2The dual worlds

He was so eager to know what was going on in heaven, that he could not see what was before his feet.

—Socrates on Thales, Plato’s Theaetetus

The bifurcations

Capitalism is characterized by several related antinomies and contrasts, basic dualities that resemble the ancient paradoxes of Hellenic philosophy. Of these dualities, the most important are the distinction between politics and economics and the separation of the real from the nominal.

The first duality — the bifurcation of politics and economics — is hardly new. Pre-capitalist history was marked, almost invariably, by a socio-ecological reality that separated political rulers from their producing subjects. The concepts of course were markedly different. There was no such thing as ‘the economy’, and the notion of ‘politics’, although dating back to ancient Athens, had little meaning in an authoritarian context. But terminology aside, there was a fairly clear separation between social rule and material provision. The common pattern of power consisted of state or quasi-state entities using organized military force to control dispersed agricultural cultivators. Politically, production was subjugated to state rule; but ecologically, the two spheres were by and large distinct — and, in the extreme case of oriental despotism, entirely alienated.

This duality was heightened by the rise of the autonomous European bourg beginning in the twelfth century. The bourg — although initially embedded in and dependent on feudalism — offered a new alternative. It fashioned a peace-seeking civil society of merchants, artisans and industrialists, a model that stood in sharp contrast to the violent, war-making feudal fiefdoms and states. Bourgeois production and trade, much like feudal agriculture, remained distinct from princely politics. But the bourgeoisie demanded more. It wanted its ‘new economy’ to be not only distinct from but also independent of princely and feudal rule.

This original demand still echoes today. Whenever we contrast civil society with state authority, free contract with organized hierarchy, horizontal markets with vertical power, or, more broadly, economics with politics — we reproduce the early demand of the bourgeoisie: the demand for particular libertates. This quest for personal exemptions, individual immunities and specific protections from the organized violence of feudalism is the forerunner of modern liberalism and its assertion of universal liberty.12

The first to openly challenge the alleged separation of production from power was Karl Marx. This separation, he argued, was a manifestation of bourgeois ‘false consciousness’. Liberals emphasize the voluntary nature of market exchange, which makes their economics seem like the domain of freedom. But under the gloss of market exchange lies the reality of production — and in the realm of production, it is exploitation, not equality, that rules. In this way, the market merely serves to conceal the underlying power nature of capitalism.

This challenge was important but ultimately insufficient. According to Marx, capitalist power works through two mechanisms: economic exploitation and political oppression. The first mechanism is responsible for extracting the surplus, the second for sustaining the capitalist mode of production as a whole. The crucial point here, which we explain in the next section, is that, according to Marx, capitalist power requires that the two mechanisms be related — yet distinct. In this sense, Marx’s insistence that power pervades the system does not reject but rather necessitates the liberal duality of politics and economics.

The second capitalist duality occurs within economics proper. The ancient ontological distinction between the Thing and its Idea is resurrected here in the two parallel worlds of liberal economics: the real and the nominal. The real world is the material sphere of production and consumption; the nominal world is the mirror image of prices, money and credit. Capital in this context has two faces: a real face made of capital goods and a nominal imprint called finance. The material means of production are recorded on the left-hand side of the balance sheet; the nominal symbols of debt and equity are entered on the right-hand side. The Thing on the left faces its Idea on the right.

Marxian economics, although very different from its liberal counterpart, adopts a similar conceptual division. Here, too, we find the contrast between the real and the nominal — a distinction between the material base of value, where labour, production and exploitation occur; and a monetary superstructure of prices and credit through which politics, ideology, the law and sheer force penetrate and reshape the accumulation process.

Let’s examine these two dualities of capitalism a bit more closely, beginning with politics versus economics.

Politics versus economics

The liberal view

For the neoclassicists, politics lies outside the realm of capital. The institutions and organizations of the state, electoral parties, the legal system, the organized use of force and international relations certainly impact capital for better or worse (mostly for the worse). But the impact is inherently external. The common language speaks of exogenous ‘shocks’, of political ‘intervention’ and ‘interference’ that ‘disturb’, ‘distort’ and ‘constrain’ the economic system. These external shocks may hold back the pace of capital accumulation or change its direction; but whatever their impact — and here we come to the critical part — they cannot alter the basic meaning of capital. According to the neoclassicists, capital is the utilitarian manifestation of multiple individual wills, expressed freely through the market and incarnated in an objective productive quantum. As a voluntary, material substance, capital itself is orthogonal — and therefore impermeable — to power politics, by definition.

This view is complemented by the liberal theory of politics. According to neoclassical historiography, the logic of capital accumulation, although inherent in the human psyche, was manifested only after civil society began its revolt against feudal and state tyranny. Gradually, the flat principle of free will, the relentless mechanism of the market and the new creed of growth undermined deference to political hierarchy and the stationary economy of feudalism. In this context, it was only natural for the utilitarian calculus of capital accumulation to become the blueprint for political democracy.

In this blueprint, the ideal political system is one that intervenes the least, and the best way to guarantee minimal intervention is to make politics itself operate as a free market. That is the gist of liberalism.

The metaphors of political liberalism — like those of neoclassical economics — are clearly Newtonian (a point to which we return in Chapter 3). The various political particles — interest groups, electoral parties, coalitions, NGOs and contending state organs — all act and react on one another. Each particle tries to maximize its own utility. But because the particles are all relatively small, the political bourse remains competitive, the different demands tend to countervail each other, and the result converges to the least harmful political equilibrium.13

The Marxist perspective

Despite their mutual hostility, Marxists share with neoclassicists the view that capital is an economic magnitude. The difference is that, in contrast to the neoclassicists, Marxists deny that capital can exist independently of politics. The relations of production, they argue, are not separate from, but intertwined with politics and the state — and have been so throughout history. The interesting question is not whether politics affects economics, but the way in which their interaction has evolved over time. And here capitalism indeed seems unique.

Capitalism, argue the Marxists, is the first social order to introduce a clear legal and ideological demarcation between public politics and state on the one hand, and private economy and market on the other. Liberal politics is based on the belief in universal equality: a society governed by the voluntary exchange of private property presupposes and implies equality before the law. By contrast, the accumulation of capital, despite its voluntary appearance, requires inequality. This necessity, argue the Marxists, is inherent in the very nature of capitalism: the means of production are owned by capitalists who do not work, while labour is performed by workers who do not own. Since value is produced only by workers, capitalists can extract, appropriate and accumulate the surplus part of this value only through exploitation. And exploitation, by definition, negates equality.

This duality of political equality and economic inequality produces a destructive contradiction. Recall that, according to Marxists, capital accumulates in the economic–productive sphere. This is where class conflict is generated, labour exploited and surplus value expropriated. But the economic process cannot occur independently of politics. Accumulation, because it is based on exploitation, cannot be sustained at the level of the individual producer-employer alone. It requires legal, ideological and cultural institutions; it needs state organs and other power organizations; it has to be framed, shaped and contained from above. In short, it requires the political power of a (nation) state. In this way, the institutions and organizations of power — although unproductive in the direct economic sense — are nonetheless indispensable for maintaining and reproducing the economic order as a whole. At the same time, these very institutions and organizations are nourished by and depend on the surplus extracted in the economic sphere. In this sense, the economic base of exploitation can exist only under a political superstructure of oppression, and vice versa.

But that requirement makes capitalist politics inherently contradictory: liberal politics has to be equal in ideology and theory, yet unequal in practice. And since this contradiction is produced by the very nature of capitalism, the only way to resolve it is to overthrow the system altogether. Eliminating the exploitation of workers by capitalists will simultaneously eliminate the duality of politics and economics. (Marxists, of course, express both the contradiction and its resolution dialectically rather than mechanically as we have done here, and certainly with far greater finesse; but their political conclusion is essentially the same.)

Capitalism from below, capitalism from above

To sum up, then, both neoclassicists and Marxists separate politics from economics, although for different reasons. The neoclassicists see the separation as desirable and, if handled properly, potentially beneficial. By contrast, Marxists view the distinction as contradictory and, in the final analysis, destructive for capitalism. Yet, both conclusions, although very different, are deeply problematic — and for much the same reason.

The difficulty lies less in the explanation of the duality and more in the widespread assumption that such a duality exists in the first place. Even E. P. Thompson, a brilliant historian who was otherwise critical of Marxist theoretical abstractions, seems unable to escape it. Writing on the development of British capitalism from the viewpoint of industrial workers, he describes the class socialization of workers as ‘subjected to an intensification of two intolerable forms of relationship: those of economic exploitation and of political oppression’ (1964: 198–99). In this dual world, the industrial labourer works for and is exploited by the factory owner — and when he organizes in opposition, in comes the policeman who breaks his bones, the sheriff who evicts him and the judge who jails him.

Now, this bifurcation is certainly relevant and meaningful — but only up to a point. From the everyday perspective of a worker, an unemployed person, a professional, even a small capitalist, economics and politics indeed seem distinct. As noted, most people tend to think of entities such as ‘factory’, ‘head office’, ‘pay cheque’ and ‘shopping’ differently from the way they think of ‘political party’, ‘taxation’, ‘police’, ‘military spending’ and ‘foreign policy’. Seen from below, the former belong to economics, the latter to politics.

But that is not at all what capitalism looks like from above. It is not how the capitalist ruling class views capitalism, and it is not the most revealing way to understand the basic concepts and broader processes of capitalism. When we consider capitalist society as a whole, the separation of politics and economics becomes a pseudofact. Contrary to both neoclassicists and Marxists who see this duality as inherent in capitalism, in our view it is a theoretical impossibility, one that is precluded by the very nature of capitalism. To paraphrase David Bohm (1980), from this broader perspective, the politics–economics duality is not a useful division, but a misleading fragmentation. It cannot be shown to exist — and if it did exist, profit and accumulation would cease and capitalism would disappear.

The consequences of this entanglement for capital theory are dramatic. As we shall demonstrate, without an ‘economy’ clearly demarcated from ‘politics’ we can no longer speak of quantifiable utility and objective labour value; and with these measures gone, neoclassical and Marxian capital theories lose their basic building blocks. They can observe that Microsoft is worth $300 billion and that Toyota pays $2 billion for a new factory, but they cannot explain why.

Real and nominal

The classical dichotomy

As noted, underneath the broad duality of politics and economics lies the further bifurcation of the economy itself. Following the so-called Classical Dichotomy, first suggested in the eighteenth century by British philosopher David Hume, neoclassicists separate economic life into ‘real’ and ‘nominal’ domains. Of the two, the real sphere is primary, the nominal secondary. The real sphere is where production and consumption take place and relative prices and distribution are determined. The nominal sphere is the domain of money and absolute prices, and it both lubricates and reflects the input–output processes of the real economy.

At the root of this duality lies an attempt to justify capitalist profit and wealth. The liberal claim — first voiced in the European city-states of the thirteenth and fourteenth centuries and later formalized in John Locke’s Two Treatises of Government (1690) — is that private property emerges from one’s own labour. This claim makes the bourgeoisie unique: earlier dominant classes looted their wealth and therefore needed religion to sanctify it; the capitalists, by contrast, produce their wealth with their effort and hence have a natural right to own it.14

Nominal income and assets, therefore, are derivative not of mercantilist plunder but of actual production with real capital goods, and that makes them fully justified. The productivity of the capitalist, intertwined with his existing capital goods, results in monetary earnings. These earnings in turn are ploughed back into producing more capital goods, leading to more monetary wealth, more capital goods, more earnings, and so on in an ever-expanding spiral. In this way, the money value of finance, measured in dollars and cents, reflects and manifests the physical capital stock created by the capitalist.

Of course, the correspondence is far from perfect. As it turns out, the ups and downs of the stock and bond markets are rather difficult to correlate with changes in the capital stock — particularly since, as we shall see in Chapter 10, the two measures tend to move in opposite directions. But this mismatch hasn’t been much of a concern. Liberals have solved it by putting into work an army of ‘distortionists’ — theorists, strategists and analysts who pry on ‘institutional imperfections’ and ‘exogenous shocks’. The theory, argue the distortionists, is perfectly fine. The problem is with the extra-economic forces — the shocks that constantly besiege the otherwise pure economic system, contaminate its real and nominal spheres and fracture their pristine correspondence. Once you account for these distortions, it becomes clear why finance is always dependent on — yet forever delinked from — its true material essence.

The Marxist mismatch

Although the Marxist logic on this subject is radically different, its conclusions are surprisingly similar. Contrary to the liberals, Marx sought to annul the bourgeois justification for profit. He agreed that value is created in the material sphere — but instead of multiple factors of production, he insisted that there is only one: labour. The value of all commodities — including that of capital goods — is determined by productive labour alone.

In this scheme, not all capitals are created equal. The so-called industrial capitalist, the employer of productive labour, does possess real capital. But the commercial and financial capitalists — insofar they employ only unproductive labour and therefore produce neither value nor surplus value — do not own real capital. Although they accumulate moneyed capital, they do so merely by appropriating some of the surplus value generated by industrial capitalists. The resulting intra-capitalist redistribution creates a mismatch. It means that the nominal magnitude of any particular capital is likely to differ from its underlying real magnitude: for the industrialist the nominal will be lower than the real, while for the commercial and financial capitalist the nominal will exceed the real (which may well be zero).

The nominal–real mismatch is further amplified by the forward-looking nature of financial markets. Stock and bond prices represent the present value of expected future earnings. Because we deal with expectations, these future earnings may or may not be ‘realized’. And since the earnings are merely tentative, there is no reason why finance should be equal to — or even correlate with — capital goods that already exist here and now. For this reason Marx considered financial assets to be ‘fictitious capital’ — in contrast to the ‘real capital’ anchored in the dead labour of realized surplus value.

And, here, too, the Marxists find themselves stuck in a liberal duality. They portray a world in which the parasitic capitalists of commerce and finance suck in surplus from the productive capitalists of industry, where speculative market bubbles inflate and deflate around the fundamentals of production, where the fiction of finance distorts the true picture of real accumulation. The specific categories and theories differ from those of the liberals, but the real–nominal bifurcation that underlies them is the same.

Quantitative equivalence?

Separating the real from the nominal enables the theorist to play both cards. On the one hand, he can stand by the theory, insisting that in the final analysis nominal finance derives from the reality of capital goods. On the other hand, when the difference between finance and capital goods gets too larger, he can suspend the theory — at least temporarily, until the ‘distortions’ go away.

This convenient doublespeak serves to conceal a deep ontological difficulty. At issue here is the very assumption of quantitative equivalence. Both neoclassicists and Marxists believe that capital has two quantities — one nominal, the other material. And they further believe that, under ideal circumstances — without intervening factors and other extra-economic distortions — these two quantities are equivalent.

As we shall show, this assumption rests on foundations of sand. Its first component — the belief that capital has two quantities — falls flat on its face. Capital certainly has a nominal quantity. We know its price in dollars and cents. But capital does not have — and indeed cannot have — a material quantity. The second belief, namely that the two quantities of capital are equivalent, is also seriously problematic. Even if capital goods did have a material quantity, why should this quantity have anything to do with the nominal value of capital? Capital, this book argues, is not a productive economic entity; it is a broad power institution. And if that is the case, what could the ‘mass’ of machines — even if it had a calculable quantity — tell us about the social dynamics of power?

  1. It should be noted that this historical description, written in the spirit of Marx, is very much out of style — particularly when compared with the fashionable hype of postmodernity. For the typical postist, our historical view here is no more than ‘Eurocentric’ arrogance, a remnant of the imperial mindset and its postcolonial successor (see for example Turner 1978). Although we’ll occasionally mention it, we have no intention of arguing with this fashion. There is simply no point. The postists deny the possibility of a universal logic — which pretty much eliminates the possibility of debate. And they are hostile to scientific thinking — which makes impossible if not meaningless any attempt to examine, verify or reject their slogans, narratives and battle cries (including those lifted gratis from past Marxist studies).

  2. A typical view of politics as a free market is portrayed by Anthony Downs (1957). According to Downs, politics is a form of competition among firms (political parties) over the hearts, minds and pockets of sovereign consumers (voters). Just like in every other market, here, too, each actor seeks to maximize his or her own utility. The voters try to maximize their net political utility (or minimize their net political disutility) by choosing the optimal ratio of public services to taxes. Similarly for the politicians. Their purpose is to maximize their net political assets: more votes, more seats, more spoils.

    This vision of politics as a free market is now deeply embedded in the everyday practice of liberalism. Political parties in the United States and elsewhere make extensive use of the Voter Vault, a massive collection of up to 50,000 databases packed with detailed consumer/ voter information. According to the Financial Times, this information, filtered through various algorithms, enables politicians to tailor their messages to the ‘preferences’ of specific groups of voters:

    The technique, known as ‘micro-targeting’ on the right and ‘modelling’ on the left, is a sign of how far modern political campaigning has become a marketing exercise, with techniques that were traditionally used in broadcast advertisements applied to political communications. Nowadays political consultants tout ‘turnout scores’, ‘clusters’ and ‘micro-targeted messages’. In the US, generic electoral constituencies such as ‘soccer moms’ and ‘Reagan Democrats’ are broken down into even more forensic clusters. There are different algorithms to weigh cultural differences between West and East Texas. Strategists target finer demographic slices such as ‘high-income, God-respecting, terrorism-fearing Republicans’ or ‘white women aged 35–45 with college educations, who are Catholic or Protestant and pro-life, with median incomes over Dollars 35,000 and live in Dollars 150,000-plus homes’.

    (Financial Times October 13, 2006, p. 11)


  3. Perhaps the first to explicitly associate income with productivity were the university professors. Knowledge (scientia) was the gift of God and therefore could not be sold, but the new urban intellectuals found a better leverage: the notion that all work deserves a salary. ‘We find it irrational that the worker not profit from his work’, argued the doctors of law in thirteenth-century Padua, and then went on to conclude that ‘the master may accept the money of students — the collecta — as the price of his work, of his trouble’ (quoted in Le Goff 1993: 94–95).