Capitalization and Social Inquiry

Members of the PERFORMABUSINESS research team are engaged today in a series of fieldwork investigations covering several project-related topics (more details on individual and joint research will be provided in the months to come). But the group’s research meetings provided recently also the opportunity to revisit in a new light one crucial element of contemporary business culture: capitalization–or, in other words, the pervasive use of discount methodologies for valuation in the context of capital investment.

The recent CRESC seminar on “How Methods Move in Markets”, held at the London Office of the Open University on March 30, 2012, provided an excellent opportunity for a first public presentation on the team’s proposals in that direction.

What is capitalization about? The reasoning and formulations introduced by pioneers of the theory of capital investment and interest rates such as Irving Fisher, the elaborations proposed by economists such as Franco Modigliani and Merton Miller, the practical evolution and diffusion of methods such as DCF (discounted cash flow) and WACC (weighted average cost of capital) are part of today’s global business culture. Compare the following rather counter-intuitive claim made by Fisher in 1907 with an ordinary encounter between a technology entrepreneur and a venture capitalist today:

“It is not because the orchard is worth $20,000 that the annual crop will be worth $1000, but it is because the annual crop is worth $1000 that the orchard will be worth $20,000. The $20,000 is the discounted value of the expected income of $1000 per annum; and in the process of discounting, a rate of interest of 5 per cent, is implied. In general, it is not because a man has $100 worth of property that he will get $5 a year, but it is because he will get that $5 a year that his property is worth $100. In short, when capital and income are measured in value, their causal connection is the reverse of that which holds true when they are measured in quantity. The orchard produces the apples; but the value of the apples produces the value of the orchard.” — I. Fischer, 1907, The Rate of Interest: Its Nature, Determination and Relation to Economic Phenomena, New York, MacMillan, p. 13-14.

How can this be studied from a sociological and anthropological perspective? This in an open question to which the PERFORMABUSINESS research team would like to contribute with a short programmatic collective publication, now in preparation.