With capital theory suddenly transformed into a hot topic by Thomas Piketty’s best-seller,  Robert P. Murphy lucidly restates the Austrian conception, attentive to the problems of commensurability between productive apparatus and its financial summarization. As he remarks: “The distinction between financial capital and physical capital goods is crucial and underscores all the issues to follow.”

The macroeconomic hypostasis of transactional equivalence (‘price’) into homogeneous substance (‘wealth’) is called into question in the name of an intrinsically and irreducibly diverse capital substrate. The ‘exchange value’ of capital — rather than being derived from some kind of stable economic essence — emerges continually from the market-process as a volatile consequence of the various entrepreurial projects that cut across it. (Like any other other good, capital is ‘worth’ exactly what it can fetch, with no underlying support of ultimate objective value.)

As Murphy emphasizes, this qualification is of special relevance to the theory of business cycles, since these are episodes of drastic capital (value) destruction, of a kind that eludes macroeconomic apprehension. Because capital ‘in itself’ is varied and path-locked, its ‘malinvested’ quantities — when exposed by the collapse of unsustainable economic projects — are crushed down to brutally-discounted salvage or scrap values.

If we use a model that represents the capital stock by a single number (call it “K”), then it’s hard to see why a boom period should lead to a “hangover” recessionary period. Yet if we adopt a richer model that includes the complexities of the heterogeneous capital structure, we can see that the “excesses” of a boom period really can have long-term negative effects. In this framework, it makes sense that after an asset bubble bursts, we would see unusually high unemployment and other “idle” resources, while the economy “recalculates,” to use Arnold Kling’s metaphor. (Kling link.)

‘K’ — the neoclassical capital aggregate, denominated in monetary units — is thus problematized by an opaque, heterogeneous, viscous productive matter, not only in theory, but also effectively — by financial crises. The economic crash is a complex epistemological-semiotic event, situated between the twin-aspects of capital, in the form of a commensuration catastrophe.

The ‘recalculation’ necessitated by the crash can therefore be evaluated as a ‘capital theory’ immanent to the economy, intrinsically prone to consensual macroeconomic hallucination. Rather than an arbitrary error, lodged in a superior perspective, the translation of sub-K (heterogeneous-technical capital) into K (homogeneous-financial capital) is a calculation process inherent within — and definitive of — capitalism as such, before it is isolated as a theoretical topic for political-economic analysis. Capitalism, in itself, is the tendency to arithmetical comprehension of itself. Operation of the price system cannot but imply an aggregated (financial) evaluation of the total productive being.

Austrianism opens a question as much as it resolves one, because capitalism cannot refrain from a cryptographic engagement with sub-K. Austro-skepticism relative to macroeconomics is consummated in the insight that only the economy can think the economy (without social-scientific transcendence), but in reaching this summit it simultaneously recognizes the economy as an auto-decrypting entity, which cannot be released from the problem it is to itself.

Murphy argues:

A proper appreciation of the heterogeneous structure of capital shows the weakness in standard theoretical approaches, which employ “simplifications for analytical convenience” that actually obscure the economic reality.

It would be far too convenient at this point to reduce “economic reality” (or sub-K) to heterogeneity in general — the simply unknowable. In this way, we would be seeking — no doubt vainly — to excuse ourselves from the cryptographic problem that capitalism itself is working out.

5 thoughts on “Sub-K

  1. Very interesting essay, but it needs moar Hayekian triangles.

    “Operation of the price system cannot but imply an aggregated (financial) evaluation of the total productive being.”
    I am not entirely sure about this. There is some truth to it. Prices convey information through the employment of arithmetical signals via the medium of exchange.
    Where Neoclassicals go wrong is when they forget this. They seem to forget that money, in itself, does not mean anything. It is not (really) ‘wealth’. It is a stand-in for something else. It is only ‘wealth’ only insofar as it can buy other goods. It is the purchasing power, i.e. what you can buy with it that is wealth, not the money themselves. (small digression here, to reiterate some basics)
    You would think that with the current world of fiat money this would be even more obvious, but most economists keep being stuck in this error. (it seems) Or they would simply translate this aggregation into the field of physical capital itself (which is, you know, real capital) and think of physical capital as one big pool of production goods. And this is where it gets really absurd. (Menger’s very crucial insight of classifying goods into different orders that form a complex interconnected system, later translated by Hayek into a tringle diagram, is completely lost)
    Another digression on (financial) capital: Financial capital is in no meaningful way “capital”. Capital is always production goods. Financial capital is simply a bunch of money intended for the purchasing of production goods (physical capital). In itself it should not stand on the same level as physical capital, but should be more of a subordinate category. Actually financial capital always means one thing only: future physical capital. Otherwise, why call it “capital”?

    Aggregation does help calculation, that much is true. But that’s all that it is, numbers. What I am getting at, is that, aggregation is useful for doing accounting, but completely useless for economics. I am sure that all of the neoclassical and keynesian economists would make great accountants. Unfortunately they do not make great economists.
    To return to your point, I do not see how a functioning price systems implies aggregation. Who does the aggregating? A functioning price system simply conveys signals to the different actors on the market. One of the crucial points of Hayek was that everyone’s knowledge is incomplete, but thanks to authentic price signals everyone was able to plan in a harmonious way. The main feature of the whole system is nobody knows everything, yet everybody knows what he needs to do. There is no aggregating done here. If there is, who is doing it? To whom is it given? Yes, the free-market economy arithmetically comprehends itself, but not through aggregating ‘sub-K’ (as you call it) into ‘K’ (homogeneous-financial capital). The economy never aggregates the heterogeneous capital structure into a homogenous pool. The price system is functional only insofar as it prevents this from happening. It functions in such a way that price signals convey the heterogeneous reality of capital structure to the different actors in the economy, so that they act in a way that corresponds to this reality, and not otherwise. (this is one of the main ways in which it is a “self-organizing” system)
    Maybe I am missing some detail in your essay (you sometimes sound cryptic to me), but I don’t see how a capitalist economy ever does (or even needs to do) aggregating through the price system.
    Do you mean to say that you could take the price signals and aggregate them? Sure, you could do that, but that’s kind of missing the point. Price signals cannot be abstracted from their specific place in the economy (more importantly the goods, whose value they signify, have a specific place in relation to all the other goods and the price of even one good depends on the price of dozens of other goods, and those prices depend on other goods and etc.) They cannot be abstracted from their unique spot in the capital structure. If you just aggregate market prices, that will obscure much more than it will reveal. Sure, you have one big number, that’s supposed to mean something, but in fact means absolutely nothing.
    “We know that all the prices for all production goods on the market equals X”
    “Ok, so what can we do with that information?”
    “Nothing, sir, I just thought it is a fun accounting exercise.”

    So, unless I am missing something, I do not think that the price system implies an aggregated financial evaluation of the “total productive being”.

    • OK, that’s all great. The relevant word that may be getting lost is “implies” — in fact it’s exactly as you note in your final skit, except that the subject of the “fun accounting exercise” is also implicit, or can perhaps simply be bracketed. My point (here) is solely that the macroeconomic delusion is rooted in an inevitable tantalization, coming out of capital itself, because the whole (global totality) of capital is already priced in commensurable terms and thus — almost irresistible — composes a speculative aggregate that the economist cannot but seek to grasp.

      Clearly, the epistemological asceticism, or skepticism, of the rigorous Austrian is to be defended, especially since the refusal of aggregation is exactly anarcho-capitalism, as registered within economic theory. Yet the idea that the cryptic problem of sub-K or pre-symbolic capital can simply be closed (replaced by a generic marker of absolute theoretical inaccessibility, like Kantian transcendence) strikes me as unpersuasive. Capital itself tends to economic reflexivity, or self-evaluation, and as it condenses into a real, emergent individual, its singularity becomes an ineluctable topic.

      I would perhaps put the question like this: What does economics have to become, in order to accommodate itself to the question of capital? The answer from the Austrian tradition, taken as an open-line of capital-theoretic inquiry, would be something like: It has to cease being a cognitive organ of the State.

      • Oooh, alright, this clarified a lot, thank you.
        Yes, the question of capital is still an open one, I was just arguing against the idea that aggregation can be a possible answer to it. Although, as you note, it is true that aggregating seems like a very attractive idea (at first at least; when capital structure is more comprehensively understood its flaws become obvious).

        “What does economics have to become, in order to accommodate itself to the question of capital? The answer from the Austrian tradition, taken as an open-line of capital-theoretic inquiry, would be something like: It has to cease being a cognitive organ of the State.”
        Economics started as “political economy”. Separating itself from its roots has been extremely difficult for the science. It seems that no matter how hard it tries, it is always forced to deal with politics. Insofar as there is politics, economics will always be glued to it. And as numerous austrians have revealed, this does indeed limit the science quite a lot. This of course leads to the question of the possibility of a post-political world, which is anarcho-capitalism (pure economy, no politics). The problem with it, as Moldbug himself noted, is “Good enough, but how do we get there?”. We don’t know. (yet)
        Insofar the first question (of capital) is concerned we still have no idea.
        Insofar the second (of a post-political reality) is concerned, it’s (as you know) a work in progress.

        Insofar as answering the question of capital is concerned, do you agree with the austrian conclusion that it is only possible for economics to do it, by “ceasing to be a cognitive organ of the state”?

        • Agreed on all points, I think. As far as your final question is concerned, I doubt that my inclination is very well camouflaged — but the reason to hold it open for a while, if possible, is to soak up some minimally partisan discussion at a peculiarly stimulating cultural and historical moment. Given that intelligent Marxists now understand the LTV is indefensible, they also have a massive capital theory question on their hands, and it will be interesting to see where they go with that. (The Marxists are good at some things — most especially the central importance of real abstraction to historical capital dynamics — so some potential plunder is definitely imaginable from that side.)

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