Capitalisation

Capitalisation is the process by which a market price is determined for revenue producing assets. It also plays an ideological role, because it creates the false impression that all revenue is the product of some form of capital. Hence the development of the pernicious notion of “human capital”. It also, thereby acts to bury the real source of value.

In Capital I, Marx outlines the basis of value as the labour-time required for the production of any use value. Any use value, which requires no expenditure of labour-time, has no value. Any use value, which requires the expenditure of labour-time (including a labour service, for example, entertainment provided by a singer, actor etc., or education provided by a teacher) is a product. Because all products contain varying amounts of labour-time/value, the value of each product can also be expressed, as a quantity of some other product. That other product then acts as its equivalent form of value. The more products come to be exchanged, as a result of trade between different communities/tribes, and the more this trade is conducted by specialised merchants, the more the values of these products are determined by the average social labour-time required for their production, rather than the actual labour-time embodied within them, and the more, therefore, products become commodities, and the value of each commodity is expressed, not as its value, but as its exchange value, the quantity of these other commodities it can command in exchange.

When a single commodity, for example, gold comes to act as a universal equivalent form of value, i.e. a commodity, which everyone will use as the basis of measuring the value of any other commodity, and will be accepted in exchange for all of them, this commodity becomes the money commodity. The expression of the exchange value of any commodity against this money commodity, then becomes its price. For example, if 100 metres of linen exchanges for 1/4 ounce of gold, then the price of 100 metres of linen is 1/4 ounce of gold. If the quarter ounce of gold is given the name £1, then the price of the linen is £1.

Prior to capitalist production, it is on this basis of exchange values that commodities exchange, and market prices for commodities are determined. However, the beginning of capitalist production, in the 15^th century, changes this situation. Marx describes, in Capital III, Chapter 9, how capitalists are interested in making the highest rate of profit, on the capital they advance. That means that if they can make a higher rate of profit producing linen than producing iron, they will keep advancing their capital to produce linen, and so obtain this higher rate of profit, and this will mean that the supply of linen continues to expand, pushing the market price of linen down further and further below its exchange value. It will continue to do that until the market price of linen falls to a level, whereby the rate of profit obtained is no longer greater than that in some other sphere of production.

This process - The Law of The Tendency For The Rate of Profit To Fall - will continue, to allocate capital to wherever the next highest rate of profit exists, and in the process, it will, therefore, create an average rate of profit. Any sphere that has a rate of profit higher than this average, will see an influx of capital, a rise in supply, to reduce market prices, and profits, whereas any sphere that has a rate of profit lower than the average, will see an outflow of capital, which causes a drop in supply, and higher market prices and profits. If every sphere was obtaining the average rate of profit, the equilibrium market prices, required to achieve that must differ from the exchange values of the commodities. These prices at which commodities exchange are then prices of production.

These prices of production are still, ultimately determined, by values. If all of the output of an economy is taken to be just one single commodity, its value would be the labour-time currently required for its production. That is the labour-time currently required to reproduce all of the constant capital that went into its production (raw materials, auxiliary materials, wear and tear of fixed capital); and all of the actual labour-time expended in processing those materials, and transforming them into new commodities. This latter portion of newly created value, is divided into that which is required to reproduce the labour-power expended, and the surplus value. But, this value of the economy's total output, would then be equal to its price of production.

The price of production is the cost price (c+v) plus the average profit. But for an economy, the average profit is the same thing as the total profit, or total surplus value, and so whether the economy's output is measured in terms of its value c + v + s, or else its price of production (c + v) + p = k + p, the two figures are the same. If more labour-time is required to produce this total output, then its value will rise, and so will its price of production.

But, this situation, created by capitalist production, does bring about a fundamental change. In every society, value and surplus value is created by labour, in the act of production, as Marx sets out in his letter to Kugelmann. This is the Law of Value. But, in every society, this surplus value, takes different forms. Indeed, Marx says that it is the form that it takes, the method by which it is pumped out of the producers, which determines the specific nature of each mode of production. Under feudalism, for example, the surplus value takes the form of rent, and profit, to the extent it exists, represents only a deduction from this rent. Under capitalism, this situation is reversed.

Under capitalism, the surplus value takes the form of profit. Rent, along with interest, are merely deductions from profit, reflecting the fact that landed property, and interest-bearing capital are now subordinated to productive-capital. Under capitalism, it is labour which continues to produce value and surplus value, but it is capital, which produces profit, the specifically capitalistic form of surplus value. For the economy as a whole, surplus value cannot exist without the expenditure of labour, as with any other mode of production, but for any individual capital, it is its existence as capital, as self-expanding value, which is the source of its profit, its right as capital to claim its share of the total social surplus.

A firm that employs no labour whatsoever, and so produces no surplus value, will still sell its output at the price of production, and this price of production, includes its share of the total surplus value. It is its own cost of production, plus the average rate of profit, calculated upon its advanced capital. It is this fact, as Marx describes in Capital III, which for the first time, makes it possible for capital itself, as self-expanding value, as the means to obtain profit, to be sold as a commodity. What is being sold, is this use value, of capital to be self-expanding value.

But, this raises a problem, because this use value of capital, to be self-expanding value is not the product of labour. As the value of any commodity is the labour-time currently required for its production, then this use value of capital, can have no value. Yet, the owner of capital, will not sell this use value to someone who wants to buy it, for free, just as a landowner will not allow a capitalist farmer to use their land for free, even though, land also is not the product of labour, and so has no value.

The owner of capital, will want to be paid for this use value. If A has £100 in money (or a machine with a value of £100), and B is a capitalist who wants to use this £100, or this machine, as capital, i.e. as a means to make profit, A will want B to pay them for being able to so use it and make profits. B will not be prepared to pay A, more for using the £100, or the machine, than the profit they expect to be able to make from doing so. If the average rate of profit is 10%, there would be no point, B paying 10% in interest to A, for the use of the £100, or the machine, because that would wipe out all of their profit.

The market price of capital, the average rate of interest, is then purely determined on the basis of supply and demand for capital. The suppliers of capital (lenders) will not lend it for free, whilst those who demand capital (borrowers) will not be prepared to pay a higher rate of interest, than the average rate of profit they expect to make from employing that capital. It is then, this average rate of interest, which forms the basis of the process of capitalisation.

Suppose, that A lends £100 to B, and does so by buying a £100 bond issued by B. The bond pays a coupon, a fixed amount of interest, of £5 per year, which is the average rate of interest, at the time of purchase. If, the demand for capital rises relative to the supply, (perhaps because an increase in economic activity means firms need to invest more, to increase their production and obtain larger profits) then other things being equal, the average rate of interest will rise. Suppose, then that firms issuing £100 bonds, pay a coupon of £10 per year, reflecting this rise in interest rates, from 5% to 10%.

In that case, the original bonds, still only pay £5 per year of coupon interest. It is the same as if the original bond were now only worth £50 rather than £100. If A sought to sell their bond, in the bond market, they would, indeed, only be able to obtain £50 for it, because only then would the £5 of interest it pays, return the average rate of interest, which now stands at 10%. In other words, the market price of the bond, is determined by the capitalised value of the revenue is produces. If the average rate of interest is 5%, then a bond that produces £5 per year of interest, will have a market price of £100, whereas if the average rate of interest is 10%, the bond will have a market price of only £500.

The capitalised value of any asset is then equal to the annual revenue it produces, multiplied by the inverse of the rate of interest, e.g. 10% = 10/100, so its inverse is 100/10 = 10, 5% = 5/100, so its inverse is 100/5 = 20. As the average rate of interest falls, capitalised values rise, and vice versa, which is why when interest rates rise, the prices of stock, bond and property markets fall.

But, once established, this process of capitalisation of revenue, becomes a useful ideological weapon for the bourgeoisie. Firstly, capital, which has no value, is given a value. Rather than the return to capital being profit, it now appears to be interest, and interest appears to be an innate property of capital. This gives rise to the pernicious and false idea that rising market prices for this “capital” can be the source of increasing levels of income and thereby wealth. If “capital”, in the shape of say the stock market produces this interest as returns, then it seems obvious that if the prices of the shares on this stock market rise, the amount of interest (dividends) generated must also rise. If the average rate of interest is 10%, then a Stock Market with a value of £10 billion, would be expected to produce, £1 billion in interest (dividends), or ten times as much as a stock market with a value of only £1 billion.

But, this is totally false. The ability to pay higher levels of interest is not a function of the market price of this capital, but of the ability of productive-capital to produce higher levels of profits. The “capital”, represented on the stock and bond markets, is in fact not capital at all. It is only fictitious capital.  All that is traded on these markets are worthless bits of paper, which are merely certificates that a certain amount of money-capital has been loaned to productive-capitalists, and the right, thereby, to receive an average rate of interest on the money loaned, to be paid out of a portion of the profits generated by the productive-capital.

Its on this totally false conception, that the idea that inflated stock and bond markets were good news for pensions was sold, whereas the opposite was the case. The ability to produce interest is not an innate property of capital, but is only a derivative of the ability of productive-capital to produce profits. The amount of interest that is produced is not a product of the market price of the financial asset, for example, a share, or bond, but vice versa.

This technique of capitalisation, is also used to give a value to other revenue producing assets, which are sold as commodities. For example, land, like capital, has no value. It is not the product of labour. Yet, just as the use value of capital, the ability to produce profit, is sold, and has a market price, equal to the average rate of interest, so too land is sold in the market place, and so has a market price.

If, the rent on ten acres of land is £1,000 p.a., then on the basis of the previously outlined method of capitalisation, if the average rate of interest is 10%, the market price of the land, will be £10,000. That is 10 x £1,000. If the average rate of interest falls to 5%, then the market price of the land will rise to £1,000 x 20 = £20,000. In fact, the price of the land will be determined not just by changes in the rate of interest, but also by changes in the level of rent, which are a reflection of changes in the surplus profit, in excess of the average rate of profit, which occur.

Capitalisation, however, has a further ideological role in that, on the basis of treating all sources of revenue as being capable of being capitalised, it turns all sources of revenue into some form of capital. So, for example, in Capital I, it was illustrated how wages are the phenomenal form of the value of labour-power, the market price of labour-power. Unlike, capital, or land, labour-power is the product of labour. It does have a value, equal to the labour-time required for its production, i.e. required to produce all of those commodities required for the reproduction of the worker and future generations of workers.

But, the process of capitalisation means that rather than wages as the value of labour-power, being elaborated, a price instead for labour, as human capital is elaborated. Labour, like land and capital has no value. It is not the product of labour, but is labour, it is the essence of value. A price for labour, as opposed to a price for the commodity labour-power, is irrational. But, just as with capital and land, the process of capitalisation allows such an irrational price to be established. If a worker earns £1000 per annum, and the average rate of interest is 10%, then this labour is the equivalent of a human capital of £10,000, and the wages are simply the appropriate return on that capital to the worker.

The pernicious nature of this from an ideological standpoint is obvious, because it transforms every form of property, every source of revenue into a form of capital, so all class differences are subsumed. It becomes simply a matter of every owner of these different forms of capital, obtaining the appropriate rate of return upon it. In the process, it obliterates all trace of the real source of value, which stands behind these market prices. It is also a fundamental basis for the later development of the marginal productivity theory of value, which simultaneously determines the value of commodities by the sum total of the value contributed by each of these different factor inputs, and then claims that each factor has been rewarded, accordingly, in line with the value it contributed.