Corporate finance and management accounting rest on three notions that the OPE does not admit as they are stated: capital expenditure (CAPEX), operating expenditure (OPEX) and the cost of capital. This appendix traces where each notion comes from, states what the OPE retains of it, and states what it rejects. Four sections follow the order of the doctrines; a synthesis closes the appendix. The propositions of Part II refer to these sections in footnotes.
The position in four statements. The four statements below govern the whole appendix.
Statement 1 — A price and a cost. The remuneration of a placement in capital is a price for the saver who supplies the service of placement, and a cost for the enterprise that buys this service (2.24). It enters the truly complete cost price, as the share of earnings that the target rate of return requires (11.10).
Statement 2 — Never an expense. The enterprise settles this cost by an allocation of its earnings, portion P (6.3), after the period and only when there are earnings. It belongs to no subtype of expense. Standard accounting states the same rule: distributions to holders of equity claims are not expenses (IASB, Conceptual Framework for Financial Reporting, 2018, § 4.69–4.70).
Statement 3 — A price formed in exchange. Its level is a price formed in exchange. Its reference is the sufficient level of the national average rate of profit, NARP (7.8, 10.3). It is neither the opportunity cost of the saver nor a risk premium.
Statement 4 — Two prices of two opposite placements. Interest is the price paid for the provision of credit and an expense of the borrower (10.1). Profit is the price of the service of placement in capital and an allocation of earnings (6.1, 6.3). Credit and capital are opposites in many respects (5.5): no single rate can average their prices.
Doctrine. In chapter 6 of his Principles of Political Economy and Taxation (3rd edition, 1821), Ricardo makes profits vary inversely with wages: they are "high or low in proportion as wages were low or high". Profit is what remains of the produce, on the land that pays no rent, once wages are paid. Its natural tendency is to fall, because of the diminishing returns of land. Profit is nonetheless the motive of accumulation: "the farmer and manufacturer can no more live without profit, than the labourer without wages". Ricardo’s moral charge falls on landlords, not on the owners of capital.
From the labor theory of value, Thomas Hodgskin (Labour Defended against the Claims of Capital, 1825) draws the right of labor to its whole produce. Marx completes the argument in the Theories of Surplus Value (1861–1863, chapter 16): Ricardo wrongly identified surplus value with profit; profit is a form of surplus value, that is, of unpaid labor. Within this subtype of doctrine, the remuneration of capital is a deduction from the product of labor.
What the OPE retains. The classical objectivity of prices. Profit as an objective necessity (6.4). The tendency towards the equalization of rates of return between sectors, pointed out by Smith, Say, Ricardo and Marx, which the OPE extends down to the direct rates of return of the same systemic level (11.9, 11.11). An inverse relation between the two kinds of income, at the macronomic scale only: total labor income is what remains of total income once total placement income has been formed (8.4).
What it rejects. Profit as a remainder: earnings and profits are not mere remainders; in forecasting, they are objectives (6.3). The order of the Ricardian relation is reversed: in the OPE, the price of capital is formed first and the remainder is total labor income (2.24, 8.4). The premise of spoliation falls with its foundation: labor as an expenditure of human energy is not a commodity (2.2), and the placement in capital is itself a service bought by the enterprise (2.24). Profit remunerates this service; it appropriates no product of labor.
Doctrine. The doctrine of opportunity cost (Wieser, 1876–1889; Green, 1894; Davenport, 1908; Knight, 1921) defines the cost of a use as the best alternative forgone. Irving Fisher (The Rate of Interest, 1907; The Theory of Interest, 1930) defines the value of capital as the present value of expected income, and interest as an index of the preference for the present. Marshall (Principles of Economics, 1890, book II, chapter 4, § 2) defines the "earnings of undertaking or management" as what remains of profits once interest on capital at the current rate has been deducted.
Combined, these three doctrines yield the notion that the funds of shareholders cost the enterprise what the shareholders forgo elsewhere. Marshall’s deduction is the ancestor of residual income, of economic profit and of the capital charge of EVA (section 4).
What the OPE retains. The comparison of the rate of profit with the rate of interest, both treated as prices. The publication of standardized rates of profit on capital, symmetrical to the annual percentage rate of charge of a credit (6.6), makes this comparison possible for every saver.
What it rejects. First, the point of view. The opportunity cost belongs to the saver: the absence of profit is a loss of income for the saver, and not in itself a loss (6.2). The cost of capital carries this opportunity cost of the saver into the cost structure of the enterprise. Second, the determination: a preference for the present, estimated subjectively, takes the place of a price formed in exchange (Statement 3). Third, Marshall’s deduction of interest from profit treats the two remunerations as homogeneous quantities, whereas one is the price of credit and the other the price of placement in capital (5.5).
Doctrine. David Durand (Costs of Debt and Equity Funds for Business, NBER, 1952) sets out the two methods of valuing a firm, net income and net operating income, and treats mixed financing as a problem of joint costs. Franco Modigliani and Merton Miller (The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, 1958) settle the question under the assumption of perfect capital markets.
Their Proposition I: the market value of a firm is independent of its capital structure, and so is its average cost of capital (p. 268). Their Proposition II: the expected yield of a share rises linearly with the debt-to-equity ratio (p. 271). Their Proposition III: the cut-off rate for investment is the capitalization rate of the class of firms, whatever the security issued to finance it (p. 288). Bonds and shares are claims on one and the same stream of operating income, and home-made leverage (p. 270) makes debt and equity interchangeable for the investor.
What the OPE retains. The theorem as a reference point: it states exactly what the OPE denies, and under which assumptions.
What it rejects. The interchangeability of credit and capital. Credit carries a repayment term, provides a receivable and earns a price fixed at the outset; capital carries no repayment term, provides ownership or co-ownership and earns a share of earnings that varies with results (5.5). A capital increase is a lasting contribution to production capacity; a loan is a temporary one (5.5). The equity ratio of an enterprise matters more than the amount of its capital (5.6): it is precisely the variable that Proposition I declares irrelevant. At the macronomic scale, the national average equity ratio, NAER, is a variable of economic policy (10.2), and the EPCE feedback runs through the national stock of capital, not through the stock of credit (7.1 to 7.6). Finally, the theorem values the firm at its market value, which places capital gains at the center; the Objective Political Economy measures the rate of return on equity (6.6, 6.7), the measure proper to yield capitalism.
Doctrine. The capital asset pricing model (CAPM; Sharpe, 1964; Lintner, 1965; Mossin, 1966) sets the required return on a share at the risk-free rate plus β times the market risk premium. The weighted average cost of capital (WACC) averages this cost of equity with the after-tax cost of debt, weighted by their market values. Economic value added (EVA; Stern Stewart; Stewart, The Quest for Value, 1991) deducts from net operating profit after tax a "capital charge" equal to WACC times capital employed; it descends from Marshall’s residual (section 2).
The accounting standard takes the opposite side. The Conceptual Framework for Financial Reporting of the IASB (2018) defines expenses as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims (§ 4.69). It follows that distributions to holders of equity claims are not expenses (§ 4.70). Treating the remuneration of equity as a cost to be deducted is therefore a construction of corporate finance, not an accounting practice.
What the OPE retains. The accounting standard, which it confirms (Statement 2). The rate of return on capital as the decisive ratio of management (8.6), which equimanagement extends to every enterprise within the enterprise (see the appendix Paul Fabra – Equimanagement).
What it rejects. Three operations. (a) Profit as a risk premium. In Capital for Profit (1991, chapter 6, p. 172), Paul Fabra treats profit as only secondarily the "recompense of risk". The asymmetry that matters lies in losses: a loss reduces the stock of capital, and only a new placement can erase it (6.2). (b) The average of two opposite prices in a single rate, the WACC (Statement 4). (c) The deduction of the remuneration of capital as if it were an expense, in order to measure a "creation of value": it contradicts both the accounting standard and Proposition 6.3. Market-value weights complete the shift towards capital gain capitalism.
Paul Fabra’s position. In Le capitalisme sans capital (2009, pp. 49–50), Fabra writes that funds contributed in capital "cost nothing" to the enterprise, and that profit can in no case be called a cost. The statement is exact in the accounting sense: profit is no expense. The Objective Political Economy does not retain it in the economic sense: the remuneration of capital is a cost for the enterprise that buys the service of placement (Statement 1).
The taxonomy of expenditure. Expenditure is the root type; it is partitioned, exhaustively and exclusively, into expense and investment (4.5, 4.7). An investment increases the stock of assets of the entity; an expense is a flow that increases no stock. The subtypes of investment are equipment, tangible or intangible, and placements held. The subtypes of expense are operating expenditures, depreciation, and finance costs, interest included (10.1). In an enterprise, the depreciation of equipment is an expense; in other entities, the relevant expense is debt amortization (4.7). Profit is a subtype of neither branch: it is an allocation of earnings, portion P (6.3).
CAPEX and OPEX. CAPEX corresponds to equipment expenditure, a subtype of investment; OPEX corresponds to operating expenditure, a subtype of expense. Three differences remain. The criterion of the Objective Political Economy is ontological, stock versus flow (4.2); the one-year threshold of practice is a bookkeeping convenience. CAPEX omits placements held, which are investments too (4.5). "Capital expenditure" uses capital in the sense of a fixed asset, whereas Proposition 5.1 reserves the term capital for permanent financing provided directly by savers: equipment expenditure is the term of the OPE, and CAPEX and OPEX remain external vocabulary.
Cross-reading. The table below sets each doctrine against the confusion it carries and the notion of the Objective Political Economy that resolves it.
| Doctrine | Confusion | Concept of the OPE |
|---|---|---|
| Ricardo (1821) | Profit as the remainder of the produce once wages are paid | Earnings and profit as objectives; total labor income as the macronomic remainder (6.3, 8.4) |
| Hodgskin, Marx | Profit as unpaid labor | Labor is not a commodity (2.2); placement in capital is a service bought by the enterprise (2.24) |
| Opportunity cost, Fisher | The saver’s forgone alternative carried into the enterprise’s costs | Absence of profit: a loss of income for the saver, not a loss (6.2); price formed in exchange, NARP (7.8) |
| Marshall (1890) | Interest deducted from profit as a homogeneous quantity | Credit and capital are opposites (5.5); interest is an expense (10.1), profit an allocation of earnings (6.3) |
| Durand, Modigliani–Miller | Debt and equity interchangeable; capital structure irrelevant | Equity ratio decisive (5.6); NAER as a variable of economic policy (10.2) |
| CAPM | Profit as a risk premium | Profit remunerates the service of placement; losses are asymmetric (6.2) |
| WACC | One average of two opposite prices | Two prices for two opposite placements (5.5, 10.1, 6.1) |
| EVA | Capital charge deducted as if it were an expense | Profit is no expense (6.3; IASB 2018, § 4.70); truly complete cost price derived from the target rate of return (11.10) |
| CAPEX / OPEX | Conventional capitalization rule; capital used for assets | Expenditure = Expense + Investment (4.5, 4.7); capital reserved for financing (5.1) |
Unified thesis. Each doctrine reviewed here treats the remuneration of placement in capital either as a remainder (Ricardo, Marx, Marshall) or as a cost of the same kind as interest, and hence as an expense (opportunity cost, Modigliani–Miller, CAPM, WACC, EVA). The OPE treats it as a price: formed in exchange, borne by the enterprise as a cost, and settled by an allocation of earnings.
Consequences for management accounting. The income statement standardized by the IASB needs no change. Management accounting budgets earnings as an objective derived from a target rate of return close to the NARP, and derives truly complete cost prices from it (11.10). Measures of a residual "value created" give way to the direct rates of return of the same systemic level, and to sufficient prices (11.11).
Macronomic consequences. Total placement income is formed first, at a sufficient level, and total labor income is the remainder (8.4). The growth of the national stock of capital, not that of the stock of credit, governs the growth of the stock of employment (7.1 to 7.6). A doctrine that makes debt and equity interchangeable, and that weights them at market values, pulls the national average equity ratio down and favors capital gain capitalism over yield capitalism (10.2).