by Tim Di Muzio
Bentham (1748–1832) was a British philosopher born to wealth. As we have already discussed, other than philosophy his main business venture – which was never realised and for which he remained forever annoyed – was to capitalise the labour of poor workers in a prison built for a perfect economy of surveillance and discipline: the Panopticon.5 But rather than dwell on his prison creation and his many writings, what concerns us here is how Bentham approached the concept of unequal property from a new perspective: that of utility. Like most political economists, other than perhaps Marx, Bentham addresses his thoughts to statesmen and particularly legislators. He begins by saying that the goal of every legislator should be the happiness of the society they are governing. Happiness, for Bentham, is a product of four additional but subordinate ends: subsistence, abundance, equality and security. However, of the four, security is chosen as the most important because Bentham believes, as do some moderns, that the other three goals cannot be accomplished without security. There are two things that are interesting about Bentham’s justification for unequal property. The first is that he avoids the concept of natural rights and conceives of property as being created by the law. In this sense, there can be no appeal to a ‘birthright’ when it comes to acquiring property. The law is what the law is, and over time some have managed to accumulate vast fortunes while others have not. Second, Bentham claims that most people are confused when they associate property with material goods. Property for Bentham is an expectation regarding the future, and the future is primarily a matter of security. In part, this is an early recognition that property owners capitalise expected future income and that part of their asset prices is conditioned by an assessment of risk or insecurity.6
But Bentham was writing at a time when the non-propertied were continuing to question the inequality of wealth, power and property, and so he was forced to deal with the call for equality despite his fervent belief that some should be subordinate to others. He admits that equality of property might be a worthwhile goal in the long run; but, in the short term, taking away property from the rich to give to the non-propertied would pose a greater harm to the ultimate goal of achieving happiness: that of providing security. There is no question in Bentham that the existing distribution of property was to be protected by the law, so any calls for equality, in Bentham’s formulation, must always yield to the security of existing property relationships. Bentham comforts himself by saying that the poor do not really know how the rich live, so they do not experience any torment or pain because they have nothing with which to compare their situation. This is unlike the rich, who can experience pain when their property is confiscated. They have experienced luxury and expect luxury, so redistribution would simply make them unhappy. In the end, Bentham asks himself whether equality and security must be perpetually at war. In perhaps the most mistaken prediction of all time, Bentham answered that to some degree they are incompatible but that, over time, property ownership would tend towards equality.
It was one thing to wax philosophical about uneven wealth. It was quite another to try to scientifically demonstrate why the 1% deserved their lot. The answer would have to wait almost a century after Bentham’s writings. In the meantime, the law, custom and the force of arms were decisive enough to settle the question in an anti-democratic age of imperialism and aristocracy. However, in an era of burgeoning democracy, increasing literacy and radical ideas about exploitation and inequality, the science could no longer wait. The first step was taken by three men interested in political economy and keen to bring a scientific gaze to questions of the economy: William Stanley Jevons (1835–82), Léon Walras (1834–1910) and Carl Menger (1840–1921). The work of these three men eviscerated politics and power from political economy. It is unclear what motivated these men to do this, other than a desire to create a more exact ‘science’ rooted in mathematics. Their ideas, bizarre and distant from reality, would go on to form the neoclassical school of economics – the dominant school to this day. Known to us as marginalists, these early dissident economists combined the abstract deductive method of David Ricardo and others with Bentham’s utilitarian calculus of pain and pleasure. In doing so they managed to create formal mathematical models of an imagined ‘economy’ existing separate from history, society and politics (Milonakis and Fine 2009: 91ff). Their chief focus was on the isolated individual spending a limited amount of funds in what they assumed to be perfectly competitive markets, where demand for goods and services equilibrated with the supply of them.7 In their thinking, they employed the concept of marginal utility: the surplus satisfaction or happiness a consumer gains from consuming one more item of the good or service – with the added assumption that satisfaction will decrease as more is consumed (negative utility).8 The goal of individuals is to maximise their pleasure given these constraints: a limited amount of money and diminishing marginal utility.
But the real problem started to emerge when the topic shifted to the distribution of wealth. It was clear to all early political economists that labour and land added to the wealth of nations, less so capital goods (Nitzan and Bichler 2009: 68ff). Of course, ever since Adam Smith, the idea that workers received wages, landlords received rents and capitalists received profits was well known. But to stay at this level of assertion would simply not do. It would not do because it was akin to saying that income is the result of where you are on the class hierarchy – your position – not your contribution, productivity or skill. Early answers to the question of the origin of profit are summarised by Nitzan and Bichler and worth quoting at length:
Chief among these theories were the notions of ‘abstinence’ as argued by Nassau Senior (1872) and of ‘waiting’ as stipulated by Alfred Marshall (1920). According to these explanations, capitalists who invest their money are abstaining from current consumption and therefore have to be remunerated for the time they wait until their investment matures. By the end of the nineteenth century, though, the huge incomes of corporate magnates, such as Rockefeller, Morgan and Carnegie, enabled them to consume conspicuously regardless of how much they ploughed back as investment (ibid.: 70).9
But as Nitzan and Bichler suggest, even if these explanations were all true, ‘the magnitude of their remuneration’ remains unexplained (ibid.: 70). For example, why do some capitalists make a 5% return, others 10% and still others 1,000%? Just as Bentham sought to overturn Rousseau’s radical appeal to natural rights, so John Bates Clark (1847–1938) stepped into the fray to provide a convincing theory for the origin of profit. This would become the main way in which typical economists explained and justified the distribution of wealth: the production function.
The first step was for Clark to posit that capital goods, like land and labour, made a distinct contribution to production. As Nitzan and Bichler point out, this assumes we can observe and measure the distinct contribution made by each factor of production in the production process (ibid.: 70–1): for example, in the production of automobiles we can observe and measure 10 units of labour, 20 units of land and 70 units of capital. If their marginal contributions to the economic output can be known, Clark argued, then – under a perfectly competitive market – income will be proportionate to the marginal contribution made by each factor of production. Since capital goods are assumed to be productive goods and are owned by capitalists, then profit is the return on their specific contribution to economic output. Clark was not ambivalent about his goals. In the opening of his 1899 The Distribution of Wealth, he states:
it is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates (Clark 1965: 1).
In other words, since income is proportional to contribution, everyone gets their just deserts. So if the 1% draws ever greater portions of income to themselves, this must be because, according to the production function, they are contributing that much more to economic outpu
t.
There are many problems with the production function but one critique overrides them all: even if you could observe and measure each factor’s contribution to production, it could exist only in a fantasy land of perfect competition. For economists, perfect competition means that no agent in the market has the power to set prices. But with the development of the large-scale corporation and big government, perfect competition became a chimera, if it ever existed at all. Readers who prefer reality over fantasy will find this intuitive. But it is worth mentioning a recent study carried out by three systems theorists from Switzerland. The theorists studied the network of ownership among firms ‘which hold at least 10% of shares in companies located in more than one country’ (Vitali et al. 2011). Forbes nicely summarises what they found:
They discovered that global corporate control has a distinct bow-tie shape, with a dominant core of 147 firms radiating out from the middle. Each of these 147 own interlocking stakes of one another and together they control 40% of the wealth in the network. A total of 737 control 80% of it all. The top 20 are at the bottom of the post. This is, say the paper’s authors, the first map of the structure of global corporate control (Upbin 2011).
What this summary of the study suggests is that there is sound evidence that we should not search for a convincing explanation for the massive disparity of wealth between the 1% and the 99% in fantasies such as perfect competition. Since mainstream economics cannot convincingly explain the distribution of wealth, we will have to look elsewhere. A good place to start is by considering the difference between business and industry.
Veblen’s political economy
Thorstein Veblen (1857–1929) had the advantage of researching and writing at a time when the economic landscape of the United States was being transformed by coal, oil and the modern corporation. It was also the period of what Josephson (1934) called the Robber Barons – men who accumulated some of the largest fortunes in history by seizing control of oil, steel, the railways and the creation of credit. To understand this vast accumulation of capitalised income streams, Veblen argued for a focus on ownership and the corporation. But to do so required a knowledge of historical development.
For Veblen, human creativity and production (as for Marx), are only possible within a community. As he claimed: ‘the isolated individual is not a productive agent’ (Veblen 1998: 34). What this means is that ‘the phenomena of human life’ take place only within the life history of human communities. But what is of particular note about these ‘generational’ or ‘life-reproducing’ communities, according to Veblen, is the common stock of knowledge, habits, customs and ways of life concerning production and reproduction held informally by the great body of the people involved in the community. This is what Veblen identifies as the ‘immaterial equipment’ or ‘intangible assets’ of the community. For example, over time Finns have built up a knowledge base of poisonous mushrooms they should avoid gathering for food. This knowledge on how to avoid getting sick or dying from eating a poisonous mushroom was developed by trial and error over time and communicated through a common language as Finnish history unfolded. The present population has the benefit of this compound knowledge.
Veblen suggests that as society advances and this ‘technological stock’ of ‘immaterial equipment’ grows larger and larger, it becomes increasingly difficult to identify – let alone trace – the connection between any given ‘technological detail’ and any specific individual of the community. This is most certainly one of Veblen’s most controversial propositions because, from this point of view, the institution of ownership cannot be rationalised. That is, the productive and even destructive power of the species is not simply the result of individual initiative, but of a working community with a ‘technological heritage’ passed on through various ways and means of knowledge transfer and communication. In other words, anyone who creates a new invention or stumbles upon a new discovery owes an unpayable debt to the communities of the past and the present. From this standpoint, it is virtually impossible to advocate monopoly or oligopolistic control over any discovery, let alone contend that the individual is the rightful producer, and thereby the owner of a tangible or intangible asset. Historically, however, this point of view has never attracted enough attention for it to become a revolutionary idea because those in power have a keen interest in denying its veracity.
Now, according to Veblen, as human industry expands along the lines of a more thorough technological development, property rights start to take on a definite form, while the principles of ownership gain consistency. It becomes possible, argued Veblen, through force and fraud, for individuals to engross or corner the ‘immaterial assets’ of the community through legal title. More to the point, there comes a time in human development when the ‘ownership of industrial equipment’ becomes an ‘institution for cornering the community’s intangible assets’ (Veblen 1919: 35). Thus, for Veblen, ownership, while having a basis in the power relations of material reality, is nothing more than an outright seizure of a given portion, element or fraction of the ‘immaterial equipment’ of humanity and has virtually nothing to do with individual productivity per se. It is a legal fiction, sanctioned by law and backed by the coercive powers of the police and governmental apparatus. As Tigar and Levy remind us:
legal change is the product of conflict between social classes seeking to turn the institutions of social control to their purposes, and to impose and maintain a specific system of social relations … Any social system preserves and maintains itself against its enemies, and regulates its internal affairs, through power – and thus in the last analysis through force and the threat of force. Its formal rules rest on the premise that if one does not obey the commands of the state – the institution with a public force specially appointed to enforce laws and commands – sooner or later one will be either forcibly constrained to obey or punished for not obeying. Any group that wants to make a radical change in a society – and the early businessmen wanted such change – first tests the existing institutions of power to see how far they will bend, and then attacks the institutions of state power directly, setting up its own apparatus of public force, with new laws and commands designed to secure its own interests (Tigar and Levy 1997: xiii, xv).
Businessmen took over from the old aristocracy they challenged and now use the legal apparatus, when it is convenient, as one of the key tools of their enrichment. As Mills noted in his study of elite power: ‘The general facts, however, are clear: the very rich have used existing laws, they have circumvented and violated existing laws, and they have had laws created and enforced for their direct benefit’ (Mills 2000: 99). With this in mind, we turn now to Veblen’s conceptualisation of industry and business.
For Veblen, industry is a synonym for human potential or creativity. It is identified with the community, workmanship and human interdependence – it is the materialisation or the application of a heritage of human knowledge to nature. Broadly conceived, it 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, Veblen claimed, it results in a tendency towards standardisation, itself concomitant with the fact that mass industry requires planning and coordination. Without this uniformity of coordination and planned synchronisation 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. Imagine, for example, what chaos would be created if all dwellings of a nation had different electrical sockets. 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, planned and balanced functioning of the industrial process.
The business enterprise or modern corp
oration, however, superintends and sabotages industry. While the industrial process has material and structural priority, it is not in the ascendancy. Business enterprise, with its motives, methods and aims, has come to drive the industrial process in pursuit of ever-expanding pecuniary gains – gains determined primarily by the expected or future earning capacity of each individual firm. The businessmen in control of each individual firm have this goal in common, although they find themselves in competition for market share. The competition for market share and profits, combined with the growing complexity and interconnectedness of the industrial system, forces each business enterprise to seek out differential advantages. For Veblen, this process manifests itself chiefly through the strategic control of industry. Thus, it is not that firms produce for the sake of production, which would be in the interests of the community, but rather they do so for the sake of profit. The products of material goods and services are supplied to the community only insofar as the businessman can calculate the saleability of his product and realise a reasonable rate of profit. As Veblen put it:
