buys healthcare.

The truth about intellectual property

The unequal rollout of COVID vaccines brings me back to intellectual property. When drug patents expire, the drugs tend to become cheaper. Why? According to, it’s because generic manufacturers have lower costs:

Generics are less expensive because the drug manufacturer does not have to duplicate the original clinical trials for effectiveness and safety, which lowers the cost to bring the drug to market.

Of course, it is true that generic manufacturers don’t do drug trials. But that’s not why drugs get cheaper when patents expire. The reality is that patented drugs are expensive precisely because they are patented. Drug patents are a government-sanctioned monopoly that gives the power to set prices. That’s the secret to Big Pharma’s thick profit margins (which tend to exceed the margins of most other companies on the S&P 500). Let the public fund the dirty work. Then get a monopoly on the final product.

Speaking of thick profit margins earned through intellectual property, perhaps the only firms that can compete with Big Pharma’s margins are academic publishers. In 2018, for instance, the publisher Elsevier reaped a profit margin of 37%. The reason academic publishers can compete with Big Pharma is because they’ve adopted the same business model:

  1. Let the public sector do the expensive basic science;
  2. In the last mile, put IP around the final product;
  3. Earn monopoly profits.

The key to these profits is intellectual property. It is the institutional fence that sanctions monopoly power. Without IP, Big Pharma’s hefty profits would vanish. That is the dirty truth that pharma execs dare not speak publicly. Instead, they’ll call their IP an ‘intangible asset’ that ‘generates value’. But inside the boardroom, Cory Doctorow notes, the doublespeak gets dropped. In the halls of power, ‘IP’ has a crisp meaning:

When you attune yourself to how businesses use “IP,” it has a very crisp meaning: “IP is anything that lets me control the conduct of my competitors, customers and critics.”

In other words, intellectual property is all about power. IP grants Big Pharma the power to restrict access to drugs. It’s no wonder that this power leads to unjust results. That’s what it’s designed to do.

Back to COVID vaccines. Big Pharma has been wielding IP for a long time, so there’s nothing new or surprising about the inequities of the COVID vaccine rollout. It’s just that the brutality of the pandemic makes these inequities more visceral. As a result, skepticism of drug IP is probably at an all-time high. A recent poll found that 85% of Americans oppose letting private companies have monopoly rights to vaccines.

Let’s put that skepticism to good use and end IP on all COVID vaccines. And when we’re done, let’s do the same for every other life-saving drug.

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Sources and methods

Data for COVID cases and vaccines is from Our World in Data. You can download the whole dataset here. I define the ‘Global North’ as Europe, North American and Oceania. Everything else is the ‘Global South’.

GDP per capita data is from the World Bank, series NY.GDP.PCAP.CD.

Further reading

Here’s a collection of articles about the public funding behind COVID vaccines and Big Pharma’s monopolization of the end product.

Public funding of vaccine science:

mRNA researcher Dr. Katalin Karikó persists despite academic rejection:

Hacking the mRNA vaccine:

Vaccine IP:

The Ritual of Capitalization

Published by Anonymous (not verified) on Thu, 03/06/2021 - 1:34am in

There’s something mysterious about finance. The symbols are arcane. The math is complex. The practitioners are impressively educated. And the stakes are high. All of this gives finance the veneer of higher truth — as if quants are uncovering a reality not accessible to the rest of us. In a sense they are. But the ‘reality’ is not what you think.

When you look at stock-market numbers, they do point to a truth about the world. But it is a truth not about natural law or of human nature. It is a truth about human ideology. The reality is that finance is a quantitative belief system. At its center is a universal ritual — the ritual of capitalization. It is this ritual that underlies all stock-market numbers.

In this post, we’ll look at the regularities that stem from the ritual of capitalization. They are astonishing in scope — a breathtaking consistency to human behavior. They beg the mind to look for some material basis for their existence. But that is a mistake. The reality is that the regularities of capitalization are an artifact of ideas — a manifestation of capitalist ideology itself. A regularity from ritual.

Giving property a number

The ritual of capitalization starts with the institutional act of exclusion — namely property.1 Property, of course, has a deep history that long predates capitalism. I won’t wade into this history here. Instead, I’ll defer to Jean-Jacques Rousseau’s succinct (but apocryphal) telling of property’s emergence. Property arose when

[t]he first person who, having enclosed a plot of land, took it into his head to say ‘this is mine’ and found people simple enough to believe him …

(Jean-Jacques Rousseau, 1755)

Putting a fence around something and calling it ‘property’ is step 1 of capitalization. But property alone is not enough. Romans had property. So did most feudal kingdoms. But these societies did not have capitalization. To capitalize property, there is a second step. You must mix property with finance.

The word ‘finance’ evokes a sense of awe — a sense of other-worldly complexity. But at its heart, finance is simple. It is the act of reducing property to a number — a price. Merge property and finance, and you have capitalization. How this merger happened historically is complicated. But let’s again reduce history to an apocryphal story. To paraphrase Rousseau:

Having enclosed a plot of land, the first capitalist took it into his head to put a number on his property and found people simple enough to believe him.

This act of giving property a number, political economists Jonathan Nitzan and Shimshon Bichler observe, is the central ritual of capitalism. It is the ritual of capitalization … and it comes with a problem.

Because ‘capitalization’ is literally just slapping numbers onto property, any number is as good as the next one. My property can be a 23. It could also be a 1023. In other words, property can have any conceivable price. But which price is ‘correct’? Ever since our apocryphal capitalist put a number on his property, capitalists have agonized over this question. ‘What is the true value of my property?’

Like so many human-created enigmas, the scientific answer is that the question has no meaning. Determining the ‘true’ value of property is like discovering the ‘true’ nature of the Holy Trinity. It cannot be done because there is no objective ‘truth’ to uncover — there are only subjective human beliefs. The ‘true nature’ of the Holy Trinity is whatever church clergy define it to be. The same holds for capitalization. The ‘true value’ of property is whatever capitalists define it to be.

This arbitrariness is why capitalists need a ritual.

If you’re going to answer unanswerable questions, there is no better way than through ritual. Think of a ritual as a mystified habit — a repetitive behavior that you reify with significance. As an example, take the ritual of gesturing the cross. It is a reified habit that Catholics use to symbolize both their faith in the Holy Trinity, and to remind them of how the Trinity has been defined (the Father, Son, and Holy Spirit).

Rituals are surprisingly powerful, especially when ingrained during youth. I’ll use myself as an example. During my childhood, my family went to a Catholic church, and I attended Catechism (Sunday school) weekly. I learned all the rituals that are part of Mass. After being ‘confirmed’ as a Catholic at age 13, however, I stopped going to church. The truth is, I’d always been an atheist … I just didn’t know it until adulthood.2 And yet, atheist that I am today, if I hear the words ‘in the name of the Father, Son, and Holy Spirit’, I have the near-irresistible urge to gesture a cross. That’s the power of ritual.

Capitalists have invented a similar ritual, but it is not physical. It is mathematical. Faced with the desire to know the ‘true value’ of their property, capitalists have invented a formula that defines it. A property’s capitalized value is the discounted value of its future income:

\displaystyle \text{capitalized value} = \frac{\text{future earnings}}{\text{discount rate}}

In textbooks, this equation is put more succinctly as:

\displaystyle K = \frac{E}{r}

Looking at this equation, Jonathan Nitzan and Shimshon Bichler note something interesting. The formula ostensibly capitalizes property — the stuff that capitalists own. And yet the capitalization equation makes no mention of this stuff. There are no symbols for factories, machines, or infrastructure. Instead, there is only income (E). And that, Nitzan and Bichler observe, is precisely the point. The capitalization ritual tells us how capitalists see the world. Capitalists care not for the things they own. They care about their property rights — their right to earn income by putting up an (institutional) fence.

Because it reflects an ideology, the capitalization formula is delightfully circular. It defines one monetary sum in terms of another. Nothing in science says that the equation should hold. It holds only because we’ve convinced ourselves that it should.

As Nitzan and Bichler see it, the spread of capitalism boils down to the spread of the capitalization ritual. It allows anything and everything to have a capitalized value. Take music. In 2020, Bob Dylan sold his entire song catalogue to Universal for some $300 million. The truth, though, is that Universal didn’t buy songs. It bought income. The copyright on Dylan’s songs ensured a sizable annual income — by some accounts about $4 million per year. Assuming this sum is accurate, Universal capitalized Dylan’s royalties by assuming a discount rate of 1%:

\displaystyle K = \frac{E}{r} = \frac{\$4~\text{million}}{0.01} = \$300~\text{million}

Bob Dylan traded future income (from his property rights) for a lump sum. And Universal traded a lump sum for future income. That’s capitalization in action.

Regularity from ritual

Unsurprisingly, rituals give rise to astonishing regularity. Every Sunday, Catholics gesture the cross. Five times a day, Muslims bow towards Mecca. Regularity from ritual. Like these religious rituals, the secular ritual of capitalization gives rise to astonishing regularities. Let’s have a look at them.

We’ll start by noting that capitalization is defined only when property changes hands. Put another way, capitalized value is contested until property is sold. Take, as an example, Donald Trump. He proclaims daily that his property is worth billions. Critics counter that Trump’s empire is worth far less. Neither side is correct. Capitalized value is undefined until the property is sold. If tomorrow, Trump sold his business for $1 billion, that would be its capitalized value.

In the past, capitalization was poorly defined because property changed hands rarely. An aristocratic family, for instance, might run a merchant business for many generations without ever knowing its capitalized value. Today things are different. That’s because in modern capitalism, partial ownership has become the norm. Portions of firms are bought and sold every second, which means we know capitalized value with exquisite detail.

Take Amazon as an example. The business is preposterously large, employing about 1.2 million people. And yet the unit of ownership — the Amazon share — is minuscule. One Amazon share buys you about 2 billionths of the company. Because the unit of ownership is tiny, it is trivial to buy and sell. The result is that unlike aristocratic businesses that changed hands once a century, Amazon shares change hands every second. As such, Amazon’s capitalized value is known exactly. As of May 28, 2021, it was:

\displaystyle  \begin{aligned} \text{Amazon market cap} &= \text{share price} \times \text{number of shares} \\ \\ &= \$3223~\text{per share} \times 0.51 ~\text{billion shares} \\ \\ &= \$1.6~\text{trillion} \end{aligned}

That’s nice. But why is Amazon capitalized at $1.6 trillion? The answer is that the company has a massive income stream — its profits in 2020 were $21 billion. Discount that income at 1.3% and you get Amazon’s capitalized value:

\displaystyle K = \frac{E}{r} = \frac{\$21.3~\text{billion}}{0.013} = \$1.6~\text{trillion}

Next question. Where did the discount rate of 1.3% come from? The answer: out of thin air. Like the capitalization ritual itself, the discount rate is whatever we define it to be. Capitalists employ the capitalization ritual by ritualistic choosing a discount rate that they deem ‘proper’. Ritual within ritual.

Yes, the whole endeavour smacks of arbitrariness. But that is the nature of ritual. What is important is the regularity to which the ritual gives rise. This regularity is not visible when looking at a single firm. It’s only by looking at thousands of firms that you can see it. On that front, let’s turn to Figure 1.

I’ve plotted here data for the profit and capitalization of US public firms dating back to 1950. Each point is a firm in a given year. (There are about 200,000 observations in total.) From this sea of firms, the regularity of capitalization is unmistakable. Capitalization is proportional to profit discounted at a rate of 7%.

Regularity from ritual.

Figure 1: Profit and capitalization of US firms, 1950 – 2017. Each point represents a US firm. Color indicates the year of observation. The black line shows how capitalization relates to profits for a discount rate of 6.8% — the average found in the data. [Sources and methods].

The discount rate

Is there something special about the discount rate of 7%? The answer is yes and no. That rate is special in the sense that it’s what US capitalists have deemed to be ‘proper’. But this rate is banal in the sense that it has no deeper meaning. US capitalists discount at 7% because that is the norm they have accepted. Gesture the cross. Discount at 7%. Regularity from ritual.

How does this regularity come to exist? In the past, it was by decree. Much like how church clergy decreed the nature of the Holy Trinity, they decreed the ‘proper’ rate of discount:

Until the emergence of capitalization in the fourteenth century, [the ‘proper’ discount rate was] seen as a matter of state decree, sanctioned by religion and tradition, and modified by necessity. The nobility and clergy set the just lending rates as well as the tolerated zone of private divergence, and they often kept them fixed for very long periods of time.

(Nitzan and Bichler, 2009)

Today, the ‘proper’ discount rate still has an element of decree. Governments (via central banks) set the benchmark interest rate, which in turn affects the benchmark discount rate on equity.

If you’re a finance outsider, you may be wondering what the interest rate has to do with discounting. The two rates are related because the principle of capitalization is the reverse of the principle of interest. Here’s an example. Suppose you put $100 in your savings account at 5% interest. In a year, you’d have $105. Now ask yourself — how much would you pay now to receive $105 in a year? The answer, if you’re a ‘rational’ capitalist, is $100. That’s the sum that would earn $5 when put in a savings account for a year. So by thinking about interest, you’ve capitalized a $5 future income at $100.

Although the principle of discounting stems from the principle of interest, the two rates (benchmark discount and interest) are not the same. This we can see from history. But before we get to the data, let’s think a bit more about the discount rate. Here’s some simple math. Start with the capitalization equation:

\displaystyle K = \frac{E}{r}

Now rearrange for the discount rate r:

\displaystyle r = \frac{E}{K}

The second equation defines the ‘effective’ discount rate at which investors capitalize income. I call it the ‘effective’ rate because the capitalization ritual is technically about future income, which is unknown. In practice, capitalists pin down earnings E by looking at the recent past (i.e. the last quarterly income report). Assuming this habit, the effective discount rate is the ratio of present income and present capitalization.

For an example calculation, let’s return to Amazon. Last year, the company raked in $21 billion in profits. And today, its market cap is about $1.6 trillion. So Amazon is currently capitalized at an effective discount rate of 1.3%:

\displaystyle r = \frac{E}{K} = \frac{\$21.3~\text{billion}}{\$1600~\text{billion}} = 0.013

This effective discount rate varies between firms. And it varies within firms over time. Let’s have a look at this variation.

The benchmark discount rate

We’ll start with the benchmark discount rate. I define this benchmark as the average of the effective discount rate across all firms.

The math: to calculate the benchmark discount rate, we first take every public firm (with available data) and divide income by capitalization. That gives the effective discount rate for each firm in a given year. The benchmark rate is then the average across all firms in that year. (Because we’re dealing with growth rates, I calculate the average using the geometric mean.)

Figure 2 shows how the US benchmark discount rate varied over the last 70 years. It oscillated around the average rate of 7%. But there are conspicuous departures from this average. In the mid 1970s, for instance, the benchmark rate soared to a high of 20%. What happened then?

Figure 2: The US benchmark discount rate. I’ve plotted here the trend in the average discount rate across all US firms in the Compustat databases. The dashed horizontal line is the average benchmark since 1950 (geometric mean, weighted equally across years). [Sources and methods].

Given that the principle of capitalization works by reversing the principle of interest, one might think that the benchmark discount rate is a simple reflection of the rate of interest. If so, the discount-rate spike in the 1970s should correspond with an interest-rate hike.

While reasonable, it turns out that this expectation is wrong. Figure 3 tells the story. Here I compare the benchmark discount rate to US interest rates. (I’ve used the US Federal Reserve interest rate — the so-called ‘effective federal funds rate’. This is the interest rate at which banks trade money with the Federal government. It sets the benchmark for all other interest rates.)

We can in see in Figure 3 that interest rates did spike in the past. But the hike came about 7 years after the spike in the discount rate. Clearly, then, interest rates are not driving how US capitalists discount income. To understand capitalists’ herd behavior, we must look elsewhere.

Figure 3: The US benchmark discount rate vs. the FED interest rate. The blue line shows the trend in the average discount rate across all US firms in the Compustat databases. The red line shows the US FED interest rate. [Sources and methods].

While only loosely related to the rate of interest, it turns out that the benchmark discount rate is related to another rate: the rate of inflation (Fig. 4). The inflation rate is a measure of how rapidly prices tend to rise. Because price change varies by commodity, there is no such thing as ‘the’ rate of inflation. Instead, think of inflation like discounting: it has an average rate surrounded by a sea of deviation.

The most comprehensive measure of the average rate of inflation is called the ‘GDP deflator’. (It measures the average price change of all the commodities included in the calculation of GDP.) In Figure 4, I compare this inflation rate to the benchmark discount rate. The two rates are clearly connected. When the benchmark discount rate spiked in the 1970s, so did the rate of inflation.

Figure 4: The benchmark US discount rate vs. inflation. The blue line shows the trend in the average discount rate across all US firms in the Compustat databases. The red line shows the US GDP deflator, a measure of inflation. The inset plot shows the correlation between the two series. [Sources and methods].

Why is the discounting benchmark related to inflation? In a word, uncertainty. Remember that capitalization is the ritual of putting a price on (unknown) future income. Capitalists make this leap of faith by assuming that present income will continue in perpetuity. But that’s a risky assumption, especially when the social order is in turmoil.

Back to inflation. Milton Friedman proclaimed that inflation as ‘always and everywhere a monetary phenomenon’. His slogan is a nice tautology, since anything to do with prices automatically has to do with money. The actual science lies in what Friedman omitted. The reality is that inflation is always differential — some companies raise prices faster than others. That means inflation is always and everywhere a restructuring of the social order. It’s a boon for some firms, a bust for others. This is the inescapable conclusion reached by Jonathan Nitzan after an exhaustive look at the US data.

Far more than just a ‘monetary phenomenon’, then, the inflation rate signals instability in the social order. That instability, it seems, translates into capitalists’ fears about the future. When the price system is more unstable, capitalists discount present income more steeply.

Discount deviation

Let’s back up now and look at the other component to discounting — deviation from the benchmark.

Over the last 70 years, the average (effective) discount rate for US public firms was about 7%. But although the aggregate data shouts this value to us, few individual firms were capitalized at exactly this rate. That’s because like all averages, the benchmark discount rate is a herd behavior that is visible only in aggregate. The effective discount rate for any single firm can vary widely. Let’s have a look at this variation.

Figure 5 plots the distribution of (effective) discount rates for every firm observation in my US dataset. The benchmark rate of 7% jumps out as big central lump in the histogram. But don’t be confused by the tidy bell curve. The horizontal axis here uses a logarithmic scale, which compresses variation. The reality is that some firms are discounted at rates up to 1000%. And other firms are discounted at rates below 0.1%. That’s variation over 4 orders of magnitude. Still, the vast majority of firms — about 90% — are discounted at rates between 1.3% and 25%.

Figure 5: The distribution of the effective discount rate among US firms. I’ve plotted here the distribution of the effective discount rate for every US firm observation in the Compustat database. I calculate the discount rate by dividing annual profit by annual (closing) capitalization. The red line shows the geometric mean. The shaded region represents the 90% interval of the data. [Sources and methods].

Whenever we have variation, the next step is to look for its source. Why do some firms have a high (effective) discount rate and others a low one? It’s here that things get interesting. Ostensibly, the capitalization ritual has a causal direction that flows from discounted earnings to capitalized value. Investors look at a revenue stream E, pick a discount rate r, divide the two, and poof … get a capitalized value:

\displaystyle  \frac{E}{r} \longrightarrow K

There are instances where capitalization works in this simple way — but these instances are the exception, not the norm. The only time capitalization is so simple is when a firm is capitalized for the first time: during its initial public offering (IPO). Before an IPO, the firm opens up its books to let would-be investors see the income stream. Using the capitalization ritual, the firm picks a share price for the launch. From the IPO onward, the stock price floats on the market.

Other than during an IPO, then, the capitalization ritual has an element of circularity. The ritual is ostensibly about capitalizing an income stream. Yet the most known quantity in the ritual is not income, but capitalized value itself. You can know a company’s market cap down to the second. In contrast, the firm’s earnings get reported 4 times a year. So what happens in practice is that investors capitalize income by keeping one eye on capitalization itself. The result is that the discount rate is circularly related to capitalization.

Figure 6 shows the trend. Among US firms, the effective discount rate declines with capitalization. (Note that because I’m comparing capitalization across years, I’ve normalized the data within each year so that the median capitalization in my firm sample is 1.) Around the median market cap, the discount rate is the same as the global benchmark of 7%. But as relative capitalization gets smaller than the median, the discount rate grows. And as relative capitalization gets larger than the median, the discount rate declines.

Figure 6: The effective discount rate vs. capitalization among US firms. The horizontal axis plots relative capitalization, normalized so that the median of the US Compustat sample in each year is 1. The vertical axis shows the corresponding discount rate, binned by capitalization. (Each point is the center of a bin.) [Sources and methods].

The same pattern emerges when we look at different time periods separately. In Figure 7, I’ve animated 5-year snapshots of the discount-rate-vs-capitalization data. The trend shifts with time, but the overall pattern is consistent. The effective discount rate declines with capitalization. It seems that US capitalists agree that small-cap investments are riskier than large-cap investments. Hence they discount small-cap firms more heavily.

Figure 7: The effective discount rate vs. capitalization over time. Here’s the same analysis as in Figure 6, but now differentiated by year. Each snapshot shows data grouped over the preceding 5 years. [Sources and methods].

Earnings risk

I’ve so far portrayed the discount rate as a number that capitalists pull out of thin air. But this portrayal is only partially true. The absolute value of the discount rate is arbitrary, just as is the absolute value of capitalization. I can capitalize my property at 23 or 1023. In isolation, the difference is meaningless. Capitalization, however, does not happen in isolation. And that, observe Nitzan and Bichler, is the whole point. The only reason to have prices is to compare them to other prices. Hence capitalization is meaningful only in relative terms. The same is true of the discount rate.

The relative value of the discount rate quantifies capitalists’ perception of risk. The rationale again has to do with the capitalization ritual itself. The ritual is ostensibly about quantifying the present value of future income. But the way capitalists calculate this value is to assume that present income continues indefinitely. That assumption is risky. And so capitalists try to bake future risk into their ritual. The more risk they perceive, the steeper they discount.

How, then, do capitalists assess future risk? Like all elements of the capitalization ritual, capitalists look to the past. They assess future risk by looking at past risk. On that front, we can see that the decline in the discount rate with capitalization is not arbitrary. It’s firmly grounded in the variability of past income.

Figure 8 shows the trend. It’s a bit complicated to interpret, so let me break down what I’ve done. I start with a firm — say General Motors. I then pick a year (say 1990) and observe GM’s market cap. Then I look at the preceding decade and measure the variability of GM’s profit over that period (1981-1990). I calculate the coefficient of variation of this profit (the standard deviation divided by the mean). Then I do the same operation in every year for which there is a preceding decade’s worth of data for GM. When that’s done, I repeat the whole process for every firm in the dataset. Finally, I analyze the aggregate trend by relative market cap.

Figure 8: Profit variability vs. capitalization among US firms. I’ve analyzed profit variability (using the coefficient of variation) over a trailing 10-year window among firms grouped by capitalization. Each point on the blue line represents a market-cap bin. Note that I’ve normalized capitalization so that the median in each year is 1. [Sources and methods].

Now that you (hopefully) understand the analysis, let’s interpret the results. According to Figure 8, the variability of past profit declines with relative capitalization. In other words, small-cap firms have more past risk than large-cap firms. If capitalists know this fact, then it is sensible to discount small firms more heavily than large firms.

It’s debatable, however, that individual capitalists know much about the aggregate trend plotted in Figure 8. Instead, it’s more likely that they rely on rules of thumb — something like ‘venture capital is more risky than blue-chip capital’. This rule then gets baked into the capitalization ritual as a sub-ritual: discount small firms more heavily than large firms.

Capitalizing markup

Continuing the theme of rituals within rituals, let’s look at another aspect of capitalization: the markup. We start with the capitalization formula:

\displaystyle K = \frac{E}{r}

Here, E is the firm’s net earnings — what the non-corporate laity call ‘profit’. Now ask yourself, how can you earn a profit? To think about this question, consider the following equation:

\displaystyle \begin{aligned} \text{profit} &= \text{sales} \times \frac{\text{profit}}{\text{sales}} \\ \\ &= \text{sales} \times \text{markup} \end{aligned}

According to this equation, there are two routes to more profit:

  1. increase sales (gross income)
  2. increase profit as a portion of sales (the markup)

The two routes to profit are very different. When you increase sales alone, everyone gets more income in the same proportion. Wages and profits increase at the same rate, so their share of the pie remains constant. This is not true, however, when you increase profit using the markup. When you fatten the markup, a greater portion of gross income goes to the firm’s owners, leaving less for workers (and for other firms).

Looking at our basic capitalization equation, we can see that it says nothing about how profits are earned. All that matters is their size (net earnings, E). But when investors apply the capitalization ritual, it turns out that they do have a profit preference. Investors prefer to capitalize a high markup.

Figure 9 shows the trend. I’ve plotted here the markup as a function of relative capitalization among all US public firms (since 1950). Each point indicates the median markup when firms are grouped by relative market cap. (I’ve normalized capitalization so that the median cap in each year is 1). It’s easy to spot the trend. The markup grows reliably with capitalization.

Figure 9: Markup vs. capitalization among US firms. I’ve analyzed firms’ markup among firms grouped by capitalization. Each point on the blue line represents a market-cap bin. The vertical axis shows the markup. Note that I’ve normalized capitalization so that the median in each year is 1. [Sources and methods].

We can see the same pattern when we look at different time periods. In Figure 10, I’ve animated 5-year snapshots of the markup-vs-capitalization data. The trend shifts with time, but the overall pattern is consistent. The markup grows with relative capitalization. When US investors capitalize profit, it seems they prefer it be reaped on a fat margin.

Figure 10: Markup vs. capitalization by year. Here’s the same analysis as in Figure 9, but now differentiated by time. Each frame shows data grouped over the preceding 5 years. [Sources and methods].

Why do investors award greater capitalization to firms with a higher markup? Perhaps it again comes down to perceptions of risk. Consider two companies with similar-sized profits. One company has mammoth sales but a razor thin markup. The other company has smaller sales, but a fat markup. Which one do investors deem more ‘risky’, and so discount more steeply?

We need not leave this question hypothetical. It’s easy to find two real-world firms that match the criteria. Consider the difference between Walmart and Apple, summarized in Table 1. In order-of-magnitude terms, the two firms have similar-sized profits. But they take different routes to this windfall. Walmart has enormous sales and a thin markup. Apple has smaller sales and a fat markup.

Table 1: Walmart vs. Apple

table_here Source: Walmart 2020 Annual Report, Apple 2020 Annual Report

Investors, it seems, prefer the Apple route to profit. Even though Apple’s profit is of similar size to Walmart’s, investors reward Apple with far more capitalization. The difference? Walmart has a thin markup, Apple a fat one.

Framed in terms of the capitalization ritual, investors discount Walmart more steeply than Apple. They obviously have reasons for doing so, but these reasons need not be object. That’s because we’re dealing with an ideological Russian doll — rituals within rituals within rituals.

The finance ethos

It’s time to wrap up our dive into the capitalization ritual. We’ll end where we started — with the mystique that surrounds high finance. This mystique is reinforced by textbooks, which make hefty use of complicated math, giving the appearance of profound ‘scientific truth’. Heck, you often need a PhD in physics to understand the equations. Does that mean that like physics, finance is a ‘hard science’?

The answer is a hard no.

Finance does not describe our social world. Finance defines it. Finance outlines the rituals whereby capitalists impose order onto society, turning the qualities of ownership into a single quantity. Finance, Jonathan Nitzan and Shimshon Bichler observe, is the ideology of our time:

The ‘science of finance’ is first and foremost a collective ethos. Its real achievement is not objective discovery but ethical articulation. Taken together, the models of finance constitute the architecture of the capitalist nomos. In a shifting world of nominal mirrors and pecuniary fiction, this nomos provides capitalists with a clear, moral anchor. It fixes the underlying terrain, it shows them the proper path to follow, and it compels them to stay on track. Without this anchor, all capitalists — whether they are small, anonymous day traders, legendary investors such as Warren Buffet, or professional fund managers like Bill Gross — would be utterly lost.

Finance theory establishes the elementary particles of capitalization and the boundaries of accumulation. It gives capitalists the basic building blocks of investment; it tells them how to quantify these entities as numerical ‘variables’; and it provides them with a universal algorithm that reduces these variables into the single magnitude of present value. Although individual capitalists differ in how they interpret and apply these principles, few if any can transcend their logic. And since they all end up obeying the same general rules, the rules themselves seem ‘objective’ and therefore amenable to ‘scientific discovery’.

(Nitzan and Bichler, 2009)

Make no mistake, the regularities of corporate finance are majestic in scope. But these regularities stem not from any laws of nature. They are regularities from ritual. Gesture the cross. Discount present income.

Perhaps the most important question is where this ritual is headed. Does capitalization have a long-term future? Neoclassical economists like William Nordhaus think so. They’re happy to apply the capitalization ritual to existential crises like climate change. And the net present value of their calculations tells them (surprise surprise) that we should do essentially nothing. But of course, by applying a heavy discount rate to future income, that is what they assumed in the first place. It’s ritualized apathy.3

Back to the present. The ritual of capitalization is surrounded by a mystique of ‘higher truth’. Whenever you encounter such a mystique, it’s a good bet that you’re dealing with ideology. The point of the ‘mystique’ is to stop you from looking under the ideology’s hood. When you do, you see that the whole thing is a house of cards. The ‘higher truth’ of the Holy Trinity is that it is an ideological invention of church clergy. So too with finance. The only difference is that with finance, the clergy aren’t priests … they’re economists.

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Sources and methods

All firm financial data comes from Compustat. Data series are as follows:

  • capitalization: number of shares outstanding (series CSHO) × annual closing share price (series PRCC_C)
  • profit (net income): series NI
  • sales: series SALE
  • markup (profit as a portion of sales): NI / SALE

Interest rates (Fig. 3) are from FRED series DFF. The GDP deflator (Fig. 4) is from FRED series A191RI1Q225SBEA

The effective discount rate

For each firm f , I define the firm’s effective discount rate r_f as

\displaystyle  r_f = \frac{E_f}{K_f}

where E_f is the firm’s profits and K_f is the firm’s capitalization (in a given year). I define the average discount rate for all firms, \overline{r} , as the geometric mean of r_f over all firms:

\displaystyle  \overline{r} = \left( r_1 r_2 \cdot \cdot \cdot r_n \right)^{1/n}

When calculating the effective discount rate, I exclude firm observations with negative profit.


  1. Here’s how Nitzan and Bichler describe the exclusionary act of property:

    The most important feature of private ownership is not that it enables those who own, but that it disables those who do not. Technically, anyone can get into someone else’s car and drive away, or give an order to sell all of Warren Buffet’s shares in Berkshire Hathaway. The sole purpose of private ownership is to prevent us from doing so. In this sense, private ownership is wholly and only an institution of exclusion, and institutional exclusion is a matter of organized power.

    (Nitzan and Bichler, 2009)


  2. One of my only memories from Sunday school was my incredulity at hearing the story of Jonah and the whale. “You’ve got to be joking,” I remember saying to the church teacher. “This is a myth, right?” The teacher assured me it was not. This interaction cemented in my mind that I wanted nothing to do with religion.↩
  3. If you’re interested in the economics of climate change, Steve Keen’s debunking of Nordhaus’ work is a must read. See his paper ‘The appallingly bad neoclassical economics of climate change’. For a discussion of how Nordhaus uses the capitalization ritual to discount future income, see Bichler and Nitzan’s research note ‘The Nordhaus Racket’.↩

Further reading

Nitzan, J. (1992). Inflation as restructuring. a theoretical and empirical account of the US experience (PhD thesis). McGill University.

Nitzan, J., & Bichler, S. (2009). Capital as power: A study of order and creorder. New York: Routledge.

Free Speech For Me, Not You

Published by Anonymous (not verified) on Fri, 07/05/2021 - 12:50am in

They say that Americans love two things: freedom … and guns. The trouble with guns is obvious. The trouble with freedom is more subtle, and boils down to doublespeak.

When a good old boy defends his ‘freedom’, there’s a good chance he has a hidden agenda. He doesn’t want freedom for everyone. He wants ‘freedom for himself, not you’. I call this sentiment freedom tribalism. It’s something that, given humanity’s evolutionary heritage, is predictable. It’s also something that has gotten worse over the last few decades. And that brings me to the topic of this essay: free speech.

When the talking heads on Fox News advocate ‘free speech’, they’re using doublespeak. What they actually want is free speech for their own tribe … and censorship for everyone else. This free-speech tribalism extends far beyond the swill of cable news. It’s clearly visible (and growing worse) in the pantheon of high thought — the US Supreme Court.

To make sense of this free-speech tribalism, we need to reframe how we understand ‘free speech’. And that means reconsidering the idea of ‘freedom’ itself. Behind freedom’s virtuous ring lies a dark underbelly: power. Free-speech tribalism, I’ll argue, amounts to a power-struggle between groups — a struggle to broadcast your tribe’s ideas and censor those of the others. When you look closely at this struggle, it becomes clear that ‘free speech’ is not universally virtuous. In modern America, free speech has become a kind of slavery.

And with those incendiary words, let’s jump into the free-speech fire.


FIRE! Fire, fire… fire. Now you’ve heard it. Not shouted in a crowded theatre, admittedly, … but the point is made.

That was the inimitable Christopher Hitchens addressing the elephant in every free-speech room: shouting fire in a crowded theatre. The metaphor has come to symbolize speech that is so ‘dangerous’ it must be censored. It’s a fair example, since people have actually died from false shouts of fire in crowded theatres.1 But more often than not, the shouting-fire metaphor is used to justify censorship of a more dubious kind.

Woodrow Wilson got the ball rolling during World War I. After declaring war on Germany, Wilson embarked on a campaign to silence internal dissent. Among the thousands of Americans who were prosecuted was Charles Schenck, a socialist convicted of printing an anti-draft leaflet. His case went to the Supreme Court. Writing to uphold the conviction, Justice Oliver Holmes claimed that war critics like Schenck were, in effect, falsely shouting fire:

The most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic. … The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that Congress has a right to prevent. It is a question of proximity and degree.

(Oliver Wendell Holmes, Schenck v. United States)

Holmes’ decision set off a long debate about what types of speech represent a ‘clear and present danger’. I won’t wade into the details. Instead, what I find more interesting is the language that is missing here. Holmes speaks about ‘free speech’, ‘danger’, and ‘evils’. But what is really at stake is the government’s power.

Holmes admits as much in a less-cited part of his ruling. Schenck’s anti-draft leaflet was dangerous, Holmes noted, precisely because it undermined the government’s power to make war:

It denied the [government’s] power to send our citizens away to foreign shores to shoot up the people of other lands …

(Oliver Wendell Holmes, Schenck v. United States)

So there you have it. The idea of ‘falsely shouting fire’ was used to bolster the government’s power to wage war.

Free speech for views you don’t like

The lesson from the Schenck case is that reasonable forms of censorship inevitably get used to justify more dubious types of speech suppression. To combat this creeping censorship, free-speech advocates like Noam Chomsky argue that we must do something that feels reprehensible — defend freedom of speech for views we despise:

[I]f you believe in freedom of speech, you believe in freedom of speech for views you don’t like. Goebbels was in favour of freedom of speech for views he liked, right? So was Stalin. If you’re in favour of freedom of speech, that means you’re in favour of freedom of speech precisely for views you despise. Otherwise you’re not in favour of freedom of speech.

(Noam Chomsky in Manufacturing Consent)

Chomsky’s position is elegant, principled and more than just words. It’s a maxim he lives by. And that has gotten him into all sorts of trouble. You can imagine the uproar, for instance, when Chomsky defended the free speech of historian Robert Faurisson, a Holocaust denier. More recently (and to the delight of the far right), Chomsky drew leftist ire for signing a Harper’s editorial warning of a “stifling atmosphere” in modern America that was “narrow[ing] the boundaries of what can be said without the threat of reprisal.”

In the face of this criticism, however, Chomsky remains unphased. He is a tireless advocate for the right to espouse ideas he finds despicable.

Free-speech tribalism

If everyone was as principled as Chomsky, the world would probably be a better place. But the reality is that Chomsky is an outlier. Most people find it difficult to separate the right to free speech from the speech itself. Rather than criticize this tendency, though, we should try to understand it. And that means studying ‘free speech’ in the context of human evolution.

If evolutionary biologists David Sloan Wilson and E.O. Wilson are correct, human evolution has been strongly shaped by ‘group selection’. That means we evolved as a social species that competed in groups. The result is that humans have an instinct for group cohesion in the face of competition — an us-vs-them mentality. In other words, humans are tribal.

When it comes to ‘free speech’, this tribalism plays out predictably. Humans behave exactly the way Chomsky says we should not. We support free speech for ideas we like, and censorship for ideas we dislike.

Take, as an example, Donald Trump. After Trump delivered his incendiary speech that stoked the storming of the Capitol, Twitter decided they’d had enough. They permanently banned Trump from their platform. How did Americans feel about this ban? Support fell predictably along partisan lines (Figure 1). Democrats overwhelmingly supported Twitter’s Trump ban. Republicans overwhelmingly opposed it. This tribal divide isn’t rocket science. When the shit hits the fan, instincts trump abstract principles.

Figure 1: Partisan support for Twitter’s Trump ban. Source: PEW Research Center.

Commentary on the Trump ban focused mostly on the content of his speech. Was he stoking ‘imminent lawlessness’? Or was he [cue incredulous cough] ‘defending democracy’? These are important questions. But what I find more interesting is what seemed to go undiscussed.

It’s one thing for a President to silence his critics. That’s state censorship. It’s another thing for critics to silence a President. That’s called accountability. The difference has nothing to do with the content of the speech. Instead, it comes down to power. When the weak censor the powerful, it’s different than when the powerful censor the weak.

Granted, Twitter CEO Jack Dorsey is hardly ‘the weak’. But the principle remains. Power dynamics should affect how we interpret ‘censorship’. When the government censors an obscure Neo-Nazi, that’s probably bad. But what if Nazis run the government? Should citizens let the Nazi regime broadcast propaganda on the grounds that it is ‘free speech’?

If so, George Orwell was right. Freedom is slavery.

Free-speech tribalism on the US Supreme Court

Back to free-speech tribalism. On the individual level, the game is about free speech for me, not you. But at the group level, it’s about us versus them. Free speech for my tribe, not your tribe.

Since Americans’ right to free speech is written in the constitution, free-speech tribalism has played out most prominently in the US Supreme Court — the institution that determines how the constitution is interpreted. Of course, Supreme Court justices all claim to believe in free speech for everyone. But their behavior tells a different story.

In a landmark study, Lee Epstein, Andrew Martin and Kevin Quinn tracked how US Supreme Court justices ruled on cases concerning free speech. Importantly, Epstein and colleagues distinguished between two factors:

  1. the partisanship of the justices;
  2. the political spectrum of the speech on trial.

Figure 2 shows Epstein’s results — a quantification of 6 decades of free-speech rulings on the Supreme Court.

Figure 2: Partisan support for free speech on the US Supreme Court. I’ve plotted here data from Epstein, Martin & Quinn’s study of Supreme Court rulings on free speech. The horizontal axis shows the court’s chief justice and their associated tenure. The vertical axis shows the percentage of rulings supporting free speech. The panels differentiate between the type of speech being tried — coded as either ‘liberal’ or ‘conservative’. Colored lines show the percentage of rulings supporting free speech, differentiated by the party of the president who appointed the corresponding justice.

It’s clear, from Figure 2, that there is a tribal game afoot. Let’s spell it out. If Supreme Court justices were following Chomsky’s ideal (free speech for ideas you like and those you despise) then the red and blue lines in Figure 2 would overlap. Democratic and Republican justices would support free speech to the same degree, regardless of the content of the speech. That clearly doesn’t happen.

Instead, Supreme Court justices are following the ‘tribal ideal’ — free speech for ideas they like … censorship for ideas they despise. Hence Democratic justices support liberal speech more than Republican justices (Figure 2, left). And Republican justices support conservative speech more than Democratic justices (Figure 2, right).

Given humanity’s evolutionary background, this tribalism is not surprising. What’s interesting, though, is that Supreme Court tribalism hasn’t been constant. Instead, it’s grown with time.

In the Warren court of the 1950s and 1960s, there was remarkably little free-speech tribalism. Justices of both parties overwhelmingly supported free speech of all kinds, with only a slight preference for the speech of their own tribe. Today, that’s changed. In the Roberts court of the 21st century, not only have justices of both parties become less tolerant of free speech in general, there is now a glaring tribal bias. Democratic justices support liberal speech far more than Republican justices. And Republican justices support conservative speech far more than Democratic justices.

It is tempting to blame both political parties for this tribalistic turn. But the reality is that the blame rests overwhelmingly on Republicans. Figure 3 tells the story. I’ve plotted here the partisan bias in support for free speech. This is the difference in support for speech made by ‘your tribe’ versus support for speech made by the ‘other tribe’. Let’s start with the Democratic tribe. While Democratic justices have become less tolerant of free speech in general (Fig. 2), they have not become more biased. Instead, for the last 6 decades, Democratic justices have had a slight but constant bias for liberal speech.

Figure 3: Partisan bias in support for free speech on the US Supreme Court. I’ve plotted here data from Epstein, Martin & Quinn’s study of Supreme Court rulings on free speech. The horizontal axis shows the court’s chief justice and their associated tenure. The vertical axis shows the partisan bias in justices’ rulings. For Democratic justices, this bias is the difference between their support for ‘liberal speech’ vs. ‘conservative speech’. For Republican justices, it is the reverse.

Now to the Republican tribe, where the story is quite different. Once less biased than Democrats (during the Warren court), Republican justices now show overwhelming bias for conservative speech. In the Roberts court, Republican justices support conservative speech over liberal speech by a whopping 44%.

Free speech for us, not them.

Free speech for business

Republican bias for ‘conservative’ speech isn’t the only way that the US Supreme Court has become more tribal. The court has also become more biased towards the business tribe.

The most seismic case in this pro-business shift was Citizens United. In this 2010 decision, the Supreme Court ruled it unconstitutional to limit corporate spending on political campaigns. The majority’s reasoning was simple:

  1. people have free speech;
  2. corporations are legal persons;
  3. therefore, corporations have free speech.

Citizens United opened the floodgates of corporate electioneering. The reality, though, was that this case was part of a larger pro-business shift on the Supreme Court — a shift that coincided with a reversal of fortune for US corporations.

Figure 4 tells the story. From the 1950s to the 1990s, US corporations had a problem. Although they had no trouble making profits in absolute terms, the profit share of the pie tended to decrease. (See the red curve in Fig. 4.) Then came a stunning reversal of fortune. From the mid-1990s onward, corporate profits boomed, eating up an ever increasing share of the US income pie.

Figure 4: ‘Free speech’ for business is good for profits. The blue curve shows the portion of US Supreme court cases involving business ‘free speech’ that were settled in favor of business. Data is from Epstein, Martin & Quinn, and is averaged over the tenure of chief justices. The red line shows the smoothed trend in US corporate profits as a share of national income.

This reversal of fortune coincided with a change in the Supreme Court’s attitudes towards ‘free speech’. Until the 1990s, the Court was increasingly hostile to ‘free speech’ for business. As a result, the ‘win rate’ for business free speech declined steadily. Then came the Roberts court, which brought relief for the business tribe. Over the last decade and a half, the Roberts court sided with business in a whopping 80% of free-speech cases.

Unsurprisingly, in this pro-business environment, profits boomed. ‘Free speech’ for corporations means wage slavery for workers.2

The trouble with ‘freedom’

The triumph of business propaganda (and the corresponding boom in corporate profits) shouts at us to reconsider some basic moral principles. Ask yourself — is ‘free speech’ universally virtuous? I think the answer has to be no.

The problem with ‘free speech’ boils down to a basic contradiction in the idea of ‘freedom’ itself. In a social world, freedom for everyone is impossible. The reason is simple. Freedom has two dimensions: ‘freedom to’ and ‘freedom from’. These two dimensions are always in opposition. For example:

  • If you are free to shout racist slurs, your neighbour cannot be free from such slurs.
  • If you are free to smoke anywhere, your friends cannot be free from second hand smoke.
  • If you are free to drive through a red light, fellow motorists cannot be free from T-bone collisions.

You get the picture. There are two sides to being ‘free’, and they are always in mutual conflict. When you think about this conflict, you realize that ‘freedom’ always involves power:

  • If I am ‘free to’ shout racist slurs, I have the power to suppress your ‘freedom from’ such slurs.
  • If I am ‘free from’ hearing racist slurs, I have the power to suppress your ‘freedom to’ shout racist speech.

When we look at this power behind ‘freedom’, we realize that ‘freedom’ cannot be universally virtuous. One man’s freedom is always another man’s chains.

Resolving conflict with property rights

If the two sides of freedom are always in opposition, we need a way to resolve the ensuing conflict. In capitalist societies, the main way we do this is by defining property rights. These are legal principles that delineate which type of freedom wins out, and when and where it does so.

A key purpose of property rights is to restrict ‘freedom to’. In other words, property rights restrict ‘free speech’. For example, if someone enters my property and shouts racist slurs, I don’t have to listen. Instead, my property rights give me the power to have the culprit removed by the cops. On my property, my ‘freedom from’ trumps your ‘freedom to’. In other words, my property gives me the power to censor.3

Is this power a bad thing? Probably not, at least in principle. To see why, imagine a world in which ‘freedom to’ always trumped ‘freedom from’. In this world, if someone wanted to insult you in your living room, you’d have to let them. It would be an Orwellian nightmare in which solitude was impossible. So having a space where ‘freedom from’ trumps ‘freedom to’ is undoubtedly a good thing.

That said, when we scale up private property, the power to censor becomes more dubious. Suppose that instead of owning a house, I own a corporation. This is a very different type of property. Rather than own space, I own an institution — a set of human relations. With this more expansive type of property, I suddenly have much more power to censor. If my employees wanted to unionize, for instance, I could ban ‘union propaganda’. I could go further and ban any speech critical of me, the supreme leader. It would be a Stalinist dream … for me. For my employees, would be a totalitarian nightmare.

Let’s flip sides now and look at the other side of property. While private property suppresses ‘freedom to’, public property suppresses ‘freedom from’. On public property, my ‘freedom to’ speak trumps your ‘freedom from’ my speech. So when I stand on a street corner, I am free to shout racist slurs. Passersby must endure my slander. In other words, on the street, I have the power to broadcast.

The street-corner ability to broadcast is, admittedly, a weak form of power. Everyone else has the same power, so they can drown me out if they want. (This is the principle of public protest.)4 But notice what happens if we treat the ‘public domain’ more broadly, not as the street-corner, but as the space between corporations. In a world in which corporations have free speech, there is no respite from corporate propaganda. It’s a world in which freedom-loving Americans now live.

Freedom is just another word for …

The problem with the debate about free speech boils down to the language of ‘freedom’ itself. When ‘freedom’ becomes synonymous with virtue, the debate becomes vacuous. Saying “I stand for freedom” is like saying “I stand for happiness.” Who’s going to argue with you?

Okay, I’ll argue with you. If murdering people makes me happy, my ‘happiness’ is not virtuous. It is sadistic. Likewise, if I am ‘free’ to murder people I dislike, my ‘freedom’ is not virtuous. It is depraved.

The same goes for ‘free speech’. It is virtuous in some contexts, but not others. Unfortunately, there is no simple way to determine when and where ‘free speech’ is good, and when and where it is bad. Like so many things in life, it is a matter of opinion. But a useful tool is to look at the underside of ‘freedom’. When you see the words ‘free speech’, substitute the language of power:

I stand for free speech the power to broadcast.

With this revised language, the virtue of ‘free speech’ becomes more ambiguous. If the substitution gives you a bad feeling, that’s a sign there is doublespeak at work. Sometimes freedom really does mean slavery.

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This work is licensed under a Creative Commons Attribution 4.0 License. You can use/share it anyway you want, provided you attribute it to me (Blair Fix) and link to Economics from the Top Down.

Sources and methods

Data for US corporate profits is from the Bureau of Economic Analysis, Table 1.12. I’ve taken corporate profits before tax (without IVA and CCAdj) and divided by national income.


  1. Some shouting-fire examples. In 1902, a crowd at the Shiloh Baptist Church (in Birmingham Alabama), misheard ‘fight!’ for ‘fire!’ The ensuing stampede killed over 100 people. In 1913, the Italian Hall in Calumet, Michigan was filled with striking miners. Someone shouted ‘fire!’, causing a stampede that killed 73 people. The miners suspected that the perpetrator was a strike breaker, but no one was ever charged.↩
  2. Mainstream economics is mute about how profits relate to the law. That’s probably because if you study the law, you realize that it (not ‘productivity’) is the foundation of corporate profits. A century ago, heterodox economist John R. Commons explored this connection in his book Legal Foundations of Capitalism. He was largely ignored.↩
  3. The word ‘censorship’ has, for good reasons, acquired a negative connotation. But it seems clear that some forms of censorship are good — perhaps even essential to maintaining a healthy dialogue. Rather than ‘censorship’, a better word for this act is ‘moderation’. Social critic Keith Spencer proposes a rule of thumb: ‘unmoderated online forums always degenerate into fascism’. This is a hyperbole, but probably contains a kernel of truth. When there is no moderation, expect a creep not to high philosophy, but to base-level urges.↩
  4. A note on free-speech tribalism. I once met a Jordan Peterson fan who was incensed that Peterson’s speaking event (in Toronto) was besieged by protesters. “Let Peterson have free speech!” he demanded. The Peterson acolyte didn’t seem to understand that he was advocating censorship … for the protesters. No matter, they weren’t in his tribe.↩

Further reading

Commons, J. R. (1924). Legal foundations of capitalism. London: Transaction Publishers.

Epstein, L., Martin, A. D., & Quinn, K. (2018). 6+ decades of freedom of expression in the US supreme court. Preprint, 1–17.