T Investment advice from Marc Barhonovich.
Capital Accumulation

Most generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth.

In economics, accounting and Marxian economics, capital accumulation is often equated with investment, especially in real capital goods.

But Capital accumulation can refer to either real investment in tangible means of production, or financial investment in paper assets, or investment in non-productive physical assets such as residential real estate, or "human capital accumulation," i.e., new education and training increasing the skills of the (potential) labour force.

Non-financial capital accumulation is an essential factor for economic growth, since additional investment is essential to enlarge the scale of production and increase employment opportunities. In modern macroeconomics and econometrics the term capital formation is often used in preference to "accumulation", though UNCTAD refers nowadays to "accumulation".

Harrod-Domar model
In macroeconomics, following the Harrod-Domar model, the savings ratio (s) and the capital coefficient (k) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital (K) is: where Y is the real national income. If the capital-output ratio or capital coefficient () is constant, the rate of growth of Y is equal to the rate of growth of K. This is determined by s (the ratio of net fixed investment or saving to Y) and k.

A country might for example save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as Keynesian economics points out, savings do not automatically mean investment (as liquid funds may be hoarded for example).

Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows, the more capital it takes to keep it growing and the more markets must expand.


Psychology, sociology and ethics of capital accumulation
There have been numerous psychological and sociological studies of the motivations of investment behaviour by individuals. Most of these suggest that the propensity to accumulate capital is associated with qualities such as an intelligent understanding of property ownership, a positive attitude towards money, the ability to seize a money-making opportunity, and a desire to acquire more wealth. These are not innate or genetic qualities, but learnt through social experience.

However, even if a strong motivation for enrichment exists, the business climate, local culture or social instability may prevent this motivation from being realised. Hernando de Soto for example argues that the reason why poor countries are poor is mainly because of the absence of a legal-cultural infrastructure of "asset management" and of formalised and enforced private property rights. However the most popular argument in this respect remains the vicious cycle of poverty: the poor are poor because they are poor. Critics of this argument object it is an uninformative tautology.

Greed and desire can play a very important role in capital accumulation, but are not a necessary requirement. Indeed according to Max Weber's study of capitalism and the Protestant ethic, frugality, sobriety and saving were among the key values of the rising bourgeoisie in the age of the Reformation.

Some economic historians (e.g. David Landes) refer to national psychology and argue that some nations or cultures (e.g. Europe) are inherently better equipped for capital accumulation, due to cultural habits, customs and values.

Other economic historians (e.g. Paul A. Baran) have argued that psychological factors explain very little, because a nation which previously had a low level of accumulation can suddenly "take off". In that case, the causes must be sought in the prevailing social relations.

Controversies about the ethics of accumulation have occurred ever since commercial trade began. If informal and formal prostitution is regarded as the oldest profession, the first ethical debate about accumulation must have occurred tens of thousands of years ago at the very least. The problem is that trade or market forces do not create any particular morality of their own, beyond the requirement to meet contractual obligations that settle transactions. Some forms of trade may be accepted, others rejected, but there exists no general moral principle for this which can be derived from the trade itself.

A good contemporary illustration of this problem is the gigantic increase in total reported crime and the grey economy or shadow economy after the deregulation of world markets from the 1980s, and the marketisation of the USSR and China. But ancient philosophers and theologians already knew about the problem, which is why they were intensely preoccupied with the politics of the “rule of law” and its enforcement.

The main ethical questions concern which routes to wealth are morally justifiable, and what entitles individuals and groups to appropriate amounts of wealth, in particular wealth which they have not themselves created. The medieval economists invented theories of a just price and the moral debate surfaces again these days e.g. in the controversies about fair trade, imperialism and Islamic banking. Neo-liberal theory emphasises that a "good" person is one who creates new wealth, while socialist theory says a "good" person shares the wealth. The most popular moral theories are similar to that of John Rawls.

But because capital accumulation does not presuppose any particular or specific "moral system", accumulation can also continue regardless of any particular morality advocated by popes, presidents, queens, journalists, pop stars, business tycoons or anybody else. All that is required is (1) the ability to own assets and trade in them and (2) sufficient income beyond subsistence to be able to afford accumulation.

The rate and measurement of accumulation
In Marxian economics, the rate of accumulation is defined as (1) the value of the real net increase in the stock of capital in an accounting period, (2) the proportion of realised surplus-value or profit-income which is reinvested, rather than consumed. This rate can be expressed by means of various ratios between the original capital outlay, the realised turnover, surplus-value or profit and reinvestments (see e.g. the writings of the economist Michal Kalecki).

Other things being equal, the greater the amount of profit-income that is disbursed as personal earnings and used for consumptive purposes, the lower the savings rate and the lower the rate of accumulation is likely to be. However, earnings spent on consumption can also stimulate market demand and higher investment. This is the cause of endless controversies in economic theory about "how much to spend, and how much to save".

In a boom period of capitalism, the growth of investments is cumulative, i.e. one investment leads to another, leading to a constantly expanding market, an expanding labor force, and an increase in the standard of living for the majority of the people.

In a stagnating, decadent capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment.

As a rule, the larger the total sum of capital invested, the higher the return on investment will be. The more capital one owns, the more capital one can also borrow and reinvest at a higher rate of profit or interest. The inverse is also true, and this is one factor in the widening gap between the rich and the poor.

Ernest Mandel emphasized that the rhythm of capital accumulation and growth depended critically on (1) the division of a society's social product between "necessary product" and "surplus product", and (2) the division of the surplus product between investment and consumption. In turn, this allocation pattern reflected the outcome of competition among capitalists, competition between capitalists and workers, and competition between workers. The pattern of capital accumulation can therefore never be simply explained by commercial factors, it also involved social factors and power relationships.

Accumulation can be measured as the monetary value of investments, or as the change in the value of assets owned. Using company balance sheets, tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national accounts and national balance of payments statistics. Usually the Reserve Banks and the Treasury provide interpretations and analysis of this data. Standard indicators include Gross fixed capital formation, fixed capital, household asset wealth, and foreign direct investment.

Organisations such as the International Monetary Fund, UNCTAD, the World Bank Group, the OECD, and the Bank for International Settlements used national investment data to estimate world trends. The Bureau of Economic analysis, Eurostat and the Japan Statistical Office provide data on the USA, Europe and Japan respectively.

Other useful sources of investment information are business magazines such as Fortune, Forbes, The Economist, Business Weekly etc. as well as various corporate "watchdog" organisations and NGO publications. A reputable scientific journal is the Review of Income & Wealth. In the case of the USA, the "Analytical Perspectives" document (an annex to the yearly budget) provides useful wealth and capital estimates applying to the whole country.


The origin of capital accumulation in trade
In the simplest circuit of commercial trade, a sum of money M is loaned and returned with interest as the larger sum M'. Or, as a variation, M is traded for another currency, which rises in value. In counter-trade (a form of barter in which money may be used only to value goods and services), a commodity C exchanges for another commodity C', which may also result in a larger sum of value. Marx calls the additional value surplus-value.

In a slightly more complex trading circuit, a sum of money M buys a commodity C which upon sale yields a larger sum of money M', which can be reinvested. Alternatively, the circuit C ? M ? C' could substitute for M ? C ? M' but in this case the enlarged value consists of commodities rather than of money. These circuits are basic to merchant trade.

In the more developed trading circuit of capitalism, however, M buys inputs C (means of production and labour-power) which through new production creates outputs C' and upon sale yield a larger sum of money M'. In this case, we are no longer dealing with merchant capitalism, but with capitalist industry (the capitalist mode of production: all or most of the inputs and outputs of production are available as marketed commodities, and the costs & benefits of total production are rationally calculated in price terms.

In modern capitalism, the circuits of finance, commerce and production have become exceedingly complex, often lack transparency and may involve multilateral exchanges or a lot of fictitious capital. The daily trading volume in the world's foreign exchange markets was estimated at $1.88 trillion in 2004, as against $590 billion in 1989 (current dollars) (Der Spiegel, special edition 4/2005, p. 107). By comparison, the New York Stock Exchange daily volume is said to be around $25 billion a day, and the global futures markets are said to trade about $35 billion worth of contracts a day. Speculative trading makes up the bulk of the daily trading volumes. Most rich people do not want to bother with the financial management of most of their wealth, and know little about it. Investment specialists make their money from investing the money of the rich using their superior market knowledge, contacts, networks and commercial skills.


The circuit of capital accumulation from production
Strictly speaking, capital has accumulated only when realised profit income has been reinvested in capital assets. But the process of capital accumulation in production has, as suggested in the first volume of Marx's Das Kapital, at least 7 distinct but linked moments:

The initial investment of capital (which could be borrowed capital) in means of production and labor-power.
The command over surplus-labour and its appropriation.
The valorisation of capital through production.
The appropriation of the new output produced by employees, containing the added value.
The realisation of surplus-value through output sales.
The appropriation of realised surplus-value as (profit) income after deduction of costs.
The reinvestment of profit income in production.
All of these moments do not refer simply to an "economic" or commercial process. Rather, they assume the existence of legal, social, cultural and economic power conditions, without which creation, distribution and circulation of the new wealth could not occur. This becomes especially clear when the attempt is made to create a market where none exists, or where people refuse to trade.

His discussion of the simple reproduction and expanded reproduction of the conditions of production offers a more sophisticated model of the parameters of the accumulation process as a whole. At simple reproduction, a sufficient amount is produced to sustain society at the given living standard; the stock of capital stays constant. At expanded reproduction, more product-value is produced than is necessary to sustain society at a given living standard (a surplus product; the additional product-value is available for investments which enlarge the scale and variety of production.

Yet there is no economic law according to which capital is necessarily re-invested in the expansion of production; that depends on anticipated profitability, market expectations and perceptions of investment risk. All that Marx proves is that in capitalism production of output is conditional on capital accumulation, i.e. at least in the longer term, if production is not profitable, it will close down.

Ernest Mandel introduced the additional concept of contracted economic reproduction, i.e. reduced accumulation where business operating at a loss outnumbers growing business, or economic reproduction on a decreasing scale, for example due to wars, natural disasters or devalorisation.

Balanced economic growth requires that different factors in the accumulation process expand in appropriate proportions. But markets themselves cannot spontaneously create that balance, in fact what drives business activity is precisely the imbalances between supply and demand: inequality is the motor of growth. This partly explains why the global pattern of economic growth is very uneven and unequal, even although markets have existed almost everwhere for a very long time. It also explains government regulation of market trade and protectionism.


Different forms of capital accumulation
Essentially, in capitalism the production of output depends on the accumulation of capital. The propensity to invest in production therefore depends a lot on expectations of profitability and sales volume, and on perceptions of market risk. If production stops being profitable, or if sales drop sharply, or if there is social instability, capital will exit more and more from the sphere of production. Or if it cannot or does not, rationalisation investments will be undertaken, to amalgamate unprofitable enterprises into profitable units.

As a corollary, capital accumulation may be the accumulation of production capital (industrial assets), or the accumulation of money capital (financial assets), or the accumulation of commodity capital (products, real estate etc. which can be traded).

But irrespective of whether the additional capital value (or surplus-value happens to take the form of profit, interest, rent, or some kind of tax impost or royalty income, what drives the accumulation process is the perpetual search for more surplus-value, for added value as such.

This requires a constant supply of a labor force which can conserve and add value to inputs and capital assets, and thus create a higher value. Normally, the socio-economic compulsion to work for a living in capitalist society is legally enforced and regulated by the state, for example through workfare and strict conditions for receiving an unemployment benefit.

Although capital accumulation does not necessarily require production, ultimately the basis for it is value-adding production which makes net additions to the stock of wealth. Capital can accumulate by shifting the ownership of assets from one place to another, but ultimately the total stock of assets must increase. Other things being equal, if production fails to grow sufficiently, the level of debt will increase, ultimately causing a breakdown of the accumulation process when debtors cannot pay creditors.

Capital accumulation does not necessarily require trade either, although capital presupposes trade, and the ability to exchange goods for money. The reason is that wealth can be amassed through illegal or legalised expropriation (robbery, plunder, theft, piracy, slavery, embezzlement, fraud and so on). However, a continuous and cumulative accumulation process always presupposes that capital ownership is secure. Consequently, military and police forces have typically been necessary for capital accumulation on a larger scale, to protect property.

In medieval society, typically the bourgeoisie could not protect its capital assets permanently from attacks, which meant that the accumulation process was interrupted, and remained limited in scope. Today however, capitalists can own billions of dollars worth of assets which are well-protected against crime (see the annual Merrill-Lynch survey of the world's wealthy). With the aid of private banking it is easier to obscure or hide the wealth that one owns.


Capital accumulation as social relation

"...Wakefield discovered that in the Colonies, property in money, means of subsistence, machines, and other means of production, does not as yet stamp a man as a capitalist if there be wanting the correlative — the wage-worker, the other man who is compelled to sell himself of his own free-will. He discovered that capital is not a thing, but a social relation between persons, established by the instrumentality of things. Mr. Peel, he moans, took with him from England to Swan River, West Australia, means of subsistence and of production to the amount of £50,000. Mr. Peel had the foresight to bring with him, besides, 3,000 persons of the working-class, men, women, and children. Once arrived at his destination, “Mr. Peel was left without a servant to make his bed or fetch him water from the river.” Unhappy Mr. Peel, who provided for everything except the export of English modes of production to Swan River!"

Regime of accumulation
Both the Regulation School of French Marxist economists, inspired by the original writings of Michel Aglietta and developed by Robert Boyer, as well as the American social structure of accumulation school founded by the economists Samuel Bowles and David Gordon have emphasized that the processes of capital accumulation occur within a social regime of accumulation.

In other words, a specific political and socio-economic environment is required that enables sustained investment and economic growth. This environment is created partly by state policy, but partly by also by technological innovations, changes in popular culture, commercial developments, the media, and so on. An example of such a regime often cited here is that of Fordism, named after the enterprise of Henry Ford. As the pattern of accumulation changes, the regime of accumulation also changes.

Similar ideas also surface in institutional economics. The main insight here is that market trade cannot flourish without regulation by a legal system plus the enforcement of basic moral conduct and private property by the state. But the regime of accumulation responds to the total experience of living in capitalist society, not just market trade.


Environmental criticism of capital accumulation
The environmental criticism of capital accumulation focuses on four main ideas.

Firstly, there is the problem of externalities. This means that privately owned industry incurs costs, including environmental and health costs, which are not charged or priced. This happens for example when effluents are discharged on land, water or in the air, which can cause pollution or despoilation of terrains. In recognition of this, environmental taxes are sometimes imposed.

Secondly, commercial activities which may be rational from the point of view of a private enterprise may not be rational from the point of view of society as a whole, or from the point of view of the biosphere, especially when they involve the destruction of natural habitats of flora and fauna, pollution and entropy.

Because a natural resource happens to be a freely available good (for example fish in the open sea), it may be plundered for profit. Or, a lot of energy may be wasted producing and transporting a good to the consumer, to which business people are indifferent because they do not pay for it. Or, the disturbance of subsistence economics by commerce may cause overpopulation.

Thirdly, goods and services may be produced for profit in ways which are directly or indirectly harmful to human life, either because of the nature of the use-value involved, or because of the techniques used to produce them, or because they encourage consumer habits with harmful effects.

Finally, business ethics may often not be reconcilable with human ethics or environmental ethics. This means for example that the imputation of a price to an environmental cost, or imposing an environment tax may be insufficient as a policy, because some things which have value simply have no price.

Nowadays environmental concerns are an essential part of so-called socially responsible business and corporate governance. However, opinion is divided about whether a capitalist market economy can be ecologically sustainable. Some argue that the experience of environmental destruction in the Soviet Union and China proves that state socialism or command economy is ecologically worse than capitalism. Others argue that the ultimate result of capital accumulation must be the destruction of the biosphere, unless drastic steps are taken to control pollution, population growth, and consumerism, and that the examples of the former Soviet Union and China are not exculpatory of Western capitalism since these nations were, in essence, copying within severe economic and strategic constraints, the production and consumerist models of the West, especially those found in the United States. They had simply bought into a false model of the good life.

In the 1970s, many environmentalists argued for a policy of "zero economic growth" in "affluent" Western societies. However, when a long recession began in that decade, halving economic growth rates, most people became more concerned about mass unemployment. Thus, the proponents of zero growth lost popularity. Nowadays, the popular concept is sustainable economic development or growth. But interpretations of what that means can differ wildly. One difficulty is that predictions of future resource scarcity are usually based on extrapolation from the past, "assuming present trends will continue", but they may not.

Today [2005] many serious environmentalists consider capitalism, or the "market system" as it is usually called, incapable of complying with the basic requisites of a sustainable and respectful habitation of planet earth. A major problem, inherent in corporate dynamics, and amply represented in its executive sociology, is the constant compulsion to expand production without limits of any kind, disregarding the irrefutable fact that it is irrational to seek infinite expansion in a finite world. In this particular regard, critics point to the corporate penchant to plan in short-term cycles, and with a purview that is only concerned with the fortunes of a single firm or business entity, thereby ignoring the cumulative effect brought to bear on the biosphere by the entire commercial production system.


Capital accumulation and risk
Most capital accumulation involves risk, because capital is committed to an investment without perfect certainty about future earnings. A capital asset could gain value, but it could also lose value in the future. Owners of capital (investors) therefore typically diversify their investment portfolio, and try to minimise the risks involved in investments by every possible means.

In the course of two centuries of capital accumulation based on industrialisation the intensive economising and exploitation of human labour, and technological innovation,

the value of the assets that are invested in has become very large
the markets traded in extend around the globe
the deregulation of markets has increased the level of market uncertainty
the volume of speculative capital has grown enormously
the banking industry dominates the ownership of capital assets.
This has led to an enormous expansion of the insurance industry and of the profession of risk management. As a corollary, this powerfully stimulates the construction of mathematical models which aim to assess how probable it is that particular "risky events" will occur. Some sociologists such as Frank Furedi claim that an exaggerated and unhealthy preoccupation or anxiety about risks has infiltrated the whole of modern society.

Speculation is justified as follows: "The roles of speculators in a market economy are to absorb risk and to add liquidity to the marketplace by risking their own capital for the chance of monetary reward."

In modern times, it has often been possible to rebuild physical capital assets destroyed in wars completely within the space of about 10 years, except in cases of severe pollution by chemical warfare or other kinds of irrepairable devastation. However, damage to human capital has been much more devastating, in terms of fatalities (in the case of world war 2, about 55 million deaths), permanent physical disability, enduring ethnic hostility and psychological injuries which have effects for at least several generations.


New developments in capital accumulation: New trends in capital accumulation include:

The crisis of numerous pension funds providing a large amount of investment capital, which are alleged to be badly managed.
An international "competition of currency values" strongly influenced by speculative capital, which has a big effect on the pattern of international trade. The magnitudes involved can be gauged e.g. from the currency conversion ratios used to establish purchasing power parity. For example, India's GDP valued at "ppp" becomes five times larger. This tends to stimulate counter-trade.

The acceleration of the concentration and centralisation of capital internationally in very large corporations. The Fortune Magazine "Global 500" largest corporations in 2004 employed more people than the whole workforce of Germany. The after-tax profit volume of the Fortune Global 500 was said to be $731 billion, the combined asset value was $60.8 trillion, gross income (revenues) $14.8 trillion, and stockholders equity $6.8 trillion. For comparison, world GDP in 2004 was valued at $40.9 trillion (World Bank).

The Merrill lynch/CapGemini World Wealth Report 2005 covering High Net Worth Individuals (HNWI) claims the fortunes of the world's millionaires and billionaires grew strongly in 2004, increasing by 8.2% to US$30.8 trillion in one year. Driven by North America & Asia–Pacific, this represents "the highest growth of HNWI wealth in more than three years".
Dollarisation - more US currency now circulates outside the US than inside it, and some countries such as Ecuador have adopted the US dollar as national currency. "Dollar hegemony" is maintained by large Asian, Arab and European investments in the United States.

Corporate investment to orient towards activities which secure good short-term returns for shareholders. This is called "value-based management". Most corporate executive officers (CEO's) cite profitability as their prime concern.
an increasing preoccupation with the conditions for extending credit, and with all sorts of risk factors.
World markets are increasingly sensitive to events and disturbances which might cause social instability or panics.

The declining overall significance of business start-ups, in the sense of enterprises creating new products and services, rather than being just tax-shelters or secondary employment (whether this is a permanent trend remains to be seen).
the growth of criminal (or illegal) accumulation as measured by crime reports, including business crime and corruption such as fraud, embezzlement, money laundering, insider trading and theft, but also prostitution, forced labour, slavery, war plunder etc. National Geographic has reported there are about 27 million slaves in the world. ILO estimates of forced labor are a little over a dozen million. There are possibly 70 million people involved globally in prostitution of one form or another. But there are many more, employed or unemployed, in "intermediate" positions. Traditional sociological categories may not describe their situation accurately, but a growing "underclass" (which may not be an accurate label) is a policy concern for many governments.

The most ignored aspect is the changing structure of the global workforce in its totality, specifically the number employed by specific employment status and by income, in different sectors. But just as Marx's Law of Accumulation predicted, the working class has grown enormously within 2 centuries. Deon Filmer estimated that 2,474 million people participated in the global non-domestic labour force in the mid-1990s. Of these around a fifth, 379 million people, worked in industry, 800 million in services, and 1,074 million in agriculture. The majority of workers in industry and services were wage & salary earners - 58 percent of the industrial workforce and 65 percent of the services workforce. But a big portion were self-employed or involved in family labour. Filmer suggests the total of employees worldwide in the 1990s was about 880 million, compared with around a billion working on own account on the land (mainly peasants), and some 480 million working on own account in industry and services.

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