Capital and Conflict in the Middle East

The Theory of Capital as Power
Departing from both neo-classical and Marxist thought, Nitzan and Bichler propose that capital is not a material object or a factor of production, nor is it a social relationship embedded and expressed through material goods, and it is not simply “‘augmented’ by power. It is, in itself, a symbolic representation of power”.

The authors state that the neo-classical economics governing our society are not objective or scientifically grounded, but are instead “largely an ideology in service to the powerful. It is the language in which the capitalist ruling class conceives and shapes society. Simultaneously, it is also the tool with which the class conceals its own power and the means with which it persuades others to accept that power.”

[pullquote]Power is nothing but its effect and can only be known by its consequences.[/pullquote]

While they debunk previous theories, the real importance of their work is this new conceptualization of power.
Furthermore, they provide empirical evidence to substantiate all of their claims. I will (very) briefly explain the theory of capital as power in three steps: understanding prices as indicative of power, through markup; understanding how such power is accumulated, differentially; and how this power is exercised and maintained.

This will be followed by an explanation of how this relates to (and perhaps explains) much of the conflict in the Middle East.

Prices and Power
The economics taught in schools today is neo-classical economics. It is mainstream knowledge that these economics are primarily the study of supply and demand. The relationship between these two allegedly independent variables is thought to determine the price of any given good or service.

Economics sees this market mechanism as a scientific and constant relationship, similar to a law of motion as understood in physics. Actors in the market, both buyers and sellers, are believed to have no power or choice in the matter, other than to passively accept and respond to the price dictated by the ‘market.’ However, this theory has been challenged since at least the 1930s, by thinkers such as Means, Hall and Hitch, and Veblen (Nitzan and Bichler, 239-240).

Gardiner Means researched industrial prices in the United States and exposed a duality in the nature of prices: market prices and administered prices. The first type are those typical of neo-classical economics, being “relatively flexible, moving up and down with supply and demand, and prevalent in competitive industries”.

The second type of prices was a new discovery and would prove to be anathema to neo-classical economic theory, as they were “relatively inflexible, changing only infrequently, responding slowly to market conditions and typical of concentrated industries”.

Administered prices run counter to neo-classical rational maximization and theories of supply and demand. Not only do prices of this type not derive from the relationship between supply and demand, but by not responding to market conditions, price makers are not attempting to make the best of their situation, and thus are not actively rationally maximizing. While administered prices present a significant challenge to the neo-classical price doctrine, they provide ample support for a theory of capital as power expressed through markup.

Taking this alternative price theory a step further, Hall and Hitch presented research into business behaviour, and more specifically pricing patterns. Based on interviews with British corporate officials, this work uncovered a system which can be called ‘markup pricing’. Corporate officials started by calculating the cost at normal levels of output, added a “conventional markup”, and maintained this price against cyclical variations in demand.

Kaplan, Dirlam and Lanzillotti continue in this vein to illuminate the logic behind markup pricing. These authors introduced the concept of a ‘target rate of return’, whereby corporations, “particularly the leading ones, begin with a long-term rate of profit, and then back-calculate the markup necessary to realize this rate of return over the longer haul”.

Michal Kalecki theorized this markup as more than a simple anomaly in economic theory; instead, he equated it with power. Kalecki calls this power the ‘degree of monopoly’ and it can be measured by examining markup. Nitzan and Bichler maintain that power is nothing but its effect and can only be known by its consequences. In this case the consequence is markup: “the higher the markup and its associated rate of return, the greater the implied power of those who set it, and vice versa.”

This is because a corporation able to maintain a high level of profit relative to that of the market average, via high markup, demonstrates a requisite degree of differential power. What this means is that markup can be used as a proxy to measure differential power, and it is important to understand how firms achieve this power.