This post is part of a series on Yochai Benkler’s recent article, Structure and Legitimation in Capitalism. Read the rest of the posts here.
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Yochai Benkler’s ambitious account of capitalism provides an intellectual smorgasbord of concepts and ideas with which to grapple. In this brief post, however, I will focus on two questions that hold particular interest to me, and I hope to others as well: Where do profits come from? And (how) does law legitimate capitalism?
Where Do Profits Come From?
Benkler’s intellectual inspirations are commendably diverse. Marx’s influence on Benkler’s concept of capitalism is clearest in his use of “market dependence.” Capitalism combines market opportunity—the freedom to participate in markets—with market imperative. Wage earners must sell their labor to obtain the necessities of life, while firms must acquire labor, resources, knowledge, and finance through markets in order to continue producing. This generalized dependence generates what Benkler calls the “Red Queen Dynamic”: firms must “run as fast as they can just to stay in place.” This is a radically different way of organizing human productive activity from that which prevailed for most of human existence, when people had direct access to their means of subsistence, rather than relying on money and market exchange to meet their basic needs.
Benkler argues that this dynamic is reinforced by genuine uncertainty and the pursuit of quasi-rents. Economic models commonly convert uncertainty into calculable risk by assuming that actors know the probability distribution of future outcomes. But as Benkler points out, real investment decisions involve uncertainty about the probability distribution themselves. Investors therefore cannot efficiently price every contingency. Financing depends instead upon the prospect that firms will acquire sufficient pricing power to compensate for unknowable costs. Innovation supplies one important source of such power: first-mover advantages, secrecy, learning effects, and organizational improvements can generate temporary quasi-rents before competitors catch up.
This is a much-improved description of actual competitive behavior, but to understand “where profits come from” within this system, we must dig deeper. In particular, “rent” remains defined against the background of perfect competition: it is the return exceeding what a factor would receive in competitive equilibrium. Benkler’s inspiration, Schumpeter’s creative destruction, was itself intended to explain how innovation could occur when markets clearing at marginal cost would otherwise produce stagnation. This emendation strikes me as a perfect example of the theoretical “epicycles” David Singh Grewal has identified elsewhere in modern economic theory. In this case, quasi-rents circle around perfect competition even when the analysis recognizes that competition continually generates departures from it. More importantly, a focus on rents directs attention to how firms divide income without fully answering the prior question of where income, specifically capital income, comes from.
To make progress on the “where do profits come from” question, there is no avoiding the so-called Cambridge Capital Controversies. To simplify dramatically, the Cambridge Capital Controversies were a series of debates between economists at Cambridge, England, and Cambridge, Massachusetts, over whether heterogeneous capital goods could coherently be aggregated into a single quantity of “capital” whose marginal productivity determines the rate of profit. Neoclassical distribution theory treats wages and profits as returns to two factors, labor and capital, according to their respective marginal products. But capital comprises heterogeneous goods—machines, buildings, inventories, raw materials, and so forth—that cannot be aggregated into a single physical quantity. Measuring them by price does not solve the problem, because their prices depend upon the profit rate that the theory invokes the quantity of capital to explain. “Reswitching” and “capital-reversing” further showed that neither production techniques nor “capital intensity” vary monotonically with the profit rate. Paul Samuelson ultimately conceded the logical force of these criticisms but excused the use of a (society-wide) “aggregate production function” as a heuristic device, and responded with the “surrogate production function,” an attempt to show that a complicated economy containing many heterogeneous capital goods can, under special conditions, behave as if it had been generated by an ordinary neoclassical production function with one homogeneous quantity of capital.
None of the neoclassical responses were (or are) without their detractors. Perhaps the mildest reply is that the neoclassical answer, unsurprisingly, elevates form over substance: it appeals to empirical predictability and logical consistency rather than addressing the underlying conceptual issues. (We should note that the epicycle theories of the motions of Mercury and Venus are also highly, successfully predictive.) In sum, once capital can no longer be treated as a homogeneous productive substance, profits become harder to portray as capital’s technologically (causally or naturalistically) determined contribution to total social income. More aggressive criticism of neoclassicism came from Piero Sraffa and his successors, who revived the classical Ricardian conception of profit as a share of the surplus: after replacing the inputs consumed in production, the remainder is distributed between wages and profits. Because the wage and profit rates are inversely related, their determination must occur outside the technical model—through institutions, policy, bargaining power, or class struggle.
Sraffa’s profound claims also triggered debate between neo-Ricardians and “substantialist” Marxists who upheld a metaphysically “materialist” “labor theory of value.” The Sraffian attack was indeed lethal to a generation of Marxists in this mold. Sraffian input-output matrices permit us to imagine a physical production process that eliminates labor altogether. That may demonstrate that labor is not a magical, transcendental substance poured into commodities. But Marx’s argument is better understood not as a labor theory of value but as a commodity theory of labor. In a society of independent, exchange-mediated producers, labor performs a historically specific social function: one obtains a share of the social product by producing commodities—or, under capitalism, by controlling commodities produced through purchased labor-power. A technical input-output system could generate a physical surplus—think of a fully-automated production system located on the moon that produces an excess of physical objects that are forever piled up on the lunar surface—but nothing internal to it explains why that surplus must assume the form of money profit privately appropriated by particular persons.
By now we may be exploring arcana of lesser interest to LPE scholars. But competing accounts of where profits come from also imply competing accounts of what corporations do. Business-law scholars, most notably Sanjukta Paul, have already drawn on Part I of Stephen Marglin’s famous “What Do Bosses Do?” to question whether managerial hierarchy is technologically necessary or instead reflects a legally constituted allocation of coordination rights. But Part II of Marglin’s essay raises a further question: does saving finance investment, making capital’s contribution to production—and thus its claim to profit—appear prior to the corporation; or does investment generate saving, making the corporation the legal institution that organizes the production of surplus value from which both saving and profit arise? Corporate-law scholars have been much more willing to question the efficiency of managerial hierarchy than to question why supplying finance entitles capital owners to appropriate the productive surplus. Benkler’s treatment of uncertainty and quasi-rents therefore offers an opening to reconsider the corporation not simply as a nexus of contracts or rent-seeking device, but as the legal form through which investment is organized and socially produced value is appropriated as private profit.
(How) Does Law Legitimate Capitalism?
According to Benkler, law legitimates the asymmetric social relations of production that it structures—relations governing control over labor, property, knowledge, natural resources, finance, and risk—by rendering them acceptable, or at least worthy of acquiescence. In developing this idea, Benkler demolishes the idea that judicial decision making has historically passed through an orderly succession of self-contained modes of legal reasoning. Instead, he shows that lawyers have always mixed formalist, historicist, realist, and purposive arguments. I will be thinking about, returning to, and citing his examples of promiscuous legal reasoning many times in the future, I am sure.
However, I have two significant reservations about the way Benkler approaches the role of “legitimation” in the law. The first is the gnawing skepticism I have about its strongly functionalist flavor, which places the burden of explanation on legitimation’s effects, rather than its proper cause. Is “legitimation” the foremost goal legal actors have in mind when “doing” law? If not, how does legitimation happen beyond the intentionality of legal actors, individually and collectively? Is that which is being legitimated not in fact legitimate? If not, how is that incongruency reconciled, on any account? Because I have tentatively developed these concerns elsewhere, I will not dwell on them here. But they remain a significant issue, from my point of view.
The second misgiving goes to the content of Benkler’s account. For Benkler, predictability and legitimacy do not arise from metatheoretical legal discourses but from a legal-professional habitus shared by judges and lawyers that identifies the “permissible moves” available in a particular historical moment. The question then becomes: what in fact are the possible moves at any historical moment? From Benkler’s account, we only know that lawyers and judges share some legal-professional habitus, but we do not yet know what, precisely, is shared. Is it a habitus resonant with the Lochner era, the New Deal settlement, the civil-rights revolution, or the contemporary conservative counterrevolution? What about a shared habitus would make it any of those? Benkler’s account thus remains surprisingly formalist. More seriously, it is unclear why any particular legal-professional habitus should be capitalist legitimating. As far as I can tell, the relationship between any possible habitus and capitalism is completely contingent. Consequently, I am not sure what the story tells us about “law in capitalism” (my emphasis) or “how [law] functions in modern market society.”
Another answer, which I am developing in current work, draws on Robert Brandom’s theory of the pragmatics of semantics to reconstruct Pashukanis’s idea of the legal form. This initially counterintuitive mashup suggests that we think of adjudication as a practical activity. Judges decide cases between legally recognized subjects, assign liability, and determine enforceable remedies. The implication is that what judges must do constrains what they can coherently say. Legal semantics must answer to adjudicative pragmatics. More concretely, the legal form (which we might call a form of law where rule application must proceed through adjudication) explains how adjudication subsumes an otherwise “chaotic” collection of legal rules and thereby plays a part in “form-determining” the law’s content—what those specific rules actually mean when applied.
Consider Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth, which have captured the attention of “legal endogeneity” scholars and about which I offer a somewhat different account. These cases posed important questions for the doctrine of workplace and sexual harassment, a decidedly “structural” conception of employment discrimination, which considers the overall systemic work environment and organizational power imbalances rather than just isolated, single-actor hiring or firing decisions. Expressed in this way, discrimination implicates deep and complex social forces and dynamics. But this poses a challenge to what courts must actually do, independent of any conscious ideology, to resolve a discrete case or controversy between individual legal subjects. To provide any sort of remedy, courts must be able to coherently answer whether or not the employer has discharged its responsibility to prevent, in this case, workplace harassment. That question requires transforming a complex social problem into a legally legible assignment of responsibility (or, liability).
Thus, the doctrine that emerged in Faragher and Ellerth gave employers an affirmative defense when they exercised “reasonable care” to prevent and correct harassment and when employees unreasonably failed to use available complaint procedures. Courts accordingly came to ask whether the employer had a policy, whether the policy was distributed, whether a complaint channel existed, and whether the employee used it. The social question of workplace harassment was converted into a formal compliance obligation. As a theory of semantics, the legal form does not dictate a unique answer, but neither is any interpretation possible within a specific, pragmatic context, that is, within a dispute between legal subjects that is resolved by adjudication. This idea is compatible with judges’ legal-professional habitus and a variety of other determinants, but I suggest that the practical requirement that liability be assigned between legal subjects is at least as constraining as judges’ legal-professional habitus, if not more so. More importantly, the legal form will typically produce determinate, capitalism-friendly decisions because the bilateral, practical-normative grammar of rights and individual responsibility gives juridical expression to a commodity-producing society, translating its impersonal and structural relations into relations among formally equal, autonomous persons.
