Monday, June 20, 2016

Capitalist Innovation vs. Capitalist Accumulation

For me it's a no brainer that Deirdre McCloskey is right when she insists that capitalism is innovation rather than accumulation. It is not the conversion of profits into a pile of new capital that creates economic growth, it is the power of new ideas tested in the market. But here is La Wik:
Capital accumuluation... is the dynamic that motivates the pursuit of profits, involving the investment of money of any financial asset with the goal of increasing the initiaul monetary value of said asset...
 This might be "a net addition to existing wealth" or "a redistribution of wealth" says La Wik.

This obviously comes from the Marxist theory of capital in which (again La Wik):
[C]apital accumulation is the operation whereby profits are reinvested into the economy, increasing the total quantity of capital. Capital was understood by Marx to be expanding value, that is... transformed through human labor into a larger value, extracted as profits and expressed as money.
The "extracted" profits are the difference betwen the social value of labor and the wages actually paid to the workers.

I came to the point of really digging into this from reading The Condition of Postmodernity by a Brit, David Harvey. He takes the idea of capital accumulation as holy writ, and the danger of overaccumulation as the justification for political power over the capitalists.

Actually, the investment of monies into a project has nothing to do with accumulation. If you lend money to someone then they pay you interest based on the concept of originary interest or time preference. Money repaid after ten years is worth less than money in the hand now. Money invested as equity is a risk proposition. The future is uncertain, so the assumption of risk about the future deserves a premium, which might or might not happen.

In the old days this process went on without growth, without an increase in wealth. Why? Because the money invested did not involve the development and implementation of an innovative idea that worked out. So the capital accounting merely recorded the time preference and risk premiums of a static world.

But things were different when people started to invest in innovations like machine cotton spinning. All of a sudden, using mechanical devices and water power, humans could produce a ton more cotton for weaving. This lowered the cost of cotton goods and made a ton of money for cotton spinners. But no accumulation.

Let's look at a more recent and familiar example. In the 1990s Apple was almost bankrupt. But then Steve Jobs returned and put several innovative ideas together to produce the iPod music player. These ideas included the new Lithium battery technology plus a miniature disk drive. An innovative idea. But who would buy it, I wondered, skeptically? A ton of kids. And so Apple started selling millions of iPods and Apple stock went through the roof. Accumulation? No. Innovation and the realization among investors that Apple would be making money for years off this idea. But then came the iPhone, combining the iPod concept with a large video screen and cell-phone technology. A staggering innovative success to put all that technology in a pocket-sized device. But would people spend hundreds of dollars on a pocket phone? Yes they would, and Apple stock went through the roof again. Accumulation? No, innovation.

The point is that when people see an innovation taking off they don't take their accumulated profits and invest in the new thing. They sell their old investments to buy into the new hot thing. And the value of the new thing is expressed not in the cost of its inputs but in the present value of the future profits likely to result from the deployment of the new thing. Not accumulation. Innovation.

The operation of the modern venture capitalist community demonstrates this. A new idea is financed by investors that are consciously taking a big risk. They know that the innovative idea has promise, but know that there is many a slip between cup and lip. If the idea starts to take off then the investors seek a new round of investment, but the new investors get less of the company for their money than the first round investors. And that is as it should be since the second-round chaps aren't bucking the odds as much as the first-round chappies. Eventually, if it is successful, the company goes public, raising a ton of money from the public in return for a small share of the company.

The current poster-boy of this concept is Uber, the innovative ride-sharing company that is demolishing the taxi-cab industry with its ride-sharing app that joins riders and drivers and maximizes safety and convenience with no cash and two-way ratings. This company recently did a $50 billion private financing, and is still a private company. Uber keeps innovating. On my last ride to the airport, Uber was advertising package delivery and also a standard meal delivery. Uber drivers will carry around a limited set of hot and cold meals and deliver in minutes. The whole point is innovation. It is innovation that demolishes the taxi-cab industry; it is innovation that brings in the investors, first with their millions and then with their billions.

And what is it that innovation delivers? It delivers more cotton goods for less money. It delivers more illuminating oil for 90 percent less money. It delivers more steel for one third the money. It delivers electric power out of understanding the science of electricity. It delivers automobiles out of the development of heat engine physics. It develops electronics out of the understanding of quantum mechanics. It develops cell phones and GPS out of the understanding of pseudo-random noise communications. All this is only tangential to the idea of investing your profits in a new venture and accumulating capital.

The Great Enrichment of the last 200 years, from $3 to $100 per day is not from accumulation. It is from innovations -- staggering, mind-blowing innovations that nobody had even thought of. Not until somebody did.

And the innovation works both ways. Cell-phones are based on staggering innovation, but can be leveraged in the most mundane ways. A sardine fisherman in his boat off the west coast of India can call buyers with his cellphone in different ports to determine which has the best price for his catch.

In The Condition of Postmodernity Harvey uses the idea of capital accumulation and overaccumulation to justify the supervision of the capitalists by the politicians. This shows the value of the capital accumulation hypothesis. It advances the conceit that political minds can understand the market system enough to regulate and command it.

I'd say that the history of the last 200 years shows that the politicians and their bribed apologists really haven't a clue about the market economy, and only make a mess when they crash in with their regulations and their coercions.

Like right now. The Democrats and the Obama administration thought they were geniuses with their Obamacare and Dodd-Frank bills. But Obamacare seems to been on the way to abolishing the full-time job and Dodd-Frank has put a bureaucrat in charge of every bank loan.

And people wonder why the economy isn't growing.

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