Capital, profit and asset prices – a brief digression

9780199390632A nice description of the basis of financial profits under capitalism:

“In a capitalist economy, the prices of most assets are derived from the potential gains to be made from them. Thus, the price of land is based on the rent which it might afford, and as Ricardo long ago showed, this rent is itself based on the profit which might be made through the use of the land. Similarly, the price of equity is tied to the future profits of the issuing company. In this sense, assets such as these are the first derivatives of real capital, bets made by the buyer on its future outcomes. From this point of view, so-called “financial derivatives” are the second derivatives of capital. They are instruments whose value is based on the expected future price of some underlying asset or future outcome (such as the future price of some commodity or currency). These can take the form of insurance against undesired risk, or bets on future gains or losses. They can also be pyramided by making derivatives based on derivatives (ie., third and fourth derivatives of capital, and so on). The calculus of finance has many moments. The end result is an inverted pyramid, with real profits at its base and a rapidly widening volume of financial assets stacked upon it.”

Anwar Shaikh (2016), Capitalism – Competition, Conflict, Crises, Chapter 6, p.231

 

Advertisements

2 thoughts on “Capital, profit and asset prices – a brief digression

  1. What history seems to have shown is that whatever problems arise from the fundamental role of profits, abolishing profit-and-loss (they always go together) is not the way to get a grip on them. Understanding this is what made the social democrat victorious over the Marxist.

    Sheikh is a joy to read, not least because of his expertise in using Marxian methods and concepts to ferret out problems in the economic system.

    Reading his “Capitalism” is a must for every economist – thanks, Nick, for drawing my attention to the author and the book.

    • No problem, glad you have found Shaikh’s book useful. For those new to his thinking, he classes himself as working in the tradition of ‘classical’ economics, although much of his work seems to draw on Marxist thought. Smith and Ricardo feature too, but to a lesser degree. He also draws on the ideas of Keynes and Kalecki, although he is critical of post-Keynesian thinking in its neglect of the supply-side, as well as neo-classical thought with its concomitant neglect of demand. This is all very appealing to me, and seems to provide more understanding than one or the other. ‘Capitalism’ is a wonderful book, and well worth the effort to study.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s