King’s College King’s Parade Cambridge 27.10.1936 Dear Joan, Many thanks for your letter – it is a valuable addition to my museum and I shall hang it next to an extract from Sidgwick where, after lecturing Ricardo on a quantity of labour, he goes on cheerfully himself to talk of quantities of utility. If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel? If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall). Yours P.S.   — Letter from Piero Sraffa to Joan Robinson, quoted in Harcourt, G.C. (1997). A “Second Edition” of the General Theory, vol. 1. New York: Routledge, p. 131.

King’s College

King’s Parade

Cambridge

27.10.1936

Dear Joan,

Many thanks for your letter – it is a valuable addition to my museum and I shall hang it next to an extract from Sidgwick where, after lecturing Ricardo on a quantity of labour, he goes on cheerfully himself to talk of quantities of utility.

If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel?

If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall).

Yours

P.S.

 

— Letter from Piero Sraffa to Joan Robinson, quoted in Harcourt, G.C. (1997). A “Second Edition” of the General Theory, vol. 1. New York: Routledge, p. 131.

Around the world, very little new investment is financed by raising new equity (selling shares of stock in a company). Indeed, the only countries with widely diversified share ownership are the United States, the United Kingdom, and Japan, all of which have strong legal systems and strong shareholder protections. It takes time to develop these legal institutions, and few countries have succeeded in doing so. In the meantime, firms around the world must rely on debt. But debt is inherently risky. IMF strategies, such as capital market liberalization and raising interest rates to exorbitant levels when a crisis occurs, make borrowing even riskier. To respond rationally, firms will engage in lower levels of borrowing and force themselves to rely on more heavily on retained earnings. Thus growth in the future will be constrained, and capital will not flow as freely as it otherwise would to most productive uses. In this way, IMF policies lead to less efficient resource allocation, particularly capital allocation, which is the scarcest resource in developing countries. The IMF does not take this impairment into account because its models do not reflect the realities of how capital markets actually work, including the impact of the imperfections of information on capital markets. — Joseph Stiglitz - Globalization & Its Discontents, p. 128

Around the world, very little new investment is financed by raising new equity (selling shares of stock in a company). Indeed, the only countries with widely diversified share ownership are the United States, the United Kingdom, and Japan, all of which have strong legal systems and strong shareholder protections. It takes time to develop these legal institutions, and few countries have succeeded in doing so. In the meantime, firms around the world must rely on debt. But debt is inherently risky. IMF strategies, such as capital market liberalization and raising interest rates to exorbitant levels when a crisis occurs, make borrowing even riskier. To respond rationally, firms will engage in lower levels of borrowing and force themselves to rely on more heavily on retained earnings. Thus growth in the future will be constrained, and capital will not flow as freely as it otherwise would to most productive uses. In this way, IMF policies lead to less efficient resource allocation, particularly capital allocation, which is the scarcest resource in developing countries. The IMF does not take this impairment into account because its models do not reflect the realities of how capital markets actually work, including the impact of the imperfections of information on capital markets.

— Joseph Stiglitz - Globalization & Its Discontents, p. 128

isomorphismes: “[I]t’s a mistake … to think of equity capital as part of the “pool of capital available to the economy,” as if there were a simple fixed quantity of “capital” in the world…. What precisely the aggregate value of the stock market represents is far from clear – and that’s why it is in some sense not particularly surprising when this value drops by 40% over the course of a year. What comes to my mind when I hear “pool of capital” is the K of economist’s models working to constrain our ability to think about what capital is. Equity capital is something that we think we understand – until we think about it a little longer. It often incorporates the value of many intangible assets that may be alienable only as part and parcel of the whole business and/or fragile in the sense that they may be easily destroyed by bad managerial decisions (e.g. goodwill). Furthermore it is axiomatic that equity capital is inflated when asset prices are too high and it evaporates when they fall. (Steve Waldman has expounded on these issues much more thoroughly and penetratingly than I do here.) In order to have a meaningful “pool of [equity] capital,” it’s necessary to have some kind of stability in asset prices – but this is precisely what we don’t have in our current system. In addition, the focus on equity capital [distracts from] the important role played by … working capital…. Many real goods come into existence only because of … working capital. While only a fraction of the output financed by working capital is converted … into equity capital, … it [may] play a more important role in the … production process than equity capital…. I get the impression that most people don’t consider working capital to be an important component of the “pool of capital available to the economy,” but [they’re dumb / wrong].” — Carolyn Sissoko (Source: syntheticassets.wordpress.com)

isomorphismes:

“[I]t’s a mistake … to think of equity capital as part of the “pool of capital available to the economy,” as if there were a simple fixed quantity of “capital” in the world…. What precisely the aggregate value of the stock market represents is far from clear – and that’s why it is in some sense not particularly surprising when this value drops by 40% over the course of a year. What comes to my mind when I hear “pool of capital” is the K of economist’s models working to constrain our ability to think about what capital is. Equity capital is something that we think we understand – until we think about it a little longer. It often incorporates the value of many intangible assets that may be alienable only as part and parcel of the whole business and/or fragile in the sense that they may be easily destroyed by bad managerial decisions (e.g. goodwill). Furthermore it is axiomatic that equity capital is inflated when asset prices are too high and it evaporates when they fall. (Steve Waldman has expounded on these issues much more thoroughly and penetratingly than I do here.) In order to have a meaningful “pool of [equity] capital,” it’s necessary to have some kind of stability in asset prices – but this is precisely what we don’t have in our current system. In addition, the focus on equity capital [distracts from] the important role played by … working capital…. Many real goods come into existence only because of … working capital. While only a fraction of the output financed by working capital is converted … into equity capital, … it [may] play a more important role in the … production process than equity capital…. I get the impression that most people don’t consider working capital to be an important component of the “pool of capital available to the economy,” but [they’re dumb / wrong].”

— Carolyn Sissoko

(Source: syntheticassets.wordpress.com)

(via)
driftwork: An adorable flowchart from Capital Vol 3
“Compared to Sraffa, Marx’s attempt and failure to make the system (and his book on the system…) self-replicating can only appear illegitimate, whatever the Althusserians may say: what prevents Marx from making a ‘scientific’ description is that he must fulfil the function of the prosecutor assigned to him by his desire for an integration of goods, means and persons into a single body. Sraffa’s ‘body’ is as elusive as the body of capital, commodities are themselves only evident there as the limits of an endless metamorphosis; which suggests the congruence of capital’s operation with that of a theoretical system. It follows, of course, from such an approach that every catastrophic perspective is excluded: the death of capital cannot come to it from within, from some contradiction, there is no contradiction, there are at most disequilibrium states, there is no death through disruption.”