There are three activities that a capitalist firm does. Every firm engages in all three at different times, but the balance and the timing bring about radically different outcomes: Financially, in immediate human welfare, for development, and morally. I therefore call these the three faces of capitalism.
- Capital formation:In capital formation the firm consumes financial assets (usually cash) and builds real assets that it will later use for production or extraction. Capital formation thus takes two forms:
- Productive capital formation, such as technical innovation, the building of customer relationships and goodwill, channels to market, facilities or machinery, organizational and human capital.
- Extractive capital formation, such as the acquisition of monopoly licenses or exclusivities, financial muscle, commodity stocks, control over suppliers or distributors, land, and all IP assets.
- Production: Production is what an industrial, agricultural, or service firm does. Resources come in, labor and and devices are applied, and goods or services come out. The goal of production is to sell the goods or services at a profit, while minimising the share paid to suppliers and labor, and the running cost of devices.
- Extraction: Extraction is what a landlord, bank, media company, utility, mining company, or retailer does. These firms have a productive function, but their dominant mode of business is to extract rents from assets that they own, while rationing those assets so as to command the maximum price.
The companies that people admire, Google, Apple, the great electrical and electronic firms, the venerable auto and aviation firms, the computer companies, the large and small software houses, big infrastructure, big science, universities, and medicine are all admired because of their productive capital formation: R&D, innovation, bright ideas, making what previously didn’t exist or wasn’t possible. Productive capital is seen as a beacon of hope and progress for humanity, and great store is set by it wittingly or unwittingly.
Property means several things to people. It has at least three meanings:
- Personal safety and dignity: My clothes, my house, my money, my computer. These are mine in the sense that I need them to go through life and I need reassurance nobody will take them away from me. Actually I don’t own my house; I prefer to invest on my skills. But it’s the same idea.
- Control over resources: My project, my team, my blog, my plan. I want to control these things. If I had a business it could be my business in this sense of controlling what the business does. These things are controlled by me and I want them free from interference so that I can pursue my goals.
- The right to exploit: My shares, my invention, my song, my contract, my land. These are artificial rights that let me exploit resources, or the activities of others. If the thing is mine I can take any profit I can extract from it as mine to keep. This type of property is an exemption from the duty to share.
Only the first two are natural. The first is needed to have a society with human rights, although the boundary could vary. For example some people feel a strong need to own their house, and some don’t. But a desire for security of your immediate needs is universal.
The second right, right to control resources and keep them free from interference, is needed to form an advanced economy. You can’t build any kind of elaborate production or a complex technological product like a plane if you can’t control the resources and the activities that bring it about. This type of property is the necessary foundation for firms. Even things that appear to be free are based on property as control. Google services are free, but they control the site and it’s designed so that you keep visiting it rather than take the data from it and go your own way. Linux is free in the sense that someone could copy the bits and start a rival project, but the actual Linux project is well controlled.
Property as the right to exploit is different. There’s nothing intuitive or natural about it, except perhaps that it formalizes feelings like “survival of the fittest”. Normally, if you have an idea that is successful or as a group you produce valuable things, you share. When nature yields oil or fish again the normal thing is to share. Perhaps in these cases we have yet to discover how to do so in a controlled and equitable way. To these productive activities, property is an overlord. Property claims what would otherwise be shared among the people directly involved, on behalf of one or a few people who are distant. It’s no accident that most property of this type is indeed derived from lordship over land.
I don’t believe this idea that a firm exists to maximize shareholder returns. If the entire economy was structured on that principle, the world would be dominated by exploitative, rent-seeking organizations even more than it is.
The reason for a firm to exist, primarily and sufficiently, is to produce goods and services that are needed or desirable in the world. There are several ways of judging and directing the firm according to this principle.
- The market is a very good indicator of what the world needs or wants, especially when it comes to the detailed and diverse wishes of individuals. It’s not sufficient, and certainly not right by definition, because the market is prone to manipulation, irrationality, and social injustice making the difference between true wishes and buying power.
- Critical opinion, commentary, or goodwill towards a firm and its activities. It’s no accident that quality consumer goods firms are held in higher regard than most banks.
- An objective analysis of the firm’s product and activities with respect to life, well-being, human fulfillment, and the environment.
- Policy. Companies need to be comissioned to create large-scale infrastructure where the market would yield lower-investment, higher use cost solutions
A second reason for a firm to exist is to provide comfortable and fulfilling employment to the people directly involved in the firm. Balance is the measure here. The firm is not a vehicle to get rich, nor is crushing, subsistence-level employment a goal.
Posted on LJ in July 2005. Not edited. If I had to leave behind just one political text, it would be this one.
Myth 1: Privatisation makes things efficient
Good management, consolidation, low corruption, and a strong drive to work (whether spontaneous or coercive), make things efficient. These factors may be present in private enterprises or state-managed ones (including science, military, transport, or healthcare). The converse problems may also plague both private and state enterprises.
The only parameters where there is an identifiable difference is corruption. Capitalism institutionalises the self-interest of managers and owners as a controlled (mostly) inefficiency called profit, whereas the same motives in public institutions result in unofficial profiteering called corruption. It’s debatable which kind of inefficiency is worst.
However, efficiency is an academic point or a red herring. The main purpose of privatisation is to increase the value of money, by allowing wealthy individuals to buy high-quality services without having to subsidise similar, or indeed any, services for the majority. Education, transport, and healthcare are the most common examples. Once private services are established, political pressure from the rich to scale down and gradually abandon the public systems is inevitable, and usually results in a two-tier system. Maybe this is “efficient” in the sense that the system only has to provide good services to a few people.
A second purpose of privatisation is to increase the value of capital by replacing nominally efficient (non-profit), in practice somewhat corrupt enterprises with officially exploitative (profit-oriented) ones. This process thus expands the scope of capitalism to the detriment of consumers. In developed countries the rich feel they can tolerate this cost as consumers, and in poor countries it’s not their problem.