Turn on any news outlet or current affairs program and you will be mistaken into thinking that economics is a well-defined science that has irrefutable evidence for it’s current position as the basis for all productive activity. You may think it’s similar to the weather report, where even though it’s hard to predict due to its chaotic nature, you can determine certain parameters to quite high precision through anemometers, temperature and rain gauges.
One of the most telling features of capitalism is that it’s principle concept – capital – has many abstract and differing definitions. This may not invalidate all theories based on capital but the degree in which you can rely on the flawed assumptions using the ill-defined depends on how consistent and empirically sound the expounded theories are.
For example, gravity1 is an abstract concept where it can be viewed as a force interacting between bodies or a curvature of space-time around a distribution of mass/energy. Likewise, temperature2 that can be defined using other conceptions, such as being a proportional measure of the average kinetic energy of particles in a system, definitions including quantum states of matter, or using qualitative descriptors such as hot or cold. These examples hold up empirically by testing the relations with different properties of systems and elaborating the results into general causative propositions. On the other hand there are abstract concepts which can not have a definitive quantitative aspect, either due to not being testable or knowable, e.g. God, or by being a subjective and/or temporal qualitative facet of existence, e.g. sense of happiness.
To see where on this scale of testable concepts capital lays, from being well-defined and experimentally testable to ill-defined and non-testable, lets look at what the economic literature has to say.
The term capital made its first appearance in medieval Latin as an adjective capitalis (from caput, head) modifying the word pars, to designate the principal sum of a money loan. The principal part of a loan was contrasted with the ‘usury’ – later called interest – the payment made to the lender in addition to the return of the sum lent. This usage, unknown to classical Latin, had become common by the thirteenth century and possibly had begun as early as 1100 A.D., in the first chartered towns of Europe3.
In its broadest possible sense, capital includes the human population; non-material elements such as skills, abilities, and education; land, buildings, machines, equipment of all kinds; and all stocks of goods—finished or unfinished—in the hands of both firms and households4. Being such a broad definition, already you can see that it can be viewed with suspicion, trying to be as all-encompassing as possible. The Ibn Khaldun inspired Adam Smith defines capital as:
“That part of a man’s stock which he expects to afford him revenue”.5
Marxists describe it in various forms, the most interesting is that it’s a social relation fetishised as a commodity relation6,7. Also pinpointing other elements of it’s conception, such as it being an accumulation of money that cannot make its appearance until the circulation of commodities has given rise to the money relation. That capital exists only within the process of buying and selling, as money advanced only in order to get it back again. Plus money is only capital if it buys a good whose consumption brings about an increase in the value of the commodity, realised in selling it for a profit. This relation of commodities and money gives a good framework in which you can explore the capital concept. It also brings about other enquiries on what is money and value and the implications of the capital cycle:
“The simple circulation of commodities – selling in order to buy – is a means of carrying out a purpose unconnected with circulation, namely, the appropriation of use-values, the satisfaction of wants. The circulation of money as capital is, on the contrary, an end in itself, for the expansion of value takes place only within this constantly renewed movement. The circulation of capital has therefore no limits.”
You could go the way of Hayek and the other Austrian economists by stating that as economics involves complex human interactions it therefore can’t be explained by mathematical models but then we are going further into the faith-based approach. Praxeology (which Hayek rejected to be fair) indeed rejects positivism and empiricism8, as espoused by Von Mises9,10:
“Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts.”
Other economists such as Léon Walras, John Maynard Keynes and others have attempted to formalise both micro- and macroeconomics into a set of mathematical relations, to varying degrees. Though the scope of these is usually limited with multiple assumptions that render the results restricted to simple models. To obtain real-world formulations, the definitions of the underlying constructs should be consistent and assumptions required for the models should be well understood.
The Cambridge capital controversy11 shows that economists were well-aware of the limitations of the ill-defined nature of capital and it’s subsequent inability to provide complex models of reality. Many issues were elaborated by Sraffa and others relating to neoclassical conceptions of aggregating12 capital not working at a specific time, meaning they cannot handle the more complicated issues of dynamics. Also, a disproof of roundaboutness (supposedly a physical measure of capital intensity) in economies with compound interest was presented by Paul Samuelson13,14. Implying there is no simple (monotonic) relationship between the profit/interest rate and the “capital intensity” or roundaboutness of production, either at the macro- or the microeconomic level of aggregation.
Many commentators have expressed views on how this effects the whole realm of economics, especially neoclassical:
“Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all econometric work.”15
“Ironically, this favouring of theory (ideology would be a better term) is selective as their exposure as fundamentally flawed does not stop them being repeated. As we discuss in section C.2, the neoclassical theory of capital was proven to be incorrect by left-wing economists. This was admitted by their opponents: “The question that confronts us is not whether the Cambridge Criticism is theoretically valid. It is. Rather the question is an empirical or econometric one: is there sufficient substitutability within the system to establish neoclassical results?” Yet this did not stop this theory being taught to this day and the successful critique forgotten. Nor has econometrics successfully refuted the analysis, as capital specified in terms of money cannot reflect a theoretical substance (neoclassical “capital”) which could not exist in reality. However, that is unimportant for “[u]ntil the econometricians have the answer for us, placing reliance upon neoclassical economic theory is a matter of faith,” which, of course, he had”16
“Economics is not a science. Many economists — particularly those who believe that decisions on whether to get married can be reduced to an equation — see the world as a complex organism that can be understood using the right differential calculus. Yet everything we know about economics suggests that it is a branch and not a particularly advanced one, of witchcraft.”17
Economics strives to be a science – but there are only predictive models, not causative. They can never be fully causative as it describes a social relation, which can change at any time and the rules change at whim, e.g. quantitative easing. If economics refocussed from capital and it’s relations and instead concentrated on resource allocations and the energy needed to transform materials into useful forms, then it may be able to be turned into a science. Well-defined concepts need to underpin any empirical research and enquiries, so as capital is not this then it suggests that economists are, in the main, just echoing story narratives and not proclaiming any evidence-based science. Though this is not the only myth that pervades capitalist thinking; more general ones that also just spin a narrative in favour of the current system and preclude alternatives are ubiquitous in society.