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The ritual of capitalization

from Blair Fix

. . . the clergy aren’t priests … they’re economists.

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 …

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.

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 resent 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 phenomena’, 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, its 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
Walmart Apple
Profit (billions $) 21 57
Sales (billions $) 520 275
Markup 4.0% 20.9%
Capitalization (billions $) 400 2127
Effective discount rate 5.1% 2.7%

Source: Walmart 2020 Annual ReportApple 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’.

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.

  1. June 3, 2021 at 12:10 am

    Hi Blair : love your approach! I quoted you with credit in my article ” TIME TO DETHRONE ECONOMICS” (May, 2021) along with Steve Keen on http://www.ethicalmarkets.com and Wall Street International magazine http://www.wsimag.com My next going live tomorrow is ” VALUING LOVE ECONOMIES ” keep up the good work, Hazel

  2. Ken Zimmerman
    June 3, 2021 at 1:19 am

    Every ritualized way of life benefits some parts society while at the same time harming other parts. With a few neutrals along for the ride. The long reign of British monarchy, epitomized by Queen Victoria but really owing its ritualization to Edward II remade not just England but all of Britain and eventually most of the world. And the rituals of this history remained fully in place even when much of political power of the monarchy was gone. The harm this ‘royal way of life’ created is almost incalculable. From Africa to the Middle East to Asia the world is still plagued today with the deadly consequences of British monarchy. And when the rituals of British monarchy finally began to fade in the 20th century, they have been replaced by the arguably more destructive rituals of American ‘exceptionalism’ and ‘white supremacy.’ With Communist China struggling to force its rituals in place for the world. I don’t believe capitalization rituals will survive for long in this setting. The more important questions are what will replace capitalization and when will that occur?

  3. Gerald Holtham
    June 3, 2021 at 1:39 pm

    “And since they all end up obeying the same general rules, the rules themselves seem ‘objective’ and therefore amenable to ‘scientific discovery’.”
    Not “seem” but “are”.
    We are dealing with human society and its conventions. These are, unsurprisingly, man-made and only remotely constrained by the laws of nature. There is a lot of room for variation. An objective phenomenon is not one arising purely from natural laws but one that different people can perceive. My dreams are subjective; the local bus service and the stock market are objective phenomena. Neither are determined at all directly by Newtonian or quantum mechanics.
    That the conventions of finance are a human artefact is not news. That they are conditioned by the dominant economic system, capitalism, is unsurprising. Nevertheless there are reasons why they take the precise form they do and these are worth exploring. Dismissing them as ritual is fun, no doubt, but doesn’t get us anywhere. All social and power structures need rules – the ones you approve of as well as the ones you don’t. The rules are not closely determined by any iron necessity. There are social choices. Why do some get chosen not others and what are the consequences? Social science tries to make what is implicit in social arrangements explicit and to explain it. That is a difficult but worthy occupation, whatever social system we live under.

    • Ken Zimmerman
      June 4, 2021 at 6:29 am

      Gerald, the rules of society are created through ongoing interactions to explan both those interactions and their context. One such rule used in economic interactions is ‘supply and demand,’ borrowed from economists’ theorizing. In application all rules are incomplete. This means every time a rule like supply and demand is applied in a new situation its usefulness and explanatory power for that situation must be assessed by the people in that situation. And often there are conflicts in making these judgments among the people involved. So describing how rules are created, interpreted, and applied by people is a large part of the work of social scientists.

  4. June 4, 2021 at 8:37 pm

    “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”.

    Okay, but when Blair goes on to compare the Christian doctrine of the Trinity with the Capitalist doctrine of the Markup, he’s already chosen the less reasonable alternative of a legitimate choice, having himself been indoctrinated to accept it and forgotten the Euclidian geometry which made sense of the Christian doctrine. [Three points define a circle and Pythagoras’s theorem defines a different 1 than a digit does, as in 1 clock hour rather than 1 sausage]. Either the universe was created or it wasn’t. If it was, then the answerable question is not How? but Why? and the best available hypothesis at that time was Trinitarian: a Father creating Children to Love, and evidence of his existence and love in the life, death and resurrection of Christ. What I’ve come up with myself is water being Trinitarian: the same substance existing as ice, water and vapour. For a start, those are explanations, not mystifications, but to deny them means denying the evidence, and denying it just as ritualistically as the more trusting type of Christian can believe it literally. Before accepting Nitzan and Blitcher’s prejudices so unquestioningly, Blair should reflect on where they came from. The actual Christian position is that you need to decide for yourself whether to have Faith in what Christ taught about our brotherhood, or in what our money-grubbing is saying about ourselves.

  5. Ikonoclast
    June 4, 2021 at 10:47 pm

    In my opinion, Jonathan Nitzan and Shimshon Bichler are the most original thinkers in the political economy space since Marx-Engels and Veblen. Blair Fix is a very able interpreter and extender of their approach.

    Bichler and Ntizan have solved what we may term the “value controversy” or the controversy about value theory. We may put this controversy in colloquial terms by asking “What does money measure?” B&N’s radical answer is that money measures nothing. They cut the Gordian Knot of the value controversy by radically dismissing it.

    Modern conventional economics would have it that money (via market operations) measures utility or its dandified big brother, rank dependent generalized expected utility, Basic Marxist thinking would have it that money measures the socially necessary abstract labor time embodied in a product or service. But the argument about what money measures is solved by realizing that money measures nothing objective. We pretend it measures and equates incommensurable quantities and values, like human lives (in actuary work), biosphere values and tons of carrots (for example). All such beliefs of the commensurable equation of incommensurable items are social-fictive nonsense and quite unscientific.

    Gerald Holtham writes, “We are dealing with human society and its conventions. These are, unsurprisingly, man-made and only remotely constrained by the laws of nature.” This is half right and half wrong. I may adopt the specifics of the RC cross signing method if I am RC and I may adopt the Russian Orthodox method if I am RO. These are ritual actions not seriously constrained by nature. The human arm and hand can make each set of movements and the energy requirements are trivial in each case.

    However, it is possible for societies to adopt rituals which are difficult and costly to perform (at least for some classes) and it is also possible for the real costs of such rituals to become completely unsustainable over time. Nature does decree (eventually if not immediately) what human rituals are sustainable and what human rituals are not sustainable. The rituals of capitalism are not sustainable and civilization and the biosphere face collapse if we persist with them. We either abandon these rituals and the profligate and unnecessary real production and consumption along with the maldistribution they decree or else we go extinct.

    It’s that simple.

  6. Ken Zimmerman
    June 5, 2021 at 8:48 am

    A few things to consider about money …

    Two things money can achieve is making events and agents commensurate and abstract from their context. Closely related to the questions of commensuration and abstraction is the problem of money’s mathematics—the kinds of calculation and equivalence it encourages. Helen Codere (1968) created a classification of money systems and monetary semiotics based on the extent and magnitude of the numbers involved. Her account interested Melitz because it seemed to “contrast abstract numerical manipulation with practical numerical application” (Melitz 1970, p. 1035). It was notable for its attempt to categorize moneys on the basis of the interrelationships among symbol, number, and use. Although earlier work such as this found a direct relationship between quantification, commensuration, and the “great transformation,” money does not always divide up the world into quantifiable bits without remainder. Money may render everything calculable, but the systems of calculation and quantification on which it depends are not always as straight forwardly algebraic as one might imagine. Number, like money, is representationally complex (Foster 1999). Numbers do not always point to enumerable objects in the world (Rotman 1997) but can, for example, also signify the divine, the transcendent, the ineffable (Maurer2002). And even where calculation seems dominant, it can be put to new uses and effects, as when people use the mathematics of money outside the sphere of the economy proper, to make sense of their lives, loves, and longings in other domains (Miyazaki 2003).

    Consider Crump’s (1978) analysis of money, number, and market relations in the state of Chiapas in southern Mexico in the 1970s. Market transactions using money, he argued, introduced notions of number and classification that were alien to Tzotzil counting and linguistic classifier systems. Money and number were thus the leading edge of linguistic conversion and cultural assimilation. As he put it, “the equivalence property of money…converts two unlike things into each other, and so money, in its own terms, effaces the distinctions 9inherent in any system of classification, so you can mix chalk with cheese” (p. 507). This echoes the common idea in the sociology of money, via Marx and Simmel, that money commensurates, flattens, and homogenizes.

    A number of other case studies reach similar conclusions. Ferreira’s study of counting among some Brazilian indigenous groups finds that monetized market transactions reshape number so that money and number together become the chief means of quantitative comparison, measurement, and evaluation and create a “conflict with other value systems” (Ferreira 1997, p.135). Hutchinson’s study of the Nuer demonstrates how money’s commensuration of values increasingly flattens relationships and simultaneously invests personal possessions with deeper importance and meaning. If modern humans are free—free because they can sell everything, and free because they can buy everything—then they now see…in the objects themselves that vigor, stability, and inner unity which they had lost because of the changed money-conditioned relationships that they have with them. (Simmel, quoted in Hutchinson 1992, p. 294). When monetary exchange is anonymous and anonymizing, the social identities of transacting parties are irrelevant to the value of the objects mediated by money (Graeber 1996, p. 6), and so the things take on the powers of the fetish described by Marx and the object of desire discussed by Lacan, ˇZiˇzek, and others. This does not mean that numbers always do what we think they do, or that numbers really are abstract and disembodied entities from a realm of pure form (Rotman 1997). We should aim to develop richer vocabularies of numerical scale and quantification techniques and procedures, even borrowing such vocabularies from the realm of statistics and mathematics themselves. We should also examine the interaction of the different scales, for example, of time and money in wage labor and the new disciplines of loan repayments in colonial and postcolonial contexts (Berry 1995; Elyachar 2002; Falola 1995; Stiansen & Guyer 1999, p. 10). And we might want to leave Marx to one side while we do this. As Guyer writes in the conclusion to her study of monetary repertoires in West Africa, “we need to increasingly incorporate attention to thought [i.e., processes of abstraction and analysis common to economic practice and to social description and explanation] and calculation…. [O]ne needs to ‘think other’ precisely about number, measurement, and money in the awkward and dangerous present because they are such powerful constructions in a quantified and insurgently commercial world” (Guyer 2004, pp. 174–75).

  7. John Jensen
    June 9, 2021 at 5:57 am

    You’ve certainly tried to mystify the process of making a profit by investing capital but it’s even far more complicated than you have intimated and that’s because there are no averages that apply to companies across our 10 sectors (more like 13 sectors now, not including crypto currencies) and there is also value in company clout and perceptions in setting prices with consumers and suppliers. Yes, in finance we do set profit margins based on past performance but internal rates of return are also based on company unique efficiency levels, avg. cost of labour, taxes, tax benefits (like depreciation and research), cost of debt, risk due to low cost debt (but with high interest expectations in the future), the cost of issuing capital, the likelihood of raising capital by issuing new shares attracting required loans (while not affecting share prices), changing energy prices, property taxes, payroll taxes, transportation costs, customer acquisition costs, cost of expansion or downsizing to suit future demand. likelihood of changing demand or supply, risk of new low cost competitors, changing technology and marketing methods, additional costs of intermediaries (such as using “Shopify”, “Salesforce” or Amazon) and on and on. There has to be a risk premium because business in not like putting your money in the bank and getting interest each month. But since the politically set rate of interest is an alternative for all investors your profit margin has to be large enough to cover all operating costs like debt servicing, paying out dividends and a decent annual growth in book value (that exceeds the rate of inflation plus provides a decent risk premium for investors) and share values that are determined from increasing net assets and shareholder perception of your company – which hopefully produces a net + growth rate.

    I suspect that markets mystify you due to a lack of “familiarity” and hence your choice of mystified words. Markets really only make sense if you are either in portfolio finance, a portfolio manager, analyst or you take the time to evaluate the price of each stock (using available metrics) you desire to invest in and then track them over time; that = experience. I have a diversified mix of 25 to 40 stocks and all I need to stay in the investing game is an 8.5% yield from a combination of my avg. unrealized capital gains and avg. dividends. Other investors require a 15% combined yield. That’s over the long term – not every year. I average out my market risk to a portfolio Beta (a measure of portfolio volatility) of roughly Beta= 0.85 compared to a market index Beta of 1.0 and I do that by selecting a greater mixture of (so called) low risk Value stocks (low volatility and low share price relative to earnings). In other words I tend to buy the cheaper stocks that have the best growth potential compared to their peers and also have a low price volatility. Most of my holdings have a lower than avg. stock price/Book ratio compared to their sector peers but all that varies with interest rates, inflation and sector growth expectations. I tend to chose companies that are underestimated by many investors and that usually means a lower price. When the market index goes up by 10% I move up by only 8.50% – that’s a compounded average over many years. Warren Buffet buys his companies when the Share Price to Book value ratio is lower than 0.5 – that’s a market value equal to half the net book value of the company (and generally far below sector peers) but he also reduces his risk of buying failures by putting his people on their boards and then works to fix their management problems and sells them when they recover. Everyone else has different standards for what they pick and why they use particular metrics so most of your averages mean nothing – there is no average company or average market expectation and all we know for sure is that the DOW rises at roughly 10%/year since 1929 with the market index Beta set at 1.0 and a standard deviation of 18% (price) volatility each year. I love low debts and cash in the bank but that also precludes me from buying growth companies like Amazon, SalesForce and shopify. So, your averaging all market performance out relative to inflation and interest rates does not capture how each investor manages his portfolio or the unique metrics used by each sector investor.

    • June 9, 2021 at 11:02 am

      John, I agree with you about gambling being about portfolio management, but Blair Fix was addressing a different problem: Are economists telling lies? I thought Blair made his argument very clearly: no matter which of the ways the look at it there is a lie in the middle. So they are telling lies; but Why? The portfolio lie is that money is valuable, but money is merely symbolic and “money in the bank” is the current way in which ambitious men think of themselves as more valuable than others: even God and the Laws of Nature they have been taught or convinced by empirical (superficial) philosophers of science to deny the existence of. As Sir Francis Bacon originally argued, science is not about what anyone can see but about taking things to bits [both theoretically and experimentally] so we can see how they work. One can’t do that safely if the theories are lies. My Critical Realist philosophy of science can be scientifically agnostic about the existence of God but not to Faith or religious commitment based on the evidence of history, which like your gambling depends on informed judgment. Blair’s lack of that is really what I was objecting to above.

  8. Ken Zimmerman
    June 9, 2021 at 11:11 am

    Much of the capitalization ritualization seems like in the word from David Graeber, ‘bullshit.’ I reach this conclusion based on what Peter Drucker laid out for us about business some 50 years ago.

    “Objectives are needed in all areas on which the survival of the business depends. The specific targets, the goals in any area of objectives, depend on the strategy of the individual business. But the areas in which objectives are needed are the same for all businesses, for all businesses depend on the same factors for their survival. A business must first be able to create a customer. There is, therefore, need for a marketing objective. Businesses must be able to innovate or else their competitors will render them obsolete. There is need for an innovation objective. All businesses depend on the three factors of production of the economist, that is, on human resources, capital resources, and physical resources. There must be objectives for their supply, their employment, and their development. The resources must be employed productively and their productivity has to grow if the business is to survive. There is need, therefore, for productivity objectives. Business exists in society and community and, therefore, has to discharge social responsibilities, at least to the point where it takes responsibility for its impact upon the environment. Therefore, objectives in respect to the social dimensions of business are needed. Finally, there is need for profit—otherwise none of the objectives can be attained. They all require effort, that is, cost. And they can be financed only out of the profits of a business. They all entail risks; they all, therefore, require a profit to cover the risk of potential losses. Profit is not an objective but it is a requirement that has to be objectively determined in respect to the individual business, its strategy, its needs, and its risks.”

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