Piketty and the Money View: A Reply to MisterMR

The last post got some very helpful comments from MisterMR (the regular commenter formerly known as Random Lurker) and Kevin Donoghue. Both of them raise issues that are worth posts of their own. I'll reply to MisterMR now, and perhaps to Kevin Donoghue later. Or perhaps not -- the biggest thing I've learned in four years of blogging is: Never make promises about future posts.

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MisterMR is coming from what I hope he won't mind my calling a classical Marxian perspective -- a perspective I'm simpatico with, tho I haven't been taking it here. One aspect of this perspective is the idea that capital can be understood in physical terms, as embodied labor. Now I agree that Marx does clearly say this, but I think this can be seen as a concession he is making to the orthodoxy of the day for the sake of the argument. Capital is subtitled "A Critique of Political Economy," and I think we should take that subtitle seriously. In effect, he is saying to Ricardo: OK, let's accept your way of thinking about capital, the system based on it is still conflictual, exploitative and in contradiction with its own conditions of existence.

I'm not sure how widely this view is held -- that Marx adopts the labor theory of value ironically. Anyway, that's not the argument I want to have here. What I want to do is clarify the perspective I'm offering in place of the labor theory. It's more in the spirit of the other core Marxian idea about capital, that it is a social relation between people.

MisterMR writes:

I think that there are 4 different kinds of capital assets (though in reality most capital assets are a mix of the four kinds). 

1) There are some capital goods that are stuff that is materially produced, such as factories. This stuff has a cost of production, that arguably has some relationship with its "value". This is what I would call "real" capital. The ambiguity in Piketty comes from the fact that he speaks as if all capital is "real" capital, and as if every money flow translates in "real" capital. 

2) There are some assets that are a finite resource that someone controls, like land. In fact, classical economists distinguished between "capital" and "land". The value of land can't be linked to the "cost of production" of land, because said cost doesn't exist. So arguably the value is just the cashflow derived from the asset divided by the normal rate of profit. I'd call this kind of assets simply "land". 

3) While land is certainly something that exists, there are some assets that have an economic value but that don't relate to something that clearly exists or that can be produced: for example, ownership on patents, or a famous brand that has an high market penetration and visibility etc. I think that these assets have dinamics that are similar to land, although they are mostly non material. 

4) Finally, there is credit. Credit also is a non material thing, and is different from all the 3 previous classes of capital for these reasons: 

4.1) It doesn't have a "cost of production";
4.2) It isn't related to any fixed resource, something that differentiates credit from both 2 and 3;
4.3) It has a fixed nominal value (which implies that the currency provider can literally print it out of existence).
4.4) It usually has a nominally fixed interest rate, something that can obviously cause chain bankruptcies. 

My problem with the "monetary view" is that it sounds like if assets of the 2 and 3 classes all are just a "montary" thing, as opposed to a "real stuff view" that sees all assets as if they were of the 1 class.

My response is that the money view is not a substantive claim about the nature of particular assets, but a way of looking at assets in general -- "real" capital goods as much as the more vaporous claims in categories 2 through 4. It does imply some kind of ontology, but in itself, the money view is just a choice to focus on money payments.

But I do want to explain the broader view of social reality that, for me at least, lies behind the money view.  Here's the way I want to look at things.

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On the one hand, there is the human productive activity of collectively transforming the world and maintaining our conditions of existence, along with the conditions that make that activity possible. When you sit down and write a blog post, you are engaged in creative activity with the goal of building up our collective knowledge of the world, and you are also maintaining the network of social ties through which this kind of activity is carried out. Your ability to engage in this activity depends on a great number of objective conditions, ranging from your physical health to the infrastructure that communicates your words to the rest of the world. Many of these conditions are the result of past human activity.

Under capitalism, a subset of human productive activity gets marked off as "labor." Labor has a number of special characteristics, most obviously that it is carried out at the direction of a boss. But for current purposes, the most important distinctive characteristics of the activity that we call "labor"  are (a) it carries a price tag, the "wage," with labor that is somehow similar carrying a similar wage. And (b) labor becomes substantively more similar over time, with the disappearance of specific skills and increasing interchangeability among the human beings performing it; it follows from this that the wage also become uniform. To the extent that (a) is true, we can attribute a "cost" to some particular set of conditions and to the extent (b) is also true, that cost will correspond to the hours of labor expended maintaining those conditions. Of course all productive activity additionally requires many conditions, both natural and social, that are not reflected in labor hours. In particular, a great deal of passive social cooperation is required for any productive activity, especially when there is an extensive division of labor.

Even in the pure case, where labor is completely homogeneous and all production is carried out for profit, under identical conditions and with no barriers to competition, there will not in general be a unique mapping from labor hours to costs or relative prices. The best we can do is to reduce all the infinite possible sets of relative prices to variation along a single dimension, with one set of relative prices corresponding to each possible profit rate. (I think this is Sraffa's point.)

So the description of assets in group 1 is correct -- but only with respect to one particular way of describing one particular way of organizing production, not as statements about reality in general. The productive activity that takes place in a factory does, of course, require the past activity that resulted in the existence of the factory. But it requires lots of other activity as well, much of which is not counted as "labor." And the fact that "labor" is a measurable input at all only holds to the extent that the productive activity has been deskilled and homogenized, a sociological fact that is never completely true and is not true at all in most historical contexts.

The think you have to avoid is believing that quantities like "value" or "cost" have any existence outside the specific social relations of capitalism.

The next question is what it means to “own” some conditions for productive activity, like a factory. The beginning of wisdom here is to recognize that ownership is a legal relationship between persons, not a relationship with a physical object. To own a piece of land means you have certain legal rights with respect to other people — to exclude them from the use of that land, to receive some equivalent from them if you do permit use of the land, to transfer those rights to someone else — and that no one else has those rights with respect to you. However, that’s only the first step. Next, we have to recognize that what constitutes “use” of piece of an asset is not a physical fact, but a social one. (As in the old story, the baker can exclude others from eating his rolls, but not from enjoying the smell of them.) So it would be more accurate to say that ownership of a piece of property is simply a form of social authority — a bundle of rights over other people. Indeed, if we want to relate the world of money flows to broader social reality, the most fundamental fact is probably this: The person who receives a money payment labeled “profit” gives orders, and the people who receive money payments labeled “wages” have to follow them. To say you own a piece of property is simply to say there is a set of commands that, if you issue them, other people are compelled to obey. Those rights are metonymously referred to by a label which bears a picture of some tangible good, just like the insignia on an officer’s uniform bear a picture of a leaf or a bird.

So:

When you say, here is a means of production, a factory, with a certain cost, you have already chosen: to ignore all the various conditions that make a certain form of collective productive activity possible, and let the existence of this one tangible object, the factory, stand in for all the rest; to ignore all the various forms of productive activity and social coordination that were necessary to bring the factory  (and the rest of the conditions of production) into existence, except for those we class as wage labor; to convert that wage labor to some common quantitative standard by measuring it in wage payments;  to assume some exogenously given profit rate, to give you the discount rate you need to add up wage payments made at different dates. Only then can you say the factory has a cost — and even then, this money cost is calculated by adding up a certain set of money payments.

At that point we have MisterMR's category (1) as a concrete social reality. We still have to establish the profit rate, since it cannot be reduced to a marginal physical product. Only then do the issues specific to the other three categories come into play.

I should be clear: the money view is not a complete account of the sphere of social reality we call the economy. (And again, I’ve adopted the term from Perry Mehrling, it’s not my invention.) The money view is defined by making the atomic units of analysis bundles of money payments. I would argue that it is logically consistent to think of any capital good as simply a bundle of income streams contingent on different states of the world, in a way that it is not logically consistent to think of it as a physical object producing a stream of physical outputs.

The fact that this is a logically consistent account doesn’t mean it’s sufficient. Obviously the money view doesn’t give a complete story, since we don’t know why the income streams attached to different assets are what they are, or why they change over time, or why assets in the monetary sense are attached to tangible goods or production processes, or for that matter why anyone cares about money payments in the first place. But by adopting a consistent story about money payments and assets, we get a clearer view of these other questions. We distinguish the questions that can be addressed with the formal techniques of economics from other questions that require a different approach. This is a step forward from the perspective that mixes up questions about money flows with questions about tangible productive activities and so can’t give a coherent story about either.