Capital and Conflict in the Middle East

“Power is nothing but its effect and can only be known by its consequences.”

The political economy of capital accumulation

By Troy Redick, Staff Writer

The theme of the Arbitrage Magazine’s sixth issue is that of chaos, and its relationship to profit. However, there is evidence to support a decidedly un-chaotic, almost mechanical relationship between the profits of certain sectors and international armed conflict.

In a multitude of works, Political Economy professors Jonathan Nitzan and Shimshon Bichler illustrate that over a period of 40 years, the profit of a specific coalition of firms increased relative to that of the Fortune 500 immediately following every conflict in the Middle East. Furthermore, they show that such conflicts occur after periods when the group of firms they term the ‘Weapondollar-Petrodollar Coalition’ earns profits below that of the Fortune 500 average. This is a case of profiting directly from war and strife.

[pullquote]Every time profits hit a danger zone, there was an energy conflict and the differential profits of the Weapondollar-Petrodollar Coalition reigned supreme.[/pullquote]

The aggregate of the ‘Arma-Core’ and ‘Petro-Core,’ referred to by Nitzan and Bichler as the Weapondollar-Petrodollar Coalition, sees its profits rise in lock-step with international armed conflict, especially in the Middle East. The cause of this positive relationship between profit and war should be easy to guess when examining defense contractors and weapons companies – Nitzan and Bichler’s Arma-Core. However, the question remains as to why oil companies profit directly from conflict, and why such conflicts always erupt at times most convenient for the financial well-being of the firms comprising the Petro-Core.

As a student of both Political Economy and Finance, I found the authors’ explanation particularly eye-opening and felt compelled to share it. Anyone interested in the functioning of business and society would do well to explore this theory and broaden their perspective. The cause, according to Nitzan and Bichler, is capital as power and the method by which said power is accumulated and exercised.

Capital as Power and the Middle East
Commonly argued causes for conflict in the Middle East include American Imperialism, clash of cultures, anti-liberalism, religious wars, etc. It is perhaps true that the conflict in the area is fuelled in part by these undercurrents. However, Nitzan and Bichler found a pattern in quantitative empirical data, that when combined with their theory of capital as power, helps explain the conflictual nature of the Middle East with demonstrable proof.

The following image (taken from Nitzan and Bichler’s work) is a graphical representation of this fact. The horizontal axis represents the point at which oil and weapon companies realize profits equal to those of the S&P 500 average. Black bars represent a relative loss of profitability for the Weapondollar-Petrodollar Coalition compared to the S&P 500 (a danger zone for conflict); white bars represent the opposite. The explosion images represent a major conflict in the Middle East. As you can see, every time profits hit a danger zone, there was an energy conflict and the differential profits of the Weapondollar-Petrodollar Coalition reigned supreme.

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.

Differential Accumulation of Power: Breadth and Depth
Nitzan and Bichler propose that there are two main methods by which dominant capital can differentially increase its power: depth and breadth. Each of these methods can be further split into internal and external means. They point to internal breadth through mergers and acquisitions (M&A) as the primary method of differential accumulation, supplemented by external depth through stagflation (no, stagflation is not an anomaly of the Great Depression – the authors prove its recurrence throughout history!).

Nitzan and Bichler state that internal breadth – especially M&A – is the most important driver of long-term differential accumulation, with stagflation being useful to bolster M&A at certain points and in specific circumstances along the way. The term internal breadth itself simply denotes a differential growth in earnings achieved through labour movement between firms. The most important form of internal breadth is M&A.

[pullquote]This Weapondollar-Petrodollar Coalition accumulated power, expressed as profits, through an ongoing cycle of oil crisis and violent conflicts in the Middle East.[/pullquote]

The amalgamation of corporate assets in this manner increases the size and earnings of a firm relative to the average of all firms, without affecting that average or increasing capacity, and thus depressing prices. The real effect of M&A is to redistribute control over existing capacity and employment, and thus differentially accumulate profits, and power: “[mergers and acquisitions] directly increases differential breadth; it indirectly helps to protect and possibly boost differential depth (relative pricing power); and it reduces differential risk”.

While M&A covertly increases differential profit and power, it explicitly concentrates ownership of firms, as the acts of merger and acquisition are themselves nothing more than a change in ownership. This has led to an increase in concentration of corporate ownership and tendencies toward oligopoly in some sectors, notably including the oil sector and OPEC.

No Coincidence
According to Nitzan, the twin politicization of oil business and commercialization of arms transfers helped shape an uneasy Weapondollar-Petrodollar Coalition. The differential profits of these companies became more and more dependent on precarious interaction between rising oil prices and growing arms exports stemming from successive Middle East energy conflicts.

The 1950s and 1960s saw the major oil companies moving toward greater cooperation with the OPEC countries, under pressures of increased nationalism and more competition. “The success of this alliance was contingent on the new atmosphere of ‘scarcity’ and oil crisis, which was in turn dependent on the progressive militarization of the Middle East”.

Bringing arms dealers into the picture, the large US and European-based military contractors were faced with ever-more reliance on exports to oil-rich countries. This Weapondollar-Petrodollar Coalition accumulated power, expressed as profits, through an ongoing cycle of oil crisis and violent conflicts in the Middle East. OPEC governments and oil companies alike realized massive profits from soaring oil prices.

As seen before, prices are an indication of power, and with oil prices rising amid periods of conflict Playpokiesonline.org, it comes as no surprise that these same OPEC governments spent the profits of oil on “expensive weaponry in preparation for the next war” Furthermore, the power of OPEC and large oil companies was cemented by the concentration of a small number of giant global players in a controlled sector.

Both the large arms dealers and oil companies gained through Middle East conflict: one through a higher price of oil amidst conflict, a risk premium of sorts, and the other through larger military orders. The interests of these firms all converged on higher oil prices, and the mechanism for achieving this common goal was the militarization of the Middle East.

And the result? The Middle East remained a hotbed of international conflict, and “became the world’s largest market for imported arms, absorbing over one-third of the global trade”. This Weapondollar-Petrodollar Coalition began to lose power and profitability during the late 1980’s and was eclipsed in relative power by other business interests. However, it retained sufficient power to delay a global financial crisis in the early 2000’s, “[managing] to put the Bush clan back in the White House, inflame the Middle East, raise the price of oil”.

This is no conspiracy theory; it is merely the rich and powerful manipulating society to maintain their financial and business interests around the globe, and thus securing their dominance. It is no different than a corporate giant such as Microsoft acquiring or crushing nascent competitors – it is conducting business by any means necessary.

With profits comes the power to shape society, and if the maintenance of said power requires conflict in order to secure profitability, then those in power will seek war – and if history is any judge, they will likely get it.

ARB Team
Arbitrage Magazine
Business News with BITE.

Liked this post? Why not buy the ARB team a beer? Just click an ad or donate below (thank you!)

Liked this article? Hated it? Comment below and share your opinions with other ARB readers!