Section C - What are the myths of capitalist economics?
C.1 What determines prices within capitalism?
C.1.1 What is wrong with this theory?
C.1.2 So what does determine prices?
C.1.3 What else effects price levels?
C.2 Where do profits come from?
C.2.1 Why does this surplus exist?
C.2.2 Are capitalists justified in appropriating a portion of
surplus value for themselves (i.e. making a profit)?
C.2.3 Why does innovation occur and how does it affect profits?
C.2.4 Wouldn't workers' control stifle innovation?
C.2.5 Aren't executives workers and so create value?
C.2.6 Is interest not the reward for waiting, and so isn't
C.2.7 But wouldn't the "time value" of money justify charging
interest in a more egalitarian capitalism?
C.3 What determines the distribution between profits and wages
C.4 Why does the market become dominated by Big Business?
C.4.1 How extensive is Big Business?
C.4.2 What are the effects of Big Business on society?
C.4.3 What does the existence of Big Business mean for economic
theory and wage labour?
C.5 Why does Big Business get a bigger slice of profits?
C.5.1 Aren't the super-profits of Big Business due to its higher
C.6 Can market dominance by Big Business change?
C.7 What causes the capitalist business cycle?
C.7.1 What role does class struggle play in the business cycle?
C.7.2 What role does the market play in the business cycle?
C.7.3 What role does investment play in the business cycle?
C.8 Is state control of money the cause of the business cycle?
C.8.1 Does this mean that Keynesianism works?
C.8.2 What happened to Keynesianism in the 1970s?
C.8.3 How did capitalism adjust to the crisis in Keynesianism?
C.9 Would laissez-faire policies reduce unemployment, as "free market"
C.9.1 Would cutting wages reduce unemployment?
C.9.2 Is unemployment caused by wages being too high?
C.9.3 Are "flexible" labour markets the answer to unemployment?
C.9.4 Is unemployment voluntary?
C.10 Will "free market" capitalism benefit everyone, *especially* the poor?
C.11 Doesn't Chile prove that the free market benefits everyone?
C.11.1 But didn't Pinochet's Chile prove that "economic freedom
is an indispensable means toward the achievement of
C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?
Section C - What are the myths of capitalist economics?
Within capitalism, economics plays an important ideological role. Economics
has been used to construct a theory from which exploitation and oppression
are excluded, by definition. We will attempt here to explain why capitalism
is deeply exploitative. Elsewhere, in section B, we have indicated why
capitalism is oppressive and will not repeat ourselves here.
In many ways economics plays the role within capitalism that religion
played in the Middle Ages, namely to provide justification for the dominant
social system and hierarchies (indeed, one neo-classical economist said that
"[u]ntil the econometricians have the answer for us, placing reliance upon
neo-classical economic theory is a matter of faith," which, of course, he
had [C. E. Ferguson, _The Neo-classical Theory of Production and Distribution_,
p. xvii]). Like religion, its basis in science is usually lacking and its
theories more based upon "leaps of faith" than empirical fact. In the
process of our discussion in this section we will often expose the
ideological apologetics that capitalist economics create to defend
the status quo and the system of oppression and exploitation it produces.
Indeed, the weakness of economics is even acknowledged by a few within the
profession itself. According to Paul Ormerod, "orthodox economics is in many
ways an empty box. Its understanding of the world is similar to that of the
physical sciences in the Middle Ages. A few insights have been obtained which
stand the test of time, but they are very few indeed, and the whole basis of
conventional economics is deeply flawed." Moreover, he notes the "overwhelming
empirical evidence against the validity of its theories." [_The Death of
Economics_, p. ix, p. 67]
It is rare to see an economist be so honest. The majority of economists
seem happy to go on with their theories, trying to squeeze life into the
Procrustean bed of their models. And, like the priests of old, make it
hard for non-academics to question their dogmas. As Ormerod notes,
"economics is often intimidating. Its practitioners. . . have erected
around the discipline a barrier of jargon and mathematics which makes
the subject difficult to penetrate for the non-initiated." [Op. Cit.,
So here we try to get to the heart of modern capitalism, cutting through
the ideological myths that supporters of the system have created around
it. Here we expose the apologetics for what they are, expose the ideological
role of economics as a means to justify, indeed ignore, exploitation and
oppression. As an example, let us take a workers wage.
For most capitalist economics, a given wage is supposed to be equal to the
"marginal contribution" that an individual makes to a given company. Are
we *really* expected to believe this? Common sense (and empirical
evidence) suggests otherwise. Consider Mr. Rand Araskog, the CEO of ITT,
who in 1990 was paid a salary of $7 million. Is it conceivable that an
ITT accountant calculated that, all else being the same, ITT's $20.4
billion in revenues that year would have been $7 million less without Mr.
Araskog -- hence determining his marginal contribution to be $7 million?
In 1979 the average CEO in the US received 29 times more income than the
average manufacturing worker; by 1985 the ratio had risen to 40 times
more, and by 1988 it had risen to 93 times more. This disturbing trend led
even conservative _Business Week_ to opine that the excesses of corporate
leaders might finally be getting out of hand [Kevin Phillips, _The
Politics of Rich and Poor: Wealth and the American Electorate in the
Reagan Aftermath_, p. 180]. The warning apparently went unheeded, however,
because by 1990 the average American CEO was earning about 100 times more
than the average factory worker [Tom Athanasiou, "After the Summit,"
_Socialist Review_ 92/4 (October-December, 1992)]. Yet during the same
period, workers' real wages remained flat. Are we to believe that during
the 1980s, the marginal contribution of CEOs more than tripled whereas
workers' marginal contributions remained stagnant?
Taking another example, if workers create only the equivalent of what they
are paid, how can that explain why, in a recent ACM study of wages in the
computer fields, it was found that black workers get paid less (on average)
than white ones doing the same job (even in the same workplace)? Does having
white skin increase a worker's creative ability when producing the same goods?
And it seems a strange coincidence that the people with power in a company,
when working out who contributes most to a product, decide it's themselves!
So what is the reason for this extreme wage difference? Simply put, it's
due to the totalitarian nature of capitalist firms. Those at the bottom
of the company have no say in what happens within it; so as long as the
share-owners are happy, wage differentials will rise and rise (particularly
when top management own large amounts of shares!). (The totalitarian nature
of private property has been discussed earlier -- see section B.4).
A good manager is one who reduces the power of the company's employees,
allowing an increased share of the wealth produced by those employees to
go to those on top. Yet without the creativity and energy of the engineers,
the shop floor workers, the administrative staff, etc., the company would
have literally *nothing* to sell.
It is capitalist property relations that allow this monopolisation of
wealth by those who own (or boss) but do not produce. The workers do not
get the full value of what they produce, nor do they have a say in how
the surplus value produced by their labour gets used (e.g. investment
decisions). Others have monopolised both the wealth produced by workers
and the decision-making power within the company. This is a private
form of taxation without representation, just as the company is a
private form of statism.
Of course, it could be argued that the owning class provide the capital
without which the worker could not produce. But where does capital come
from? From profits, which represent the unpaid labour of past generations.
And before that? From the tribute of serfs to their feudal masters. And
before that? The right of conquest which imposed feudalism on the peasants.
And before that? Well, the point is made. Every generation of property
owners gets a "free lunch" due to the obvious fact that we inherit the
ideas and constructions of past generations, such as our current notion
of property rights. Capitalism places the dead hand of the past on living
generations, strangling the individuality of the many for the privilege of
the few. Whether we break free of this burden and take a new direction
depends on the individuals who are alive *now.*
In the sections that follow, the exploitative nature of capitalism is
explained in greater detail. We would like to point out that for anarchists,
exploitation is not more important than domination. Anarchists are opposed
to both equally and consider them to be two sides of the same coin. You
cannot have domination without exploitation nor exploitation without
domination. As Emma Goldman pointed out, under capitalism:
"Man is being robbed not merely of the products of his labour, but of the
power of free initiative, of originality, and the interest in, or desire
for, the things he is making." [_Red Emma Speaks_, p. 53]
C.1 What determines price within capitalism?
Supporters of capitalism usually agree with what is called the Subjective
Theory of Value (STV), as explained by most mainstream economic textbooks.
This system of economics is usually termed "marginalist" economics, for
reasons which will become clear.
In a nutshell, the STV states that the price of a commodity is determined
by its marginal utility to the consumer and producer. Marginal utility is
the point, on an individual's scale of satisfaction, at which his/her desire
for a good is satisfied. Hence price is the result of individual, subjective
evaluations within the marketplace. One can easily see why this theory
could be appealing to those interested in individual freedom.
However, the STV is a myth. Like most myths, it does have a grain of
truth in it. But as an explanation of how to determine the price of a
commodity, it has serious flaws.
The kernel of truth is that individuals, groups, companies, etc. do
indeed value goods and consume/produce them. The rate of consumption,
for example, is based on the use-value of goods to the users (although
whether some one buys a product is affected by price and income
considerations, as we will see). Similarly, production is determined
by the utility to the producer of supplying more goods. The use-value
of a good is a highly subjective evaluation, and so varies from case
to case, depending on the individual's taste and needs. As such it
has an *effect* on the price, as will be shown, but as the means
to *determine* a product's price it ignores the dynamics of a
capitalist economy and the production relations that underlie the
market. In effect, the STV treats all commodities like works of
art, and such products of human activity (due to their uniqueness)
are *not* a capitalistic commodity in the usual sense of the word
(i.e. they cannot be reproduced and so labour cannot increase their
quantity). Therefore the STV ignores the nature of production under
capitalism. This is what will be discussed in the following sections.
Of course, modern economists try and portray economics as a "value-free
science." Of course, it rarely dawns on them that they are usually just
taking existing social structures and the economic dogmas build round them
for granted and so justifying them. As Kropotkin pointed out:
"[A]ll the so-called laws and theories of political economy are in reality
no more than statements of the following nature:
'Granting that there are always in a country a considerable number of people
who cannot subsist a month, or even a fortnight, without accepting the
conditions of work imposed upon them by the State, or offered to them by
those whom the State recognises as owners of land, factories, railways,
etc., then the results will be so and so.'
"So far middle-class political economy has been only an enumeration of
what happens under the just-mentioned conditions -- without distinctly
stating the conditions themselves. And then, having described *the facts*
which arise in our society under these conditions, they represent to us
these facts as rigid, *inevitable economic laws.*" [_Kropotkin's
Revolutionary Pamphlets_, p. 179]
In other words, economists usually take the political and economic
aspects of capitalist society (such as property rights, inequality
and so on) as given and construct their theories around it. Marginalism,
in effect, took the "political" out of "political economy" by taking
capitalist society for granted along with its class system, its
hierarchies and its inequalities. By concentrating on individual
choices they abstracted from the social system within which such
choices are made and what influences them. Indeed, the STV was built
upon abstracting individuals from their social surroundings and
generating economic "laws" applicable for all individuals, in all
societies, for all times. This results in all concrete instances,
no matter how historically different, being treated as expressions
of the same universal concept. Thus, in neo-classical economics,
wage-labour becomes labour, capital becomes the means of production,
the labour process becomes a production function, acquisitive behaviour
becomes human nature. In this way the uniqueness of contemporary
society, namely its basis in wage labour, is ignored ("The period
through which we are passing . . . is distinguished by a special
characteristic -- WAGES." [Proudhon, _System of Economical
Contradictions_, p. 199]) and what is specific to capitalism
is universalised and made applicable for all time. Such a perspective
cannot help being ideological rather than scientific. By trying to
create a theory applicable for all time (and so, apparently, value
free) they just hide the fact their theory justifies the inequalities
of capitalism. As Edward Herman points out:
"Back in 1849, the British economist Nassau Senior chided those
defending trade unions and minimum wage regulations for expounding
an 'economics of the poor.' The idea that he and his establishment
confreres were putting forth an 'economics of the rich' never
occurred to him; he thought of himself as a scientist and
spokesperson of true principles. This self-deception pervaded
mainstream economics up to the time of the Keynesian Revolution
of the 1930s. Keynesian economics, though quickly tamed into an
instrument of service to the capitalist state, was disturbing in
its stress on the inherent instability of capitalism, the tendency
toward chronic unemployment, and the need for substantial
government intervention to maintain viability. With the resurgent
capitalism of the past 50 years, Keynesian ideas, and their
implicit call for intervention, have been under incessant attack,
and, in the intellectual counterrevolution led by the Chicago
School, the traditional laissez-faire ('let-the-fur-fly')
economics of the rich has been reestablished as the core of
mainstream economics." [_The Economics of the Rich_]
Herman goes on to ask "[w]hy do the economists serve the rich?" and
argues that "[f]or one thing, the leading economists are among the rich,
and others seek advancement to similar heights. Chicago School economist
Gary Becker was on to something when he argued that economic motives
explain a lot of actions frequently attributed to other forces. He of
course never applied this idea to economics as a profession . . ."
[Ibid.] There are a great many well paying think tanks, research posts,
consultancies and so on that create an "'effective demand' that should
elicit an appropriate supply resource." [Ibid.]
The introduction of marginalism and its acceptance as "orthodoxy" served,
and serves in the present, to divert serious attention from the most
critical questions facing working people (for example, what goes on
in production, how authority relations impact on society and in the
workplace). Rather than looking to how things are produced, the conflicts
generated in the production process and the generation/division of surplus,
marginalism took what was produced as given, as well as the capitalist
workplace, the division of labour and authority relations and so on.
Theories can pursue truth or serve vested interests. In the later capacity
they will incorporate only concepts suited to attaining the results desired.
An economic theory, for example, may highlight profits, quantities of output,
amount of investment, and prices, and leave out class struggle, alienation,
hierarchy and bargaining power. Then the theory will serve capitalists, and,
since capitalists pay economists' wages and endow their universities,
economists and their students who comply, will benefit as well.
General equilibrium analysis and marginalism is made to order for
the ruling class. Marginalism ignores the question of production and
concentrates on exchange. It argues that any attempt by working people
to improve their position in society (by, for example, unions) is
counter-productive, it preaches that "in the long run" everyone will
be better off and so present day problems are irrelevant (and any
attempt to fix them counterproductive) and, of course, the capitalists
are entitled to their profits, interest payments and rent. The utility
of such a theory is obvious. An economic theory that justifies
inequality, "proves" that profits, rent and interest are not exploitative
and argues that the economically powerful be given free reign will have
more use-value ("utility") to the ruling class than those that do not.
In the market place of ideas, it is these which will satisfy the demand
and become intellectually "respectable."
Of course, not all supporters of capitalist economics are rich (although
most desire to become so). Many do believe its claims that capitalism
is based upon freedom and that the profits, interest and rent represent
"rewards" for services provided rather than resulting from the exploitation
generated by hierarchical workplaces and social inequality. However, before
tackling the question of profits, interest and rent we must first discuss
why the STV is wrong.
C.1.1 So what is wrong with this theory?
The first problem in using marginal utility to determine price is that it
leads to circular reasoning. Prices are supposed to measure the "marginal
utility" of the commodity, yet consumers need to know the price *first* in
order to evaluate how best to maximise their satisfaction. Hence subjective
value theory "obviously rest[s] on circular reasoning. Although it tries to
explain prices, prices [are] necessary to explain marginal utility." [Paul
Mattick, _Economics, Politics and the Age of Inflation_, p.58] In the
end, as Jevons (one of the founders of marginalism) acknowledged, the
price of a commodity is the only test we have of the utility of the
commodity to the producer. Given that marginality utility was meant
to explain those prices, the failure of the theory could not be more
Secondly, consider the definition of equilibrium price. Equilibrium price
is the price for which the quantity demanded is precisely equal to the
quantity supplied. At such a price there is no incentive for either
demanders or suppliers to alter their behaviour.
Why does this happen? The subjective theory cannot really explain why
*this* price is the equilibrium price, as opposed to any other. This is
because the STV ignores that an objective measure is required upon which
to base "subjective" evaluations within the market. The consumer, when
shopping, requires prices in order to allocate their money to best
maximise their "utility" (and, of course, the consumer faces prices
on the market, the very thing marginal utility theory was meant to
explain!). And how does a company know it is making a profit unless
it compares the market price with the production costs of the commodity
it produces? As Proudhon put it, "[i]f supply and demand alone determine
value, how can we tell what is an excess and what is a sufficiency? If
neither cost, nor market price, nor wages can be mathematically determined,
how is it possible to conceive of a surplus, a profit?" [_System of
Economical Contradictions_, p. 114] This objective measure can only
be the actual processes of production within capitalism, production
which is for profit. The implications of this are important when
discovering what determines price within capitalism, as will be
discussed in the next section (C.1.2 - So what does determine price?).
The early marginalists were aware of this problem and argued that price
reflected the utility at the "margin" (Jevons, one of the founders of the
marginalist school, argued that the "final degree of utility determines
value"); but what determined the position of the margin itself? This is
fixed by the available supply ("Supply determines final degree of utility"
-- Jevons); but what determines the level of supply? ("Cost of production
determines supply" -- Jevons). In other words, price is dependent on marginal
utility, which is dependent on supply, which is dependent on the cost of
production. In other words, ultimately on an *objective* measure (supply or
cost of production) rather than subjective evaluations! This is unsurprising
because before you can consume ("subjectively value") something on the market,
it has to be produced. It is the process of production that rearranges matter
and energy from less useful to more useful (to us) forms. Which brings us
straight back to production and the social relations which exist within a
given society -- and the political dangers of defining (exchange) value
in terms of labour (see next section). After all, the individual does not
just face a given supply on the market, they also face prices, including
the costs associated with production and profit taking.
As the whole aim of marginalism was to abstract away from production (where
power relations are clear) and concentrate on exchange (where power works
indirectly), it is unsurprising that early marginal utility value theory
was quickly abandoned. The continued discussion of "utility" in economics
textbooks is primarily heuristic. First the neo-classical economists used
measurable (cardinal) "utility" (i.e. that utility was the same for all)
but that caused political problems (as cardinal utility implied that the
"utility" of an extra dollar to a poor person was clearly greater than the
loss of one dollar to a rich man and this obviously justified redistribution
polities). When this was recognised (along with the obvious fact that
cardinal utility was impossible in practice) utility became "ordinal"
(i.e. utility was an individual thing and so could not be measured). Then
even ordinal utility was abandoned as cross-personal utilities were not comparable and so objective prices could be derived from it (which was
Adam Smith's argument and which lead him to develop a *labour* theory
of value rather than one based on utility, or use value). With the
abandonment of "ordinal" utility, mainstream economics gave up even
thinking about individual preferences in those terms. This means that
modern economics does not have a value theory at all -- and without a
value theory, the claim that the workings of capitalism will benefit all
or its outcome will realise individual preferences has no rational
Thus utility theory was gradually deprived of all its bite and reduced
from cardinal to ordinal utility and from ordinal utility to 'revealed
preference.' This retreat from cardinal utility (patently dreamland)
to ordinal utility (distinction without a difference) to "revealed
preferences" (the naked tautology -- consumers maximise total utility
as "revealed" in the structures of spending or, consumers maximise what
they maximise) was but one of the many retreats made among the marginalists
as their contrived core assumptions were exposed to simple but penetrating
While ignoring "utility" theory of value, most mainstream economics
accept the notions of "perfect competition" and (Walrasian) "general
equilibrium" which were part and parcel of it. Marginalism attempted to
show, in the words of Paul Ormerod, "that under certain assumptions the
free market system would lead to an allocation of a given set of resources
which was in a very particular and restricted sense optimal from the point
of view of every individual and company in the economy." [_The Death
of Economics_, p. 45] This was what Walrasian general equilibrium proved.
However, the assumptions required prove to be somewhat unrealistic (to
understate the point). As Ormerod points out:
"[i]t cannot be emphasised too strongly that . . . the competitive model
is far removed from being a reasonable representation of Western
economies in practice. . . [It is] a travesty of reality. The world
does not consist, for example, of an enormous number of small firms,
none of which has any degree of control over the market . . . The
theory introduced by the marginal revolution was based upon a series
of postulates about human behaviour and the workings of the economy.
It was very much an experiment in pure thought, with little empirical
rationalisation of the assumptions."
Indeed, "the weight of evidence" is "against the validity of the model
of competitive general equilibrium as a plausible representation of
reality." [Op. Cit., p. 48, p. 62] For example, oligopoly and imperfect competition have been abstracted from so that the theory does not allow
one to answer interesting questions which turn on the asymmetry of
information and bargaining power among economic agents, whether due
to size, or organisation, or social stigmas, or whatever else. In the
real world, oligopoly is common place and asymmetry of information and
bargaining power the norm. To abstract from these means to present an
economic vision at odds with the reality people face and, therefore,
can only propose solutions which harm those with weaker bargaining
positions and without information. In addition, the model is set in a
timeless environment, with people and companies working in a world
where they have perfect knowledge and information about the state of
the market. A world without a future and so with no uncertainty (any
attempt to include time, and so uncertainty, ensures that the model
ceases to be of value). Thus model cannot easily or usefully account
for the reality that economic agents do not actually know such things
as future prices, future availability of goods, changes in production
techniques or in markets to occur in the future, etc. Instead, to
achieve its results -- proofs about equilibrium conditions -- the model
assumes that actors have perfect knowledge at least of the probabilities
of all possible outcomes for the economy. The opposite is the case in
In this timeless, perfect world, "free market" capitalism will prove
itself an efficient method of allocating resources and all markets will
clear. In part at least, General Equilibrium Theory is an abstract answer
to an abstract and important question: Can an economy relying only on
price signals for market information be orderly? The answer of general
equilibrium is clear and definitive -- one can describe such an economy
with these properties. However, no actual economy has been described and,
given the assumptions involved, no such economy could ever exist. An
theoretical question has been answered involving some amount of
intellectual achievement, but it is a answer which has no bearing to
reality. And this is often termed the "high theory" of equilibrium.
Obviously most economists must treat the real world as a special case.
Thus General Equilibrium theory analyses an economic state which
there is no reason to suppose will ever, or have ever, come about.
It is, therefore, an abstraction which has no discernible applicability
or relevance to the world as it is. To argue that it can give insights
into the real world is ridiculous. As mainstream economic theory begins
with axioms and assumptions and uses a deductivist methodology to
arrive at conclusions, its usefulness in discovering how the world
works is limited. Firstly, as we note in section F.1.3, the deductive
method is *pre-scientific* in nature. Secondly, the axioms and
assumptions can be considered fictitious (as they have negligible
empirical relevance) and the conclusions of deductivist models can
only really have relevance to the structure of those models as the
models themselves bear no relation to economic reality. While it is
true that there are certain imaginary intellectual problems for which
the general equilibrium model is well designed to provide precise
answers (if anything really could), in practice this means the
same as saying that if one insists on analysing a problem which
has no real world equivalent or solution, it may be appropriate
to use a model which has no real-world application. Models derived
to provide answers to imaginary problems will be unsuitable for
resolving practical, real-world economic problems or even providing a
useful insight into how capitalism works and develops. In the words
of noted left-wing economist Nicholas Kaldor, "equilibrium theory
has reached the stage where the pure theorist has successfully
(though perhaps inadvertently) demonstrated that the main implications
of this theory cannot possibly hold in reality, but has not yet
managed to pass his message down the line to the textbook writer
and to the classroom." Little wonder, then, that his "basic objection
to the theory of general equilibrium is not that it is abstract --
all theory is abstract and must necessarily be so since there can
be no analysis without abstraction -- but that it starts from the
wrong kind of abstraction, and therefore gives a misleading
'paradigm' . . . of the world as it is; it gives a misleading
impression of the nature and the manner of operation of economic
forces." [_The Essential Kaldor_, p. 377 and p. 399]
There is a more realistic neo-classical notion of equilibrium called "partial"
equilibrium theory (developed by Alfred Marshall). "Time" is included via
Alfred Marshall's notion of equilibrium existing in various runs. The most
important of Marshall's concepts are "short run" and "long run" equilibrium.
However, this is just comparing one static (ideal) state with another.
Marshall treated markets "one at a time" (hence the expression "partial
equilibrium") with "all other things being equal" -- the assumption being
that the rest of the economy is unchanged! This theory confuses the
comparison of possible alternative equilibrium positions with the analysis
of a process taking place through time, i.e. historical events are introduced
into a timeless picture. In other words, time as the real world knows it
does not exist. In the real world, any adjustment takes a certain time to
complete and events may occur that alter equilibrium. The very process of
moving has an effect upon the destination and so there is no such thing
as a position of long-run equilibrium which exists independently of the
course which the economy is following. Marshall's assumptions of "one
market at a time" and "all other things equal" ensure that the concept
of time is as foreign to "partial" equilibrium as it is to "general"
So much of mainstream economics is based upon theories which have little
or no relation to reality. The aim of marginality utility theory was to
show that capitalism was efficient and that everyone benefits from it
(it maximises utility, in the limited sense imposed by what is available
on the market, of course). This was what perfect competition was said to
prove. But perfect competition is impossible. And as perfect competition
is itself an assumption of marginal utility, we might expect the theory
to have been abandoned at this point. Instead, the contradiction was
swept under the carpet.
In addition, like most religions, neo-classical economics cannot be
scientifically tested. This is because the perfect competition model
makes no falsifiable predictions whatsoever. As Martin Hollis
and Edward Nell argue:
"Indeed the whole idea of testing the marginal analysis is absurd. For
what could a test reveal? Negative results show only that the market is
defective. Various interpretations can be given . . . But one interpretation
is not possible -- that the marginal analysis has been refuted. . . . To
generalise the point, marginalist statements to the effect that, if the
assumptions of Positive micro-economics hold, then so-and-so will happen,
are tautologies and their consequences are simply logical deductions from
their protases. . . the model is untestable." [_Rational Economic Man_,
In other words, if a prediction of marginalist economics does not hold
all we can draw from the test is that perfect competition was not in
existence. The theory cannot be disproven, no matter now much evidence
is gathered against it. In addition, there are other useful techniques
which can be used in defending the neo-classical ideology from empirical
evidence. For example, neo-classical economics maintains that production
is marked by diminishing returns to scale. Any empirical evidence that
suggests otherwise can be dismissed simply because, obviously, the scale
is not large enough -- *eventually* returns will decrease with size.
Similarly, the term "in the long run" can work wonders for the ideology.
For if the claimed good results of a given policy do not materialise
for anyone bar the ruling class, then, rather than blame the ideology,
the time scale can be the culprit (in the long run, things will turn out
for the best -- unfortunately for the majority, the long run has not arrived
yet, but it will; until then you will have to make sacrifices for your future
gains...). Obviously with such an "analysis" anything can be proven.
Little wonder Nicholas Kaldor argued that:
"The Walrasian [i.e. general] equilibrium theory is a highly developed
intellectual system, much refined and elaborated by mathematical economists
since World War II -- an intellectual experiment . . . But it does not
constitute a scientific hypothesis, like Einstein's theory of relativity
or Newton's law of gravitation, in that its basic assumptions are
axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be
tested. The assumptions make assertions about reality in their
implications, but these are not founded on direct observation,
and, in the opinion of practitioners of the theory at any rate,
they cannot be contradicted by observation or experiment." [Op. Cit.,
Marginalism, however, in spite of these slight problems, did serve
a valuable ideological function. It removed the appearance of exploitation
from the system, justifies giving business leaders the "freedom" to
operate as they liked and portrayed a world of harmony between the
owners of factors. Hence its general acceptance within economics. In
other words, it justified the mentality of "what is profitable is right"
and removed politics and ethics from the field of economics. Moreover,
the theory of "perfect competition" (regardless of its impossibility)
allowed economists to portray capitalism as optimal, efficient and the
satisfier of individual desires. And this is important, for without the
assumption of equilibrium, market transactions need not benefit all. Indeed,
it may lead to the tyranny of the fortunate over the unfortunate, with the
majority facing a series of dismal choices between the lessor of a group
of evils. Of course, *with* the assumption of equilibrium, reality must
be ignored. So capitalist economics is between a rock and a hard place.
All in all, the world assumed by neo-classical economics is not the one
we actually live in, and so applying that theory is both misleading and
(usually) disastrous (at least to the "have-nots").
Some pro-"free market" capitalist economists (such as those in the right-wing
"Austrian school") reject the notion of equilibrium completely and embrace a
dynamic model of capitalism. While being far more realistic than mainstream
neo-classical theory, this method abandons the possibility of demonstrating
that the market outcome is in any sense a realisation of the individual
preferences of whose interaction it is an expression. It has no way of
establishing the supposedly stabilising character of entrepreneurial
activity or its alleged socially beneficial character. Indeed, entrepreneurial
activity tends to disrupt markets (particularly labour markets) *away*
from equilibrium (i.e. the full use of available resources) rather than
towards it. In other words, the dynamic process could lead to a divergence
rather than a convergence of behaviour and so to increased unemployment,
a reduction in the *quality* of available choices available from which
to maximise your "utility" and so on. A dynamic system need not be
self-correcting, particularly in the labour market, nor show any sign
of self-equilibrium (i.e. be subject to the business cycle). Ironically
enough, economists of this school often maintain that while equilibrium
cannot be reached the labour market will experience full employment under
"free market" or "pure" capitalism. That this condition is one of equilibrium
does not seem to cause them much concern. Thus we find von Hayek, for
example, arguing that the "cause of unemployment . . . is a deviation
of prices and wages from their equilibrium position which would establish
itself with a free market and stable money" and that "the deviation of
existing prices from that equilibrium position . . . is the cause of the
impossibility of selling part of the labour supply." [_New Studies_, p. 201]
Therefore, we see the usual embrace of equilibrium theory to defend
capitalism against the evils it creates even by those who claim to know
better. Perhaps this is a case of political expediency, allowing the
ideological supporters of free market capitalism to attack the notion
of equilibrium when it clearly clashes with reality but being able
to return to it when attacking, say, trade unions, welfare programmes
and other schemes which aim to aid working class people against the
ravages of the capitalist market?
These supporters of capitalism stress "freedom" -- the freedom of individuals
to make their own decisions. And who can deny that individuals, when free to
choose, will pick the option they consider best for themselves? However,
what this praise for individual freedom ignores is that capitalism often
reduces choice to picking the lesser of two (or more) evils due to the
inequalities it creates (hence our reference to the *quality* of the
decisions available to us). The worker who agrees to work in a sweatshop
does "maximise" her "utility" by so doing -- after all, this option is
better than starving to death -- but only an ideologue blinded by
capitalist economics will think that she is free or that her decision
is not made under (economic) compulsion. In other words, this idealisation of
freedom through the market completely ignores the fact that this freedom
can be, to a large number of people, very limited in scope. Moreover, the
freedom associated with capitalism, as far as the labour market goes, becomes
little more than the freedom to pick your master. All in all, this defence
of capitalism ignores the existence of economic inequality (and so power)
which infringes the freedom and opportunities of others (for a fuller
discussion of this, see section F.3.1). Social inequalities can ensure
that people end up "wanting what they get" rather than "getting what they
want" simply because they have to adjust their expectations and behaviour
to fit into the patterns determined by concentrations of economic power.
This is particularly the case within the labour market, where sellers of
labour power are usually at a disadvantage when compared to buyers due
to the existence of unemployment (see sections B.4.3, C.7 and F.10.2).
Which brings us to another problem associated with marginalism, namely
the distribution of resources within society. Market demand is usually
discussed in terms of tastes, not in the distribution of purchasing power
required to satisfy those tastes. So, as a method of determining price,
marginal utility ignores the differences in purchasing power between
individuals and assumes the legal fiction that corporations are individual
persons (income distribution is taken as a given). Those who have a lot of
money will be able to maximise their satisfactions far easier than those
who have little. Also, of course, they can out-bid those with less money.
If, as many right-"Libertarians" say, capitalism is "one dollar, one vote,"
it is obvious whose values are going to be reflected most strongly in the
market. This is why orthodox economists make the convenient assumption of
a 'given distribution of income' when they try to show the best allocation
of resources is the market based one.
In other words, under capitalism, it is not "utility" as such that is
maximised, rather it is "effective" utility (usually called "effective
demand") -- namely utility that is backed up with money. The capitalist
market places (or rather, the owning class in such a system places) value
(i.e. prices) on things according to the effective demand for them.
"Effective demand" is people's desires weighted by their ability to pay.
So, the market counts the desires of affluent people as more important
than the desires of destitute people. And so capitalism skews consumption
away from satisfying the "utility" of those most in need and into satisfying
the needs of the wealthy few first. This does not mean that the needs of
the many will not be meet (usually, but not always, they are to some
degree), it means that for any given resource those with money can
out-bid those with less -- regardless of the human cost. As the pro-free
market capitalism economist Von Hayek argued the "[s]pontaneous order
produced by the market does not ensure that what general opinion regards
as more important needs are always met before the less important ones."
[_The Essential Hayek_, p. 258] Which is just a polite way of referring to
the process by which millionaires build a new mansion while thousands
are homeless or live in slums, feed luxury food to their pets will humans
go hungry or when agribusiness grow cash crops for foreign markets while
the landless starve to death (see also section I.4.5). Needless to say,
marginalist economics justifies this market power and its results.
In summary, neo-classical economics shows the viability of an unreal
system and this is translated into assertions about the world that we
live in until most people just accept that reality reflects the model
(rather than vice versa, as it should but does not in neo-classical
theory). Moreover, and even worse, policy decisions will be enacted
based on a model which has no bearing in reality -- with disastrous
results (for example, the rise and fall of Monetarism -- see section
C.8). In addition, it justifies (when not ignoring) hierarchical
structures and massive inequalities in wealth and bargaining power
in society, which make a mockery of individual freedom (see section
F.3.1 for details). It serves the interests of those with power and
wealth in modern society as well as the aims of a soul-destroying,
world-polluting commercial system by deprecating the importance of
aesthetic, humane and, indeed, human factors in economic decision
making. Indeed, the mere suggestion that people should be placed
before (never mind instead of) profits would produce a fit. Starting
from a false premise, marginalism ends up negating its own stated
ideals -- rather than being the economics of individual freedom
it becomes the means of justifying restrictions and negations of
So, if the STV is flawed, what does determine prices? Obviously, in the
short term, prices are heavily influenced by supply and demand. If demand
exceeds supply, the price rises and vice versa. This truism, however, does
not answer the question. The answer lies in production and in the social
relationships generated there. This is discussed in the next section.
C.1.2 So what does determine price?
The key to understanding prices lies in understanding that production
under capitalism has as its "only aim . . . to increase the profits of
the capitalist." [Peter Kropotkin, _Kropotkin's Revolutionary Pamphlets_,
p. 55] In other words, profit is the driving force of capitalism. Once
this fact and its implications are understood, the determination of
price is simple and the dynamics of the capitalist system made clearer.
The price of a capitalist commodity will tend towards its *production
price* in a free market, production price being the sum of production
costs plus average profit rates (the average profit rate, we should
note, depends upon the ease of entry into the market, see below).
Consumers, when shopping, are confronted by given prices and a
given supply. The price determines the demand, based on the
use-value of the product to the consumer and his/her financial
situation. If supply exceeds demand, supply is reduced (either by
firms reducing production or by firms closing and capital moving
to other, more profitable, markets) until an average *rate of profit*
is generated (although we must stress that investment decisions are
difficult to reverse and this means mobility can be reduced, causing
adjustment problems -- such as unemployment -- within the economy).
The *rate of profit* is the amount of profit divided by the total
capital invested (i.e. constant capital -- means of production --
and variable capital -- wages and slavery). If the given price
generates above-average profits (and so profit rate), then capital
will try to move from profit-poor areas into this profit-rich area,
increasing supply and competition and so reducing the price until
an average rate of profit is again produced (we stress *try to* as
many markets have extensive barriers to entry which limit the mobility
of capital and so allow big business to reap higher profit rates -- see
section C.4). So, if the price results in demand exceeding supply, this
causes a short term price increase and these extra profits indicate to
other capitalists to move into this market. The supply of the commodity
will tend to stabilise at whatever level of the commodity is demanded
at the price which produces average profit rates (this level being
dependent on the "degree of monopoly" within a market -- see
section C.5). This profit level means that suppliers have no
incentive to move capital into or out of that market. Any change
from this level in the long term depends on changes on the production
price of the good (lower production prices meaning higher profits,
indicating to other capitalists that the market could be profitable
for new investment).
As can be seen, this theory (often called the _Labour Theory of Value_ --
or LTV for short) does not deny that consumers subjectively evaluate goods
and that this evaluation can have a short term effect on price (which
determines supply and demand). Many right-"libertarian" and mainstream
economists assert that the labour theory of value removes demand from the
determination of price. A favourite example is that of the "mud pie"
-- if it takes the same labour as an apple pie to make, they ask,
surely it has the same value (price)? These assertions are incorrect
as the LTV bases itself on supply and demand and seeks to explain the
dynamics of prices and so recognises (indeed bases itself on the
fact) that individuals make their own decisions based upon their
subjective needs (in the words of Proudhon, "utility is the necessary
condition for exchange." [_System of Economical Contradictions_,
p. 77]). What the LTV seeks to explain is price (i.e. *exchange* value)
-- and a good can only have an exchange value if others desire it (i.e.
has a use value for them and they seek to *exchange* money or goods
for it). Thus the example of the "mud pie" is a classic straw man
argument -- the "mud pie" does not have an exchange value as it has
no use value to others and is not subject to exchange. In other words,
if a commodity cannot be exchanged, it cannot have an *exchange* value
(and so price). As Proudhon argued, "nothing is exchangeable if it be
not useful." [Op. Cit., p. 85]
The LTV is based upon the insight that without labour nothing would be
produced and you have to produce something before you can exchange it
(or you can steal it, as in the case of land). As the utility (i.e. use
value) of a commodity cannot be measured, labour is the basis of (exchange)
value. The LTV bases itself on the objective needs of production and
recognises the key role labour plays (directly and indirectly) in the
creation of commodities. However, this does not mean that value exists
independently of demand. Far from it -- as noted, in order to have an
exchange value, a good must be desired by someone other than its maker
(or the capitalist who employs the maker), it must have a use-value for
them (in other words, it is subjectively valued by them). Therefore
workers produce that which has (use) value, as determined by the demand,
and the costs of production involved in creating these use-values help
determine the price (its exchange value) along with profit levels.
Therefore the LTV includes the element of truth of "subjective" theory
while destroying its myths. For, in the end, the STV just states that
"prices are determined marginal utility; marginal utility is measured
by prices. Prices . . . are nothing more or less than prices.
Marginalists, having begun their search in the field of subjectivity,
proceeded to walk in a circle." [Allan Engler, _Apostles of Greed_,
p. 27] The LTV, on the other hand, bases itself on the objective
fact of production and the costs (ultimately expressed labour time)
ensuing in it ("The absolute value of a thing, then, is its
cost in time and expense." [Proudhon, _What is Property?_, p. 145]).
The variations in supply and demand (i.e. market prices) oscillate
round this "absolute value" (i.e. production price) and so it is
the cost of production of a commodity which ultimately regulates
its price, not supply and demand (which only temporarily affects
its market price).
While the STV is handy for describing the price of works of art (and we
should note that the LTV can also provide an explanation for this), there
is little point having an economic theory which ignores the nature of the
vast majority of economic activity in a capitalist society (i.e. the
kind that produces goods which can be reproduced and their quality
increased by human industry). What the labour theory of value explains
is what is beneath supply and demand, what actually determines price
under capitalism. It recognises the objectivity given price and supply
which face a consumer and indicates how consumption ("subjective
evaluations") affect their movements. It explains why a certain
commodity sells at a certain price and not another -- something
which the subjective theory cannot really do. Why should a supplier
"alter their behaviour" in the market if it is based purely on "subjective
evaluations"? There has to be an objective indication that guides their
actions and this is found in the reality of capitalist production. To
re-quote Proudhon, "[i]f supply and demand alone determine value, how
can we tell what is an excess and what is a sufficiency? If neither cost,
nor market price, nor wages can be mathematically determined, how is
it possible to conceive of a surplus, a profit?" [_System of Economical
Contradictions_, p. 114] Therefore, "[t]o say . . . that supply and
demand is the law of exchange is to say that supply and demand is the
law of supply and demand; it is not an explanation of the general
practice, but a declaration of its absurdity." [Op. Cit., p. 91] Thus
the labour theory of value more accurately reflects reality: namely,
that for a normal commodity, prices as well as supply exist before
subjective evaluations can take place and that capitalism is based
on the production of profit rather than abstractly satisfying
It could be argued that this "prices of production" theory is close to the
neo-classical "partial equilibrium" theory. In some ways this is true.
Marshall basically synthesised this theory from the marginal utility
theory and the older "cost of production" theory which J.S. Mill derived
from the LTV. However, the differences are important. First, the LTV does
not get into the circular reasoning associated with attempts to derive
utility from price we have indicated above. Second, it argues that rent,
profit and interest are the unpaid labour of workers rather than being
the "rewards" to owners for being owners. Thirdly, it is a *dynamic*
system in which the prices of production can and do change as economic
decisions are made. Fourthly, it can easily reject the idea of "perfect
competition" and give an account of an economy marked by barriers to
entry and difficult to reverse investment decisions. And, lastly, labour
markets need not clear in the long run. Given that modern economics has
given up trying to measure utility, it means that in practice (if not
in rhetoric) the neo-classical model has rejected the marginal utility
theory of value part of the synthesis and returned, basically, to the
classical (LTV) approach -- but with important differences which gut
the earlier version of its critical edge and dynamic nature.
Needless to say, the LTV does not ignore naturally occurring objects like
gems, wild foods, and water. Nature is a vast source of use-values which
humanity must utilise in order to produce other, different, use-values.
If you like, the earth is the mother and labour the father of wealth. Its
sometimes claimed that the labour theory of value implies that naturally
occurring objects should have no price, since it takes no labour to produce
them. This, however, is false. For example, gemstones are valuable because
it takes a huge amount of labour to find them. If they were easy to find,
like sand, they would be cheap. Similarly, wild foods and water have value
according to how much labour is needed to find, collect, and process them
in a given area (for example water in arid places is more "valuable"
than water near a lake).
The same logic applies to other naturally occurring objects. If it
takes virtually no effort to obtain them -- like air -- then they will
have little or no exchange value. However, the more effort it takes to
find, collect, purify, or otherwise process them for use, the more exchange
value they will have relative to other goods (i.e. their production prices
are higher, leading to a higher market price).
The attempt to ignore production implied in the STV comes from a desire
to hide the exploitative nature of capitalism. By concentrating upon the
"subjective" evaluations of individuals, those individuals are abstracted
away from real economic activity (i.e. production) so the source of profits
and power in the economy can be ignored. Section C.2 (Where do profits come
from?) indicates why exploitation of labour in production is the source of
profits, not activity in the market.
Of course, the pro-capitalist will argue that the labour theory of value
is not universally accepted within mainstream economics. How true; but
this hardly suggests that the theory is wrong. After all, it would have
been easy to "prove" that democratic theory was "wrong" in Nazi Germany
simply because it was not universally accepted by most lecturers and
political leaders at the time. Under capitalism, more and more things
are turned into commodities -- including economic theories and jobs
for economists. Given a choice between a theory which argues that
profits, interest and rent are unpaid labour (i.e. exploitation)
or one that argues they are all valid "rewards" for service, which
one do you think the wealthy will back in terms of funding?
This was the case with the Labour Theory of Value. From the time of Adam
Smith onwards, radicals had used the LTV to critique capitalism. The
classical economists (Adam Smith and David Ricardo and their followers
like J.S. Mill) argued that, in the long run, commodities exchanged
in proportion to the labour used to produce them. Thus commodity exchange
benefited all parties as they received an equivalent amount of labour
as they had expended. However, this left the nature and source of capitalist
profits subject to debate, debate which soon spread to the working class.
Long before Karl Marx (the person most associated with the LTV) wrote his
(in)famous work _Capital_, Ricardian Socialists like Robert Owen and William
Thompson and anarchists like Proudhon were using the LTV to present a
critique of capitalism, exposing it as being based upon exploitation (the
worker did not, in fact, receive in wages the equivalent of the value she
produced and so capitalism was *not* based on the exchange of equivalents).
In the United States, Henry George was using it to attack the private ownership
of land. When marginalist economics came along, it was quickly seized upon
as a way of undercutting radical influence. Indeed, followers of Henry
George argue that neo-classical economics was developed primarily to counter
act his ideas and influence (see _The Corruption of Economics_ by Mason
Gaffney and Fred Harrison).
Thus, as noted above, marginalist economics was seized upon, regardless
of its merits as a science, simply because it took the political out of
political economy. With the rise of the socialist movement and the
critiques of Owen, Thompson, Proudhon and many others, the labour theory
of value was considered too political and dangerous. Capitalism could no
longer be seen as being based on the exchange of equivalent labour. Rather,
it should seen as being based on exchange of equivalent utility. But, as
indicated (in the last section) the notion of equivalent utility was quickly
dropped while the superstructure built upon it became the basis of capitalist
economics. And without a theory of value, capitalist economics cannot prove
that capitalism will result in harmony, the satisfaction of individual
needs, justice in exchange or the efficient allocation of resources.
One last point. We must stress that not all anarchists support the LTV.
Kropotkin, for example, did not agree with it. He considered socialist
use of the LTV as taking "the metaphysical definitions of the academical
economists" to critique capitalism using its own definitions and so, like
capitalist economics, it was not scientific [_Evolution and Environment_,
p. 92]. However, his rejection of the LTV did not imply that Kropotkin did
not consider capitalism as exploitative. Far from it. Like every anarchist,
Kropotkin attacked the "appropriation of the produce of human labour
by the owners of capital," seeing its roots in the fact that "millions
of men [and women] have literally nothing to live upon, unless they
sell their labour force and their intelligence at a price that will
make the net profit of the capitalist and 'surplus value' possible."
[Op. Cit., p. 106] We discuss profits in more detail in section C.2
(Where do profits come from?).
Kropotkin's rejection of the LTV is based on the fact that, within
capitalism, "[v]alue in exchange and the necessary labour are *not
proportional to each other*" and so "Labour is *not the measure of
Value.*" [Op. Cit., p. 91] Which is, of course, true under capitalism.
As Proudhon (and Marx) argued, under capitalism (due to existence
of capitalist profit, rent and interest) prices could not be
proportional to the average labour required to produce a commodity
("Wherever labour has not been socialised, -- that is, wherever value
is not synthetically determined, -- there is irregularity and
dishonesty in exchange." [Proudhon, Op. Cit., p. 128]) Only when
the rate of profit is zero could prices directly reflect labour
values (which is, of course, what Proudhon and Tucker desired
-- "Socialism . . . extends its ["that labour is the true measure
of price"] function to the description of society as it should be,
and the discovery of the means of making it what it should be."
[Tucker, _The Individualist Anarchists_, p. 79]). Therefore,
Kropotkin is correct to state that "[u]nder the capitalist
system, value in exchange is measured *no more* by the amount
of necessary labour." [Op. Cit., p. 91]
However, this does not mean that the LTV is irrelevant to analysing
the capitalist economy. Rather, it argues that under capitalism labour
is, essentially, the *regulator* of price, *not* its measure. "The
idea that has been entertained hitherto of the measure of value,"
argued Proudhon, "then, is inexact; the object of our inquiry is
not the standard of value, as has been said so often and so
foolishly, but the law which regulates the proportions of the
various products to the social wealth; for upon the knowledge of
this law depends the rise and fall of prices." [_System of
Economical Contradictions_, p. 94] So Kropotkin's argument does
not undermine the LTV. Stripped of the metaphysical baggage
which many (particularly Marxists) have placed on the LTV (and
correctly attacked as unscientific by Kropotkin), it is essentially
a methodological tool, a means of investigating the key aspects of
capitalism -- namely wage labour and the conflicts associated with
it at the point of production -- at a high level of abstraction.
Thus it is a *explanatory* tool and value an explanatory category,
a means of understanding the dynamics of capitalism.
Therefore, rather than being the crude idea that "exchange value"
equals prices the LTV is primarily a means of analysis. This can
be seen by our use of "production prices" rather than (exchange)
value in our description of how the theory works. The LTV
focuses analysis onto the production process and thus correctly
points our investigations of how capitalism works to what
goes on in production, to the relations of authority in the
capitalist workplace, the struggle between the power of the
boss and the liberty of the workers, the struggle over who
controls the production process and how the surplus produced
by workers is divided (i.e. how much remains in the hands
of those who produced it and how much is appropriated by
capitalists). Therefore, the claim that prices deviate from values
and so the LTV is outdated indicates a confusion between the
explanatory role of the LTV and the actual world of prices and
profits. The LTV reminds us that production comes before and so
underlies exchange and what happens at the point of production
directly influences what happens in exchange. Decreasing the
direct and indirect labour time required for production will
decrease the cost price of a commodity and so reduce its
production price. Thus the rise and fall of prices and profits is
the result of changes in value relations (i.e. in the objective
labour costs of production -- labour-time value) and so the
use of the LTV as an explanatory tool is valid.
In other words, the labour theory of value is simply a good heuristic
analysis device which gives an insight into how prices are formed
rather than the prices as such. In practice, production prices are
dependent on wages and these *reflect* labour-time values rather
than *are* labour-time.
Thus Kropotkin was right -- up to a point. His critique of the LTV
is correct for those versions of it which state that "equilibrium"
price equals the (exchange) value of a good. He was correct to
note that under capitalism this rarely happens. Which means that
our use of the LTV is simply that of an explanatory tool, a means
of looking at the key aspect of capitalism -- namely the production
process which creates things which have use value for others and
are then exchanged. Production comes first and so we must first
start there to understand the dynamics of capitalism. Not to do
so, as the STV does, will lead your analysis into a dead end
and will ignore the fundamental aspect of capitalism -- wage
labour, the authority structures in production and the exploitation
of labour such oppression generates.
Indeed, Kropotkin's argument is reflected the "prices of production"
perspective outlined above as we concentrate of *prices* rather
than "values." We reject the metaphysical abstractions often
associated with the LTV and rather concentrate on real phenomenon,
such as prices, profits, class struggle and so on. Such a perspective
helps ground our critique of capitalism in what happens in the
real world rather than in the realms of abstraction. As we argue
in section H.3, Marx's concentration on *value* (i.e. the
abstract level of analysis) made him ignore the role of class
struggle in capitalism and its affect on profits (with bad
results for his theory and the movement he inspired).
C.1.3 What else affects price levels?
As indicated in the last section, the price of a capitalist commodity is,
in the long term, equal to its production price, which in turn determines
supply and demand. If demand or supply changes, which of course they can
and do as consumers' values change and new means of production are created
and old ones end, these will have a short-term effect on prices, but the
average production price is the price around which a capitalist commodity
sells. Thus it is the cost of production which ultimately regulates
the price of commodities. In other words, "market relations are governed
by the production relations." [Paul Mattick, _Economic Crisis and Crisis
Theory_, p. 51] As Proudhon put it:
"Thus value varies, and the law of value is unchangeable, further, if
value is susceptible of variation, it is because it is governed by a law
whose principle is essentially inconstant, -- namely, labour measured by
time." [Op. Cit., p. 101]
However, the amount of time and effort spent in producing a particular
commodity is not the essential factor in determining its price in the
market. What counts is the costs (including the amount of work time)
that it takes *on average* to produce that type of commodity, when the
work is performed with average intensity, with typically used tools and
average skill levels. Commodity production that falls below such standards,
e.g. using obsolete technology or less-than-average intensity of work,
will not allow the seller to raise the price of the commodity to
compensate for its inefficient production, because its price is
determined in the market by average conditions (and thus average
costs) of production, plus the average profit levels required to meet
the average rate of profit on the invested capital. On the other
hand, using production methods that are *more* efficient than average --
i.e.. which allow more commodities to be produced with *less labour* --
will allow the seller to reap more profits and/or lower the price
below average, and thus capture more market share, which will
eventually force other producers to adopt the same technology in
order to survive, and so lower the market production price of that
type of commodity. In this way, advances that reduce labour time
translate into reduced exchange value (and so price), thus showing
the regulating function of labour time (and indicating the usefulness
of the LTV as a methodological tool).
Similarly, the LTV also provides an explanation of why common resources in
one area become more valuable in others (for example, the price of water to
a person in a desert would be far higher than to someone next to a river).
In the short term, the owner of water in the desert can charge a vast amount
to those who want it simply because it is rare and the amount of labour
required to find an alternative source would be high (we will ignore the
ethics of charging high prices to people in need for the moment, as does
marginalist economics which portrays such situations -- which most people
would intuitively class as exploitative -- as "fair exchange"). But if
such excess profits could be maintained for long periods, then they would
tempt others to increase competition. If a steady demand for water existed
in that region then competition would drive down the price of water to
around to the average price required to make it available (which explains
why capitalists desire to reduce competition via the use of copyright
laws, patents and so on -- see section B.3.2 -- as well as increasing
company size, market share and power -- see section C.4).
To summarise, as the production cost for a commodity is a given, only
profit levels can indicate whether a given product is "valued" enough
by consumers to warrant increased production. This means that "capital
moves from relatively stagnating into rapidly developing industries
. . . The extra profit, in excess of the average profit, won at a
given price level disappears again, however, with the influx of
capital from profit-poor into profit-rich industries," so
increasing supply and reducing prices, and thus profits.
[Paul Mattick, Op. Cit., p. 49]
This process of capital investment, and its resulting competition, is the
means by which markets prices tend towards production prices in a given
market. Profit and the realities of the production process are the keys
to understanding prices and how they affect (and are affected by) supply
Lastly, we must stress that to state that market price tends toward production
price is *not* to suggest that capitalism is at equilibrium. Far from it.
Capitalism is always unstable, since "growing out of capitalist competition,
to heighten exploitation, . . . the relations of production... [are] in a
state of perpetual transformation, which manifests itself in changing
relative prices of goods on the market. Therefore the market is continuously
in disequilibrium, although with different degrees of severity, thus giving
rise, by its occasional approach to an equilibrium state, to the illusion
of a tendency toward equilibrium." [Paul Mattick, Op. Cit., p. 51]
Therefore, innovation due to class struggle, competition, or the creation
of new markets, has an important effect on market prices. This is because
innovation changes the production costs of a commodity or creates new,
profit-rich markets. While equilibrium may not be reached in practice, this
does not change the fact that price determines demand, since consumers face
prices as (usually) an already given objective value when they shop and make
decisions based on these prices in order to satisfy their subjective needs.
Thus the LTV recognises that capitalism is a system existing in time,
with an uncertain future (a future influenced by many factors, including
class struggle) and, by its very nature, dynamic. In addition, unlike
neo-classical "long run equilibrium" prices, the LTV does not claim
that labour markets will clear or that a change within one market will
have no effect on others. Indeed, the labour market may see extensive
unemployment as this helps maintain profit levels by maintaining discipline
-- via fear of the sack -- in the workplace (see section C.7). Neither does
it maintain that capitalism will be stable. As the history of "actually
existing" capitalism shows, unemployment is always with us and the business
cycle exists (in neo-classical economics such things cannot happen as the
theory assumes that all markets clear and that slumps are impossible).
Moreover, the LTV indicates the source of this instability -- namely
the "contradictory idea of value, so clearly exhibited by the
inevitable distinction between useful value and value in exchange."
[Proudhon, Op. Cit., p. 84] This is particularly the case with
labour, as the exchange value of labour (its cost, i.e. wages)
is different than its use value (i.e. what it actually produces
during a working day). As we argue in the next section, this
difference between the use value of labour (its product) and
its exchange value (its wage) is the source of capitalist profit
(we will indicate in section C.7 how this distinction influences
the business cycle -- i.e. instability in the economy).
C.2 Where do profits come from?
As mentioned in the last section, profits are the driving force of capitalism.
If a profit cannot be made, a good is not produced, regardless of how many
people "subjectively value" it. But where do profits come from?
In order to make more money, money must be transformed into capital,
i.e., workplaces, machinery and other "capital goods." By itself, however,
capital (like money) produces nothing. Capital only becomes productive
in the labour process when workers use capital ("Neither property nor
capital produces anything when not fertilised by labour" - Bakunin).
Under capitalism, workers not only create sufficient value (i.e.
produced commodities) to maintain existing capital and their own
existence, they also produce a surplus. This surplus expresses
itself as a surplus of goods, i.e. an excess of commodities
compared to the number a workers' wages could buy back.
"The working man cannot. . . repurchase that which he has produced for his
master. It is thus with all trades whatsoever. . . since, producing for a
master who in one form or another makes a profit, they are obliged to pay
more for their own labour than they get for it." [_What is Property_,
In other words, the price of all produced goods is greater than the money
value represented by the workers' wages (plus raw materials and overheads
such as wear and tear on machinery) when those goods were produced. The
labour contained in these "surplus-products" is the source of profit, which
has to be realised on the market. (In practice, of course, the value
represented by these surplus-products is distributed throughout all the
commodities produced in the form of profit -- the difference between the
cost price and the market price).
Obviously, pro-capitalist economics argue against this theory of how a
surplus arises. However, one example will suffice here to see why labour
is the source of a surplus, rather than (say) "waiting", risk or capital
(these arguments, and others, will be discussed below). A good poker-player
uses equipment (capital), takes risks, delays gratification, engages in
strategic behaviour, tries new tricks (innovates), not to mention cheats,
and earns large winnings (and can even do so repeatedly). But no surplus
product results from such behaviour; the gambler's winnings are simply
redistributions from others with no new production occurring. Thus,
risk-taking, abstinence, entrepreneurship, etc. might be necessary for
an individual to receive profits but are far from sufficient for them
not to be the result a pure redistribution from others (a redistribution,
we may add, which can only occur under capitalism if workers produce
goods to sell).
Thus, in order for a profit to be generated within capitalism two things
are required. Firstly, a group of workers to work the available capital.
Secondly, that they must produce more value than they are paid in wages.
If only the first condition is present, all that occurs is that social
wealth is redistributed between individuals. With the second condition,
a surplus proper is generated. In both cases, however, workers are
exploited for without their labour there would be no goods to facilitate
a redistribution of existing wealth nor surplus products.
The surplus value produced by labour is divided between profits, interest
and rent (or, more correctly, between the owners of the various factors
of production other than labour). In practice, this surplus is used
by the owners of capital for: (a) investment (b) to pay themselves dividends
on their stock, if any; (c) to pay for rent and interest payments; and (d)
to pay their executives and managers (who are sometimes identical with the
owners themselves) much higher salaries than workers. As the surplus is
being divided between different groups of capitalists, this means that
there can be clashes of interest between (say) industrial capitalists and
finance capitalists. For example, a rise in interest rates can squeeze
industrial capitalists by directing more of the surplus from them into
the hands of rentiers. Such a rise could cause business failures and so
a slump (indeed, rising interest rates is a key way of regulating working
class power by generating unemployment to discipline workers by fear of
the sack). The surplus, like the labour used to reproduce existing capital,
is embodied in the finished commodity and is realised once it is sold. This
means that workers do not receive the full value of their labour, since the
surplus appropriated by owners for investment, etc. represents value added
to commodities by workers -- value for which they are not paid.
So capitalist profits (as well as rent and interest payments) are in
essence *unpaid labour,* and hence capitalism is based on exploitation.
As Proudhon noted, "*Products,* say economists, *are only bought by products*.
This maxim is property's condemnation. The proprietor producing neither by
his own labour nor by his implement, and receiving products in exchange for
nothing, is either a parasite or a thief." [Op. Cit., p. 170] It is this
appropriation of wealth from the worker by the owner which differentiates
capitalism from the simple commodity production of artisan and peasant
economies. All anarchists agree with Bakunin when he stated that:
"*what is property, what is capital in their present form?* For the
capitalist and the property owner they mean the power and the right,
guaranteed by the State, to live without working. . . [and so] the power
and right to live by exploiting the work of someone else . . . those . . .
[who are] forced to sell their productive power to the lucky owners of
both." [_The Political Philosophy of Bakunin_, p. 180]
Obviously supporters of capitalism disagree. Profits are not the product
of exploitation and workers, capitalists and landlords get paid the value
of their contributions to output, they say. A few even talk about "making
money work for you" (as if pieces of paper can actually do any form of work!)
while, obviously, human beings have to do the actual work (and usually for
money). However, all agree that capitalism is not exploitative (no matter
how exploitative it may look) and present various arguments why capitalists
deserve to keep the products others make. This section of the FAQ presents
some of the reasons why anarchists reject this claim.
Lastly, we would like to point out that some apologists for capitalism cite
the empirical fact that, in a modern capitalist economy, a large majority
of all income goes to "labour," with profit, interest and rent adding
up to something under twenty percent of the total. Of course, even if
surplus value was less than 20% of a workers' output, this does not change
its exploitative nature. These apologists of capitalism do not say that
taxation stops being "theft" just because it is around 10% of all income.
However, this value for profit, interest and rent is based on a statistical
sleight-of-hand, as "worker" is defined as including everyone who has
a salary in a company, including managers and CEOs (income to "labour"
includes both wages *and* salaries, in other words). The large incomes
which many managers and all CEOs receive would, of course, ensure that a
large majority of all income does go to "labour." Thus this "fact" ignores
the role of most managers as de facto capitalists and exploiters of surplus
value and ignores the changes in industry that have occurred in the
last 50 years (see section C.2.5 - Aren't Executives workers and so
creators of value?).
To get a better picture of the nature of exploitation within modern capitalism
we have to compare workers wages to their productivity. According to the
World Bank, in 1966, US manufacturing wages were equal to 46% of the
value-added in production (value-added is the difference between selling
price and the costs of raw materials and other inputs to the production
process). In 1990, that figure had fallen to 36% and (using figures from
1992 Economic Census of the US Census Bureau) by 1992 it had reached 19.76%
(39.24% if we take the *total* payroll which includes managers and so on).
In the US construction industry, wages were 35.4% of value added in 1992
(with total payroll, 50.18%). Therefore the argument that because a large
percentage of income goes to "labour" capitalism is fine hides the realities
of that system and the exploitation its hierarchical nature creates.
We now move on to why this surplus value exists.
C.2.1 Why does this surplus exist?
It is the nature of capitalism for the monopolisation of the worker's
product by others to exist. This is because of private property in the
means of production and so in "consequence of [which] . . . [the] worker,
when he is able to work, finds no acre to till, no machine to set in
motion, unless he agrees to sell his labour for a sum inferior to its
real value." [Peter Kropotkin, _Kropotkin's Revolutionary Pamphlets_,
Therefore workers have to sell their labour on the market. However, as
this "commodity" "cannot be separated from the person of the worker like
pieces of property. The worker's capacities are developed over time and
they form an integral part of his self and self-identity; capacities are
internally not externally related to the person. Moreover, capacities
or labour power cannot be used without the worker using his will, his
understanding and experience, to put them into effect. The use of labour
power requires the presence of its 'owner'. . . To contract for the use
of labour power is a waste of resources unless it can be used in the
way in which the new owner requires . . . The employment contract must,
therefore, create a relationship of command and obedience between
employer and worker." [Carole Pateman, _The Sexual Contract_, pp. 150-1]
So, "the contract in which the worker allegedly sells his labour power
is a contract in which, since he cannot be separated from his capacities,
he sells command over the use of his body and himself. . . The
characteristics of this condition are captured in the term *wage slave.*"
[Ibid., p. 151] Or, to use Bakunin's words, "the worker sells his person
and his liberty for a given time" and so "concluded for a term only and
reserving to the worker the right to quit his employer, this contract
constitutes a sort of *voluntary* and *transitory* serfdom." [_The
Political Philosophy of Bakunin_, p. 187]
This domination is the source of the surplus, for "wage slavery is not
a consequence of exploitation -- exploitation is a consequence of the
fact that the sale of labour power entails the worker's subordination.
The employment contract creates the capitalist as master; he has the
political right to determine how the labour of the worker will be used,
and -- consequently -- can engage in exploitation." [Carole Pateman,
Op. Cit., p. 149]
So profits exist because the worker sells themselves to the capitalist,
who then owns their activity and, therefore, controls them (or, more
accurately, *tries* to control them) like a machine. Benjamin Tucker's
comments with regard to the claim that capital is entitled to a reward
are of use here. He notes that some "combat. . . the doctrine that
surplus value -- oftener called profits -- belong to the labourer
because he creates it, by arguing that the horse. . . is rightly
entitled to the surplus value which he creates for his owner. So
he will be when he has the sense to claim and the power to take
it. . . Th[is] argument . . is based upon the assumption that
certain men are born owned by other men, just as horses are. Thus
its *reductio ad absurdum* turns upon itself." [_Instead of a Book_,
In other words, to argue that capital should be rewarded is to
implicitly assume that workers are just like machinery, another
"factor of production" rather than human beings and the creator
of things of value. So profits exists because during the working
day the capitalist controls the activity and output of the worker
(i.e. owns them during working hours as activity cannot be
separated from the body and "[t]here is an integral relationship
between the body and self. The body and self are not identical,
but selves are inseparable from bodies." [Carole Pateman, Op. Cit.,
Considered purely in terms of output, this results in, as Proudhon
noted, workers working "for an entrepreneur who pays them and keeps
their products." [quoted by Martin Buber, _Paths in Utopia_, p. 29]
The ability of capitalists to maintain this kind of monopolisation of
another's time and output is enshrined in "property rights" enforced by
either public or private states. In short, therefore, property "is the
right to enjoy and dispose at will of another's goods - the fruit of
an other's industry and labour." [P-J Proudhon, _What is Property_,
p. 171] And because of this "right," a worker's wage will always be
less than the wealth that he or she produces.
The size of this surplus, the amount of unpaid labour, can be changed
by changing the duration and intensity of work (i.e. by making workers
labour longer and harder). If the duration of work is increased, the
amount of surplus value is increased absolutely. If the intensity is
increased, e.g. by innovation in the production process, then the amount
of surplus value increases relatively (i.e. workers produce the equivalent
of their wage sooner during their working day resulting in more unpaid
labour for their boss).
Such surplus indicates that labour, like any other commodity, has a use
value and an exchange value. Labour's exchange value is a worker's wages,
its use value their ability to work, to do what the capitalist who buys
it wants. Thus the existence of "surplus products" indicates that there
is a difference between the exchange value of labour and its use value,
that labour can *potentially* create *more* value than it receives back
in wages. We stress potentially, because the extraction of use value from
labour is not a simple operation like the extraction of so many joules
of energy from a ton of coal. Labour power cannot be used without subjecting
the labourer to the will of the capitalist - unlike other commodities,
labour power remains inseparably embodied in human beings. Both the
extraction of use value and the determination of exchange value for labour
depends upon - and are profoundly modified by - the actions of workers.
Neither the effort provided during an hours work, nor the time spent in
work, nor the wage received in exchange for it, can be determined
without taking into account the worker's resistance to being turned
into a commodity, into an order taker. In other words, the amount of
"surplus products" extracted from a worker is dependent upon the
resistance to dehumanisation within the workplace, to the attempts by
workers to resist the destruction of liberty during work hours.
Thus unpaid labour, the consequence of the authority relations explicit
in private property, is the source of profits. Part of this surplus
is used to enrich capitalists and another to increase capital, which
in turn is used to increase profits, in an endless cycle (a cycle,
however, which is not a steady increase but is subject to periodic
disruption by recessions or depressions - "The business cycle." The basic
causes for such crises will be discussed later, in sections C.7 and C.8).
C.2.2 Are capitalists justified in appropriating a portion of surplus value
for themselves (i.e. making a profit)?
In a word, no. As we will attempt to indicate, capitalists are not justified
in appropriating surplus value from workers. No matter how this appropriation
is explained by capitalist economics, we find that inequality in wealth and
power are the real reasons for this appropriation rather than some actual
productive act. Indeed, neo-classical economics reflects this truism. In
the words of the noted left-wing economist Joan Robinson:
"the neo-classical theory did not contain a solution to the problems
of profits or of the value of capital. They have erected a towering
structure of mathematical theorems on a foundation that does not exist."
[_Contributions to Modern Economics_, p. 186]
If profits *are* the result of private property and the inequality it
produces, then it is unsurprising that neo-classical theory would be
as foundationless as Robinson argues. After all, this is a *political*
question and neo-classical economics was developed to ignore such questions.
Here we indicate why this is the case and discuss the various rationales
for capitalist profit in order to show why they are false.
Some consider that profit is the capitalist's "contribution" to the value
of a commodity. However, as David Schweickart points out, "'providing
capital' means nothing more than 'allowing it to be used.' But an act of
granting permission, in and of itself, is not a productive activity. If
labourers cease to labour, production ceases in any society. But if owners
cease to grant permission, production is affected only if their *authority*
over the means of production is respected." [_Against Capitalism_, p. 11]
This authority, as discussed earlier, derives from the coercive mechanisms
of the state, whose primary purpose is to ensure that capitalists have
this ability to grant or deny workers access to the means of production.
Therefore, not only is "providing capital" not a productive activity, it
depends on a system of organised coercion which requires the appropriation
of a considerable portion of the value produced by labour, through taxes,
and hence is actually parasitic. Needless to say, rent can also be considered
as "profit", being based purely on "granting permission" and so not a
productive activity. The same can be said of interest, although the
arguments are somewhat different (see section C.2.6).
Another problem with the capitalists' "contribution to production" argument
is that one must either assume (a) a strict definition of who is the
producer of something, in which case one must credit only the worker, or
(b) a looser definition based on which individuals have contributed to the
circumstances that made the productive work possible. Since the worker's
productivity was made possible in part by the use of property supplied by
the capitalist, one can thus credit the capitalist with "contributing to
production" and so claim that he or she is entitled to a reward, i.e.
However, if one assumes (b), one must then explain why the chain of credit
should stop with the capitalist. Since all human activity takes place
within a complex social network, many factors might be cited as contributing
to the circumstances that allowed workers to produce -- e.g. their upbringing
and education, the government maintained infrastructure that permits their
place of employment to operate, and so on. Certainly the property of the
capitalist contributed in this sense. But his contribution was less
important than the work of, say, the worker's mother. Yet no capitalist, so
far as we know, has proposed compensating workers' mothers with any share
of the firm's revenues, and particularly not with a *greater* share than
that received by capitalists! Plainly, however, if they followed their own
logic consistently, capitalists would have to agree that such compensation
would be fair.
Therefore, as capital is not autonomously productive and is the product
of human (mental and physical) labour, anarchists reject the idea that
providing capital is a productive act. As Proudhon pointed out, "Capital,
tools, and machinery are likewise unproductive. . . The proprietor who asks
to be rewarded for the use of a tool or for the productive power of his
land, takes for granted, then, that which is radically false; namely, that
capital produces by its own effort -- and, in taking pay for this imaginary
product, he literally receives something for nothing." [Op. Cit., p. 169]
Of course, it could be argued (and it frequently is) that capital makes
work more productive and so the owner of capital should be "rewarded"
for allowing its use. This, however, is a false conclusion, since providing
capital is unlike normal commodity production. This is because capitalists,
unlike workers, get paid multiple times for one piece of work (which, in all
likelihood, they paid others to do) and *keep* the result of that labour.
As Proudhon argued:
"He [the worker] who manufactures or repairs the farmer's tools receives
the price *once*, either at the time of delivery, or in several payments;
and when this price is once paid to the manufacturer, the tools which he has
delivered belong to him no more. Never can he claim double payment for the
same tool, or the same job of repairs. If he annually shares in the products
of the farmer, it is owing to the fact that he annually does something for
"The proprietor, on the contrary, does not yield his implement; eternally he
is paid for it, eternally he keeps it." [Op. Cit., pp. 169-170]
Therefore, providing capital is *not* a productive act, and keeping the
profits that are produced by those who actually do use capital is an act of
theft. This does not mean, of course, that creating capital goods is not
creative nor that it does not aid production. Far from it! But owning the
outcome of such activity and renting it does not justify capitalism or
Some supporters of capitalism claim that profits represent the productivity
of capital. They argue that a worker is said to receive exactly what she has
produced because (according to the neo-classical answer) if she ceases to
work, the total product will decline by precisely the value of her wage.
However, this argument has a flaw in it. This is because the total product
will decline by more than that value if two or more workers leave. This is
because the wage each worker receives under conditions of perfect competition
is assumed to be the product of the *last* labourer in neo-classical theory.
The neo-classical argument presumes a "declining marginal productivity,"
i.e. the marginal product of the last worker is assumed to be less than
the second last and so on.
In other words, in neo-classical economics, all workers bar the mythical
"last worker" do not receive the full product of their labour. They only
receive what the *last* worker is claimed to produce and so everyone
*bar* the last worker does not receive exactly what he or she produces.
It looks like the neo-classical claim of no exploitation within
capitalism seems invalidated by its own theory.
This is recognised by the theorists. Because of this declining marginal
productivity, the contribution of labour is less than the total product.
The difference is claimed to be precisely the contribution of capital.
But what is this "contribution" of capital? Without any labourers there
would be no output. In addition, in physical terms, the marginal
product of capital is simply the amount by which production would decline
is one piece of capital were taken out of production. It does not reflect
any productive activity whatsoever on the part of the owner of said
capital. *It does not, therefore, measure his or her productive
contribution.* In other words, capitalist economics tries to confuse
the owners of capital with the machinery they own.
Indeed, the notion that profits represent the contribution of capital
is one that is shattered by the practice of "profit sharing." *If*
profits were the contribution of capital, then sharing profits would
mean that capital was not receiving its full "contribution" to
production (and so was being exploited by labour!). Moreover, given
that profit sharing is usually used as a technique to *increase*
productivity and profits it seems strange that such a technique
would be required if profits, in fact, *did* represent capital's
"contribution." After all, the machinery which the workers are
using is the same as before profit sharing was introduced -- how
could this unchanged capital stock produce an increased "contribution"?
It could only do so if, in fact, capital was unproductive and it
was the unpaid efforts, skills and energy of workers' that actually
was the source of profits. Thus the claim that profit equals capital's
"contribution" has little basis in fact.
While it is true that the value invested in fixed capital is in the course
of time transferred to the commodities produced by it and through their sale
transformed into money, this does not represent any actual labour by the
owners of capital. Anarchists reject the ideological sleight-of-hand that
suggests otherwise and recognise that (mental and physical) labour is the
*only* form of contribution that can be made by humans to a productive
process. Without labour, nothing can be produced nor the value contained
in fixed capital transferred to goods. As Charles A. Dana pointed out in
his popular introduction to Proudhon's ideas, "[t]he labourer without capital
would soon supply his wants by its production . . . but capital with no
labourers to consume it can only lie useless and rot." [_Proudhon and his
"Bank of the People"_, p. 31] If workers do not get paid the full value of
their contributions to the output they produce then they are exploited and
so, as indicated, capitalism is based upon exploitation.
So, in and of themselves, fixed costs do not create value. Whether value
is created depends on how investments are developed and used once in place.
In the words of the English socialist Thomas Hodgskin:
"Fixed capital does not derive its utility from previous, but present
labour; and does not bring its owner a profit because it has been
stored up, but because it is a means of obtaining a command over
labour." [_Labour Defended against the Claims of Capital_]
Which brings us back to labour (and the social relationships which exist
within an economy) as the fundamental source of profits. Moreover the idea
(so beloved by pro-capitalist economics) that a worker's wage *is* the
equivalent of what she produces is one violated everyday within reality.
As one economist critical of neo-classical dogma put it:
"Managers of a capitalist enterprise are not content simply to respond
to the dictates of the market by equating the wage to the value of
the marginal product of labour. Once the worker has entered the
production process, the forces of the market have, for a time at least,
been superseded. The effort-pay relation will depend not only on
market relations of exchange but also. . . on the hierarchical relations
of production - on the relative power of managers and workers within
the enterprise." [William Lazonick, _Business Organisation and the
Myth of the Market Economy_, pp. 184-5]
But, then again, capitalist economics is more concerned with justifying
the status quo than being in touch with the real world. To claim that
a workers wage represents her contribution and profit capital's is
simply false. Capital cannot produce anything (never mind a surplus)
unless used by labour and so profits do not represent the productivity
Other common justifications of profit are based on claims about the
"special abilities" of a select few, e.g. as "risk taking" or "creative"
ability, and are equally unsound as the one just outlined.
As for risk taking, virtually all human activity involves risk. To claim
that capitalists should be paid for the risks associated with investment
is to implicitly state that money is more valuable that human life.
After all, workers risk their health and often their lives in work and
often the most dangerous workplaces are those associated with the lowest
pay (safe working conditions can eat into profits and so to reward
capitalist "risk", the risk workers face may actually increase). In the
inverted world of capitalist ethics, it is usually cheaper (or more
"efficient") to replace an individual worker than a capital investment.
Moreover, the risk theory of profit fails to take into account the
different risk-taking abilities of that derive from the unequal distribution
of society's wealth. As James Meade puts it, while "property owners can
spread their risks by putting small bits of their property into a large
number of concerns, a worker cannot easily put small bits of his effort
into a large number of different jobs. This presumably is the main reason
we find risk-bearing capital hiring labour" and not vice versa [quoted
by David Schweickart, Op. Cit., pp. 129-130]. Needless to say, the most
serious consequences of "risk" are usually suffered by working people who
can lose their jobs, health and even lives. So, rather than individual
evaluations determining "risk", these evaluations will be dependent
on the class position of the individuals involved. Risk, therefore, is
not an independent factor and so cannot be the source of profit. Indeed,
as indicated, other activities can involve far more risk and be rewarded
As for the "creative" spirit which innovates profits into existence, it is
true that individuals do see new potential and act in innovative ways to
create new products or processes. However, as discussed in the next section,
this is not the source of profit.
C.2.3 Why does innovation occur and how does it affect profits?
There is a given amount of surplus value in existence within the economy at
any one time. How this surplus is created by or divided between firms is
determined by competition, within which innovation plays an important role.
Innovation occurs in order to expand profits and so survive competition
from other companies. While profits can be generated in circulation (for
example by oligopolistic competition or inflation) this can only occur at the
expense of other people or capitals (see C.5 - Why does Big Business get a
bigger slice of profits? and C.7 - What causes the capitalist business
cycle? - respectively). Innovation, however, allows the generation of profits
directly from the new or increased productivity (i.e. exploitation) of labour.
This is because it is in production that commodities, and so profits, are
created and innovation results in new products and/or new production methods.
New products mean that the company can reap excess profits until competitors
enter the new market and force the market price down by competition. New
production methods allow the intensity of labour to be increased, meaning
that workers do more work relative to their wages (in other words, the
cost of production falls relative to the market price, meaning extra
So while competition ensures that capitalist firms innovate, innovation is
the means by which companies can get an edge in the market. This is because
innovation means that "capitalist excess profits come from the production
process. . . when there is an above-average rise in labour productivity;
the reduced costs then enable firms to earn higher than average profits in
their products. But this form of excess profits is only temporary and
disappears again when improved production methods become more general."
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 38]
In addition, innovation in terms of new technology is also used to help
win the class war at the point of production for the capitalists. As
the aim of capitalist production is to maximise profits, it follows that
capitalism will introduce technology that will allow more surplus value
to be extracted from workers. As Cornelius Castoriadis argues, capitalism
"has created a capitalist technology, for its *own* ends, which are by
no means neutral. The real essence of capitalist technology is not to
develop production for production's sake: it is to subordinate and
dominate the producers." [_Workers' Councils and the Economics of a
Self-Managed Society_, p. 13]
Therefore, technological improvement can also be used to increase the
power of capital over the workforce, to ensure that workers will do as
they are told. In this way innovation can maximise surplus value production
by trying to increase domination during working hours as well as by
increasing productivity by new processes.
These attempts to increase profits by using innovation is the key to
capitalist expansion and accumulation. As such innovation plays a key
role within the capitalist system. However, the source of profits does
not change and remains in the labour, skills and creativity of workers
in the workplace. And we must stress that innovation itself is a form
of labour -- mental labour. Indeed, many companies have Research and
Development departments in which groups of workers are paid to generate
new and innovative ideas for their employers. And we must also point out
that many new innovations come from individuals who combine mental and
physical labour outside of capitalist companies. In other words, arguments
that mental labour alone is the source of wealth (or profits) are false.
That this is the case can be seen from various experiments in workers'
control (see the next section) where increased equality within the
workplace actually increases productivity and innovation. As these
experiments show workers, when given the chance, can develop numerous
"good ideas" *and*, equally as important, produce them. A capitalist
with a "good idea," on the other hand, would be powerless to produce
it without workers and it is this fact that shows that innovation, in
and of itself, is not the source of surplus value.
C.2.4 Wouldn't workers' control stifle innovation?
Contrary to much capitalist apologetics, innovation is not the monopoly
of an elite class of humans. It is within all of us, although the
necessary social environment needed to nurture and develop it in ordinary
workers is crushed by the authoritarian workplaces of capitalism. If
workers were truly incapable of innovation, any shift toward greater
control of production by workers should result in decreased productivity.
What one actually finds, however, is just the opposite: In the few
examples where workers' control has been implemented, productivity
increased dramatically as ordinary people were given the chance, usually
denied them, to apply their skills, talents, and creativity.
As Christopher Eaton Gunn notes, there is "a growing body of empirical
literature that is generally supportive of claims for the economic
efficiency of the labour-managed firm. Much of this literature focuses
on productivity, frequently finding it to be positively correlated
with increasing levels of participation. . . Studies that encompass
a range of issues broader than the purely economic also tend to support
claims for the efficiency of labour managed and worker-controlled
firms. . . In addition, studies that compare the economic preference
of groups of traditionally and worker-controlled forms point to
the stronger performance of the latter." [_Workers' Self-Management
in the United States_, pp. 42-3]
This has been strikingly confirmed in studies of the Mondragon
co-operatives in Spain, where workers are democratically involved in
production decisions and encouraged to innovate. As George Bennello
notes, "Mondragon productivity is very high -- higher than in its
capitalist counterparts. Efficiency, measured as the ratio of utilised
resources -- capital and labour -- to output, is far higher than in
comparable capitalist factories." [_The Challenge of Mondragon_, p. 216]
The example of the Lucus workers in Britain, during the 1970's, again
indicates the creative potential waiting to be utilised. The workers in
Lucus created a plan which would convert the military-based Lucus company
into a company producing useful goods for ordinary people. The workers in
Lucus designed the products themselves, using their own experiences of
work and life. The management just were not interested.
During the Spanish Revolution of 1936-39, workers self-managed many
factories following the principles of participatory democracy.
Productivity and innovation in the Spanish collectives was exceptionally
high. The metal-working industry is a good example. As Augustine
Souchy observes, at the outbreak of the Civil War, the metal industry
in Catalonia was "very poorly developed." Yet within months, the
Catalonian metal workers had rebuilt the industry from scratch,
converting factories to the production of war materials for the
anti-fascist troops. A few days after the July 19th revolution, the
Hispano-Suiza Automobile Company was already converted to the manufacture
of armoured cars, ambulances, weapons, and munitions for the fighting
front. "Experts were truly astounded," Souchy writes, "at the expertise
of the workers in building new machinery for the manufacture of arms and
munitions. Very few machines were imported. In a short time, two hundred
different hydraulic presses of up to 250 tons pressure, one hundred
seventy-eight revolving lathes, and hundreds of milling machines and
boring machines were built." [_The Anarchist Collectives: Workers'
Self-management in the Spanish Revolution, 1936-1939_, ed. Sam Dolgoff,
Similarly, there was virtually no optical industry in Spain before the
July revolution, only some scattered workshops. After the revolution, the
small workshops were voluntarily converted into a production collective.
"The greatest innovation," according to Souchy, "was the construction of a
new factory for optical apparatuses and instruments. The whole operation
was financed by the voluntary contributions of the workers. In a short
time the factory turned out opera glasses, telemeters, binoculars,
surveying instruments, industrial glassware in different colours, and
certain scientific instruments. It also manufactured and repaired optical
equipment for the fighting fronts . . . What private capitalists failed to
do was accomplished by the creative capacity of the members of the Optical
Workers' Union of the CNT." [Op. Cit., pp. 98-99]
Therefore, far from being a threat to innovation, workers' control
would increase it and, more importantly, direct it towards improving the
quality of life for all as opposed to increasing the profits of the few.
This aspect an anarchist society will be discussed in more detail in
section I (What would an anarchist society look like?). In addition,
see sections J.5.10. J.5.11 and J.5.12 for more on why anarchists
support self-management and why, in spite of its higher efficiency
and productivity, the capitalist market will select against it.
In short, rather than being a defence of capitalist profit taking (and the
inequality it generates) the argument that freedom increases innovation and
productivity actually points towards libertarian socialism and workers'
self-management. This is unsurprising, for only equality can maximise
liberty and so workers' control (rather than capitalist power) is the
key to innovation. Only those who confuse freedom with the oppression
of wage labour would be surprised by this.
C.2.5 Aren't Executives workers and so creators of value?
Of course it could be argued that executives are also "workers" and so
contribute to the value of the commodities produced. However, this is
not the case. Though they may not own the instruments of production,
they are certainly buyers and controllers of labour power, and under
their auspices production is still *capitalist* production. The creation
of a "salary-slave" strata of managers does not alter the capitalist
relations of production. In effect, the management strata are *de facto*
capitalists. As exploitation requires labour ("There is work and there is
work." as Bakunin noted, "There is productive labour and there is the
labour of exploitation" [_The Political Philosophy of Bakunin_, p. 180]),
management is like the early "working capitalist" and their "wages" come
from the surplus value appropriated from workers and realised on the
market. Or, to use a different analogy, managers are like the slave
drivers hired by slave owners who do not want to manage the slaves
themselves. The slave drivers' wages come from the surplus value
extracted from the slaves; it is not in itself productive labour.
Thus the exploitative role of managers, even if they can be fired,
is no different from capitalists. Moreover, "shareholders and
managers/technocrats share common motives: to make profits and to
reproduce hierarchy relations that exclude most of the employees from
effective decision making" [Takis Fotopoulos, "The Economic Foundations
of an Ecological Society", p. 16, _Society and Nature_ No.3, pp. 1-40]
This is not to say that 100 percent of what managers do is exploitative.
The case is complicated by the fact that there is a legitimate need for
co-ordination between various aspects of complex production processes --
a need that would remain under libertarian socialism and would be filled
by elected and recallable (and in some cases rotating) managers (see
Section I). But under capitalism, managers become parasitic in proportion
to their proximity to the top of the pyramid. In fact, the further the
distance from the production process, the higher the salary; whereas the
closer the distance, the more likely that a "manager" is a worker with
a little more power than average. In capitalist organisations, the less
you do, the more you get. In practice, executives typically call upon
subordinates to perform managerial (i.e. co-ordinating) functions and
restrict themselves to broader policy-making decisions. As their
decision-making power comes from the hierarchical nature of the firm,
they could be easily replaced if policy making was in the hands of
those who are affected by it.
C.2.6 Is interest not the reward for waiting, and so isn't capitalism just?
The idea that interest is the reward for "abstinence" on the part of
savers is a common one in capitalist economics. As Alfred Marshall argues,
"[i]f we admit it [a commodity] is the product of labour alone, and not of
labour and waiting, we can no doubt be compelled by an inexorable logic to
admit that there is no justification of interest, the reward for waiting."
[_Principles of Economics_, p. 587] While implicitly recognising that
labour is the source of all value in capitalism (and that abstinence is
not the *source* of profits), it is claimed that interest is a justifiable
claim on the surplus value produced by a worker.
Why is this the case? Capitalist economics claims that by "deferring
consumption," the capitalist allows new means of production to be
developed and so should be rewarded for this sacrifice. In other words, in
order to have capital available as an input -- i.e. to bear costs now for
returns in the future -- someone has to be willing to postpone his or her
consumption. That is a real cost, and one that people will pay only if
rewarded for it.
This theory usually appears ludicrous to a critic of capitalism -- simply
put, does the mine owner really sacrifice more than a miner, a rich
stockholder more than an autoworker working in their car plant? It is far
easier for a rich person to "defer consumption" than for someone on an
average income. This is borne out by statistics, for as Simon Kuznets has
noted, "only the upper income groups save; the total savings of groups
below the top decile are fairly close to zero." [_Economic Growth and
Structure_, p. 263] Therefore, the plausibility of interest as payment
for the pain of deferring consumption rests on the premise that the
typical saving unit is a small or medium-income household. But in
contemporary capitalist societies, this is not the case. Such households
are not the source of most savings; the bulk of interest payments do not
go to them.
To put this point differently, the capitalist proponents of interest only
consider "postponing consumption" as an abstraction, without making it
concrete. For example, a capitalist may "postpone consumption" of 48
Rolls Royces because he needs the money to upgrade some machinery in his
factory; whereas a single mother may have to "postpone consumption" of
food or adequate housing in order to attempt to better take care of her
children. The two situations are vastly different, yet the capitalist
equates them. This equation implies that "not being able to buy anything
you want" is the same as "not being able to buy things you need", and is
thus skewing the obvious difference in costs of such postponement of
Thus Proudhon's comments that the loaning of capital "does not involve an
actual sacrifice on the part of the capitalist" and so "does not deprive
himself. . . of the capital which be lends. He lends it, on the contrary,
precisely because the loan is not a deprivation to him; he lends it because
he has no use for it himself, being sufficiently provided with capital
without it; be lends it, finally, because he neither intends nor is able
to make it valuable to him personally, -- because, if he should keep it
in his own hands, this capital, sterile by nature, would remain sterile,
whereas, by its loan and the resulting interest, it yields a profit which
enables the capitalist to live without working. Now, to live without working
is, in political as well as moral economy, a contradictory proposition,
an impossible thing." [_Interest and Principal: A Loan is a Service_]
He goes on:
"The proprietor who possesses two estates, one at Tours, and the other
at Orleans, and who is obliged to fix his residence on the one which he
uses, and consequently to abandon his residence on the other, can this
proprietor claim that he deprives himself of anything, because he is not,
like God, ubiquitous in action and presence? As well say that we who live
in Paris are deprived of a residence in New York! Confess, then, that
the privation of the capitalist is akin to that of the master who has
lost his slave, to that of the prince expelled by his subjects, to that
of the robber who, wishing to break into a house, finds the dogs on the
watch and the inmates at the windows." [Ibid.]
In the capitalist's world, an industrialist who cannot buy a third
summer home "suffers" a cost equivalent to that of someone who postpones
consumption to get something they need. Similarly, if the industrialist
"earns" hundred times more in interest than the wage of the coal miner who
works in his mine, the industrialist "suffers" hundred times more discomfort
living in his palace than the coal miner does working at the coal face in
dangerous conditions. The "disutility" of postponing consumption while
living in luxury is obviously 100 times greater than the "disutility" of
working for a living and so should be rewarded appropriately. Of course,
the difference is that proponents of capitalism feel that capitalists
deserves compensation for their "restraint" in anticipation of future
gain, while at the same time refusing to recognise the ambiguity of
All in all, as Joan Robinson pointed out, "'waiting' only means owning
wealth." [_Contributions to Modern Economics_, p. 11] Interest is not
the reward for "waiting," rather it is one of the rewards for being
Little wonder, then, that neo-classical economists introduced the term
*waiting* as an "explanation" for returns to capital (such as interest).
Before this change in the jargon of economics, mainstream economists used
the notion of "abstinence" (a term invented by Nassau Senior) to account
for (and so justify) interest. Just as Senior's "theory" was seized upon
to defend returns to capital, so was the term "waiting" after it was
introduced in 1887. Interestingly, while describing *exactly* the same
thing, "waiting" became the preferred term simply because it had a less
apologetic ring to it. According to Marshall, the term "abstinence" was
"liable to be misunderstood" because there were just too many wealthy
people around who received interest and dividends without ever having
abstained from anything (as he noted, the "greatest accumulators of
wealth are very rich persons, some [!] of whom live in luxury" [Op. Cit.,
p. 232]). So he opted for the term "waiting" because there was "advantage"
in its use, particularly because socialists had long been pointing out
the obvious fact that capitalists do not "abstain" from anything (see
Marshall, Op. Cit., p. 233). The lesson is obvious, in mainstream
economics if reality conflicts with your theory, do not reconsider the
theory, change its name!
Indeed, as Joan Robinson points out, the pro-capitalist theories of who
abstains are wrong, "since saving is mainly out of profits, and real wages
tend to be lower the higher the rate of profit, the abstinence associated
with saving is mainly done by the workers, who do not receive any share
in the 'reward.'" [_The Accumulation of Capital_, p. 393]
To say that those who hold capital can lay claim to a portion of the social
product by abstaining or waiting provides no explanation of what makes
production profitable, and so to what extent interest and dividends can be
paid. Reliance on a "waiting" theory of why returns of capital exist represents
nothing less than a reluctance by economists to confront the sources of value
creation in an economy or to analyse the social relations between workers and
managers/bosses on the shop floor. To do so would be to bring into question
the whole nature of capitalism and any claims it was based upon freedom.
C.2.7 But wouldn't the "time value" of money justify charging interest in
a more egalitarian capitalism?
More needs to be said about interest, since a more egalitarian capitalism
(if such a thing could exist) would still have interest, and the greater
egalitarianism could even be used as the basis of a justification for it.
Indeed, the conceptual history that supporters of capitalism present to
justify interest (or the appropriation of surplus value in general)
usually start in a fictional community of equals. The time preference
theory of interest bases itself on such a fiction. We are presented
with the argument that individuals have different "time preferences."
Most individuals prefer, it is claimed, to consume now rather than
later while a few prefer to save now on the condition that they can
consume more later. Interest, therefore, is the payment that encourages
people to defer consumption and so is dependent upon the subjective
evaluations of individuals.
Based on this argument, many supporters of capitalism claim that it is
legitimate for the person who provided the capital to get back *more*
than they put in, because of the "time value of money." This is because
the person who provided the machinery, tools, etc. had to postpone X
amount of consumption which he could have had with his money. Capital
providers will only get back X amount of consuming power later, after
they have been paid back for the machinery etc. by receiving a portion,
over time, of the increased output that it makes possible. Since people
prefer consumption now to consumption later, they can only be persuaded
to give up consumption now by the promise of receiving more later.
Hence returns to capital are based upon this "time value" of money
and the argument that individuals have different "time preferences."
That the idea of doing nothing (i.e. not consuming) can be considered
as productive says a lot about capitalist theory. Even supporters of
capitalism recognise that interest income "arises independently of any
personal act of the capitalist. It accrues to him even though he has not
moved any finger in creating it. . . And it flows without ever exhausting
that capital from which it arises, and therefore without any necessary
limit to its continuance. It is, if one may use such an expression in
mundane matters, capable of everlasting life." [Eugen Bohm-Bawark,
_Capital and Interest_, vol. 1, p. 1] Needless to say, Bohm-Bawark
then went on to justify this situation.
Lets not forget that, due to *one* decision not to do anything (i.e.
*not* to consume), a person (and his or her heirs) may receive *forever*
a reward that is not tied to any productive activity. Unlike the people
actually doing the work (who only get a reward every time they "contribute"
to creating a commodity), the capitalist will get rewarded for just
*one* act of abstention. This is hardly a just arrangement. As David
Schweickart has pointed out, "Capitalism does reward some individuals
perpetually. This, if it is to be justified by the canon of contribution,
one must defend the claim that some contributions are indeed eternal."
[_Against Capitalism_, p.17] In addition, the receiver of interest can
pass the benefits of this *one* decision to his family after he or she
dies, weakening the case for "abstinence" even more.
It was in the face of the weaknesses of the "abstinence" or "waiting"
theories of capital that Bohm-Bawark suggested the "time preference"
theory (namely that surplus value is generated by the exchange of
present goods for future goods, as future goods are valued less than
present goods due to "time preference"). Of course, this theory is subject
to exactly the same points we raised in the last section. An individual's
psychology is conditioned by the social situation they find themselves in.
Just as "abstaining" or "waiting" is far easier to do when one is rich,
ones "time preference" is also determined by ones social position. If one
has more than enough money for current needs, one can more easily "discount"
the future (for example, workers will value the future product of their
labour less than their current wages simply because without those wages
there will be no future). And if ones "time preference" is dependent on
social facts (such as available resources, ones class, etc.), then
interest cannot be based upon subjective evaluations, as these are not
the independent factor. In other words, saving does not express "time
preference", it simply expresses the extent of inequality.
Even if we ignore the problem that inequality influences the subjective
"time preference" of individuals, the theory still does not provide a
defence of interest. It is worthwhile quoting the noted post-Keynesian
economist Joan Robinson on why this is so:
"The notion that human beings discount the future certainly seems to
correspond to everyone's subjective experience, but the conclusion
drawn from it is a *non sequitor*, for most people have enough sense to
want to be able to exercise consuming power as long as fate permits, and
many people are in the situation of having a higher income in the present
than they expect in the future (salary earners will have to retire,
business may be better now than it seems likely to be later, etc.) and
many look beyond their own lifetime and wish to leave consuming power
to their heirs. Thus a great many . . . are eagerly looking for a
reliable vehicle to carry purchasing power into the future . . . It is
impossible to say what price would rule is there were a market for
present *versus* future purchasing power, unaffected by any other
influence except the desires of individuals about the time-pattern
of their consumption. It might will be such a market would normally
yield a negative rate of discount . . .
"The rate of interest is normally positive for a quite different reason.
Present purchasing power is valuable partly because, under the capitalist
rules of the game, it permits its owner . . . to employ labour and
undertake production which will yield a surplus of receipts over costs.
In an economy in which the rate of profit is expected to be positive,
the rate of interest is positive . . . [and so] the present value of
purchasing power exceeds its future value to the corresponding extent. . .
This is nothing whatever to do with the subjective *rate of discount
of the future* of the individual concerned. . . " [_The Accumulation
of Capital_, p. 395]
So, interest has little to do with "time preference" and a lot more to
do with the inequalities associated with the capitalist system. In effect,
the "time preference" theory assumes what it is trying to prove. Interest
is positive simply because capitalists can appropriate surplus value from
workers and so current money is more valuable than future money because
of this fact. Indeed, in an uncertain world future money may be its own
reward (for example, workers facing unemployment in the future could
value the same amount of money more then than in the present). It is
only because money provides the authority to allocate resources and
exploit wage labour that money now is more valuable. In other words,
the capitalist does not supply "time" (as the "time value" theory
argues), it provides authority/power.
So, does someone who saves deserve a reward for saving? Simply put, no.
Why? Because the act of saving is no more an act of production than is
purchasing a commodity. Clearly the reward for purchasing a commodity is
that commodity. By analogy, the reward for saving should be not interest
but one's savings -- the ability to consume at a later stage.
Capitalists assume that people will not save unless promised the ability
to consume *more* at a later stage, yet close examination of this argument
reveals its absurdity. People in many different economic systems save in
order to consume later, but only in capitalism is it assumed that they
need a reward for it beyond the reward of having those savings available
for consumption later. The peasant farmer "defers consumption" in order
to have grain to plant next year, the squirrel "defers consumption" of
nuts in order to have a stock through winter. But neither expects to see
their stores increase in size over time. Therefore, saving is rewarded by
saving, as consuming is rewarded by consuming. In fact, the capitalist
"explanation" for interest has all the hallmarks of apologetics. It is
merely an attempt to justify an activity without careful analysing it.
To be sure, there is an economic truth underlying this argument for
justifying interest, but the formulation by supporters of capitalism
is inaccurate and unfortunate. There is a sense in which 'waiting'
is a condition for capital *increase*, though not for capital per
se. Any society which wishes to increase its stock of capital goods
may have to postpone some gratification. Workplaces and resources
turned over to producing capital goods cannot be used to produce
consumer items, after all. So, like most capitalist economics there is
a grain of truth in it but this grain of truth is used to grow a forest
of half-truths and confusion.
Any economy is a network, where decisions affect everyone. Therefore,
if some people do not consume now, production is turned away from
consumption goods, and this has an effect on all. Or, to put it slightly
differently, aggregate demand -- and so aggregate supply -- is changed
when some people postpone consumption, and this affects others. The
decrease in the demand for consumer goods affects the producers of these
goods. Under capitalism, this may result in other people having to
"defer consumption," as they cannot sell their goods on the market; but
supporters of capitalism assume that *only* capitalists are affected by
their decision to postpone consumption, and therefore that they should get
a reward for it. Indeed, why should someone be rewarded for a decision
which may cause companies to go bust, so *reducing* the available means of
production as reduced demand results in job loses and idle factories, is
not even raised as an issue by the supporters of capitalism.
Lastly, we must consider what interest actually means. It is *not* the
same as other forms of exchange. Proudhon pointed out the difference:
"Comparing a loan to a *sale*, you say: Your argument is as valid against
the latter as against the former, for the hatter who sells hats does not
"No, for he receives for his hats -- at least he is reputed to receive for
them -- their exact value immediately, neither *more* nor *less*. But the
capitalist lender not only is not deprived, since he recovers his capital
intact, but he receives more than his capital, more than he contributes
to the exchange; he receives in addition to his capital an interest which
represents no positive product on his part. Now, a service which costs no
labour to him who renders it is a service which may become gratuitous."
[_Interest and Principal: The Circulation of Capital, Not Capital Itself,
Gives Birth to Progress_]
Thus selling the use of money (paid for by interest) is not the same as
selling a commodity. The seller of the commodity does not receive the
commodity back as well as its price. In effect, as with rent and profits,
interest is payment for permission to use something and, therefore, not
a productive act which should be rewarded. Ultimately, interest is an
expression of inequality, *not* exchange:
"If there is chicanery afoot in calling 'money now' a different good than
'money later,' it is be no means harmless, for the intended effect is to
subsume money lending under the normative rubric of exchange. . . [but]
there are obvious differences . . . [for in normal commodity exchange]
both parties have something [while in loaning] he has something you don't
. . . [so] inequality dominates the relationship. He has more than you have
now, and he will get back more than he gives." [Schweickart, Op. Cit., p.23]
Therefore, money lending is, for the poor person, not a choice between
more consumption now/less later and less consumption now/more later. If
there is no consumption now, there will not be any later. In addition,
even in a relatively egalitarian capitalism, interest implies that the
producer of new capital is *not* producing commodities. Would-be
capitalists have "deferred consumption" and allowed a machine to be
created. They then offer to let others use it for a fee, but they are
*not* selling a commodity, they are renting the use of something. And
giving permission is not a productive act (as noted above).
Therefore, providing capital and charging interest are not productive acts.
As Proudhon argued, "all rent received (nominally as damages, but really
as payment for a loan) is an act of property - of robbery [theft]."
[_What is Property_, p. 171] In other words, capitalism is based on
usury, i.e. paying for the use of something. The machine owner has
"deferred consumption" and so is "rewarded" with wage labourers to boss
about and payment in excess of what he or she originally put forward.
In addition, the commodity producers have made goods which the owner of
the machine gets paid for and still has the machine! This means that the
interest paid has been taken from the labour of those who use the machine,
who end up with *nothing* at the end beyond their wages and so are still
wage slaves, looking for a new boss. Little wonder Proudhon argued that
"Property is theft!"
Interest is a con, pure and simple. Little wonder both social and
individualist anarchists have opposed it. Ben Tucker assumed that mutual
banking, besides reducing interest to zero, would also increase the power
of workers in the economy, meaning that workers would be in a position to
refuse to work for a capitalist unless they agreed to a hire-purchase deal
on the capital they used (see section G). As for the social anarchists,
they realised that free agreements between syndicates and communes would
ensure suitable investment in new means of production. They also
recognised the network of common influence in any advanced economy,
and thus that since everyone is affected by investment decisions, all
should have a say in them (see section I).
C.3 What determines the distribution between profits and wages within
At any time, there is a given amount of unpaid labour in circulation
in the form of goods or services representing more added value than
workers were paid for. This given sum of unpaid labour represents total
available profits. Each company tries to maximise its share of that
total, and if a company does realise an above-average share, it means that
some other companies receive less than average. The larger the company,
the more likely it is to obtain a larger share of the available surplus,
for reasons discussed later (see section C.5). The important thing to note
here is that companies compete on the market to realise their share of the
total surplus of profits (unpaid labour). However, the *source* of these
profits does not lie in the market, but in production. One cannot buy
what does not exist and if one gains, another loses.
As indicated above, production prices determine market prices. In any
company, wages determine a large percentage of the production costs.
Looking at other costs (such as raw materials), again wages play a large
role in determining their price. Obviously the division of a commodity's
price into costs and profits is not a fixed ratio, which mean that prices
are the result of complex interactions of wage levels and productivity.
Within the limits of a given situation, the class struggle between
employers and employees over wages, working conditions and benefits
determines the degree of exploitation within a workplace and industry,
and so determines the relative amount of money which goes to labour
(i.e. wages) and the company (profits). As Proudhon argued, the
expression "the relations of profits to wages" meant "the war between
labour and capital." [_System of Economical Contradictions_, p. 130]
This also means that an increase in wages may not drive up prices, as it
may reduce profits or be tied to productivity; but this will have more
widespread effects, as capital will move to other industries and
countries in order to improve profit rates, if this is required.
The essential point is that the extraction of surplus value from
workers is not a simple technical operation like the extraction of so
many joules from a ton of coal. It is a bitter struggle, in which the
capitalists lose half the time. Labour power is unlike all other
commodities - it is and remains inseparably embodied in human
beings. The division of profits and wages in a company and in
the economy as a whole is dependent upon and modified by the
actions of workers, both as individuals and as a class.
We are not saying that economic and objective factors play no role in
the determination of the wage level. On the contrary, at any moment the
class struggle can only act within a given economic framework. However,
these objective conditions are constantly modified by the class struggle
and it is this conflict between the human and commodity aspects of
labour power that ultimately brings capitalism into crisis (see section
From this perspective, the neo-classical argument that a factor in production
(labour, capital or land) receives an income share that indicates its productive
power "at the margin" is false. Rather, it is a question of power -- and the
willingness to use it. As Christopher Eaton Gunn points out, this argument
"take[s] no account of power -- of politics, conflict, and bargaining -- as
more likely indicators of relative shares of income in the real world."
[_Workers' Self-Management in the United States_, p. 185] If the power
of labour is increasing, it's share in income will tend to increase and,
obviously, if the power of labour decreased it would fall. And the history
of the post-war economy supports such an analysis, with labour in the
advanced countries share of income falling from 68% in the 1970s to
65.1% in 1995 (in the EU, it fell from 69.2% to 62%). In the USA,
labour's share of income in the manufacturing sector fell from 74.8%
to 70.6% over the 1979-89 period, reversing the rise in labour's share
that occurred over the 1950s, 1960s and 1970s. The reversal in labour's
share occurred at the same time as labour's power was undercut by
right-wing governments and high unemployment.
Thus, for many anarchists, the relative power between labour and capital
determines the distribution of income between them. In periods of
full employment or growing workplace organisation and solidarity,
workers wages will tend to rise faster. In periods where there is high
unemployment and weaker unions and less direct action, labour's share
will fall. From this analysis anarchists support collective organisation
and action in order to increase the power of labour and ensure we
receive more of the value we produce.
The neo-classical notion that rising productivity allows for increasing
wages is one that has suffered numerous shocks since the early 1970s.
Usually wage increases lag behind productivity. For example, during
Thatcher's reign of freer markets, productivity rose by 4.2%, 1.4% higher
than the increase in real earnings between 1980-88. Under Reagan,
productivity increased by 3.3%, accompanied by a fall of 0.8% in real
earnings. Remember, though, these are averages and hide the actual
increases in pay between workers and managers. To take one example, the
real wages for employed single men between 1978 and 1984 in the UK rose
by 1.8% for the bottom 10% of that group, for the highest 10%, it was a
massive 18.4%. The average rise (10.1%) hides the vast differences between
top and bottom. In addition, these figures ignore the starting point of
these rises -- the often massive differences in wages between employees
(compare the earnings of the CEO of McDonalds and one of its cleaners).
In other words, 2.8% of nearly nothing is still nearly nothing!
Looking at the USA again, we find that workers who are paid by the
hour (the majority of employees) saw their average pay peak in 1973.
Since then, it had declined substantially and stood at its mid-1960s
level in 1992. For over 80 per cent of the US workforce (production
and non-supervisory workers), real wages have fallen by 19.2 per cent
for weekly earnings and 13.4 per cent for hourly earnings between 1973
and 1994. Productivity had risen by 23.2 per cent. Combined with this
drop in real wages in the USA, we have seen an increase in hours
worked. In order to maintain their current standard of living, working
class people have turned to both debt and longer working hours.
Since 1979, the annual hours worked by middle-income families rose
from 3 020 to 3 206 in 1989, 3 287 in 1996 and 3 335 in 1997. In
Mexico we find a similar process. Between 1980 and 1992,
productivity rose by 48 per cent while salaries (adjusted for
inflation) fell by 21 per cent.
Between 1989 to 1997, productivity increased by 9.7% in the USA while
medium compensation decreased by 4.2%. In addition, medium family
working hours grew by 4% (or three weeks of full-time work) while its
income increased by only 0.6 % (in other words, increases in working
hours helped to create this slight growth). If the wages of workers were related
to their productivity, as argued by neo-classical economics, you would expect
wages to increase as productivity rose, rather than fall. However, if wages
are related to economic power, then this fall is to be expected. This explains
the desire for "flexible" labour markets, where workers' bargaining power
is eroded and so more income can go to profits rather than wages. Of
course, it will be argued that only in a perfectly competitive market (or,
more realistically, a truly "free" one) will wages increase in-line with
productivity. However, you would expect that a regime of *freer* markets
would make things better, not worse. Moreover, the neo-classical argument
that unions, struggling over wages and working conditions will harm workers
in the "long run" has been dramatically refuted over the last 30
years -- the decline of the labour movement in the USA has been marked
by falling wages, not rising ones, for example.
Unsurprisingly, in a hierarchical system those at the top do better than
those at the bottom. The system is set up so that the majority enrich the
minority. That is way anarchists argue that workplace organisation and
resistance is essential to maintain -- and even increase -- labour's income.
For if the share of income between labour and capital depends on their
relative power -- and it does -- then only the actions of workers themselves
can improve their situation and determine the distribution of the value they
C.4 Why does the market become dominated by Big Business?
"The facts show. . .that capitalist economies tend over time and with
some interruptions to become more and more heavily concentrated." [M.A.
Utton, _The Political Economy of Big Business_, p. 186] The dynamic
of the "free" market is that it tends to becomes dominated by a few
firms (on a national, and increasingly, international, level), resulting
in oligopolistic competition and higher profits for the companies in
question (see next section for details and evidence). This occurs because
only established firms can afford the large capital investments needed to
compete, thus reducing the number of competitors who can enter or survive
in a given the market. Thus, in Proudhon's words, "competition kills
competition." [_System of Economical Contradictions_, p. 242]
This "does not mean that new, powerful brands have not emerged [after
the rise of Big Business in the USA after the 1880s]; they have, but
in such markets. . . which were either small or non-existent in the
early years of this century." The dynamic of capitalism is such that
the "competitive advantage [associated with the size and market power
of Big Business], once created, prove[s] to be enduring." [Paul
Ormerod, _The Death of Economics_, p. 55]
For people with little or no capital, entering competition is limited to
new markets with low start-up costs ("In general, the industries which
are generally associated with small scale production. . . have low levels
of concentration" [Malcolm C. Sawyer, _The Economics of Industries and
Firms_, p. 35]). Sadly, however, due to the dynamics of competition,
these markets usually in turn become dominated by a few big firms, as
weaker firms fail, successful ones grow and capital costs increase --
"Each time capital completes its cycle, the individual grows smaller in
proportion to it." [Josephine Guerts, _Anarchy: A Journal of Desire Armed_
no. 41, p. 48]
For example, between 1869 and 1955 "there was a marked growth in capital
per person and per number of the labour force. Net capital per head rose.
. . to about four times its initial level. . . at a rate of about 17% per
decade." The annual rate of gross capital formation rose "from $3.5
billion in 1869-1888 to $19 billion in 1929-1955, and to $30 billion in
1946-1955. This long term rise over some three quarters of a century was
thus about nine times the original level." [Simon Kuznets, _Capital in the
American Economy_, p. 33 and p. 394, constant (1929) dollars] To take the
steel industry as an illustration: in 1869 the average cost of steel
works in the USA was $156,000, but by 1899 it was $967,000 -- a 520%
increase. From 1901 to 1950, gross fixed assets increased from $740,201
to $2,829,186 in the steel industry as a whole, with the assets of
Bethlehem Steel increasing by 4,386.5% from 1905 ($29,294) to 1950
($1,314,267). These increasing assets are reflect both in the size of
workplaces and in the administration levels in the company as a whole
(i.e. *between* individual workplaces).
With the increasing ratio of capital to worker, the cost of starting a
rival firm in a given, well-developed, market prohibits all but other
large firms from doing so (and here we ignore advertising and other
distribution expenses, which increase start-up costs even more -
"advertising raises the capital requirements for entry into the industry"
-- Sawyer, Op. Cit., p. 108). J.S Bain (in _Barriers in New Competition_)
identified three main sources of entry barrier: economies of scale
(i.e. increased capital costs and their more productive nature); product
differentiation (i.e. advertising); and a more general category he called
"absolute cost advantage."
This last barrier means that larger companies are able to outbid smaller
companies for resources, ideas, etc. and put more money into Research and
Development and buying patents. Therefore they can have a technological
and material advantage over the small company. They can charge
"uneconomic" prices for a time (and still survive due to their resources) --
an activity called "predatory pricing" -- and/or mount lavish promotional
campaigns to gain larger market share or drive competitors out of the
market. In addition, it is easier for large companies to raise external
capital, and risk is generally less.
In addition, large firms can have a major impact on innovation and the
development of technology -- they can simply absorb newer, smaller,
enterprises by way of their economic power, buying out (and thus
controlling) new ideas, much the way oil companies hold patents on
a variety of alternative energy source technologies, which they then
fail to develop in order to reduce competition for their product (of
course, at some future date they may develop them when it becomes
profitable for them to do so). Also, when control of a market is
secure, oligopolies will usually delay innovation to maximise their
use of existing plant and equipment or introduce spurious innovations
to maximise product differentiation. If their control of a market is
challenged (usually by other big firms, such as the increased competition
Western oligopolies faced from Japanese ones in the 1970s and 1980s),
they can speed up the introduction of more advanced technology and
usually remain competitive (due, mainly, to the size of the resources
they have available).
These barriers work on two levels - *absolute* (entry) barriers and
*relative* (movement) barriers. As business grows in size, the amount
of capital required to invest in order to start a business also increases.
This restricts entry of new capital into the market (and limits it to firms
with substantial financial and/or political backing behind them):
"Once dominant organisations have come to characterise the structure of
an industry, immense barriers to entry face potential competitors. Huge
investments in plant, equipment, and personnel are needed. . . [T]he
development and utilisation of productive resources *within* the organisation
takes considerable time, particularly in the face of formidable incumbents
. . . It is therefore one thing for a few business organisations to emerge
in an industry that has been characterised by . . . highly competitive
conditions. It is quite another to break into an industry. . . [marked by]
oligopolistic market power." [William Lazonick, _Business Organisation
and the Myth of the Market Economy_, pp. 86-87]
Moreover, *within* the oligopolistic industry, the large size and market power
of the dominant firms mean that smaller firms face expansion disadvantages
which reduce competition. The dominant firms have many advantages over
their smaller rivals -- significant purchasing power (which gains better service
and lower prices from suppliers as well as better access to resources),
privileged access to financial resources, larger amounts of retained earnings
to fund investment, economies of scale both within and *between* workplaces,
the undercutting of prices to "uneconomical" levels and so on (and, of course,
they can *buy* the smaller company -- IBM paid $3.5 billion for Lotus in
1995. That is about equal to the entire annual output of Nepal, which has
a population of 20 million). The large firm or firms can also rely on
its established relationships with customers or suppliers to limit the
activities of smaller firms which are trying to expand (for example, using
their clout to stop their contacts purchasing the smaller firms products).
Little wonder Proudhon argued that "[i]n competition. . . victory is assured
to the heaviest battalions." [Op. Cit., p. 260]
As a result of these entry/movement barriers, we see the market being divided
into two main sectors -- an oligopolistic sector and a more competitive one.
These sectors work on two levels -- within markets (with a few firms in a
given market having very large market shares, power and excess profits) and
within the economy itself (some markets being highly concentrated and
dominated by a few firms, other markets being more competitive). This results
in smaller firms in oligopolistic markers being squeezed by big business
along side firms in more competitive markets. Being protected from competitive
forces means that the market price of oligopolistic markets is *not* forced
down to the average production price by the market, but instead it tends to
stabilise around the production price of the smaller firms in the industry
(which do not have access to the benefits associated with dominant position
in a market). This means that the dominant firms get super-profits while
new capital is not tempted into the market as returns would not make the move
worthwhile for any but the biggest companies, who usually get comparable
returns in their own oligopolised markets (and due to the existence of market
power in a few hands, entry can potentially be disastrous for small firms
if the dominant firms perceive expansion as a threat).
Thus whatever super-profits Big Business reap are maintained due to the
advantages it has in terms of concentration, market power and size which
reduce competition (see section C.5 for details).
And, we must note, that the processes that saw the rise of national
Big Business is also at work on the global market. Just as Big Business
arose from a desire to maximise profits and survive on the market, so
"[t]ransnationals arise because they are a means of consolidating or
increasing profits in an oligopoly world." [Keith Cowling and Roger Sugden,
_Transnational Monopoly Capitalism_, p. 20] So while a strictly national
picture will show a market dominated by, say, four firms, a global view shows
us twelve firms instead and market power looks much less worrisome. But just
as the national market saw a increased concentration of firms over time,
so will global markets. Over time a well-evolved structure of global
oligopoly will appear, with a handful of firms dominating most global
markets (with turnovers larger than most countries GDP -- which is the
case even now. For example, in 1993 Shell had assets of US$ 100.8 billion,
which is more than double the GDP of New Zealand and three times that of
Nigeria, and total sales of US$ 95.2 billion).
Thus the very dynamic of capitalism, the requirements for survival on
the market, results in the market becoming dominated by Big Business
("the more competition develops, the more it tends to reduce the
number of competitors." [P-J Proudhon, Op. Cit., p. 243]). The irony
that competition results in its destruction and the replacement of
market co-ordination with planned allocation of resources is one usually
lost on supporters of capitalism.
C.4.1 How extensive is Big Business?
The effects of Big Business on assets, sales and profit distribution are
clear. In the USA, in 1985, there were 14,600 commercial banks. The 50
largest owned 45.7 of all assets, the 100 largest held 57.4%. In 1984
there were 272,037 active corporations in the manufacturing sector, 710
of them (one-fourth of 1 percent) held 80.2 percent of total assets. In
the service sector (usually held to home of small business), 95 firms of
the total of 899,369 owned 28 percent of the sector's assets. In 1986 in
agriculture, 29,000 large farms (only 1.3% of all farms) accounted for
one-third of total farm sales and 46% of farm profits. In 1987, the top
50 firms accounted for 54.4% of the total sales of the _Fortune_ 500
largest industrial companies. [Richard B. Du Boff, _Accumulation and
Power_, p. 171]
The process of market domination is reflected by the increasing market share
of the big companies. In Britain, the top 100 manufacturing companies saw
their market share rise from 16% in 1909, to 27% in 1949, to 32% in 1958
and to 42% by 1975. In terms of net assets, the top 100 industrial and
commercial companies saw their share of net assets rise from 47% in 1948
to 64% in 1968 to 80% in 1976 [R.C.O. Matthews (ed.), _Economy and
Democracy_, p. 239]. Looking wider afield, we find that in 1995 about
50 firms produce about 15 percent of the manufactured goods in the
industrialised world. There are about 150 firms in the world-wide motor
vehicle industry. But the two largest firms, General Motors and Ford,
together produce almost one-third of all vehicles. The five largest firms
produce half of all output and the ten largest firms produce three-quarters.
Four appliance firms manufacture 98 percent of the washing machines made in
the United States. In the U. S. meatpacking industry, four firms account for
over 85 percent of the output of beef, while the other 1,245 firms have less
than 15 percent of the market.
While the concentration of economic power is most apparent in the
manufacturing sector, it is not limited to manufacturing. We are seeing
increasing concentration in the service sector - airlines, fast-food
chains and the entertainment industry are just a few examples.
The other effect of Big Business is that large companies tend to become
more diversified as the concentration levels in individual industries
increase. This is because as a given market becomes dominated by larger
companies, these companies expand into other markets (using their larger
resources to do so) in order to strengthen their position in the economy
and reduce risks. This can be seen in the rise of "subsidiaries" of parent
companies in many different markets, with some products apparently
competing against each other actually owned by the same company!
Tobacco companies are masters of this diversification strategy; most people
support their toxic industry without even knowing it! Don't believe it?
Well, if you ate any Jell-O products, drank Kool-Aid, used Log Cabin syrup,
munched Minute Rice, quaffed Miller beer, gobbled Oreos, smeared Velveeta
on Ritz crackers, and washed it all down with Maxwell House coffee, you
supported the tobacco industry, all without taking a puff on a cigarette!
Ironically, the reason why the economy becomes dominated by Big Business
has to do with the nature of competition itself. In order to survive (by
maximising profits) in a competitive market, firms have to invest in capital,
advertising, and so on. This survival process results in barriers to
potential competitors being created, which results in more and more markets
being dominated by a few big firms. This oligopolisation process becomes
self-supporting as oligopolies (due to their size) have access to more
resources than smaller firms. Thus the dynamic of competitive capitalism
is to negate itself in the form of oligopoly.
C.4.2 What are the effects of Big Business on society?
Unsurprisingly many pro-capitalist economists and supporters of capitalism
try to downplay the extensive evidence on the size and dominance of Big
Business in capitalism.
Some deny that Big Business is a problem - if the market results in a
few companies dominating it, then so be it (the right-libertarian "Austrian"
school is at the forefront of this kind of position - although it does
seem somewhat ironic that "Austrian" economists and other "market advocates"
should celebrate the suppression of market co-ordination by *planned*
co-ordination within the economy that the increased size of Big Business
marks). According to this perspective, oligopolies and cartels usually do
not survive very long, unless they are doing a good job of serving the
We agree -- it is oligopolistic *competition* we are discussing here. Big
Business has to be responsive to demand (when not manipulating/creating it
by advertising, of course), otherwise they lose market share to their rivals
(usually other dominant firms in the same market, or big firms from other
countries). However, the "free market" response to the reality of oligopoly
ignores the fact that we are more than just consumers and that economic
activity and the results of market events impact on many different aspects
of life. Thus our argument is not focused on the fact we pay more for some
products than we would in a more competitive market -- it is the *wider*
results of oligopoly we are concerned with here. If a few companies receive
excess profits just because their size limits competition the effects of
this will be felt *everywhere.*
For a start, these "excessive" profits will tend to end up in few hands, so
skewing the income distribution (and so power and influence) within society.
The available evidence suggests that "more concentrated industries generate
a lower wage share for workers" in a firm's value-added. [Keith Cowling,
_Monopoly Capitalism_, p. 106] The largest firms retain only 52% of their
profits, the rest is paid out as dividends, compared to 79% for the smallest
ones and "what might be called rentiers share of the corporate surplus -
dividends plus interest as a percentage of pretax profits and interest -
has risen sharply, from 20-30% in the 1950s to 60-70% in the early 1990s."
[Doug Henwood, _Wall Street_, p. 75, p. 73] The top 10% of the US population
own well over 80% of stock and bonds owned by individuals while the top 5% of
stockowners own 94.5% of all stock held by individuals. Little wonder wealth
has become so concentrated since the 1970s [Ibid., pp. 66-67]. At its most
basic, this skewing of income provides the capitalist class with more
resources to fight the class war but its impact goes much wider than this.
Moreover, the "level of aggregate concentration helps to indicate the degree
of centralisation of decision-making in the economy and the economic power
of large firms." [Malcolm C. Sawyer, Op. Cit., p. 261] Thus oligopoly
increases and centralises economic power over investment decisions and
location decisions which can be used to play one region/country and/or
workforce against another to lower wages and conditions for all (or, equally
likely, investment will be moved away from countries with rebellious work
forces or radical governments, the resulting slump teaching them a lesson on
whose interests count). As the size of business increases, the power of capital
over labour and society also increases with the threat of relocation being
enough to make workforces accept pay cuts, worsening conditions, "down-sizing"
and so on and communities increased pollution, the passing of pro-capital
laws with respect to strikes, union rights, etc. (and increased corporate
control over politics due to the mobility of capital).
Also, of course, oligopoly results in political power as their economic
importance and resources gives them the ability to influence government
to introduce favourable policies -- either directly, by funding political
parties, or indirectly by investment decisions or influence the media and
funding political think-tanks. Economic power also extends into the labour
market, where restricted labour opportunities as well as negative effects
on the work process itself may result. All of which shapes the society we
live in the laws we are subject to, the "evenness" and "levelness" of the
"playing field" we face in the market and the ideas dominant in society
(see sections D.2 and D.3).
So, with increasing size, comes the increasing power, the power of
oligopolies to "influence the terms under which they choose to operate.
Not only do they *react* to the level of wages and the pace of work,
they also *act* to determine them. . . The credible threat of the shift of
production and investment will serve to hold down wages and raise the
level of effort [required from workers] . . . [and] may also be able to
gain the co-operation of the state in securing the appropriate environment
. . . [for] a redistribution towards profits" in value/added and national
income. [Keith Cowling and Roger Sugden, _Transnational Monopoly
Capitalism_, p. 99]
Since the market price of commodities produced by oligopolies is determined
by a mark-up over costs, this means that they contribute to inflation as
they adapt to increasing costs or falls in their rate of profit by increasing
prices. However, this does not mean that oligopolistic capitalism is
not subject to slumps. Far from it. Class struggle will influence the
share of wages (and so profit share) as wage increases will not be
fully offset by price increases -- higher prices mean lower demand and
there is always the threat of competition from other oligopolies. In
addition, class struggle will also have an impact on productivity and the
amount of surplus value in the economy as a whole, which places major
limitations on the stability of the system. Thus oligopolistic capitalism
still has to contend with the effects of social resistance to hierarchy,
exploitation and oppression that afflicted the more competitive capitalism
of the past.
The distributive effects of oligopoly skews income, thus the degree of
monopoly has a major impact on the degree of inequality in household
distribution. The flow of wealth to the top helps to skew production away
from working class needs (by outbidding others for resources and having
firms produce goods for elite markets while others go without). The
empirical evidence presented by Keith Cowling "points to the conclusion
that a redistribution from wages to profits will have a depressive
impact on consumption" [Op. Cit, p. 51] which may cause depression.
High profits also means that more can be retaining by the firm to fund
investment (or pay high level managers more salaries or increase dividends,
of course). When capital expands faster than labour income over-investment
is an increasing problem and aggregate demand cannot keep up to counteract
falling profit shares (see section C.7 on more about the business cycle).
Moreover, as the capital stock is larger, oligopoly will also have a
tendency to deepen the eventual slump, making it last long and harder
to recover from.
Looking at oligopoly from an efficiency angle, the existence of super
profits from oligopolies means that the higher price within a market
allows inefficient firms to continue production. Smaller firms can
make average (non-oligopolistic) profits *in spite* of having higher
costs, sub-optimal plant and so on. This results in inefficient use of
resources as market forces cannot work to eliminate firms which have
higher costs than average (one of the key features of capitalism according
to its supporters). And, of course, oligopolistic profits skew allocative
efficiency as a handful of firms can out-bid all the rest, meaning that
resources do not go where they are most needed but where the largest
effective demand lies.
Such large resources available to oligopolistic companies also allows
inefficient firms to survive on the market even in the face of competition
from other oligopolistic firms. As Richard B. Du Boff points out, efficiency
can also be "impaired when market power so reduces competitive pressures
that administrative reforms can be dispensed with. One notorious case was
. . . U.S. Steel [formed in 1901]. Nevertheless, the company was hardly
a commercial failure, effective market control endured for decades, and
above normal returns were made on the watered stock. . . Another such case
was Ford. The company survived the 1930s only because of cash reserves
socked away in its glory days. 'Ford provides an excellent illustration
of the fact that a really large business organisation can withstand a
surprising amount of mismanagement.'" [_Accumulation and Power_, p. 174]
Thus Big Business reduces efficiency within an economy on many levels
as well as having significant and lasting impact on society's social,
economic and political structure.
The effects of the concentration of capital and wealth on society are very
important, which is why we are discussing capitalism's tendency to result
in big business. The impact of the wealth of the few on the lives of the
many is indicated in section D of the FAQ. As shown there, in addition to
involving direct authority over employees, capitalism also involves indirect
control over communities through the power that stems from wealth.
Thus capitalism is not the free market described by such people as Adam
Smith -- the level of capital concentration has made a mockery of the ideas
of free competition.
C.4.3 What does the existence of Big Business mean for economic theory
and wage labour?
Here we indicate the impact of Big Business on economic theory itself and
wage labour. In the words of Michal Kalecki, perfect competition is
"a most unrealistic assumption" and "when its actual status of a handy
model is forgotten becomes a dangerous myth." [quoted by Malcolm C. Sawyer,
_The Economics of Michal Kalecki_, p. 8] Unfortunately mainstream capitalist
economics is *built* on this myth. Ironically, it was against a "background
[of rising Big Business in the 1890s] that the grip of marginal economics,
an imaginary world of many small firms. . . was consolidated in the
economics profession." Thus, "[a]lmost from its conception, the theoretical
postulates of marginal economics concerning the nature of companies [and
of markets, we must add] have been a travesty of reality." [Paul Ormerod,
Op. Cit., pp. 55-56]
That the assumptions of economic ideology so contradicts reality has important
considerations on the "voluntary" nature of wage labour. If the competitive
model assumed by neo-classical economics held we would see a wide range of
ownership types (including co-operatives, extensive self-employment and
workers hiring capital) as there would be no "barriers of entry" associated
with firm control. This is not the case -- workers hiring capital is
non-existent and self-employment and co-operatives are marginal. The
dominant control form is capital hiring labour (wage slavery).
With a model based upon "perfect competition," supporters of capitalism
could build a case that wage labour is a voluntary choice -- after all,
workers (in such a market) could hire capital or form co-operatives
relatively easily. But the *reality* of the "free" market is such that
this model is does not exist -- and as an assumption, it is seriously
misleading. If we take into account the actuality of the capitalist
economy, we soon have to realise that oligopoly is the dominant form
of market and that the capitalist economy, by its very nature, restricts
the options available to workers -- which makes the notion that wage
labour is a "voluntary" choice untenable.
If the economy is so structured as to make entry into markets difficult
and survival dependent on accumulating capital, then these barriers are
just as effective as government decrees. If small businesses are
squeezed by oligopolies then chances of failure are increased (and so
off-putting to workers with few resources) and if income inequality is
large, then workers will find it very hard to find the collateral
required to borrow capital and start their own co-operatives. Thus,
looking at the *reality* of capitalism (as opposed to the textbooks) it
is clear that the existence of oligopoly helps to maintain wage labour
by restricting the options available on the "free market" for working
As we noted in section C.4, those with little capital are reduced to
markets with low set-up costs and low concentration. Thus, claim the
supporters of capitalism, workers still have a choice. However, this
choice is (as we have indicated) somewhat limited by the existence of
oligopolistic markets -- so limited, in fact, that less than 10% of
the working population are self-employed workers. Moreover, it is
claimed, technological forces may work to increase the number of
markets that require low set-up costs (the computing market is often
pointed to as an example). However, similar predictions were made over
100 years ago when the electric motor began to replace the steam
engine in factories. "The new technologies [of the 1870s] may have been
compatible with small production units and decentralised operations. . .
That. . . expectation was not fulfilled." [Richard B. Du Boff, Op. Cit.,
p. 65] From the history of capitalism, we imagine that markets
associated with new technologies will go the same way.
The reality of capitalist development is that even *if* workers invested
in new markets, one that require low set-up costs, the dynamic of the
system is such that over time these markets will also become dominated by
a few big firms. Moreover, to survive in an oligopolised economy small
cooperatives will be under pressure to hire wage labour and otherwise act
as capitalist concerns (see section J.5.11). Therefore, even if we ignore
the massive state intervention which created capitalism in the first place
(see section B.3.2), the dynamics of the system are such that relations of
domination and oppression will always be associated with it -- they cannot
be "competed" away as the actions of competition creates and re-enforces
them (also see sections J.5.11 and J.5.12 on the barriers capitalism place
on co-operatives and self-management even though they are more efficient).
So the effects of the concentration of capital on the options open to us
are great and very important. The existence of Big Business has a direct
impact on the "voluntary" nature of wage labour as it produces very
effective "barriers of entry" for alternative modes of production. The
resultant pressures big business place on small firms also reduces the
viability of co-operatives and self-employment to survive *as* co-operatives
and non-employers of wage labour, effectively marginalising them as true
alternatives. Moreover, even in new markets the dynamics of capitalism are
such that *new* barriers are created all the time, again reducing our
Overall, the *reality* of capitalism is such that the equality of opportunity
implied in models of "perfect competition" is lacking. And without such
equality, wage labour cannot be said to be a "voluntary" choice between
available options -- the options available have been skewed so far in one
direction that the other alternatives have been marginalised.
C.5 Why does Big Business get a bigger slice of profits?
As described in the last section, due to the nature of the capitalist market,
large firms soon come to dominate. Once a few large companies dominate a
particular market, they form an oligopoly from which a large number of
competitors have effectively been excluded, thus reducing competitive
pressures. In this situation there is a tendency for prices to rise above
what would be the "market" level, as the oligopolistic producers do not
face the potential of new capital entering "their" market (due to the
relatively high capital costs and other entry/movement barriers). This form
of competition results in Big Business having an "unfair" slice of available
profits. As there is an *objective* level of profits existing in the
economy at any one time, oligopolistic profits are "created at the
expense of individual capitals still caught up in competition." [Paul
Mattick, _Economics, Politics, and the Age of Inflation_, p. 38]
As argued in section C.1, the price of a commodity will tend towards
its production price (which is costs plus average profit). In a
developed capitalist economy it is not as simple as this -- there are
various "average" profits depending on what Michal Kalecki termed the
"degree of monopoly" within a market. This theory "indicates that profits
arise from monopoly power, and hence profits accrue to firms with more
monopoly power. . . A rise in the degree of monopoly caused by the growth
of large firms would result in the shift of profits from small business
to big business." [Malcolm C. Sawyer, _The Economics of Michal Kalecki_,
p. 36] Thus a market with a high "degree of monopoly" will have a higher
average profit level (or rate of return) than one which is more competitive.
The "degree of monopoly" reflects such factors as level of market
concentration and power, market share, extent of advertising, barriers
to entry/movement, collusion and so on. The higher these factors, the
higher the degree of monopoly and the higher the mark-up of prices over
costs (and so the share of profits in value added). Our approach to this
issue is similar to Kalecki's in many ways although we stress that the
degree of monopoly affects how profits are distributed *between* firms,
*not* how they are created in the first place (which come, as argued in
section C.2, from the "unpaid labour of the poor" -- to use Kropotkin's
There is substantial evidence to support such a theory. J.S Bain
in _Barriers in New Competition_ noted that in industries where the
level of seller concentration was very high and where entry barriers
were also substantial, profit rates were higher than average. Research
has tended to confirm Bain's findings. Keith Cowling summarises this
"[A]s far as the USA is concerned. . . there are grounds for believing
that a significant, but not very strong, relationship exists between
profitability and concentration. . . [along with] a significant
relationship between advertising and profitability [an important factor
in a market's "degree of monopoly"]. . . [Moreover w]here the estimation
is restricted to an appropriate cross-section [of industry] . . . both
concentration and advertising appeared significant [for the UK]. By
focusing on the impact of changes in concentration overtime . . . [we are]
able to circumvent the major problems posed by the lack of appropriate
estimates of price elasticities of demand . . . [to find] a significant
and positive concentration effect. . . It seems reasonable to conclude on
the basis of evidence for both the USA and UK that there is a significant
relationship between concentration and price-cost margins." [_Monopoly
Capitalism_, pp. 109-110]
We must note that the price-cost margin variable typically used in these
studies subtracts the wage and *salary* bill from the value added in
production. This would have a tendency to reduce the margin as it does
not take into account that most management salaries (particularly those
at the top of the hierarchy) are more akin to profits than costs (and
so should *not* be subtracted from value added). Also, as many markets
are regionalised (particularly in the USA) nation-wide analysis may
downplay the level of concentration existing in a given market.
This means that large firms can maintain their prices and profits above
"normal" (competitive) levels without the assistance of government simply
due to their size and market power (and let us not forget the important fact
that Big Business rose during the period in which capitalism was closest
to "laissez faire" and the size and activity of the state was small). As
much of mainstream economics is based on the idea of "perfect competition"
(and the related concept that the free market is an efficient allocator of
resources when it approximates this condition) it is clear that such a
finding cuts to the heart of claims that capitalism is a system based upon
equal opportunity, freedom and justice. The existence of Big Business and
the impact it has on the rest of the economy and society at large exposes
capitalist economics as a house built on sand (see sections C.4.2 and C.4.3).
Another side effect of oligopoly is that the number of mergers will tend
to increase in the run up to a slump. Just as credit is expanded in an
attempt to hold off the crisis (see section C.8), so firms will merge
in an attempt to increase their market power and so improve their profit
margins by increasing their mark-up over costs. As the rate of profit
levels off and falls, mergers are an attempt to raise profits by increasing
the degree of monopoly in the market/economy. However, this is a short
term solution and can only postpone, but stop, the crisis as its roots lie in
production, *not* the market (see section C.7) -- there is only so much
surplus value around and the capital stock cannot be wished away. Once the
slump occurs, a period of cut-throat competition will start and then, slowly,
the process of concentration will start again (as weak firms go under,
successful firms increase their market share and capital stock and so on).
The development of oligopolies within capitalism thus causes a redistribution
of profits away from small capitalists to Big Business (i.e. small businesses
are squeezed by big ones due to the latter's market power and size). Moreover,
the existence of oligopoly can and does result in increased costs faced by
Big Business being passed on in the form of price increases, which can force
other companies, in unrelated markets, to raise *their* prices in order to
realise sufficient profits. Therefore, oligopoly has a tendency to create
price increases across the market as a whole and can thus be inflationary.
For these (and other) reasons many small businessmen and members of the
middle-class wind up hating Big Business (while trying to replace them!) and
embracing ideologies which promise to wipe them out. Hence we see that both
ideologies of the "radical" middle-class -- Libertarianism and fascism --
attack Big Business, either as "the socialism of Big Business" targeted
by Libertarianism or the "International Plutocracy" by Fascism.
As Peter Sabatini notes in _Libertarianism: Bogus Anarchy_, "[a]t the turn
of the century, local entrepreneurial (proprietorship/partnership) business
[in the USA] was overshadowed in short order by transnational corporate
capitalism. . . . The various strata comprising the capitalist class
responded differentially to these transpiring events as a function of
their respective position of benefit. Small business that remained as
such came to greatly resent the economic advantage corporate capitalism
secured to itself, and the sweeping changes the latter imposed on the
presumed ground rules of bourgeois competition. Nevertheless, because
capitalism is liberalism's raison d'etre, small business operators had
little choice but to blame the state for their financial woes, otherwise
they moved themselves to another ideological camp (anti-capitalism).
Hence, the enlarged state was imputed as the primary cause for
capitalism's 'aberration' into its monopoly form, and thus it became
the scapegoat for small business complaint."
However, despite the complaints of small capitalists, the tendency of
markets to become dominated by a few big firms is an obvious side-effect
of capitalism itself. "If the home of 'Big Business' was once the public
utilities and manufacturing it now seems to be equally comfortable
in any environment." [M.A. Utton, Op. Cit., p. 29] This is because in
their drive to expand (which they must do in order to survive), capitalists
invest in new machinery and plants in order to reduce production costs
and so increase profits (see section C.2 and related sections). Hence a
successful capitalist firm will grow in size over time and squeeze out
C.5.1 Aren't the super-profits of Big Business due to its higher efficiency?
Obviously the analysis of Big Business profitability presented in section C.5
is denied by supporters of capitalism. H. Demsetz of the pro-"free" market
"Chicago School" of economists (which echoes the right-libertarian "Austrian"
position that whatever happens on a free market is for the best) argues that
*efficiency* (not degree of monopoly) is the cause of the super-profits
for Big Business. His argument is that if oligopolistic profits are due
to high levels of concentration, then the big firms in an industry will
not be able to stop smaller ones reaping the benefits of this in the form
of higher profits. So if concentration leads to high profits (due, mostly,
to collusion between the dominant firms) then smaller firms in the same
industry should benefit too.
However, his argument is flawed as it is not the case that oligopolies
practice overt collusion. The barriers to entry/mobility are such that
the dominant firms in a oligopolistic market do not have to compete by price
and their market power allows a mark-up over costs which market forces
cannot undermine. As their only possible competitors are similarly large
firms, collusion is not required as these firms have no interest in reducing
the mark-up they share and so they "compete" over market share by non-price
methods such as advertising (advertising, as well as being a barrier to
entry, reduces price competition and increases mark-up).
In his study, Demsetz notes that while there is a positive correlation
between profit rate and market concentration, smaller firms in the oligarchic
market are *not* more profitable than their counterparts in other markets
[see M.A. Utton, _The Political Economy of Big Business_, p. 98]. From
this Demsetz concludes that oligopoly is irrelevant and that the efficiency
of increased size is the source of excess profits. But this misses the
point -- smaller firms in concentrated industries will have a similar
profitability to firms of similar size in less concentrated markets,
*not* higher profitability. The existence of super profits across *all*
the firms in a given industry would attract firms to that market, so
reducing profits. However, because profitability is associated with the
large firms in the market the barriers of entry/movement associated with
Big Business stops this process happening. *If* small firms were as
profitable, then entry would be easier and so the "degree of monopoly"
would be low and we would see an influx of smaller firms.
While it is true that bigger firms may gain advantages associated with
economies of scale the question surely is, what stops the smaller firms
investing and increasing the size of their companies in order to reap
economies of scale within and between workplaces? What is stopping
market forces eroding super-profits by capital moving into the industry
and increasing the number of firms, and so increasing supply? If barriers
exist to stop this process occurring, then concentration, market power
and other barriers to entry/movement (not efficiency) is the issue.
Competition is a *process,* not a state, and this indicates that
"efficiency" is not the source of oligopolistic profits (indeed, what
creates the apparent "efficiency" of big firms is likely to be the
barriers to market forces which add to the mark-up!).
It seems likely that large firms gather "economies of scale" due to
the size of the firm, not plant, as well as from the level of concentration
within an industry. "Considerable evidence indicates that economies of
scale [at plant level] . . . do not account for the high concentration
levels in U.S. industry" [Richard B. Du Boff, _Accumulation and Power_,
p. 174] and, further, "the explanation for the enormous growth in
aggregate concentration must be found in factors other than economies
of scale at plant level." [M.A. Utton, Op. Cit., p. 44] Co-ordination of
individual plants by the visible hand of management seems to be the key
to creating and maintaining dominant positions within a market. And, of
course, these structures are costly to create and maintain as well as
taking time to build up. Thus the size of the firm, with the economies of
scale *beyond* the workplace associated with the administrative co-ordination
by management hierarchies, also creates formidable barriers to entry/movement.
Another important factor influencing the profitability of Big Business
is the clout that market power provides. This comes in two main forms -
horizontal and vertical controls:
"Horizontal controls allow oligopolies to control necessary steps in an
economic process from material supplies to processing, manufacturing,
transportation and distribution. Oligopolies. . . [control] more of the
highest quality and most accessible supplies than they intend to market
immediately. . . competitors are left with lower quality or more expensive
supplies. . . [It is also] based on exclusive possession of technologies,
patents and franchises as well as on excess productive capacity [. . .]
"Vertical controls substitute administrative command for exchange between
steps of economic processes. The largest oligopolies procure materials
from their own subsidiaries, process and manufacture these in their own
refineries, mills and factories, transport their own goods and then market
these through their own distribution and sales network." [Allan Engler,
_Apostles of Greed_, p. 51]
Moreover, large firms reduce their costs due to their privileged access to
credit and resources. Both credit and advertising show economies of scale,
meaning that as the size of loans and advertising increase, costs go down.
In the case of finance, interest rates are usually cheaper for big firms
than small one and while "firms of all sizes find most [about 70% between
1970 and 1984] of their investments without having to resort to [financial]
markets or banks" size does have an impact on the "importance of banks as a
source of finance": "Firms with assets under $100 million relied on banks for
around 70% of their long-term debt. . . those with assets from $250 million
to $1 billion, 41%; and those with over $1 billion in assets, 15%." [Doug
Henwood, _Wall Street_, p. 75] Also dominant firms can get better deals
with independent suppliers and distributors due to their market clout and
their large demand for goods/inputs, also reducing their costs.
This means that oligopolies are more "efficient" (i.e. have higher profits)
than smaller firms due to the benefits associated with their market power
rather than vice versa. Concentration (and firm size) leads to "economies
of scale" which smaller firms in the same market cannot gain access to.
Hence the claim that any positive association between concentration and
profit rates is simply recording the fact that the largest firms tend
to be most efficient, and hence more profitable, is wrong. In addition,
"Demsetz's findings have been questioned by non-Chicago [school] critics"
due to the inappropriateness of the evidence used as well as some of
his analysis techniques. Overall, "the empirical work gives limited support"
to this "free-market" explanation of oligopolistic profits and instead
suggest market power plays the key role. [William L. Baldwin, _Market
Power, Competition and Anti-Trust Policy_, p. 310, p. 315]
Unsurprisingly we find that the "bigger the corporation in size of assets
or the larger its market share, the higher its rate of profit: these findings
confirm the advantages of market power. . . Furthermore, 'large firms in
concentrated industries earn systematically higher profits than do all
other firms, about 30 percent more. . . on average,' and there is less
variation in profit rates too." [Richard B. Du Boff, _Accumulation and
Power_, p. 175]
Thus, concentration, not efficiency, is the key to profitability, with those
factors what create "efficiency" themselves being very effective barriers to
entry which helps maintain the "degree of monopoly" (and so mark-up and
profits for the dominant firms) in a market. Oligopolies have varying degrees
of administrative efficiency and market power, all of which consolidate
its position -- "[t]he barriers to entry posed by decreasing unit costs
of production and distribution and by national organisations of managers,
buyers, salesmen, and service personnel made oligopoly advantages
cumulative - and were as global in their implications as they were
national." [Ibid., p. 150]
This recent research confirms Kropotkin's analysis of capitalism found in
his classic work _Fields, Factories and Workshops_ (first published in 1899).
Kropotkin, after extensive investigation of the actual situation within the
economy, argued that "it is not the superiority of the *technical* organisation
of the trade in a factory, nor the economies realised on the prime-mover,
which militate against the small industry . . . but the more advantageous
conditions for *selling* the produce and for *buying* the raw produce
which are at the disposal of big concerns." Since the "manufacture being
a strictly private enterprise, its owners find it advantageous to have all the
branches of a given industry under their own management: they thus
cumulate the profits of the successful transformations of the raw
material. . . [and soon] the owner finds his advantage in being able
to hold the command of the market. But from a *technical* point of
view the advantages of such an accumulation are trifling and often
doubtful." He sums up by stating that "[t]his is why the 'concentration'
so much spoken of is often nothing but an amalgamation of capitalists
for the purpose of *dominating the market,* not for cheapening the
technical process." [_Fields, Factories and Workshops Tomorrow_,
p. 147, p. 153 and p. 154]
All this means is that the "degree of monopoly" within an industry helps
determine the distribution of profits within an economy, with some of the
surplus value "created" by other companies being realised by Big Business.
Hence, the oligopolies reduce the pool of profits available to other companies
in more competitive markets by charging consumers higher prices than a
more competitive market would. As high capital costs reduce mobility within
and exclude most competitors from entering the oligopolistic market,
it means that only if the oligopolies raise their prices *too* high can
real competition become possible (i.e. profitable) again and so "it should
not be concluded that oligopolies can set prices as high as they like. If
prices are set too high, dominant firms from other industries would be
tempted to move in and gain a share of the exceptional returns. Small
producers -- using more expensive materials or out-dated technologies
-- would be able to increase their share of the market and make the
competitive rate of profit or better." [Allan Engler, Op. Cit., p. 53]
Big Business, therefore, receives a larger share of the available surplus
value in the economy, due to its size advantage and market power, not due
to "higher efficiency".
C.6 Can market dominance by Big Business change?
Capital concentration, of course, does not mean that in a given market,
dominance will continue forever by the same firms, no matter what. However,
the fact that the companies that dominate a market can change over time
is no great cause for joy (no matter what supporters of free market capitalism
claim). This is because when market dominance changes between companies
all it means is that *old* Big Business is replaced by *new* Big Business:
"Once oligopoly emerges in an industry, one should not assume that
sustained competitive advantage will be maintained forever. . . once
achieved in any given product market, oligopoly creates barriers to entry
that can be overcome only by the development of even more powerful forms
of business organisation that can plan and co-ordinate even more complex
specialised divisions of labour." [William Lazonick, _Business Organisation
and the Myth of the Market Economy_, p. 173]
Hardly a great improvement as changing the company hardly changes the impact
of capital concentration or Big Business on the economy. While the faces
may change, the system itself remains the same.
In a developed market, with a high degree of monopoly (i.e. high market
concentration and capital costs that create barriers to entry into it),
new companies can usually only enter under four conditions:
1) They have enough capital available to them to pay for set-up costs and
any initial losses. This can come from two main sources, from other parts
of their company (e.g. Virgin going into the cola business) or large
firms from other areas/nations enter the market. The former is part of
the diversification process associated with Big Business and the second
is the globalisation of markets resulting from pressures on national
oligopolies (see section C.4). Both of which increases competition
within a given market for a period as the number of firms in its
oligopolistic sector has increased. Over time, however, market forces
will result in mergers and growth, increasing the degree of monopoly
2) They get state aid to protect them against foreign competition (e.g.
the South East Asian "Tiger" economies or the 19th century US economy) -
"Historically, political strategies to develop national economies have
provided critical protection and support to overcome. . . barriers to
entry." [William Lazonick, Op. Cit., p. 87]
3) Demand exceeds supply, resulting in a profit level which tempts other
big companies into the market or gives smaller firms already there excess
profits, allowing them to expand. Demand still plays a limiting role
in even the most oligopolistic market (but this process hardly decreases
barriers to entry/mobility or oligopolistic tendencies in the long run).
4) The dominant companies raise their prices too high or become complacent
and make mistakes, so allowing other big firms to undermine their position
in a market (and, sometimes, allow smaller companies to expand and do the
same). For example, many large US oligopolies in the 1970s came under
pressure from Japanese oligopolies because of this. However, as noted
in section C.4.2, these declining oligopolies can see their market control
last for decades and the resulting market will still be dominated by
oligopolies (as big firms are generally replaced by similar sized, or
Usually some or all of these processes are at work at once.
Let's consider the US steel industry as an example. The 1980's saw the
rise of the so-called "mini-mills" with lower capital costs. The
mini-mills, a new industry segment, developed only after the US steel
industry had gone into decline due to Japanese competition. The creation
of Nippon Steel, matching the size of US steel companies, was a key factor
in the rise of the Japanese steel industry, which invested heavily in
modern technology to increase steel output by 2,216% in 30 years (5.3
million tons in 1950 to 122.8 million by 1980). By the mid 1980's, the
mini-mills and imports each had a quarter of the US market, with many
previously steel-based companies diversifying into new markets.
Only by investing $9 billion to increase technological competitiveness,
cutting workers wages to increase labour productivity, getting relief
from stringent pollution control laws and (very importantly) the US
government restricting imports to a quarter of the total home market
could the US steel industry survive. The fall in the value of the dollar
also helped by making imports more expensive. In addition, US steel
firms became increasingly linked with their Japanese "rivals," resulting
in increased centralisation (and so concentration) of capital.
Therefore, only because competition from foreign capital created space in
a previously dominated market, driving established capital out, combined
with state intervention to protect and aid home producers, was a new segment
of the industry able to get a foothold in the local market. With many
established companies closing down and moving to other markets, and once
the value of the dollar fell which forced import prices up and state
intervention reduced foreign competition, the mini-mills were in an
excellent position to increase US market share.
This period in the US steel industry was marked by increased "co-operation"
between US and Japanese companies, with larger companies the outcome.
This meant, in the case of the mini-mills, that the cycle of capital
formation and concentration would start again, with bigger companies
driving out the smaller ones through competition.
So, while the actual companies involved may change over time, the economy
as a whole will always be marked by Big Business due to the nature of
capitalism. That's the way capitalism works -- profits for the few at the
expense of the many.
C.7 What causes the capitalist business cycle?
The business cycle is the term used to describe the boom and slump nature
of capitalism. Sometimes there is full employment, with workplaces producing
more and more goods and services, the economy grows and along with it
wages. However, as Proudhon argued, this happy situation does not last:
"But industry, under the influence of property, does not proceed with such
regularity. . . As soon as a demand begins to be felt, the factories fill
up, and everybody goes to work. Then business is lively. . . Under
the rule of property, the flowers of industry are woven into none but
funeral wreaths. The labourer digs his own grave. . . [the capitalist]
tries. . . to continue production by lessening expenses. Then comes the
lowering of wages; the introduction of machinery; the employment of women
and children . . . the decreased cost creates a larger market. . . [but] the
productive power tends to more than ever outstrip consumption. . . To-day
the factory is closed. Tomorrow the people starve in the streets. . . In
consequence of the cessation of business and the extreme cheapness of
merchandise. . . frightened creditors hasten to withdraw their funds [and]
Production is suspended, and labour comes to a standstill." [P-J Proudhon,
_What is Property_, pp. 191-192]
Why does this happen? For anarchists, as Proudhon noted, it's to do with
the nature of capitalist production and the social relationships it creates
("the rule of property"). The key to understanding the business cycle is
to understand that, to use Proudhon's words, "Property sells products to
the labourer for more than it pays him for them; therefore it is impossible."
[Op. Cit., p. 194] In other words, the need for the capitalist to make a
profit from the workers they employ is the underlying cause of the business
cycle. If the capitalist class cannot make enough profit, then it will stop
production, sack people, ruin lives and communities until such as enough
profit can again be extracted from the workers.
So what influences this profit level? There are two main classes of pressure
on profits, what we will call the "subjective" and "objective." The objective
pressures are related to what Proudhon termed the fact that "productive power
tends more and more to outstrip consumption" and are discussed in sections
C.7.2 and C.7.3. The "subjective" pressures are to do with the nature of
the social relationships created by capitalism, the relations of domination
and subjection which are the root of exploitation and the resistance to
them. In other words the subjective pressures are the result of the fact
that "property is despotism" (to use Proudhon's expression). We will
discuss the impact of the class struggle (the "subjective" pressure) in
the next section.
Before continuing, we would like to stress here that all three factors
operate together in a real economy and we have divided them purely to
help explain the issues involved in each one. The class struggle, market
"communication" creating disproportionalities and over-investment all
interact. Due to the needs of the internal (class struggle) and external
(inter-company) competition, capitalists have to invest in new means of
production. As workers' power increase during a boom, capitalists innovate
and invest in order to try and counter it. Similarly, to get market advantage
(and so increased profits) over their competitors, a company invests in
new machinery. However, due to lack of effective communication within
the market caused by the price mechanism and incomplete information provided
by the interest rate, this investment becomes concentrated in certain parts
of the economy. Relative over-investment can occur, creating the possibility
of crisis. In addition, the boom encourages new companies and foreign
competitors to try and get market share, so decreasing the "degree of
mmonopoly" in an industry, and so reducing the mark-up and profits of big
business (which, in turn, can cause an increase in mergers and take-overs
towards the end of the boom). Meanwhile, workers power is increasing,
causing profit margins to be eroded, but also reducing tendencies to
over-invest by resisting the introduction of new machinery and technics
and by maintaining demand for the finished goods. This contradictory
effect of class struggle matches the contradictory effect of investment.
Just as investment causes crisis because it is useful (i.e. it helps
increase profits for individual companies in the short term, but it
leads to collective over-investment and falling profits in the long
term), the class struggle both hinders over-accumulation of capital
and maintains aggregate demand (so postponing the crisis) while at
the same time eroding profit margins at the point of production (so
accelerating it). Thus subjective and objective factors interact and
counteract with each other, but in the end a crisis will result
simply because the system is based upon wage labour and the producers
are not producing for themselves. Ultimately, a crisis is caused when
the capitalist class does not get a sufficient rate of profit. If
workers produced for themselves, this decisive factor would not be
an issue as no capitalist class would exist.
And we should note that these factors work in reverse during a slump,
creating the potential for a boom. During a crisis, capitalists still try
to improve their profitability (i.e. increase surplus value). Labour is
in a weak position due to the large rise in unemployment and so, usually,
accept the increased rate of exploitation this implies to remain in work.
In the slump, many firms go out of business, so reducing the amount
of fixed capital in the economy. In addition, as firms go under the "degree
of monopoly" of each industry increases, which increases the mark-up and
profits of big business. Eventually this increased surplus value production
is enough relative to the (reduced) fixed capital stock to increase the
rate of profit. This encourages capitalists to start investing again and a
boom begins (a boom which contains the seeds of its own end).
And so the business cycle continues, driven by "subjective" and "objective"
pressures -- pressures that are related directly to the nature of capitalist
production and the wage labour on which it is based.
C.7.1 What role does class struggle play in the business cycle?
At its most basic, the class struggle (the resistance to hierarchy in all
its forms) is the main cause of the business cycle. As we argued in section
B.1.2 and section C.2, capitalists in order to exploit a worker must first
oppress them. But where there is oppression, there is resistance; where there
is authority, there is the will to freedom. Hence capitalism is marked by a
continuous struggle between worker and boss at the point of production as
well as struggle outside of the workplace against other forms of hierarchy.
This class struggle reflects a conflict between workers attempts at
liberation and self-empowerment and capitals attempts to turn the
individual worker into a small cog in a big machine. It reflects the
attempts of the oppressed to try to live a fully human life, expressed
when the "worker claims his share in the riches he produces; he claims
his share in the management of production; and he claims not only
some additional well-being, but also his full rights in the higher
enjoyment of science and art." [Peter Kropotkin, _Kropotkin's
Revolutionary Pamphlets_, pp. 48-49]
As Errico Malatesta argued, if workers "succeed in getting what they demand,
they will be better off: they will earn more, work fewer hours and will
have more time and energy to reflect on things that matter to them, and
will immediately make greater demands and have greater needs. . . [T]here
exists no natural law (law of wages) which determines what part of a
worker's labour should go to him [or her]. . . Wages, hours and other
conditions of employment are the result of the struggle between bosses
and workers. The former try and give the workers as little as possible; the
latter try, or should try to work as little, and earn as much, as possible. Where
workers accept any conditions, or even being discontented, do not know
how to put up effective resistance to the bosses demands, they are soon
reduced to bestial conditions of life. Where, instead, they have ideas of
how human beings should live and know how to join forces, and through
refusal to work or the latent and open threat of rebellion, to win bosses
respect, in such cases, they are treated in a relatively decent way. . .
Through struggle, by resistance against the bosses, therefore, workers
can, up to a certain point, prevent a worsening of their conditions as
well as obtaining real improvement." [_Life and Ideas_, pp. 191-2]
It is this struggle that determines wages and indirect income such as
welfare, education grants and so forth. This struggle also influences
the concentration of capital, as capital attempts to use technology to
control workers (and so extract the maximum surplus value possible from
them) and to get an advantage against their competitors (see section C.2.3).
And, as will be discussed in section D.10 (How does capitalism affect
technology?), increased capital investment also reflects an attempt to
increase the control of the worker by capital (or to replace them with
machinery that cannot say "no") *plus* the transformation of the
individual into "the mass worker" who can be fired and replaced
with little or no hassle. For example, Proudhon quotes an "English
Manufacturer" who states that he invested in machinery precisely to
replace humans by machines because machines are easier to control:
"The insubordination of our workforce has given us the idea of dispensing
with them. We have made and stimulated every imaginable effort of the mind
to replace the service of men by tools more docile, and we have achieved
our object. Machinery has delivered capital from the oppression of labour."
[_System of Economical Contradictions_, p. 189]
(To which Proudhon replied "[w]hat a misfortunate that machinery cannot
also deliver capital from the oppression of consumers!" as the over-production
and inadequate market caused by machinery replacing people soon destroys
these illusions of automatic production by a slump -- see section C.7.3).
Therefore, class struggle influences both wages and capital investment,
and so the prices of commodities in the market. It also, more importantly,
determines profit levels and it is profit levels that are the cause of
the business cycle. This is because, under capitalism, production's "only
aim is to increase the profits of the capitalist. And we have, therefore,
- the continuous fluctuations of industry, the crisis coming periodically. . . "
[Kropotkin, Op. Cit., p. 55]
A common capitalist myth, derived from the capitalist Subjective Theory
of Value, is that free-market capitalism will result in a continuous boom,
since the cause of slumps is allegedly state control of credit and money.
Let us assume, for a moment, that this is the case. (In fact, it is not the
case, as will be highlighted in section C.8). In the "boom economy" of
"free market" dreams, there will be full employment. But in a period
of full employment, while it helps "increase total demand, its fatal
characteristic from the business view is that it keeps the reserve army
of the unemployed low, thereby protecting wage levels and strengthening
labour's bargaining power." [Edward S. Herman, _Beyond Hypocrisy_, p. 93]
In other words, workers are in a very strong position under boom conditions,
a strength which can undermine the system. This is because capitalism always
proceeds along a tightrope. If a boom is to continue smoothly, real wages must
develop within a certain band. If their growth is too low then capitalists will
find it difficult to sell the products their workers have produced and so,
because of this, face what is often called a "realisation crisis" (i.e. the fact
that capitalists cannot make a profit if they cannot sell their products). If
real wage growth is too high then the conditions for producing profits are
undermined as labour gets more of the value it produces. This means that
in periods of boom, when unemployment is falling, the conditions for
realisation improve as demand for consumer goods increase, thus
expanding markets and encouraging capitalists to invest. However,
such an increase in investment (and so employment) has an adverse effect
on the conditions for *producing* surplus value as labour can assert
itself at the point of production, increase its resistance to the demands
of management and, far more importantly, make its own.
If an industry or country experiences high unemployment, workers will put
up with longer hours, stagnating wages, worse conditions and new technology
in order to remain in work. This allows capital to extract a higher level of
profit from those workers, which in turn signals other capitalists to invest
in that area. As investment increases, unemployment falls. As the pool of
available labour runs dry, then wages will rise as employers bid for scare
resources and workers feel their power. As workers are in a better position
they can go from resisting capital's agenda to proposing their own (e.g.
demands for higher wages, better working conditions and even for workers'
control). As workers' power increases, the share of income going to capital
falls, as do profit rates, and capital experiences a profits squeeze and so
cuts down on investment and employment and/or wages. The cut in
investment increases unemployment in the capital goods sector of the
economy, which in turn reduces demand for consumption goods as
jobless workers can no longer afford to buy as much as before. This
process accelerates as bosses fire workers or cut their wages and the
slump deepens and so unemployment increases, which begins the cycle
again. This can be called "subjective" pressure on profit rates.
This interplay of profits and wages can be seen in most business
cycles. As an example, let's consider the crisis which ended post-war
Keynesianism in the early 1970's and paved the way for the "supply side
revolutions" of Thatcher and Reagan. This crisis, which occurred in
1973, had its roots in the 1960s boom. If we look at the USA we find
that it experienced continuous growth between 1961 and 1969 (the
longest in its history). From 1961 onwards, unemployment steadily
fell, effectively creating full employment. From 1963, the number
of strikes and total working time lost steadily increased (from
around 3 000 strikes in 1963 to nearly 6 000 in 1970). The number
of wildcat strike rose from 22% of all strikes in 1960 to 36.5%
in 1966. By 1965 both the business profit shares and business
profit rates peaked. The fall in profit share and rate of profit
continued until 1970 (when unemployment started to increase), where
it rose slightly until the 1973 slump occurred, In addition, after
1965, inflation started to accelerate as capitalist firms tried to
maintain their profit margins by passing cost increases to consumers
(as we discuss below, inflation has far more to do with capitalist
profits than it has with money supply or wages). This helped to reduce
real wage gains and maintain profitability over the 1968 to 1973
period above what it otherwise would have been, which helped
postpone, but not stop, a slump.
Looking at the wider picture, we find that for the advanced capital countries
as a whole, the product wage rose steadily between 1962 and 1971 while
productivity fell. The product wage (the real cost to the employer of hiring
workers) meet that of productivity in 1965 (at around 4%) -- which was
also the year in which profit share in income and the rate of profit peaked .
From 1965 to 1971, productivity continued to fall while the product wage
continued to rise. This process, the result of falling unemployment and
rising workers' power (expressed, in part, by an explosion in the number
of strikes across Europe and elsewhere), helped to ensure that the actual
post-tax real wages and productivity in a the advanced capitalist
countries increased at about the same rate from 1960 to 1968 (4%).
But between 1968 and 1973, post-tax real wages increased by an average
of 4.5% compared to a productivity rise of only 3.4%. Moreover, due to
increased international competition companies could not pass on wage
rises to consumers in the form of higher prices (which, again, would
only have postponed, but not stopped, the slump). As a result of these
factors, the share of profits going to business fell by about 15% in
In addition, outside the workplace a "series of strong liberation movements
emerged among women, students and ethnic minorities. A crisis of social
institutions was in progress, and large social groups were questioning the
very foundations of the modern, hierarchical society: the patriarchal
family, the authoritarian school and university, the hierarchical workplace
or office, the bureaucratic trade union or party." [Takis Fotopoulos,
"The Nation-state and the Market," p. 58, _Society and Nature_, Vol. 3,
These social struggles resulted in an economic crisis as capital could no
longer oppress and exploit working class people sufficiently in order
to maintain a suitable profit rate. This crisis was then used to discipline
the working class and restore capitalist authority within and without the
workplace (see section C.8.2). We should also note that this process of
social revolt in spite, or perhaps because of, the increase of material
wealth was predicted by Malatesta. In 1922 he argued that:
"The fundamental error of the reformists is that of dreaming of solidarity,
a sincere collaboration, between masters and servants. . .
"Those who envisage a society of well stuffed pigs which waddle contentedly
under the ferule of a small number of swineherd; who do not take into account
the need for freedom and the sentiment of human dignity. . . can also imagine
and aspire to a technical organisation of production which assures abundance
for all and at the same time materially advantageous both to bosses and the
workers. But in reality 'social peace' based on abundance for all will remain
a dream, so long as society is divided into antagonistic classes, that is
employers and employees. . .
"The antagonism is spiritual rather than material. There will never be a
sincere understanding between bosses and workers for the better exploitation
[sic!] of the forces of nature in the interests of mankind, because the
bosses above all want to remain bosses and secure always more power at
the expense of the workers, as well as by competition with other bosses,
whereas the workers have had their fill of bosses and don't want more!"
[_Life and Ideas_, pp. 78-79]
The experience of the post-war compromise and social democratic reform
indicates well that, ultimately, the social question is not poverty but
rather freedom. However, to return to the impact of class struggle on
More recently, the panics in Wall Street that accompany news that
unemployment is dropping in the USA reflect this fear of working class
power. Without the fear of unemployment, workers may start to fight for
improvements in their conditions, against capitalist oppression and
exploitation and *for* liberty and a just world. Every slump within
capitalism has occurred when workers have seen unemployment fall and
their living standards improve -- not a coincidence.
The Philips Curve, which indicates that inflation rises as employment
falls is also an indication of this relationship. Inflation is the situation
when there is a general rise in prices. Neo-classical (and other pro-"free
market" capitalist) economics argue that inflation is purely a monetary
phenomenon, the result of there being more money in circulation than is
needed for the sale of the various commodities on the market. However,
this is not true. In general, there is no relationship between the money
supply and inflation. The amount of money can increase while the rate
of inflation falls, for example (as was the case in the USA between
1975 and 1984). Inflation has other roots, namely it is "an expression
of inadequate profits that must be offset by price and money policies. . .
Under any circumstances, inflation spells the need for higher profits. . ."
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 19]
Inflation leads to higher profits by making labour cheaper. That is,
it reduces "the real wages of workers. . . [which] directly benefits
employers. . . [as] prices rise faster than wages, income that would
have gone to workers goes to business instead." [J. Brecher and
T. Costello, _Common Sense for Hard Times_, p. 120]
Inflation, in other words, is a symptom of an on-going struggle over
income distribution between classes and, as workers do not have any
control over prices, it is caused when capitalist profit margins are
reduced (for whatever reason, subjective or objective). This means
that it would be wrong to conclude that wage increases "cause"
inflation as such. To do so ignores the fact that workers do not
set prices, capitalists do. Inflation, in its own way, shows the
hypocrisy of capitalism. After all, wages are increasing due to
"natural" market forces of supply and demand. It is the capitalists
who are trying to buck the market by refusing to accept lower profits
caused by conditions on that market. Obviously, to use Tucker's
expression, under capitalism market forces are good for the goose
(labour) but bad for the gander (capital).
This does not mean that inflation suits all capitalists equally (nor,
obviously, does it suit those social layers who live on fixed incomes and
who thus suffer when prices increase but such people are irrelevant in the
eyes of capital). Far from it - during periods of inflation, lenders tend to
lose and borrowers tend to gain. The opposition to high levels of inflation
by many supporters of capitalism is based upon this fact and the division
within the capitalist class it indicates. There are two main groups of
capitalists, finance capitalists and industrial capitalists. The latter can
and do benefit from inflation (as indicated above) but the former sees high
inflation as a threat. When inflation is accelerating it can push the real
interest rate into negative territory and this is a horrifying prospect
to those for whom interest income is fundamental (i.e. finance capital).
In addition, high levels of inflation can also fuel social struggle, as
workers and other sections of society try to keep their income at a steady
level. As social struggle has a politicising effect on those involved, a
condition of high inflation could have serious impacts on the political
stability of capitalism and so cause problems for the ruling class.
How inflation is viewed in the media and by governments is an expression
of the relative strengths of the two sections of the capitalist class and
of the level of class struggle within society. For example, in the 1970s,
with the increased international mobility of capital, the balance of power
came to rest with finance capital and inflation became the source of all
evil. This shift of influence to finance capital can be seen from the rise
of rentier income. The distribution of US manufacturing profits indicate
this process -- comparing the periods 1965-73 to 1990-96, we find that
interest payments rose from 11% to 24%, dividend payments rose from
26% to 36% while retained earnings fell from 65% to 40% (given that
retained earnings are the most important source of investment funds,
the rise of finance capital helps explain why, in contradiction to the
claims of the right-wing, economic growth has become steadily worse
as markets have been liberalised -- funds that would have been resulted
in real investment have ended up in the finance machine). In addition,
the waves of strikes and protests that inflation produced had worrying
implications for the ruling class. However, as the underlying reasons
for inflation remained (namely to increase profits) inflation itself was
only reduced to acceptable levels, levels that ensured a positive real
interest rate and acceptable profits.
It is the awareness that full employment is bad for business which is the
basis of the so-called "Non-Accelerating Inflation Rate of Unemployment"
(NAIRU). This is the rate of unemployment for an economy under which
inflation, it is claimed, starts to accelerate. While the basis of
this "theory" is slim (the NAIRU is an invisible, mobile rate and so the
"theory" can explain every historical event simply because you can prove
anything when your datum cannot be seen by mere mortals) it is very
useful for justifying policies which aim at attacking working people,
their organisations and their activities. The NAIRU is concerned with a
"wage-price" spiral caused by falling unemployment and rising workers'
rights and power. Of course, you never hear of an "interest-price"
spiral or a "rent-price" spiral or a "profits-price" spiral even though
these are also part of any price. It is always a "wage-price" spiral,
simply because interest, rent and profits are income to capital and
so, by definition, above reproach. By accepting the logic of NAIRU, the
capitalist system implicitly acknowledges that it and full employment
are incompatible and so with it any claim that it allocates resources
efficiently or labour contracts benefit both parties equally.
For these reasons, anarchists argue that a continual "boom" economy is
an impossibility simply because capitalism is driven by profit considerations,
which, combined with the subjective pressure on profits due to the class
struggle between workers and capitalists, *necessarily* produces a continuous
boom-and-bust cycle. When it boils down to it, this is unsurprising, as
"[o]f necessity, the abundance of some will be based upon the poverty of
others, and the straitened circumstances of the greater number will have
to be maintained at all costs, that there may be hands to sell themselves
for a part only of that which they are capable of producing, without
which private accumulation of capital is impossible!" [Kropotkin, Op.
Cit., p. 128]
Of course, when such "subjective" pressures are felt on the system, when
private accumulation of capital is threatened by improved circumstances
for the many, the ruling class denounces working class "greed" and
"selfishness." When this occurs we should remember what Adam Smith
had to say on this subject:
"In reality high profits tend much more to raise the price of work than high
wages. . . That part of the price of the commodity that resolved itself into
wages would. . . rise only in arithmetical proportion to the rise in wages. But
if profits of all the different employers of those working people should be
raised five per cent., that price of the commodity which resolved itself into
profit would. . . rise in geometrical proportion to this rise in profit. . .
Our merchants and master manufacturers complain of the bad effects of
high wages in raising the price and thereby lessening the sale of their
goods at home and abroad. They say nothing concerning the bad effects
of high profits. They are silent with regard to the pernicious effects of
their own gains. They complain only of those of other people" [_The
Wealth of Nations_, pp. 87-88]
As an aside, we must note that these days we would have to add
economists to Smith's "merchants and master manufacturers." Not
that this is surprising, given that economic theory has progressed
(or degenerated) from Smith's disinterested analysis to apologetics
for any action of the boss (a classic example, we must add, of supply
and demand, with the marketplace of ideas responding to a demand for
such work from "our merchants and master manufacturers"). Any
"theory" which blames capitalism's problems on "greedy" workers
will always be favoured over one that correctly places them in the
contradictions created by wage slavery. Proudhon summed by capitalist
economic theory well when he stated that "Political economy -- that
is, proprietary despotism -- can never be in the wrong: it must be the
proletariat." [_System of Economical Contradictions_, p. 187] And
little has changed since 1846 (or 1776!) when it comes to economics
"explaining" capitalism's problems (such as the business cycle or
unemployment). Ultimately, capitalist economics blame every problem
of capitalism on the working class refusing to kow-tow to the bosses
(for example, unemployment is caused by wages being too high rather
than bosses needing unemployment to maintain their power and profits
-- see section C.9.2 on empirical evidence that indicates that the second
explanation is the accurate one).
Before concluding, one last point. While it may appear that our analysis
of the "subjective" pressures on capitalism is similar to that of mainstream
economics, this is not the case. This is because our analysis recognises
that such pressures are inherent in the system, have contradictory effects
(and so cannot be easily solved without making things worse before
they get better) and hold the potential for creating a free society. Our
analysis recognises that workers' power and resistance *is* bad for
capitalism (as for any hierarchical system), but it also indicates that there
is nothing capitalism can do about it without creating authoritarian regimes
(such as Nazi Germany) or by generating massive amounts of unemployment
(as was the case in the early 1980s in both the USA and the UK, when
right-wing governments deliberately caused deep recessions) and even this
is no guarantee of eliminating working class struggle as can be seen, for
example, from 1930s America or 1970s Britain.
This means that our analysis shows the limitations and contradictions
of the system as well as its need for workers to be in a weak bargaining
position in order for it to "work" (which explodes the myth that capitalism
is a free society). Moreover, rather than portray working people as victims
of the system (as is the case in many Marxist analyses of capitalism) our
analysis recognises that we, both individually and collectively, have the
power to influence and *change* that system by our activity. We should
be proud of the fact that working people refuse to negate themselves or
submit their interests to that of others or play the role of order-takers
required by the system. Such expressions of the human spirit, of the
struggle of freedom against authority, should not be ignored or
down-played, rather they should be celebrated. That the struggle
against authority causes the system so much trouble is not an
argument against social struggle, it is an argument against a
system based on hierarchy, exploitation and the denial of freedom.
To sum up, in many ways, social struggle is the inner dynamic of the
system, and its most basic contradiction: while capitalism tries to turn
the majority of people into commodities (namely, bearers of labour power),
it also has to deal with the human responses to this process of objectification
(namely, the class struggle). However, it does not follow that cutting wages
will solve a crisis -- far from it, for, as we argue in section C.9.1, cutting
wages will deepen any crisis, making things worse before they get better.
Nor does it follow that, if social struggle were eliminated, capitalism would
work fine. After all, if we assume that labour power is a commodity like any
other, its price will rise as demand increases relative to supply (which will
either produce inflation or a profits squeeze, probably both). Therefore,
even without the social struggle which accompanies the fact that labour power
cannot be separated from the individuals who sell it, capitalism would still
be faced with the fact that only surplus labour (unemployment) ensures the
creation of adequate amounts of surplus value.
Moreover, even assuming that individuals can be totally happy in a capitalist
economy, willing to sell their freedom and creativity for a little money,
putting up, unquestioningly, with every demand and whim of their bosses (and so
negating their own personality and individuality in the process), capitalism
does have "objective" pressures limiting its development. So while social
struggle, as argued above, can have a decisive effect on the health of the
capitalist economy, it is not the only problems the system faces. This is
because there are objective pressures within the system beyond and above
the authoritarian social relations it produces (and the resistance to them).
These pressures are discussed next, in sections C.7.2 and C.7.3.
C.7.2 What role does the market play in the business cycle?
A major problem with capitalism is the working of the capitalist market
itself. For the supporters of "free market" capitalism, the market
provides all the necessary information required to make investment and
production decisions. This means that a rise or fall in the price of a
commodity acts as a signal to everyone in the market, who then respond to
that signal. These responses will be co-ordinated by the market, resulting
in a healthy economy. For example, a rise in the price of a commodity will
result in increased production and reduced consumption of that good, and
this will move the economy towards equilibrium.
While it can be granted that this account of the market is not without
foundation, its also clear that the price mechanism does not communicate
all the relevant information needed by companies or individuals. This
means that capitalism does not work in the way suggested in the economic
textbooks. It is the workings of the price mechanism itself which leads to
booms and slumps in economic activity and the resulting human and social
costs they entail. This can be seen if we investigate the actual
processes hidden behind the workings of the price mechanism.
When individuals and companies make plans concerning future production,
they are planning not with respect of demand *now* but with respect
to expected demand at some *future time* when their products reach
the market. The information the price mechanism provides, however, is the
relation of supply and demand (or market price with respect to the market
production price) at the current time. While this information *is*
relevant to people's plans, it is not *all* the information that is
relevant or is required by those involved.
The information which the market does *not* provide is that of the
plans of *other* people's reactions to the supplied information. This
information, moreover, cannot be supplied due to competition. Simply put,
if A and B are in competition, if A informs B of her activities and B does
not reciprocate, then B is in a position to compete more effectively than
A. Hence communication within the market is discouraged and each
production unit is isolated from the rest. In other words, each person or
company responds to the same signal (the change in price) but each acts
independently of the response of other producers and consumers. The result
is often a slump in the market, causing unemployment and economic
For example, lets assume a price rise due to a shortage of a commodity.
This results in excess profits in that market, leading the owners of
capital to invest in this branch of production in order to get some of
these above-average profits. However, consumers will respond to the price
rise by reducing their consumption of that good. This means that when
the results of these independent decisions are realised, there is an
overproduction of that good in the market in relation to effective demand
for it. Goods cannot be sold and so there is a realisation crisis as
producers cannot make a profit from their products. Given this
overproduction, there is a slump, capital disinvests, and the market
price falls. This eventually leads to a rise in demand against supply,
production expands leading to another boom and so on.
Proudhon described this process as occurring because of the "contradiction" of
"the double character of value" (i.e. between value in use and value in exchange).
This contradiction results in a good's "value decreas[ing] as the production
of utility increases, and a producer may arrive at poverty by continually enriching
himself" via over-production. This is because a producer "who has harvested
twenty sacks of wheat. . . believes himself twice as rich as if he had harvested
only ten. . . Relatively to the household, [they] are right; looked at in their
external relations, they may be utterly mistaken. If the crop of wheat is double
throughout the whole country, twenty sacks will sell for less than ten would
have sold for if it had been as half as great." [_The System of Economical
Contradictions_, p. 78, pp. 77-78]
This, it should be noted, is not a problem of people making a series of
unrelated mistakes. Rather, it results because the market imparts the same
information to all involved and this information is not sufficient for
rational decision making. While it is rational for each agent to expand
or contract production, it is not rational for all agents to act in this
manner. In a capitalist economy, the price mechanism does not supply all
the information needed to make rational decisions. In fact, it actively
encourages the suppression of the needed extra information concerning
the planned responses to the original information.
It is this irrationality and lack of information which feed into the
business cycle. These local booms and slumps in production of the
kind outlined here can then be amplified into general crises due to the
insufficient information spread through the economy by the market. However,
disproportionalities of capital between industries do not *per se* result
in a general crisis. If this was that case the capitalism would be in a
constant state of crisis because capital moves between markets during periods
of prosperity as well as just before periods of depression. This means that
market dislocations cannot be a basis for explaining the existence of
a general crisis in the economy (although it can and does explain localised
Therefore, the tendency to general crisis that expresses itself in a
generalised glut on the market is the product of deeper economic changes.
While the suppression of information by the market plays a role in producing
a depression, a general slump only develops from a local boom and slump
cycle when it occurs along with the second side-effect of capitalist
economic activity, namely the increase of productivity as a result of
capital investment, as well as the subjective pressures of class struggle.
The problems resulting from increased productivity and capital investment
are discussed in the next section.
C.7.3 What role does investment play in the business cycle?
Other problems for capitalism arise due to increases in productivity which
occur as a result of capital investment or new working practices which aim
to increase short term profits for the company. The need to maximise
profits results in more and more investment in order to improve the
productivity of the workforce (i.e. to increase the amount of surplus
value produced). A rise in productivity, however, means that whatever
profit is produced is spread over an increasing number of commodities.
This profit still needs to be realised on the market but this may prove
difficult as capitalists produce not for existing markets but for expected
ones. As individual firms cannot predict what their competitors will do, it
is rational for them to try to maximise their market share by increasing
production (by increasing investment). As the market does not provide the
necessary information to co-ordinate their actions, this leads to supply
exceeding demand and difficulties realising the profits contained in the
produced commodities. In other words, a period of over-production occurs
due to the over-accumulation of capital.
Due to the increased investment in the means of production, variable capital
(labour) uses a larger and larger constant capital (the means of production).
As labour is the source of surplus value, this means that in the short term
profits must be increased by the new investment, i.e. workers must produce
more, in relative terms, than before so reducing a firms production costs
for the commodities or services it produces. This allows increased profits
to be realised at the current market price (which reflects the old costs of
production). Exploitation of labour must increase in order for the return
on total (i.e. constant *and* variable) capital to increase or, at worse,
However, while this is rational for one company, it is not rational when all
firms do it, which they must in order to remain in business. As investment
increases, the surplus value workers have to produce must increase faster.
If the mass of available profits in the economy is too small compared to
the total capital invested then any problems a company faces in making
profits in a specific market due to a localised slump caused by the price
mechanism may spread to affect the whole economy. In other words, a fall
in the rate of profit (the ratio of profit to investment in capital and labour)
in the economy as a whole could result in already produced surplus value,
earmarked for the expansion of capital, remaining in its money form and
thus failing to act as capital. No new investments are made, goods cannot
be sold resulting in a general reduction of production and so increased
unemployment as companies fire workers or go out of business. This
removes more and more constant capital from the economy, increasing
unemployment which forces those with jobs to work harder, for longer
so allowing the mass of profits produced to be increased, resulting
(eventually) in an increase in the rate of profit. Once profit rates
are high enough, capitalists have the incentive to make new investments
and slump turns to boom.
It could be argued that such an analysis is flawed as no company would
invest in machinery if it would reduce it's rate of profit. But such an
objection is flawed, simply because (as we noted) such investment is
perfectly sensible (indeed, a necessity) for a specific firm. By investing
they gain (potentially) an edge in the market and so increased profits.
Unfortunately, while this is individually sensible, collectively it is not
as the net result of these individual acts is over-investment in the economy
as a whole. Unlike the model of perfect competition, in a real economy
capitalists have no way of knowing the future, and so the results of
their own actions, nevermind the actions of their competitors. Thus
over-accumulation of capital is the natural result of competition
simply because it is individually rational and the future is unknowable.
Both of these factors ensure that firms act as they do, investing in
machinery which, in the end, will result in a crisis of over-accumulation.
Cycles of prosperity, followed by over-production and then depression
are the natural result of capitalism. Over-production is the result of
over-accumulation, and over-accumulation occurs because of the need to
maximise short-term profits in order to stay in business. So while the
crisis appears as a glut of commodities on the market, as there are
more commodities in circulation that can be purchased by the aggregate
demand ("Property sells products to the labourer for more than it pays
him for them," to use Proudhon's words), its roots are deeper. It lies
in the nature of capitalist production itself.
A classic example of these "objective" pressures on capitalism is the
"Roaring Twenties" that preceded the Great Depression of the 1930s. After
the 1921 slump, there was a rapid rise in investment in the USA with
investment nearly doubling between 1919 and 1927.
Because of this investment in capital equipment, manufacturing production
grew by 8.0% per annum between 1919 and 1929 and labour productivity grew
by an annual rate of 5.6% (this is including the slump of 1921-22). This
increase in productivity was reflected in the fact that over the post-1922
boom, the share of manufacturing income paid in salaries rose from 17% to
18.3% and the share to capital rose from 25.5% to 29.1%. Managerial salaries
rose by 21.9% and firm surplus by 62.6% between 1920 and 1929. With costs
falling and prices comparatively stable, profits increased which in turn
lead to high levels of capital investment (the production of capital goods
increased at an average annual rate of 6.4%).
Unsurprisingly, in such circumstances, in the 1920s prosperity was concentrated
at the top 60% of families made less than $2000 a year, 42% less than $1000.
One-tenth of the top 1% of families received as much income as the bottom
42% and only 2.3% of the population enjoyed incomes over $10000. While the
richest 1% owned 40% of the nation's wealth by 1929 (and the number of
people claiming half-million dollar incomes rose from 156 in 1920 to
1489 in 1929) the bottom 93% of the population experienced a 4% drop
in real disposable per-capita income between 1923 and 1929.
However, in spite of this, US capitalism was booming and the laissez-faire
capitalism was at its peak. But by 1929 all this had changed with the stock
market crashing -- followed by a deep depression. What was its cause? Given
our analysis presented above, it may have been expected to have been caused
by the "boom" decreasing unemployment, so increased working class power
and leading to a profits squeeze, but this was not the case.
This slump was *not* the result of working class resistance, indeed the
1920s were marked by a labour market which remained continuously favourable
to employers. This was for two reasons. Firstly, the "Palmer Raids" at the
end of the 1910s saw the state root out radicals in the US labour movement
and wider society. Secondly, the deep depression of 1920-21 (during which
national unemployment rates averaged over 9%) combined with the use of legal
injunctions by employers against work protests and the use of industrial
spies to identify and sack union members made labour weak and so the
influence and size of unions fell as workers were forced to sign "yellow-dog"
contracts to keep their jobs.
During the post-1922 boom, this position did not change. The national 3.3%
unemployment rate hid the fact that non-farm unemployment averaged 5.5%
between 1923 and 1929. Across all industries, the growth of manufacturing
output did not increase the demand for labour. Between 1919 and 1929,
employment of production workers fell by 1% and non-production employment
fell by about 6% (during the 1923 to 29 boom, production employment
only increased by 2%, and non-production employment remained constant).
This was due to the introduction of labour saving machinery and the rise
in the capital stock. In addition, the high productivity associated with
farming resulted in a flood of rural workers into the urban labour market.
Facing high unemployment, workers' quit rates fell due to fear of loosing
jobs (particularly those workers with relatively higher wages and employment
stability). This combined with the steady decline of the unions and the very
low number of strikes (lowest since the early 1880s) indicates that labour
was weak. Wages, like prices, were comparatively stable. Indeed, the share
of total manufacturing income going to wages fell from 57.5% in 1923-24 to
52.6% in 1928/29 (between 1920 and 1929, it fell by 5.7%). It is interesting
to note that even *with* a labour market favourable to employers for over
5 years, unemployment was still high. This suggests that the neo-classical
"argument" that unemployment within capitalism is caused by strong unions
or high real wages is somewhat flawed to say the least (see section C.9).
The key to understanding what happened lies the contradictory nature of
capitalist production. The "boom" conditions were the result of capital
investment, which increased productivity, thereby reducing costs and
increasing profits. The large and increasing investment in capital goods
was the principal device by which profits were spent. In addition, those
sectors of the economy marked by big business (i.e. oligopoly, a market
dominated by a few firms) placed pressures upon the more competitive ones.
As big business, as usual, received a higher share of profits due to their market
position (see section C.5), this lead to many firms in the more competitive
sectors of the economy facing a profitability crisis during the 1920s.
The increase in investment, while directly squeezing profits in the more
competitive sectors of the economy, also eventually caused the rate of
profit to stagnate, and then fall, over the economy as a whole. While the
mass of available profits in the economy grew, it eventually became too
small compared to the total capital invested. Moreover, with the fall in the
share of income going to labour and the rise of inequality, aggregate demand
for goods could not keep up with production, leading to unsold goods (which
is another way of expressing the process of over-investment leading to
over-production, as over-production implies under-consumption and vice
versa). As expected returns (profitability) on investments hesitated, a decline
in investment demand occurred and so a slump began (rising predominantly
from the capital stock rising faster than profits). Investment flattened out in
1928 and turned down in 1929. With the stagnation in investment, a great
speculative orgy occurred in 1928 and 1929 in an attempt to enhance
profitability. This unsurprisingly failed and in October 1929 the stock
market crashed, paving the way for the Great Depression of the 1930s.
The crash of 1929 indicates the "objective" limits of capitalism. Even with
a very weak position of labour, crisis still occurred and prosperity turned
to "hard times." In contradiction to neo-classical economic theory, the events
of the 1920s indicate that even if the capitalist assumption that labour is
a commodity like all others *is* approximated in real life, capitalism
is still subject to crisis (ironically, a militant union movement in the
1920s would have postponed crisis by shifting income from capital to labour,
increasing aggregate demand, reducing investment and supporting the more
competitive sectors of the economy!). Therefore, any neo-classical "blame
labour" arguments for crisis (which were so popular in the 1930s and 1970s)
only tells half the story (if that). Even if workers *do* act in a servile
way to capitalist authority, capitalism will still be marked by boom and
bust (as shown by the 1920s and 1980s).
To take another example, America's 100 largest firms, employing 5 million
persons and having assets of $126 billion, saw their average amount of
assets per worker grow from $12,200 in 1949 to $20,900 in 1959 and to
$24,000 in 1962 [First National City Bank, _Economic Letter_, June 1963].
As can be seen, the rate of increase in average assets per worker falls off
over time. The initial period of high capital formation was followed by a
recessionary period between 1957 and 1961. These years were marked by a
sharp increase in unemployment (from 3 million in 1956 to a high of 5
million in 1961) and a higher unemployment rate after the slump than
before (an increase of 1 million from 1956 figures to around 4 million
in 1962). [T. Brecher and T. Costello, _Common Sense for Hard Times_,
We have referred to data from this period, because some supporters of
"free market" capitalism have used the same period to argue for the
advantages of capital investment. This data actually indicates, however,
that increased capital formation helps to create the potential for
recession, because although it increases productivity (and so profits) for
a period, it reduces profit rates in the long run because there is a
relative scarcity of surplus value in the economy (compared to invested
capital). This fall in profit rates is indicated by the decrease in
capital formation, which is the point of production in the first place
within capitalism, as well as by the increase of unemployment during that
So, if the profit rate falls to a level that does not allow capital formation
to continue, a slump sets in. This general slump is usually started by
overproduction for a specific commodity, possibly caused by the process
described in section C.7.2. If there are enough profits in the economy,
localised slumps have a reduced tendency to grow and become general. A slump
only becomes general when the rate of profit over the whole economy falls.
A local slump spreads through the market because of the lack of information
the market provides producers. When one industry over-produces, it cuts
back production, introduces cost-cutting measures, fires workers and so on
in order to try and realise more profits. This reduces demand for industries
that supplied the affected industry and reduces *general* demand due to
unemployment. The related industries now face over-production themselves
and the natural response to the information supplied by the market is for
individual companies to reduce production, fire workers, etc., which again
leads to declining demand. This makes it even harder to realise profit on the
market and leads to more cost cutting, deepening the crisis. While individually
this is rational, collectively it is not and so soon all industries face the
same problem. A local slump is propagated through the economy because the
capitalist economy does not communicate enough information for producers to
make rational decisions or co-ordinate their activities.
"Over-production," we should point out, exists only from the viewpoint of
capital, not of the working class:
"What economists call over-production is but a production that is above
the purchasing power of the worker. . . this sort of over-production
remains fatally characteristic of the present capitalist production,
because workers cannot buy with their salaries what they have produced
and at the same time copiously nourish the swarm of idlers who live
upon their work." [Peter Kropotkin, Op. Cit., pp. 127-128]
In other words, over-production and under-consumption reciprocally imply
each other. There is no over production except in regard to a given level
of solvent demand. There is no deficiency in demand except in relation to
a given level of production. The goods "over-produced" may be required
by consumers, but the market price is too low to generate a profit and so
production must be reduced in order to artificially increase it. So, for
example, the sight of food being destroyed while people go hungry is
a common one in depression years.
So, while the crisis appears on the market as a "commodity glut" (i.e. as a
reduction in effective demand) and is propagated through the economy by the
price mechanism, its roots lie in production. Until such time as profit levels
stabilise at an acceptable level, thus allowing renewed capital expansion, the
slump will continue. The social costs of such cost cutting is yet another
"externality," to be bothered with only if they threaten capitalists' power
There are means, of course, by which capitalism can postpone (but not stop)
a general crisis developing. Imperialism, by which markets are increased and
profits are extracted from less developed countries and used to boost the
imperialist countries profits, is one method ("The workman being unable to
purchase with their wages the riches they are producing, industry must search
for markets elsewhere" - Kropotkin, Op. Cit., p. 55). Another is state
manipulation of credit and other economic factors (such as minimum wages,
the incorporation of trades unions into the system, arms production,
maintaining a "natural" rate of unemployment to keep workers on their
toes etc.). Another is state spending to increase aggregate demand, which
can increase consumption and so lessen the dangers of over-production. Or
the rate of exploitation produced by the new investments can be high enough
to counteract the increase in constant capital and keep the profit rate
from falling. However, these have (objective and subjective) limits and
can never succeed in stopping depressions from occurring.
Hence capitalism will suffer from a boom-and-bust cycle due to the
above-mentioned objective pressures on profit production, even if we
ignore the subjective revolt against authority by workers, explained
earlier. In other words, even if the capitalist assumption that workers
are not human beings but only "variable capital" *was* true, it would
not mean that capitalism was a crisis free system. However, for most
anarchists, such a discussion is somewhat academic for human beings are
not commodities, the labour "market" is not like the iron market, and the
subjective revolt against capitalist domination will exist as long as
C.8 Is state control of money the cause of the business cycle?
As explained in the last section, capitalism will suffer from a
boom-and-bust cycle due to objective pressures on profit
production, even if we ignore the subjective revolt against
authority by working class people. It is this two-way pressure
on profit rates, the subjective and objective, which causes the
business cycle and such economic problems as "stagflation."
However, for supporters of the free market, this conclusion
is unacceptable and so they usually try to explain the business
cycle in terms of *external* influences rather than those generated
by the way capitalism works. Most pro-"free market" capitalists
blame government intervention in the market, particularly state
control over money, as the source of the business cycle. This
analysis is defective, as will be shown below.
It should be noted that many supporters of capitalism ignore the
"subjective" pressures on capitalism that we discussed in section
C.7.1. In addition, the problems associated with rising capital
investment (as highlighted in section C.7.3) are also usually
ignored, because they usually consider capital to be "productive"
and so cannot see how its use could result in crises. This leaves
them with the problems associated with the price mechanism, as
discussed in section C.7.2.
The idea behind the "state-control-of-money" theory of crises is that
interest rates provide companies and individuals with information about
how price changes will affect future trends in production. Specifically,
the claim is that changes in interest rates (i.e. changes in the demand
and supply of credit) indirectly inform companies of the responses of
their competitors. For example, if the price of tin rises, this will lead
to an expansion in investment in the tin industry, so leading to a rise in
interest rates (as more credit is demanded). This rise in interest rates
lowers anticipated profits and dampens the expansion. State control of
money stops this process (by distorting the interest rate) and so results
in the credit system being unable to perform its economic function.
This results in overproduction as interest rates do not reflect *real*
savings and so capitalists over-invest in new capital, capital which
appears profitable only because the interest rate is artificially low.
When the rate inevitably adjusts upwards towards its "real" value, the
invested capital becomes unprofitable and so over-investment appears.
Hence, according to the argument, by eliminating state control of
money these negative effects of capitalism would disappear.
Before discussing whether state control of money *is* the cause of
the business cycle, we must point out that the argument concerning
the role of the interest rate does not, in fact, explain the occurrence
of over-investment (and so the business cycle). In other words, the
explanation of the business cycle as lying in the features of the
credit system is flawed. This is because it is *not* clear that the
*relevant* information is communicated by changes in interest rates.
Interest rates reflect the general aggregate demand for credit in
an economy. However, the information which a *specific* company
requires is about the over-expansion in the production of the specific
good they produce and so the level of demand for credit amongst
competitors, *not* the general demand for credit in the economy as
a whole. An increase in the planned production of some good by a
group of competitors will be reflected in a proportional change in
interest rates only if it is assumed that the change in demand for
credit by that industry is identical with that found in the economy
as a whole.
There is no reason to suppose such an assumption is true, given the
different production cycles of different industries and their differing
needs for credit (in both terms of amount and of intensity). Therefore,
assuming uneven changes in the demand for credit between industries
reflecting uneven changes in their requirements, it is quite possible
for over-investment (and so over-production) to occur, even if the
credit system is working as it should in theory (i.e. the interest
rate is, in fact, accurately reflecting the *real* savings available).
The credit system, therefore, does not communicate the *relevant*
information, and for this reason, it cannot be the case that the
business cycle can be explained by departure from an "ideal system"
(i.e. laissez-faire capitalism).
Therefore, it cannot be claimed that removing state-control of money
will also remove the business-cycle. However, the arguments that the
state control of money do have an element of truth in them. Expansion
of credit above the "natural" level which equates it with savings can
and does allow capital to expand further than it otherwise would and
so encourages over-investment (i.e. it builds upon trends already present
rather than *creating* them). While we have ignored the role of credit
expansion in our comments above to stress that credit is not fundamental
to the business cycle, it is useful to discuss this as it is an essential
factor in real capitalist economies. Indeed, without it capitalist
economies would not have grown as fast as they have. Credit is
fundamental to capitalism, in other words.
There are two main approaches to the question of eliminating state
control of money in "free market" capitalist economics -- Monetarism
and what is often called "free banking." We will take each in turn
(a third possible "solution" is to impose a 100% gold reserve
limit for banks, but as this is highly interventionist, and so not
laissez-faire, simply impossible as there is not enough gold to
go round and has all the problems associated with inflexible money
regimes we highlight below, we will not discuss it).
Monetarism was very popular in the 1970s and is associated with the
works of Milton Friedman. It is far less radical that the "free banking"
school and argues that rather than abolish state money, its issue should
be controlled. Friedman stressed, like most capitalist economists, that
monetary factors are the important feature in explaining such problems
of capitalism as the business cycle, inflation and so on. This is
unsurprising, as it has the useful ideological effect of acquitting
the inner-workings of capitalism of any involvement in such problems.
Slumps, for example, may occur, but they are the fault of the state
interfering in the economy. This is how Friedman explains the Great
Depression of the 1930s in the USA, for example (see his "The Role
of Monetary Policy" in _American Economic Review_, March, 1968).
He also explains inflation by arguing it was a purely monetary
phenomenon caused by the state printing more money than required
by the growth of economic activity (for example, if the economy
grew by 2% but the money supply increased by 5%, inflation would
rise by 3%). This analysis of inflation is deeply flawed, as we
Thus Monetarists argued for controlling the money supply, of
placing the state under a "monetary constitution" which ensured
that the central banks be required by law to increase the quantity
of money at a constant rate of 3-5% a year. This would ensure that
inflation would be banished, the economy would adjust to its natural
equilibrium, the business cycle would become mild (if not disappear)
and capitalism would finally work as predicted in the economics
textbooks. With the "monetary constitution" money would become
"depoliticised" and state influence and control over money would
be eliminated. Money would go back to being what it is in
neo-classical theory, essentially neutral, a link between
production and consumption and capable of no mischief on its own.
Unfortunately for Monetarism, its analysis was simply wrong. Even
more unfortunately for both the theory and vast numbers of people,
it was proven wrong not only theoretically but also empirically.
Monetarism was imposed on both the USA and the UK in the early
1980s, with disastrous results. As the Thatcher government in 1979
applied Monetarist dogma the most whole-heartedly we will concentrate
on that regime (the same basic things occurred under Reagan as well).
Firstly, the attempt to control the money supply failed, as predicted
in 1970 by the radical Keynesian Nicholas Kaldor (see his essay
"The New Monetarism" in _Further Essays on Applied Economics_, for
example). This is because the money supply, rather than being set
by the central bank or the state (as Friedman claimed), is a
function of the demand for credit, which is itself a function
of economic activity. To use economic terminology, Friedman had
assumed that the money supply was "exogenous" and so determined
outside the economy by the state when, in fact, it is "endogenous"
in nature (i.e. comes from *within* the economy). This means that
any attempt to control the money supply will fail. Charles P.
"As a historical generalisation, it can be said that every
time the authorities stabilise or control some quantity of
money. . . in moments of euphoria more will be produced. Or
if the definition of money is fixed in terms of particular
assets, and the euphoria happens to 'monetise' credit in
new ways that are excluded from the definition, the amount
of money defined in the old way will not grow, but its
velocity will increase. . .fix any [definition of money]
and the market will create new forms of money in periods
of boom to get round the limit." [_Manias, Panics and
Crashes_, p. 48]
The experience of the Thatcher and Reagan regimes indicates
this well. The Thatcher government could not meet the
money controls it set -- the growth was 74%, 37% and 23%
above the top of the ranges set in 1980 [Ian Gilmore,
_Dancing With Dogma_, p. 22]. It took until 1986 before
the Tory government stopped announcing monetary targets,
persuaded no doubt by its inability to hit them. In addition,
the variations in the money supply also showed that Milton
Friedman's argument on what caused inflation was also wrong.
According to his theory, inflation was caused by the money
supply increasing faster than the economy, yet inflation
*fell* as the money supply increased. As the moderate
conservative Ian Gilmore points out, "[h]ad Friedmanite
monetarism. . . been right, inflation would have been about
16 per cent in 1982-3, 11 per cent in 1983-4, and 8 per
cent in 1984-5. In fact . . . in the relevant years it
never approached the levels infallibly predicted by
monetarist doctrine." [Op. Cit., p. 52] From an anarchist
perspective, however, the fall in inflation was the result
of the high unemployment of this period as it weakened
labour, so allowing profits to be made in production
rather than in circulation (see section C.7.1). With no
need for capitalists to maintain their profits via
price increases, inflation would naturally decrease as
labour's bargaining position was weakened by massive
unemployment. Rather than being a purely monetary phenomena
as Friedman claimed, it is a product of the profit needs
of capital and the state of the class struggle.
It is also of interest to note that even in Friedman's own
test of his basic contention, the Great Depression of 1929-33,
he got it wrong. Kaldor noted pointed out that "[a]ccording to
Friedman's own figures, the amount of 'high-powered money'. . .
in the US increased, not decreased, throughout the Great
Contraction: in July 1932, it was more than 10 per cent higher
than in July, 1929. . . The Great Contraction of the money
supply . . . occurred *despite* this increase in the monetary
base." [Op. Cit., pp. 11-12] Other economists also investigated
Friedman's claims, with similar result -- "Peter Temin took
issue with Friedman and Schwartz from a Keynesian point of
view [in the book _Did Monetary Forces Cause the Great
Depression?_]. He asked whether the decline in spending
resulted from a decline in the money supply or the other way
round. . . [He found that] the money supply not only did not
decline but actually increased 5 percent between August 1929
and August 1931. . . Temin concluded that there is no evidence
that money caused the depression between the stock market
crash and. . . September 1931." [Charles P. Kindleburger,
Op. Cit., p. 60]
In other words, causality runs from the real economy to money,
not vice versa, and fluctuations in the money supply results from
fluctuations in the economy. If the money supply is endogenous,
and it is, this would be expected. Attempts to control the money
supply would, of necessity, fail and the only tool available would
take the form of raising interest rates. This would reduce
inflation, for example, by depressing investment, generating
unemployment, and so (eventually) slowing the growth in wages.
Which is what happened in the 1980s. Trying to "control" the money
supply actually meant increasing interest rates to extremely
high levels, which helped produce the worse depression since
the end of the war (a depression which Friedman notably failed
Given the absolute failure of Monetarism, in both theory and
practice, it is little talked about now. However, in the 1970s
it was the leading economic dogma of the right -- the right
which usually likes to portray itself as being strong on the
economy. It is useful to indicate that this is not the case.
In addition, we discuss the failure of Monetarism in order to
highlight the problems with the "free banking" solution to state
control of money. This school of thought is associated with the
"Austrian" school of economics and right-wing libertarians in
general (we also discuss this theory in section F.10.1). It is
based on totally privatising the banking system and creating a
system in which banks and other private companies compete on the
market to get their coins and notes accepted by the general
population. This position is not the same as anarchist mutual
banking as it is seen not as a way of reducing usury to zero
but rather as a means of ensuring that interest rates work
as they are claimed to do in capitalist theory.
The "free banking" school argues that under competitive pressures,
banks would maintain a 100% ratio between the credit they provide
and the money they issue with the reserves they actually have (i.e.
market forces would ensure the end of fractional reserve banking).
They argue that under the present system, banks can create more
credit than they have funds/reserves available. This pushes the
rate of interest below its "natural rate" (i.e. the rate which
equates savings with investment). Capitalists, mis-informed by
the artificially low interest rates invest in more capital
intensive equipment and this, eventually, results in a crisis,
a crisis caused by over-investment ("Austrian" economists term
this "malinvestment"). If banks were subject to market forces,
it is argued, then they would not generate credit money, interest
rates would reflect the real rate and so over-investment, and
so crisis, would be a thing of the past.
This analysis, however, is flawed. We have noted one flaw above,
namely the problem that interest rates do not provide sufficient
or correct information for investment decisions. Thus relative
over-investment could still occur. Another problem follows
on from our discussion of Monetarism, namely the endogenous
nature of money and the pressures this puts on banks. The noted
post-keynesian economist Hyman Minsky created an analysis which
gives an insight into why it is doubtful that even a "free banking"
system would resist the temptation to create credit money (i.e.
loaning more money than available savings). This model is often
called "The Financial Instability Hypothesis."
Let us assume that the economy is going into the recovery period
after a crash. Initially firms would be conservative in their
investment while banks would lend within their savings limit
and to low-risk investments. In this way the banks do ensure
that the interest rate reflects the natural rate. However, this
combination of a growing economy and conservatively financed
investment means that most projects succeed and this gradually
becomes clear to managers/capitalists and bankers. As a result,
both managers and bankers come to regard the present risk
premium as excessive. New investment projects are evaluated
using less conservative estimates of future cash flows. This
is the foundation of the new boom and its eventual bust. In
Minsky's words, "stability is destabilising."
As the economy starts to grow, companies increasingly turn to
external finance and these funds are forthcoming because the
banking sector shares the increased optimism of investors.
Let us not forget that banks are private companies too and so
seek profits as well. Providing credit is the key way of doing
this and so banks start to accommodate their customers and
they have to do this by credit expansion. If they did not,
the boom would soon turn into slump as investors would have
no funds available for them and interest rates would increase,
thus forcing firms to pay more in debt repayment, an increase
which many firms may not be able to do or find difficult. This
in turn would suppress investment and so production, generating
unemployment (as companies cannot "fire" investments as easily
as they can fire workers), so reducing consumption demand along
with investment demand, so deepening the slump.
However, due to the rising economy bankers accommodate their
customers and generate credit rather than rise interest rates.
In this way they accept liability structures both for themselves
and for their customers "that, in a more sober expectational
climate, they would have rejected." [Minsky, _Inflation,
Recession and Economic Policy_, p. 123] The banks innovate
their financial products, in other words, in line with demand.
Firms increase their indebtedness and banks are more than
willing to allow this due to the few signs of financial strain
in the economy. The individual firms and banks increase their
financial liability, and so the whole economy moves up the
However, eventually interest rates rise (as the existing extension
of credit appears too high) and this affects all firms, from the
most conservative to the most speculative, and "pushes" them up
even higher up the liability structure (conservative firms no
longer can repay their debts easily, less conservative firms
fail to pay them and so on). The margin of error narrows and
firms and banks become more vulnerable to unexpected developments,
such a new competitors, strikes, investments which do not generate
the expected rate of return, credit becoming hard to get, interest
rates increase and so on. In the end, the boom turns to slump
and firms and banks fail.
The "free banking" school reject this claim and argue that
private banks in competition would *not* do this as this
would make them appear less competitive on the market and
so customers would frequent other banks (this is the same
process by which inflation would be solved by a "free
banking" system). However, it is *because* the banks are
competing that they innovate -- if they do not, another
bank or company would in order to get more profits. This
can be seen from the fact that "[b]ank notes. . . and
bills of exchange. . . were initially developed because
of an inelastic supply of coin" [Kindleburger, Op. Cit.,
p. 51] and "any shortage of commonly-used types [of money]
is bound to lead to the emergence of new types; indeed,
this is how, historically, first bank notes and the
chequing account emerged." [Kaldor, Op. Cit., p. 10]
This process can be seen at work in Adam Smith's _The Wealth
of Nations_. Scotland in Smith's time was based on a competitive
banking system and, as Smith notes, they issued more money than
was available in the banks coffers:
"Though some of those notes [the banks issued] are continually
coming back for payment, part of them continue to circulate for
months and years together. Though he [the banker] has generally
in circulation, therefore, notes to the extent of a hundred
thousand pounds, twenty thousand pounds in gold and silver
may frequently be a sufficient provision for answering
occasional demands." [_The Wealth of Nations_, pp. 257-8]
In other words, the competitive banking system did not, in
fact, eliminate fractional reserve banking. Ironically enough,
Smith noted that "the Bank of England paid very dearly, not
only for its own imprudence, but for the much greater
imprudence of almost all of the Scotch [sic!] banks." [Op.
Cit., p. 269] Thus the central bank was more conservative
in its credit generation than the banks under competitive
pressures! Indeed, Smith argues that the banking companies
did not, in fact, act in line with their interests as assumed
by the "free banking" school:
"had every particular banking company always understood and
and attended to its own particular interest, the circulation
never could have been overstocked with paper money. But every
particular baking company has not always understood and
attended to its own particular interest, and the circulation
has frequently been overstocked with paper money." [Op. Cit.,
Thus we have reserve banking plus bankers acting in ways
opposed to their "particular interest" (i.e. what economics
consider to be their actual self-interest rather than what
the bankers actually thought was their self-interest!) in a
system of competitive banking. Why could this be the case?
Smith mentions, in passing, a possible reason. He notes that
"the high profits of trade afforded a great temptation to
over-trading" and that while a "multiplication of banking
companies. . . increases the security of the public" by forcing
them "to be more circumspect in their conduct" it also "obliges
all bankers to be more liberal in their dealings with their
customers, lest their rivals should carry them away." [Op.
Cit., p. 274, p. 294]
Thus "free banking" is pulled in two directions at once, to
accommodate their customers while being circumspect in their
activities. Which factor prevails would depend on the state
of the economy, with up-swings provoking liberal lending (as
described by Minsky). Moreover, given that the "free banking"
school argues that credit generation produces the business
cycle, it is clear from the case of Scotland that competitive
banking does not, in fact, stop credit generation (and so
the business cycle, according to "Austrian" theory). This
also seemed the case with 19th century America, which did
not have a central bank for most of that period -- "the up
cycles were also extraordinary [like the busts], powered
by loose credit and kinky currencies (like privately issued
banknotes)." [Doug Henwood, _Wall Street_, p. 94]
Most "free banking" supporters also argue that regulated systems
of free banking were more unstable than unregulated. Perhaps this
is the case, but that implies that the regulated systems could
not freely accommodate their customers by generating credit
and the resulting inflexible money regime created problems by
increasing interest rates and reducing the amount of money
available, which would result in a slump sooner rather than
later. Thus the over supply of credit, rather than being the
*cause* of the crisis is actually a symptom. Competitive
investment also drives the business-cycle expansion, which
is allowed and encouraged by the competition among banks in
supplying credit. Such expansion complements -- and thus amplifies
-- other objective tendencies towards crisis, such as over-investment
In other words, a pure "free market" capitalist would still have a business
cycle as this cycle is caused by the nature of capitalism, not by state
intervention. In reality (i.e. in "actually existing" capitalism), state
manipulation of money (via interest rates) is essential for the capitalist
class as it is more related to indirect profit-generating activity, such as
ensuring a "natural" level of unemployment to keep profits up, an acceptable
level of inflation to ensure increased profits, and so forth, as well as
providing a means of tempering the business cycle, organising bailouts
and injecting money into the economy during panics. If state manipulation
of money caused the problems of capitalism, we would not have seen the
economic successes of the post-war Keynesian experiment or the business
cycle in pre-Keynesian days and in countries which had a more free banking
system (for example, nearly half of the late 19th century in the US was
spent in periods of recession and depression, compared to a fifth since
the end of World War II).
It is true that all crises have been preceded by a speculatively-enhanced
expansion of production and credit. This does not mean, however, that
crisis *results* from speculation and the expansion of credit. The
connection is not causal in free market capitalism. The expansion and
contraction of credit is a mere symptom of the periodic changes in the
business cycle, as the decline of profitability contracts credit just
as an increase enlarges it.
Paul Mattick gives the correct analysis:
"[M]oney and credit policies can themselves change nothing with
regard to profitability or insufficient profits. Profits come only
from production, from the surplus value produced by workers. . .
The expansion of credit has always been taken as a sign of a coming
crisis, in the sense that it reflected the attempt of individual
capital entities to expand despite sharpening competition, and
hence survive the crisis. . . Although the expansion of credit has
staved off crisis for a short time, it has never prevented it, since
ultimately it is the real relationship between total profits and the
needs of social capital to expand in value which is the decisive factor,
and that cannot be altered by credit." [_Economics, Politics and the
Age of Inflation_, pp. 17-18]
In short, the apologists of "free market" capitalism confuse the
symptoms for the disease.
Where there is no profit to be had, credit will not be sought. While
extension of the credit system "can be a factor deferring crisis, the
actual outbreak of crisis makes it into an aggravating factor because
of the larger amount of capital that must be devalued." [Paul Mattick,
_Economic Crisis and Crisis Theory_, p. 138] But this is also a problem
facing private companies using the gold standard, as advocated by
right-wing Libertarians (who are supporters of "free market" capitalism
and banking). The money supply reflects the economic activity within
a country and if that supply cannot adjust, interest rates rise and
provoke a crisis. Thus the need for a flexible money supply (as
desired, for example, by the US Individualist Anarchists). As Adam
Smith pointed out, "the quantity of coin in every country is regulated
by the value of the commodities which are to be circulated by it:
increase that value and . . . the additional quantity of coin
requisite for circulating them [will be found]." [Op. Cit., p. 385]
Token money came into being because commodity money proved to be too
inflexible for this to occur, as "the expansion of production or trade
unaccompanied by an increase in the amount of money must cause a fall
in the price level. . . Token money was developed at an early date to
shelter trade from the enforced deflations that accompanied the use of
specie when the volume of business swelled. . . Specie is an
inadequate money just because it is a commodity and its amount
cannot be increased at will. The amount of gold available may be
increased by a few per cent a year, but not by as many dozen within
a few weeks, as might be required to carry out a sudden expansion of
transactions. In the absence of token money business would have to
be either curtailed or carried on at very much lower prices, thus
inducing a slump and creating unemployment." [Karl Polyani, _The
Great Transformation_, p. 193]
To sum up, "[i]t is not credit but only the increase in production made
possible by it that increases surplus value. It is then the rate of
exploitation which determines credit expansion." [Paul Mattick,
_Economics, Politics and the Age of Inflation_, p. 18] Hence token
money would increase and decrease in line with capitalist profitability,
as predicted in capitalist economic theory. But this could not affect
the business cycle, which has its roots in production for capital (i.e.
profit) and capitalist authority relations, to which the credit supply
would obviously be tied, and not vice versa.
C.8.1 Does this mean that Keynesianism works?
If state control of credit does not cause the business cycle, does that
mean Keynesianism capitalism can work? Keynesian economics, as opposed
to free market capitalism, maintains that the state can and should
intervene in the economy in order to stop economic crises from occurring.
The post-war boom presents compelling evidence that it can be effect the
business cycle for the better by reducing its impact from developing into
a full depression.
The period of social Keynesianism after the war was marked by reduced
inequality, increased rights for working people, less unemployment, a
welfare state you could actually use and so on. Compared to present-day
capitalism, it had much going for it. However, Keynesian capitalism is still
capitalism and so is still based upon oppression and exploitation. It was, in
fact, a more refined form of capitalism, within which the state intervention
was used to protect capitalism from itself while trying to ensure that working
class struggle against it was directed, via productivity deals, into
keeping the system going. For the population at large, the general idea
was that the welfare state (especially in Europe) was a way for society
to get a grip on capitalism by putting some humanity into it. In a confused
way, the welfare state was supported as an attempt to create a society in
which the economy existed for people, not people for the economy.
While the state has always had a share in the total surplus value produced
by the working class, only under Keynesianism is this share increased
and used actively to manage the economy. Traditionally, placing checks on
state appropriation of surplus value had been one of the aims of classical
capitalist thought (simply put, cheap government means more surplus value
available for capitalists to compete for). But as capital has accumulated,
so has the state increased and its share in social surplus (for control over
the domestic enemy has to be expanded and society protected from the
destruction caused by free market capitalism).
Indeed, such state intervention was not *totally* new for "[f]rom its origins,
the United States had relied heavily on state intervention and protection for
the development of industry and agriculture, from the textile industry in the
early nineteenth century, through the steel industry at the end of the century,
to computers, electronics, and biotechnology today. Furthermore, the same has
been true of every other successful industrial society." [_World Orders,
Old and New_, p. 101]
The roots of the new policy of higher levels and different forms of state
intervention lie in the Great Depression of the 1930s and the realisation
that attempts to enforce widespread reductions in money wages and costs
(the traditional means to overcome depression) were impossible because
the social and economic costs would have been too expensive. A militant
strike wave involving a half million workers occurred in 1934,
with factory occupations and other forms of militant direct action
Instead of attempting the usual class war (which may have had revolutionary
results), sections of the capitalist class thought a new approach was
required. This involved using the state to manipulate credit in order to
increase the funds available for capital and to increase demand by state
orders. As Paul Mattick points out:
"The additional production made possible by deficit financing does appear
as additional demand, but as demand unaccompanied by a corresponding
increase in total profits. . . [this] functions immediately as an increase
in demand that stimulates the economy as a whole and can become the point
for a new prosperity" if objective conditions allow it. [_Economic
Crisis and Crisis Theory_, p. 143]
State intervention can, in the short term, postpone crises by stimulating
production. This can be seen from the in 1930s New Deal period under Roosevelt
when the economy grew five years out of seven compared to it shrinking
every year under the pro-laissez-faire Republican President Herbert Hoover
(under Hoover, the GNP shrank an average of -8.4 percent a year, under
Roosevelt it grew by 6.4 percent). The 1938 slump after 3 years of growth
under Roosevelt was due to a decrease in state intervention:
"The forces of recovery operating within the depression, as well as the
decrease in unemployment via public expenditures, increased production
up to the output level of 1929. This was sufficient for the Roosevelt
administration to drastically reduce public works. . . in a new effort to
balance the budget in response to the demands of the business world. . . The
recovery proved to be short-lived. At the end of 1937 the Business Index
fell from 110 to 85, bring the economy back to the state in which it had
found itself in 1935. . . Millions of workers lost their jobs once again."
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 138]
With the success of state intervention during the second world war,
Keynesianism was seen as a way of ensuring capitalist survival. The
resulting boom is well known, with state intervention being seen as the
way of ensuring prosperity for all sections of society. Before the Second
World War, the USA (for example) suffered eight depressions, since the war
there has been none (although there has been periods of recession). There
is no denying that for a considerable time, capitalism has been able to
prevent the rise of depressions which so plagued the pre-war world and
that this was accomplished by government interventions.
This is because Keynesianism can serve to initiate a new prosperity and
postpone crisis by the extension of credit. This can mitigate the conditions
of crisis, since one of its short-term effects is that it offers private
capital a wider range of action and an improved basis for its own efforts
to escape the shortage of profits for accumulation. In addition, Keynesianism
can fund Research and Development in new technologies and working methods
(such as automation), guarantee markets for goods as well as transferring
wealth from the working class to capital via taxation and inflation.
In the long run, however, Keynesian "management of the economy by means of
monetary and credit policies and by means of state-induced production must
eventually find its end in the contradictions of the accumulation process."
[Paul Mattick, Op. Cit., p. 18]
So, these interventions did not actually set aside the underlying causes
of economic and social crisis. The modifications of the capitalist system
could not totally countermand the subjective and objective limitations
of a system based upon wage slavery and social hierarchy. This can be seen
when the rosy picture of post-war prosperity changed drastically in the 1970s
when economic crisis returned with a vengeance, with high unemployment
occurring along with high inflation. This soon lead to a return to a more
"free market" capitalism with, in Chomsky's words, "state protection and
public subsidy for the rich, market discipline for the poor." This process,
and its effects, are discussed in the next section.
C.8.2 What happened to Keynesianism in the 1970s?
Basically, the subjective and objective limitations to Keynesianism we
highlighted in the last section were finally reached in the early 1970s.
Economic crisis returned with massive unemployment accompanied with high
inflation, with the state interventions that for so long kept capitalism
healthy making the crisis worse. In other words, a combination of social
struggle and a lack of surplus value available to capital resulted in the
breakdown of the successful post-war consensus.
The roots and legacy of this breakdown in Keynesianism is informative and
worth analysing. The post-war period marked a distinct change for capitalism,
with new, higher levels of state intervention. So why the change? Simply put,
because capitalism was not a viable system. It had not recovered from the
Great Depression and the boom economy during war had obviously contrasted
deeply with the stagnation of the 1930s. Plus, of course, a militant working
class, which has put up with years of denial in the struggle against
fascist-capitalism would not have taken lightly to a return to mass
unemployment and poverty. So, politically and economically a change was
required. This change was provided by the ideas of Keynes, a change which
occurred under working class pressure but in the interests of the ruling
The mix of intervention obviously differed from country to country, based
upon the needs and ideologies of the ruling parties and social elites. In
Europe nationalisation was widespread as inefficient capital was taken
over by the state and reinvigorated by state funding and social spending
more important as Social Democratic parties attempted to introduce reforms.
Chomsky describes the process in the USA:
"Business leaders recognised that social spending could stimulate the
economy, but much preferred the military Keynesian alternative - for
reasons having to do with privilege and power, not 'economic rationality.'
This approach was adopted at once, the Cold War serving as the justification.
. . . The Pentagon system was considered ideal for these purposes. It extends
well beyond the military establishment, incorporating also the Department of
Energy. . . and the space agency NASA, converted by the Kennedy administration
to a significant component of the state-directed public subsidy to advanced
industry. These arrangements impose on the public a large burden of the
costs of industry (research and development, R&D) and provide a guaranteed
market for excess production, a useful cushion for management decisions.
Furthermore, this form of industrial policy does not have the undesirable
side-effects of social spending directed to human needs. Apart from unwelcome
redistributive effects, the latter policies tend to interfere with managerial
prerogatives; useful production may undercut private gain, while
state-subsidised waste production. . . is a gift to the owner and manager,
to whom any marketable spin-offs will be promptly delivered. Social
spending may also resource public interest and participation, thus enhancing
the threat of democracy. . . The defects of social spending do not taint
the military Keynesian alternative. For such reasons, _Business Week_
explained, 'there's a tremendous social and economic difference between
welfare pump-priming and military pump-priming,' the latter being far
preferable." [_World Orders, Old and New_, pp. 100-101]
Over time, social Keynesianism took increasing hold even in the USA, partly
in response to working class struggle, partly due to the need for popular
support at elections and partly due to "[p]opular opposition to the Vietnam
war [which] prevented Washington from carrying out a national mobilisation. . .
which might have made it possible to complete the conquest without harm to
the domestic economy. Washington was forced to fight a 'guns-and-butter' was
to placate the population, at considerable economic cost." [Noam Chomsky,
Op. Cit., pp. 157-8]
Social Keynesianism directs part of the total surplus value to workers
and unemployed while military Keynesianism transfers surplus value from
the general population to capital and from capital to capital. This allows
R&D and capital to be publicly subsidised, as well as essential but
unproductive capital to survive. As long as real wages did not exceed a
rise in productivity, Keynesianism would continue. However, both functions
have objective limits as the transfer of profits from successful capital to
essential, but less successful, or long term investment can cause a crisis
is there is not enough profit available to the system as a whole. The
surplus value producing capital, in this case, would be handicapped due
to the transfers and cannot respond to economic problems with freely as
This lack of profitable capital was part of the reason for the collapse
of the post-war consensus. In their deeply flawed 1966 book, _Monopoly
Capital_, radical economists Baran and Sweezy point out that "[i]f military
spending were reduced once again to pre-Second World War proportions the
nation's economy would return to a state of profound depression" [p. 153]
In other words, the US economy was still in a state of depression,
countermanded by state expenditures which allowed the system to appear
successful (for a good, if somewhat economic, critique of Baran and
Sweezy see Paul Mattick's "Monopoly Capital" in _Anti-Bolshevik
In addition, the world was becoming economically "tripolar," with a revitalised
Europe and a Japan-based Asian region emerging as major economic forces. This
placed the USA under increased pressure, as did the Vietnam War. However,
the main reason for its breakdown was social struggle by working people. The
only limit to the rate of growth required by Keynesianism to function is
the degree to which final output consists of consumption goods for the
presently employed population instead of investment. And investment is the
most basic means by which work, i.e. capitalist domination, is imposed.
Capitalism and the state could no longer ensure that working class struggles
could be contained within the system.
This pressure on US capitalism had an impact in the world economy and was
also accompanied by general social struggle across the world. This struggle
was directed against hierarchy in general, with workers, students, women,
ethnic groups, anti-war protesters and the unemployed all organising successful
struggles against authority. This struggle attacked the hierarchical core of
capitalism as well increasing the amount of income going to labour, resulting
in a profit squeeze (see section C.7) creating an economic crisis.
In other words, post-war Keynesianism failed simply because it could not,
in the long term, stop the subjective and objective pressures which capitalism
C.8.3 How did capitalism adjust to the crisis in Keynesianism?
Basically by using, and then managing, the 1970s crisis to discipline the
working class in order to reap increased profits and secure and extend the
ruling classes' power. It did this using a combination of crisis, free markets
and adjusted Keynesianism as part of a ruling elite lead class war against
In the face of crisis in the 1970s, Keynesianist redirection of profits
between capitals and classes had become a burden to capital as a whole
and had increased the expectations and militancy of working people to
dangerous levels. The crisis, however, helped control working class power
and was latter utilised as a means of saving capitalism.
Initially the crisis was used to justify attacks on working class people
in the name of the free market. And, indeed, capitalism was made more market
based, although with a "safety net" and "welfare state" for the wealthy. We
have seen a partial return to "what economists have called freedom of industry
and commerce, but which really meant the relieving of industry from the
harassing and repressive supervision of the State, and the giving to it
full liberty to exploit the worker, whom was still to be deprived of his
freedom." [Peter Kropotkin, _The Great French Revolution_, vol.1 , p. 28] The
"crisis of democracy" was overcome and replaced with the "liberty to exploit
human labour without any safeguard for the victims of such exploitation and
the political power organised as to assure freedom of exploitation to the
middle-class." [Op. Cit., p. 30]
Then under the rhetoric of "free market" capitalism, Keynesianism was used
to manage the crisis as it had previously managed the prosperity. "Supply
Side" economics (combined with neo-classical dogma) was used to undercut
working class power and consumption and so allow capital to reap more
profits off working people. Unemployment was used to discipline a militant
workforce and as a means of getting workers to struggle *for* work instead
of *against* wage labour. With the fear of job loss hanging over their heads,
workers put up with speedups, longer hours, worse conditions, less safety
protection and lower wages and this increased the profits that could be
extracted directly from workers as well as reducing business costs by allowing
employers to reduce on-job safety and protection and so on. The labour
"market" was fragmented to a large degree into powerless, atomised units with
unions fighting a losing battle in the face of state backed recession. In
this way capitalism could successfully change the composition of demand from
the working class to capital.
This disciplining of the working class resulted in the income going to capital
increasing by more than double the amount of that going to "labour." Between
1979 and 1989, total labour income rose by 22.8%, total capital income rose
by 65.3% and realised capital gains by 205.5%. The real value of a standard
welfare benefit package has also declined by some 26 percent since 1972.
[Edward S. Herman, "Immiserating Growth: The First World", _Z Magazine_]
And Stanford University economist Victor Fuch estimates that US children
have lost 10-12 hours of parental time between 1960 and 1986, leading to
a deterioration of family relations and values. Unemployment and
underemployment is still widespread, with most newly created jobs
We should point out that the growth in income going to labour includes all
"labour" incomes and as such includes the "wages" of CEOs and high level
managers. As we have already noted, these "wages" are part of the surplus
value extracted from workers and so should not be counted as income to
"labour." The facts of the Reagan fronted class war of the 1980s is that
while top management income has skyrocketed, workers wages have remained
usually stable or decreased absolutely. For example, the median hourly wage
of US production workers has fallen by some 13% since 1973 (we are not
implying that only production workers create surplus value or are "the
working class"). In contrast, US management today receives 150 times what
the average worker earns. Unsurprisingly 70% of the recent gain in per capita
income have gone to the top 1% of income earners (while the bottom lost
absolutely). [Chomsky, Op. Cit., p. 141] Income inequality has increased,
with the income of the bottom fifth of the US population falling by 18%,
while that of the richest fifth rose by 8%.
Indirect means of increasing capital's share in the social income were also
used, such as reducing environment regulations, so externalising pollution
costs onto current and future generations. In Britain, state owned
monopolies were privatised at knock-down prices allowing private capital
to increase its resources at a fraction of the real cost. Indeed, some
nationalised industries were privatised *as monopolies* allowing monopoly
profits to be extracted from consumers for many years before the state allowed
competition in those markets. Indirect taxation also increased, being used
to reduce working class consumption by getting us to foot the bill for
Exploitation of under-developed nations increased with $418 billion being
transferred to the developed world between 1982 and 1990 [Chomsky, Op. Cit.,
p. 130] Capital also became increasingly international in scope, as it used
advances in technology to move capital to third world countries where state
repression ensured a less militant working class. This transfer had the
advantage of increasing unemployment in the developed world, so placing
more pressures upon working class resistance.
This policy of capital-led class war, a response to the successful working
class struggles of the 1960s and 1970s, obviously reaped the benefits it
was intended to for capital. Income going to capital has increased and
that going to labour has declined and the "labour market" has been disciplined
to a large degree (but not totally we must add). Working people have been
turned, to a large degree, from participants into spectators, as required
for any hierarchical system. The human impact of these policies cannot be
calculated. Little wonder, then, the utility of neo-classical dogma to the
elite - it could be used by rich, powerful people to justify the fact that
they are pursuing social policies that create poverty and force children
As Chomsky argues, "one aspect of the internationalisation of the economy
is the extension of the two-tiered Third World mode to the core countries.
Market doctrine thus becomes an essential ideological weapon at home as
well, its highly selective application safely obscured by the doctrinal
system. Wealth and power are increasingly concentrated. Service for
the general public - education, health, transportation, libraries, etc. -
become as superfluous as those they serve, and can therefore be limited
or dispensed with entirely." [_Year 501_, p. 109]
The state managed recession has had its successes. Company profits are
up as the "competitive cost" of workers is reduced due to fear of job
losses. The Wall Street Journal's review of economic performance
for the last quarter of 1995 is headlined "Companies' Profits Surged 61%
on Higher Prices, Cost Cuts." After-tax profits rose 62% from 1993, up
from 34% for the third quarter. While working America faces market forces,
Corporate America posted record profits in 1994. _Business Week_
estimated 1994 profits to be up "an enormous 41% over ," despite
a bare 9% increase in sales, a "colossal success," resulting in large part
from a "sharp" drop in the "share going to labour," though "economists say
labour will benefit -- eventually." [cited by Noam Chomsky, "Rollback III",
_Z Magazine_, April 1995]
Moreover, for capital, Keynesianism is still goes on as before, combined
(as usual) with praises to market miracles. For example, Michael Borrus,
co-director of the Berkeley Roundtable on the International Economy (a
corporate-funded trade and technology research institute), cites a 1988
Department of Commerce study that states that "five of the top six fastest
growing U.S. industries from 1972 to 1988 were sponsored or sustained,
directly or indirectly, by federal investment." He goes on to state
that the "winners [in earlier years were] computers, biotechnology, jet
engines, and airframes" all "the by-product of public spending." [cited by
Chomsky, _World Orders, Old and New_, p. 109]
As James Midgley points out, "the aggregate size of the public sector did
not decrease during the 1980s and instead, budgetary policy resulted in a
significant shift in existing allocations from social to military and law
enforcement." ["The radical right, politics and society", _The Radical Right
and the Welfare State_, Howard Glennerster and James Midgley (eds.), p. 11]
Indeed, the US state funds one third of all civil R&D projects, and the
UK state provides a similar subsidy. [Chomsky, Op. Cit., p. 107] And after
the widespread collapse of Savings and Loans Associations in deregulated
corruption and speculation, the 1980s pro-"free market" Republican
administration happily bailed them out, showing that market forces were
only for one class.
The corporate owned media attacks social Keynesianism, while remaining
silent or justifying pro-business state intervention. Combined with
extensive corporate funding of right-wing "think-tanks" which explain why
(the wrong sort of) social programmes are counter-productive, the corporate
state system tried to fool the population into thinking that there is no
alternative to the rule by the market while the elite enrich themselves
at the publics expense.
So, social Keynesianism has been replaced by Pentagon Keynesianism cloaked
beneath the rhetoric of "free market" dogma. Combined with a strange
mix of free markets (for the many) and state intervention (for the select
few), the state has become stronger and more centralised and "prisons also
offer a Keynesian stimulus to the economy, both to the construction business
and white collar employment; the fastest growing profession is reported to
be security personnel." [Chomsky, _Year 501_, p. 110]
While working class resistance continues, it is largely defensive, but, as
in the past, this can and will change. Even the darkest night ends with
the dawn and the lights of working class resistance can be seen across
the globe. For example, the anti-Poll Tax struggle in Britain against the
Thatcher Government was successful as have been many anti-cuts struggles
across the USA and Western Europe, the Zapatista uprising in Mexico is
inspiring and there has been continual strikes and protests across the
world. Even in the face of state repression and managed economic recession,
working class people are still fighting back. The job for anarchists to is
encourage these sparks of liberty and help them win.
C.9 Would laissez-faire capitalism reduce unemployment, as supporters of
"free market" capitalism claim?
Firstly, we have to state that "actually existing capitalism" in the West
actually manages unemployment to ensure high profit rates for the capitalist
class (see section C.8.3) - market discipline for the working class, state
protection for the ruling class, in other words. As Edward Herman points
"Conservative economists have even developed a concept of a 'natural rate
of unemployment' [which Herman defines as "the rate of unemployment
preferred by the propertied classes"] . . . [which] is defined as the
minimum level consistent with price level stability, but, as it is based
on a highly abstract model that is not directly testable, the natural
rate can only be inferred from the price level itself. That is, if prices
are going up, unemployment is below the 'natural rate' and too low. . .
Apart from the grossness of this kind of metaphysical legerdemain, the
very concept of a natural rate of unemployment has a huge built-in
bias. It takes as granted all the other institutional factors that
influence the price level-unemployment trade-off (market structures
and independent pricing power, business investment policies at home
and abroad, the distribution of income, the fiscal and monetary mix,
etc.) and focuses solely on the tightness of the labour market
as the controllable variable. Inflation is the main threat, the
labour market (i.e. wage rates and unemployment levels) is the
locus of the solution to the problem." [_Beyond Hypocrisy_, p. 94]
In a sense, it is understandable that the ruling class within capitalism
desires to manipulate unemployment in this way and deflect questions
about their profit, property and power onto the labour market. Managing
depression (as indicated by high unemployment levels) allows greater profits
to be extracted from workers as management hierarchy is more secure. When
times are hard, workers with jobs think twice before standing up to their
bosses and so work harder, for longer and in worse conditions. This ensures
that surplus value is increased relative to real wages (indeed, in the
USA, real wages have stagnated since 1973 while profits have grown
massively). In addition, such a policy ensures that political discussion
about investment, profits, power and so on ("the other institutional
factors") are reduced and diverted because working class people are
too busy trying to make ends meet.
Of course, it can be argued that as this "natural" rate is both invisible
and can move, historical evidence is meaningless -- you can prove anything
with an invisible, mobile value. But if this is the case then any attempts to
maintain a "natural" rate is also meaningless as the only way to discover it
is to watch inflation levels (and with an invisible, mobile value, the theory
is always true after the fact -- if inflation rises as unemployment rises, then
the natural rate has increased; if inflation falls as unemployment rises, it has
fallen!). Which means that people are being made unemployed on the off-chance
that the unemployment level will drop below the (invisible and mobile) "natural"
rate and harm the interests of the ruling class (high inflation rates harms interest
incomes and full employment squeezes profits by increasing workers' power).
Given that most mainstream economists subscribe to this fallacy, it just
shows how the "science" accommodates itself to the needs of the powerful.
So, supporters of "free market" capitalism do have a point, "actually
existing capitalism" has created high levels of unemployment. The
question now arises, will a "purer" capitalism create full employment?
First, we should point out that some supporters of "free market" capitalism
claim that the market has no tendency to equilibrium at all, which means full
employment is impossible, but few explicitly state this obvious conclusion
of their own theories. However, most claim that full employment can occur.
Anarchists agree, full employment can occur in "free market" capitalism,
but not for ever (nor for long periods). As the Polish economist Michal
Kalecki pointed out in regards to pre-Keynesian capitalism, the "reserve
of capital equipment and the reserve army of unemployed are typical features
of capitalist economy at least throughout a considerable part of the
[business] cycle." [quoted by George R. Feiwel, _The Intellectual Capital
of Michal Kalecki_, p. 130]
Cycles of short periods of full employment and longer periods of rising and
falling unemployment are actually a more likely outcome of "free market"
capitalism than continued full employment. As we argued in sections B.4.4
and C.7.1 capitalism needs unemployment to function successfully and so
"free market" capitalism will experience periods of boom and slump, with
unemployment increasing and decreasing over time (as can be seen from 19th
century capitalism). So, full employment under capitalism is unlikely to last
long (nor would full employment booms fill a major part of the full
business cycle). Moreover, the notion that capitalism naturally stays at
equilibrium or that unemployment is temporary adjustments is false,
even given the logic of neo-classical economics. As Proudhon argued:
"The economists admit it [that machinery causes unemployment]: but
here they repeat their eternal refrain that, after a lapse of time, the
demand for the product having increased in proportion to the reduction
in price [caused by the investment], labour in turn will come finally to
be in greater demand than ever. Undoubtedly, *with time,* the equilibrium
will be restored; but I must add again, the equilibrium will be no sooner
restored at this point than it will be disturbed at another, because the
spirit of invention never stops. . ." [_System of Economical
Contradictions_, pp. 200-1]
That capitalism creates permanent unemployment and, indeed, needs it
to function is a conclusion that few, if any, pro-"free market" capitalists
subscribe to. Faced with the empirical evidence that full employment is
rare in capitalism, they argue that reality is not close enough to their
theories and must be changed (usually by weakening the power of
labour by welfare "reform" and reducing "union power"). Thus
reality is at fault, not the theory (to re-quote Proudhon, "Political
economy -- that is, proprietary despotism -- can never be in the
wrong: it must be the proletariat." [Op. Cit. p. 187]) So if
unemployment exists, then its because real wages are too high, not
because capitalists need unemployment to discipline labour (see
section C.9.2 for evidence that the neo-classical theory is false). Or
if real wages are falling as unemployment is rising, it can only
mean that the real wage is not falling fast enough -- empirical
evidence is never enough to falsify logical deductions from
(As an aside, it is one of amazing aspects of the "science" of economics
that empirical evidence is never enough to refute its claims. As the
left-wing economist Nicholas Kaldor once pointed out, "[b]ut unlike
any scientific theory, where the basic assumptions are chosen on the
basis of direct observation of the phenomena the behaviour of which
forms the subject-matter of the theory, the basic assumptions of
economic theory are either of a kind that are unverifiable. . . or
of a kind which are directly contradicted by observation." [_Further
Essays on Applied Economics_, pp. 177-8] Or, if we take the standard
economics expression "in the long run," we may point out that unless
a time is actually given it will always remain unclear as to how much
evidence must be gathered before one can accept or reject the theory.)
Of course, reality often has the last laugh on any ideology. For example,
since the late 1970s and early 1980s right-wing capitalist parties
have taken power in many countries across the world. These regimes
made many pro-free market reforms, arguing that a dose of market
forces would lower unemployment, increase growth and so on. The
reality proved somewhat different. For example, in the UK, by the
time the Labour Party under Tony Blair come back to office in 1997,
unemployment (while falling) was still higher than it had been
when the last Labour government left office in May, 1979. 18 years
of labour market reform had not reduced unemployment. It is no
understatement to argue, in the words of two critics of neo-liberalism,
that the "performance of the world economy since capital was
liberalised has been worse than when it was tightly controlled"
and that "[t]hus far, [the] actual performance [of liberalised
capitalism] has not lived up to the propaganda." [Larry Elliot
and Dan Atkinson, _The Age of Insecurity_, p. 274, p. 223]
Lastly, it is apparent merely from a glance at the history of capitalism
during its laissez-faire heyday in the 19th century that "free"
competition among workers for jobs does not lead to full employment.
Between 1870 and 1913, unemployment was at an average of 5.7% in
the 16 more advanced capitalist countries. This compares to an average
of 7.3% in 1913-50 and 3.1% in 1950-70. If laissez-faire did lead to
full employment, these figures would be reversed. As discussed above
(in section C.7.1), full employment *cannot* be a fixed feature of
capitalism due to its authoritarian nature and the requirements of
production for profit. To summarise, unemployment has more to
do with private property than the wages of our fellow workers.
However, it is worthwhile to discuss why the "free market" capitalist is
wrong to claim that unemployment within their system will not exist for
long periods of time. In addition, to do so will also indicate the poverty
of their theory of, and "solution" to, unemployment and the human
misery they would cause. We do this in the next section.
C.9.1 Would cutting wages reduce unemployment?
The "free market" capitalist (or neo-classical or neo-liberal or "Austrian")
argument is that unemployment is caused by workers' real wage being higher
than the market clearing level. Workers, it is claimed, are more interested
in money wages than real wages (which is the amount of goods they can by with
their money wages). This leads them to resist wage cuts even when prices are
falling, leading to a rise in their real wages. In other words, they are
pricing themselves out of work without realising it (the validity of the
claim that unemployment is caused by high wages is discussed in the next
From this analysis comes the argument that if workers were allowed to compete
'freely' among themselves for jobs, real wages would decrease. This would reduce
production costs and this drop would produce an expansion in production which
provides jobs for the unemployed. Hence unemployment would fall. State intervention
(e.g. unemployment benefit, social welfare programmes, legal rights to organise,
minimum wage laws, etc.) and labour union activity according to this theory is
the cause of unemployment, as such intervention and activity forces wages above
their market level, thus increasing production costs and "forcing" employers to
"let people go."
Therefore, according to neo-classical economic theory, firms adjust production
to bring the marginal cost of their products (the cost of producing one
more item) into equality with the product's market-determined price. So a
drop in costs theoretically leads to an expansion in production, producing
jobs for the "temporarily" unemployed and moving the economy toward
a full-employment equilibrium.
So, in neo-classical theory, unemployment can be reduced by reducing the
real wages of workers currently employed. However, this argument is flawed.
While cutting wages may make sense for one firm, it would not have this
effect throughout the economy as a whole (as is required to reduce
unemployment in a country as a whole). This is because, in all versions of
neo-classical theory, it is assumed that prices depend (at least in part)
on wages. If all workers accepted a cut in wages, all prices would fall
and there would be little reduction in the buying power of wages. In other
words, the fall in money wages would reduce prices and leave real wages
nearly unchanged and unemployment would continue.
Moreover, if prices remained unchanged or only fell by a small amount (i.e.
if wealth was redistributed from workers to their employers), then the effect
of this cut in real wages would not increase employment, it would reduce it.
For people's consumption depends on their income, and if their incomes
have fallen, in real terms, so will their consumption. As Proudhon pointed
out in 1846, "if the producer earns less, he will buy less. . . [which will]
engender. . . over-production and destitution" because "though the
workmen cost you [the capitalist] something, they are your customers:
what will you do with your products, when driven away by you, they
shall consume no longer? Thus, machinery, after crushing, is not show
in dealing employers a counter-blow; for if production excludes
consumption, it is soon obliged to stop itself." [_System of Economical
Contradictions_, p. 204, p. 190]
However, it can be argued, not everyone's real income would fall: incomes from
profits would increase. But redistributing income from workers to capitalists, a
group who tend to spend a smaller portion of their income on consumption than do
workers, could reduce effective demand and increase unemployment. As David
Schweickart points out, when wages decline, so does workers' purchasing power;
and if this is not offset by an increase in spending elsewhere, total demand
will decline [_Against Capitalism_, pp. 106-107]. In other words, contrary to
neo-classical economics, market equilibrium might be established at any level
But in "free market" capitalist theory, such a possibility of market
equilibrium with unemployment is impossible. Neo-liberals reject the
claim that cutting real wages would merely decrease the demand for
consumer goods without automatically increasing investment sufficiently to
compensate for this. Neo-classicists argue that investment will increase
to make up for the decline in working class consumption.
However, in order make this claim, the theory depends on three critical
assumptions, namely that firms can expand production, that they will expand
production, and that, if they do, they can sell their expanded production.
However, this theory and its assumptions can be questioned.
The first assumption states that it is always possible for a company to
take on new workers. But increasing production requires more than just
labour. If production goods and facilities are not available, employment
will not be increased. Therefore the assumption that labour can always be
added to the existing stock to increase output is plainly unrealistic.
Next, will firms expand production when labour costs decline? Hardly.
Increasing production will increase supply and eat into the excess profits
resulting from the fall in wages. If unemployment did result in a lowering
of the general market wage, companies might use the opportunity to replace
their current workers or force them to take a pay cut. If this happened,
neither production nor employment would increase. However, it could be
argued that the excess profits would increase capital investment in the
economy (a key assumption of neo-liberalism). The reply is obvious: perhaps,
perhaps not. A slumping economy might well induce financial caution and
so capitalists could stall investment until they are convinced of the
sustained higher profitability while last.
This feeds directly into the last assumption, namely that the produced
goods will be sold. But when wages decline, so does worker purchasing
power, and if this is not offset by an increase in spending elsewhere,
then total demand will decline. Hence the fall in wages may result in the
same or even more unemployment as aggregate demand drops and companies
cannot find a market for their goods. However, business does not (cannot)
instantaneously make use of the enlarged funds resulting from the shift
of wages to profit for investment (either because of financial caution
or lack of existing facilities). This will lead to a reduction in aggregate
demand as profits are accumulated but unused, so leading to stocks
of unsold goods and renewed price reductions. This means that the
cut in real wages will be cancelled out by price cuts to sell unsold
stock and unemployment remains.
So, the traditional neo-classical reply that investment spending will increase
because lower costs will mean greater profits, leading to greater savings,
and ultimately, to greater investment is weak. Lower costs will mean greater
profits only if the products are sold, which they might not be if demand
is adversely affected. In other words, a higher profit margins do not result in
higher profits due to fall in consumption caused by the reduction of workers
purchasing power. And, as Michal Kalecki argued, wage cuts in combating
a slump may be ineffective because gains in profits are not applied
immediately to increase investment and the reduced purchasing power
caused by the wage cuts causes a fall in sales, meaning that higher profit
margins do not result in higher profits. Moreover, as Keynes pointed out long
ago, the forces and motivations governing saving are quite distinct from
those governing investment. Hence there is no necessity for the two quantities
always to coincide. So firms that have reduced wages may not be able to sell
as much as before, let alone more. In that case they will cut production,
adding to unemployment and further lowering demand. This can set off a
vicious downward spiral of falling demand and plummeting production leading
to depression (the political results of such a process would be dangerous
to the continued survival of capitalism). This downward spiral is described
by Kropotkin (nearly 40 years before Keynes made the same point in his
_General Theory of Employment, Interest and Money_):
"Profits being the basis of capitalist industry, low profits explain all
"Low profits induce the employers to reduce the wages, or the number of
workers, or the number of days of employment during the week. . . [L]ow
profits ultimately mean a reduction of wages, and low wages mean a
reduced consumption by the worker. Low profits mean also a somewhat
reduced consumption by the employer; and both together mean lower
profits and reduced consumption with that immense class of middlemen
which has grown up in manufacturing countries, and that, again, means
a further reduction of profits for the employers." [_Fields, Factories and
Workshops Tomorrow_, p. 33]
Thus, a cut in wages will deepen any slump, making it deeper and longer
than it otherwise would be. Rather than being the solution to unemployment,
cutting wages will make it worse (we will address the question of whether
wages being too high actually causes unemployment in the first place, as
maintained by neo-classical economics, below). Given that, as we argued
in section C.7.1, inflation is caused by insufficient profits for capitalists
(they try to maintain their profit margins by price increases) this spiralling
effect of cutting wages helps to explain what economists term "stagflation"
-- rising unemployment combined with rising inflation (as seen in the 1970s).
As workers are made unemployed, aggregate demand falls, cutting profit
margins even more and in response capitalists raise prices in an attempt to
recoup their losses. Only a very deep recession can break this cycle (along
with labour militancy and more than a few workers and their families).
Working people paying for capitalism's contradictions, in other words.
All this means that working class people have two options in a slump --
accept a deeper depression in order to start the boom-bust cycle again or
get rid of capitalism and with it the contradictory nature of capitalist
production which produces the business cycle in the first place (not to
mention other blights such as hierarchy and inequality).
The "Pigou" (or "real balance") effect is another neo-classical argument
that aims to prove that (in the end) capitalism will pass from slump to
boom. This theory argues that when unemployment is sufficiently high, it
will lead to the price level falling which would lead to a rise in the real
value of the money supply and so increase the real value of savings. People
with such assets will have become richer and this increase in wealth will
enable people to buy more goods and so investment will begin again. In
this way, slump passes to boom naturally.
However, this argument is flawed in many ways. In reply, Michal Kalecki
argued that, firstly, Pigou had "assumed that the banking system would
maintain the stock of money constant in the face of declining incomes,
although there was no particular reason why they should." If the money
stock changes, the value of money will also change. Secondly, that "the
gain in money holders when prices fall is exactly offset by the loss to
money providers. Thus, whilst the real value of a deposit in bank
account rises for the depositor when prices fell, the liability
represented by that deposit for the bank also rises in size." And,
thirdly, "that falling prices and wages would mean that the real value
of outstanding debts would be increased, which borrowers would find it
increasingly difficult to repay as their real income fails to keep pace
with the rising real value of debt. Indeed, when the falling prices and
wages are generated by low levels of demand, the aggregate real income
will be low. Bankruptcies follow, debts cannot be repaid, and a
confidence crisis was likely to follow." In other words, debtors may
cut back on spending more than creditors would increase it and so the
depression would continue as demand did not rise. [Malcolm C. Sawyer,
_The Economics of Michal Kalecki_, p. 90]
So, as Schweickart, Kalecki and others correctly observe, such
considerations undercut the neo-classical contention that labour
unions and state intervention are responsible for unemployment (or
that depressions will easily or naturally end by the workings of the
market). To the contrary, insofar as labour unions and various welfare
provisions prevent demand from falling as low as it might otherwise
go during a slump, they apply a brake to the downward spiral. Far
from being responsible for unemployment, they actually mitigate it.
This should be obvious, as wages (and benefits) may be costs for
some firms but they are revenue for even more.
C.9.2 Is unemployment caused by wages being too high?
As we noted in the last section, most capitalist economic theories argue
that unemployment is caused by wages being too high. Any economics
student will tell you that high wages will reduce the quantity of labour
demanded, in other words unemployment is caused by wages being
too high -- a simple case of "supply and demand." From this theory
we would expect that areas with high wages will also be areas with
high levels of unemployment. Unfortunately for the theory, this does
not seem to be the case.
Empirical evidence does not support the argument the neo-classical
argument that unemployment is caused by real wages being too high.
The phenomenon that real wages increase during the upward swing
of the business cycle (as unemployment falls) and fall during
recessions (when unemployment increases) renders the neo-classical
interpretation that real wages govern employment difficult to maintain
(real wages are "pro-cyclical," to use economic terminology). But this
is not the only evidence against the neo-classical theory of unemployment.
Will Hutton, the UK based neo-Keynesian economist, summaries research
that suggests high wages do not cause unemployment (as claimed
by neo-classical economists):
"the British economists David Blanchflower and Andrew Oswald [examined] . . .
the data in twelve countries about the actual relation between wages and
unemployment - and what they have discovered is another major challenge
to the free market account of the labour market. . . [They found] precisely
the opposite relationship [than that predicted in neo-classical theory]. The
higher the wages, the lower the local unemployment - and the lower the
wages, the higher the local unemployment. As they say, this is not a
conclusion that can be squared with free market text-book theories of
how a competitive labour market should work." [_The State We're In_,
Blanchflower and Oswald state their conclusions from their research that
employees "who work in areas of high unemployment earn less, other
things constant, than those who are surrounded by low unemployment."
[_The Wage Curve_, p. 360] This relationship, the exact opposite of
that predicted by neo-classical economics, was found in many different
countries and time periods, with the curve being similar for different
countries. Thus, the evidence suggests that high unemployment is
associated with low earnings, not high, and vice versa.
Looking at less extensive evidence we find that, taking the example of the
USA, if minimum wages and unions cause unemployment, why did the
South-eastern states (with a *lower* minimum wage and weaker unions)
have a *higher* unemployment rate than North-western states during the
1960's and 1970's? Or why, when the (relative) minimum wage declined
under Reagan and Bush, did chronic unemployment accompany it?
[Allan Engler, _The Apostles of Greed_, p. 107]
Or the Low Pay Network report "Priced Into Poverty" which discovered
that in the 18 months before they were abolished, the British Wages
Councils (which set minimum wages for various industries) saw a rise
of 18,200 in full-time equivalent jobs compared to a net loss of 39,300
full-time equivalent jobs in the 18 months afterwards. Given that nearly
half the vacancies in former Wages Council sectors paid less than the
rate which it is estimated Wages Councils would now pay, and nearly 15%
paid less than the rate at abolition, there should (by the neo-classical
argument) have been rises in employment in these sectors as pay falls.
The opposite happened. This research shows clearly that the falls in pay
associated with Wages Council abolition have not created more employment.
Indeed, employment growth was more buoyant prior to abolition than
subsequently. So whilst Wages Council abolition has not resulted in more
employment, the erosion of pay rates caused by abolition has resulted in
more families having to endure poverty pay.
(This does not mean that anarchists support the imposition of a legal
minimum wage. Most anarchists do not because it takes the responsibility
for wages from unions and other working class organisations, where it
belongs, and places it in the hands of the state. We mention these
examples in order to highlight that the neo-classical argument has
flaws with it.)
While this evidence may come as a shock to neo-classical economics,
it fits well with anarchist and other socialist analysis. For anarchists,
unemployment is a means of disciplining labour and maintaining
a suitable rate of profit (i.e. unemployment is a key means of ensuring
that workers are exploited). As full employment is approached, labour's
power increases, so reducing the rate of exploitation and so increasing
labour's share of the value it produces (and so higher wages). Thus, from
an anarchist point of view, the fact that wages are higher in areas of low
unemployment is not a surprise, nor is the phenomenon of pro-cyclical
real wages. After all, as we noted in section C.3, the ratio between wages
and profits are, to a large degree, a product of bargaining power and so
we would expect real wages to grow in the upswing of the business cycle,
fall in the slump and be high in areas of low unemployment. And, far more
importantly, this evidence suggests that the neo-classical claim that
unemployment is caused by unions, "too high" wage rates, and so on,
is false. Indeed, by stopping capitalists appropriating more of the income
created by workers, high wages maintain aggregate demand and contribute
to higher employment (although, of course, high employment cannot be
maintained indefinitely under wage slavery due to the rise in workers'
power this implies). Rather, unemployment is a key aspect of the capitalist
system and cannot be got rid off within it and the neo-classical "blame the
workers" approach fails to understand the nature and dynamic of the system.
So, perhaps, high real wages for workers increases aggregate demand and
reduces unemployment from the level it would be if the wage rate was cut.
Indeed, this seems to supported by research into the "wage curve" of
numerous countries. This means that a "free market" capitalism, marked
by a fully competitive labour market, no welfare programmes, unemployment
benefits, higher inequality and extensive business power to break unions
and strikes would see aggregate demand constantly rise and fall, in line
with the business cycle, and unemployment would follow suit. Moreover,
unemployment would be higher over most of the business cycle (and
particularly at the bottom of the slump) than under a capitalism with
social programmes, militant unions and legal rights to organise because
the real wage would not be able to stay at levels that could support
aggregate demand nor could the unemployed use their benefits to
stimulate the production of consumer goods.
In other words, a fully competitive labour market would increase the instability
of the market, as welfare programmes and union activity maintain aggregate
income for working people, who spend most of their income, so stabilising
aggregate demand -- an analysis which was confirmed in during the 1980s
("the relationship between measured inequality and economic stability. . .
was weak but if anything it suggests that the more egalitarian countries
showed a more stable pattern of growth after 1979" [Dan Corry and Andrew
Glyn, "The Macroeconomics of equality, stability and growth", in _Paying
for Inequality_, Andrew Glyn and David Miliband (Eds.) pp. 212-213]).
C.9.3 Are "flexible" labour markets the answer to unemployment?
The usual neo-liberal argument is that labour markets must become
more "flexible" to solve the problem of unemployment. This is done
by weakening unions, reducing (or abolishing) the welfare state, and so
on. However, we should note that the current arguments for greater
"flexibility" within the labour market as the means of reducing
unemployment seem somewhat phoney. The argument is that by
increasing flexibility, making the labour market more "perfect", the
so-called "natural" rate of unemployment will drop (this is the rate at
which inflation is said to start accelerating upwards) and so unemployment
can fall without triggering an accelerating inflation rate. Of course, that
the real source of inflation is capitalists trying to maintain their profit
levels is not mentioned (after all, profits, unlike wages, are to be
maximised for the greater good). Nor is it mentioned that the history
of labour market flexibility is somewhat at odds with the theory:
"it appears to be only relatively recently that the maintained greater
flexibility of US labour markets has apparently led to a superior performance
in terms of lower unemployment, despite the fact this flexibility is no new
phenomenon. Comparing, for example, the United States with the United
Kingdom, in the 1960s the United States averaged 4.8 per cent, with the
United Kingdom at 1.9 per cent; in the 1970s the United States rate rose
to 6.1 per cent, with the United Kingdom rising to 4.3 per cent, and it was
only in the 1980s that the ranking was reversed with the United States at
7.2 per cent and the United Kingdom at 10 per cent. . . Notice that this
reversal of rankings in the 1980s took place despite all the best efforts
of Mrs Thatcher to create labour market flexibility. . . [I]f labour market
flexibility is important in explaining the level of unemployment. . . why
does the level of unemployment remain so persistently high in a country,
Britain, where active measures have been taken to create flexibility?"
[Keith Cowling and Roger Sugden, _Beyond Capitalism_, p. 9]
If we look at the fraction of the labour force without a job in America, we
find that in 1969 it was 3.4% (7.3% including the underemployed) and *rose*
to 6.1% in 1987 (16.8% including the underemployed). Using more recent data,
we find that, on average, the unemployment rate was 6.2% in 1990-97 compared
to 5.0% in the period 1950-65. In other words, labour market "flexibility" has
not reduced unemployment levels, in fact "flexible" labour markets have been
associated with higher levels of unemployment.
Of course we are comparing different time periods. A lot has changed between
the 1960s and the 1990s and so comparing these periods cannot be the whole
answer. After all, the rise in flexibility and the increase in unemployment may
be unrelated. However, if we look at different countries over the same time
period we can see if "flexibility" actually reduces unemployment. As one
British economist notes, this may not be the case:
"Open unemployment is, of course, lower in the US. But once we allow
for all forms of non-employment [such as underemployment, jobless
workers who are not officially registered as such and so on], there is
little difference between Europe and the US: between 1988 and 1994,
11 per cent of men aged 25-55 were not in work in France, compared
with 13 per cent in the UK, 14 per cent in the US and 15 per cent in
Germany." [Richard Layard quoted by John Gray in _False Dawn_,
In addition, all estimates of America's unemployment record must take
into account America's incarceration rates. Over a million people more
would be seeking work if the US penal policies resembled those of
any other Western nation. [John Gray, Op. Cit., p. 113]
Taking the period 1983 to 1995, we find that around 30 per cent of the
population of OECD Europe lived in countries with average unemployment
rates lower than the USA and around 70 per cent in countries with lower
unemployment than Canada (whose relative wages are only slightly
less flexible than the USA). Furthermore, the European countries
with the lowest unemployment rates were not noted for their wage
flexibility (Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9%
and Switzerland 1.7%). Britain, which probably had the most flexible
labour market had an average unemployment rate higher than half of
Europe. And the unemployment rate of Germany is heavily influenced
by areas which were formally in East Germany. Looking at the former
West German regions only, unemployment between 1983 and 1995
was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK).
So, perhaps, "flexibility" is not the solution to unemployment some
claim it is (after all, the lack of a welfare state in the 19th century
did not stop unemployment nor long depressions occurring). Indeed,
a case could be made that the higher open unemployment in Europe
has a lot less to do with "rigid" structures and "pampered" citizens
than it does with the fiscal and monetary austerity required by
European unification as expressed in the Maastricht Treaty. As
this Treaty has the support of most of Europe's ruling class such
an explanation is off the political agenda.
Moreover, if we look at the rationale behind "flexibility" we find a strange
fact. While the labour market is to be made more "flexible" and in line
with ideal of "perfect competition", on the capitalist side no attempt
is being made to bring *it* into line with that model. Let us not forget
that perfect competition (the theoretical condition in which all resources,
including labour, will be efficiently utilised) states that there must be a
large number of buyers and sellers. This is the case on the sellers side of the
"flexible" labour market, but this is *not* the case on the buyers (where, as
indicated in section C.4, oligopoly reigns). Most who favour labour market
"flexibility" are also those most against breaking up of big business and
oligopolistic markets or the stopping of mergers between dominant
companies in and across markets. The model requires *both* sides to
be "flexible," so why expect making one side more "flexible" will have a
positive effect on the whole? There is no logical reason for this to be the
case. Indeed, with the resulting shift in power on the labour market things
may get worse as income is distributed from labour to capital. It is a bit
like expecting peace to occur between two warring factions by disarming
one side and arguing that because the number of guns have been halved
peacefulness has doubled! Of course, the only "peace" that would result
would be the peace of the graveyard or a conquered people -- subservience
can pass for peace, if you do not look too close. In the end, calls for the
"flexibility" of labour indicate the truism that, under capitalism, labour
exists to meet the requirements of capital (or living labour exists to meet
the needs of dead labour, a truly insane way to organise a society).
All this is unsurprising for anarchists as we recognise that "flexibility"
just means weakening the bargaining power of labour in order to increase
the power and profits of the rich (hence the expression "flexploitation"!).
Increased "flexibility" has been associated with *higher,* not lower
unemployment. This, again, is unsurprising, as a "flexible" labour market
basically means one in which workers are glad to have any job and face
increased insecurity at work (actually, "insecurity" would be a more honest
word to use to describe the ideal of a competitive labour market rather than
"flexibility" but such honesty would let the cat out of the bag). In such an
environment, workers' power is reduced, meaning that capital gets a larger
share of the national income than labour and workers are less inclined to stand
up for their rights. This contributes to a fall in aggregate demand, so
increasing unemployment. In addition, we should note that "flexibility" may
have little effect on unemployment (although not on profits) as a reduction of
labour's bargaining power may result in *more* rather than less unemployment.
This is because firms can fire "excess" workers at will, increase the hours
of those who remain (the paradox of overwork and unemployment is just an
expression of how capitalism works) and stagnating or falling wages reduces
aggregate demand. Thus the paradox of increased "flexibility" resulting in
higher unemployment is only a paradox in the neo-classical framework. From
an anarchist perspective, it is just the way the system works.
And we must add that whenever governments have attempted to make
the labour market "fully competitive" it has either been the product of
dictatorship (e.g. Chile under Pinochet) or occurred at the same time
increased centralisation of state power and increased powers for the police
and employers (e.g. Britain under Thatcher, Reagan in the USA). Latin
American Presidents trying to introduce neo-liberalism into their
countries have had to follow suit and "ride roughshod over democratic
institutions, using the tradition Latin American technique of
governing by decree in order to bypass congressional opposition. . .
Civil rights have also taken a battering. In Bolivia, the government
attempted to defuse union opposition . . . by declaring a state of
siege and imprisoning 143 strike leaders. . . In Colombia, the
government used anti-terrorist legislation in 1993 to try 15 trade
union leaders opposing the privatisation of the state telecommunications
company. In the most extreme example, Peru's Alberto Fujimori dealt
with a troublesome Congress by simply dissolving it . . . and seizing
emergency powers." [Duncan Green, _The Silent Revolution_, p. 157]
This is unsurprising. People, when left alone, will create communities,
organise together to collectively pursue their own happiness, protect
their communities and environment. In other words, they will form
associations and unions to influence the decisions that affect them.
In order to create a "fully competitive" labour market, individuals must
be atomised and unions, communities and associations weakened, if not
destroyed, in order to fully privatise life. State power must be used
to disempower the mass of the population, restrict their liberty, control
popular organisations and social protest and so ensure that the free market
can function without opposition to the human suffering, misery and pain
it would cause. People, to use Rousseau's evil term, "must be forced
to be free." And, unfortunately for neo-liberalism, the countries that tried
to reform their labour market still suffered from high unemployment, plus
increased social inequality and poverty and where still subject to the
booms and slumps of the business cycle.
Ultimately, the only real solution to unemployment is to end wage labour
and liberate humanity from the needs of capital.
C.9.4 Is unemployment voluntary?
Here we point out another aspect of the neo-classical "blame the workers"
argument, of which the diatribes against unions and workers' rights
highlighted above is only a part. This is the argument that unemployment is
not involuntary but is freely chosen by workers. As the left-wing economist
Nicholas Kaldor put it, for "free market" economists involuntary employment
"cannot exist because it is excluded by the assumptions." [_Further Essays
on Applied Economics_, p. x] The neo-classical economists claim that
unemployed workers calculate that their time is better spent searching
for more highly paid employment (or living on welfare than working) and
so desire to be jobless. That this argument is taken seriously says a lot
about the state of modern capitalist economic theory, but as it is popular
in many right-wing circles, we should discuss it.
Firstly, when unemployment rises it is because of layoffs, not voluntary
quittings, are increasing. When a company fires a number of its workers,
it can hardly be said that the sacked workers have calculated that their
time is better spent looking for a new job. They have no option. Secondly,
unemployed workers normally accept their first job offer. Neither of these
facts fits well with the hypothesis that most unemployment is "voluntary."
Of course, there are numerous jobs advertised in the media. Does this not
prove that capitalism always provides jobs for those who want them?
Hardly, as the number of jobs advertised must have some correspondence to
the number of unemployed. If 100 jobs are advertised in an areas reporting
1,000 unemployed, it can scarcely be claimed that capitalism tends to
In addition, it is worthwhile to note that the right-wing assumption that
higher unemployment benefits and a healthy welfare state promote
unemployment is not supported by the evidence. As a moderate member
of the British Conservative Party notes, the "OECD studied seventeen
industrial countries and found no connect between a country's unemployment
rate and the level of its social-security payments." [_Dancing with Dogma_,
p. 118] Moreover, the economists David Blanchflower and Andrew Oswald
"Wage Curve" for many different countries is approximately the same for
each of the fifteen countries they looked at. This also suggests that labour
market unemployment is independent of social-security conditions as
their "wage curve" can be considered as a measure of wage flexibility.
Both of these facts suggest that unemployment is involuntary in nature
and cutting social-security will *not* affect unemployment.
Another factor in considering the nature of unemployment is the effect of
nearly 20 years of "reform" of the welfare state conducted in both the USA
and UK. During the 1960s the welfare state was far more generous than it
was in the 1990s and unemployment was lower. If unemployment was
"voluntary" and due to social-security being high, we would expect a
decrease in unemployment as welfare was cut (this was, after all, the
rationale for cutting it in the first place). In fact, the reverse occurred,
with unemployment rising as the welfare state was cut. Lower
social-security payments did not lead to lower unemployment,
quite the reverse in fact.
Faced with these facts, some may conclude that as unemployment is independent
of social security payments then the welfare state can be cut. However, this
is not the case as the size of the welfare state does affect the poverty rates
and how long people remain in poverty. In the USA, the poverty rate was 11.7%
in 1979 and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The
net effect of cutting the welfare state was to help *increase* poverty.
Similarly, in the UK during the same period, to quote the ex-Thatcherite
John Gray, there "was the growth of an underclass. The percentage of British
(non-pensioner) households that are wholly workless - that is, none of whose
members is active in the productive economy - increased from 6.5 per cent in
1975 to 16.4 per cent in 1985 and 19.1 per cent in 1994. . . Between 1992
and 1997 there was a 15 per cent increase in unemployed lone parents. . .
This dramatic growth of an underclass occurred as a direct consequence of
neo-liberal welfare reforms, particularly as they affected housing."
[_False Dawn_, p. 30] This is the opposite of the predictions of right-wing
theories and rhetoric. As John Gray correctly argues, the "message of the
American [and other] New Right has always been that poverty and the
under class are products of the disincentive effects of welfare, not
the free market." He goes on to note that it "has never squared with
the experience of the countries of continental Europe where levels of
welfare provision are far more comprehensive than those of the United
States have long co-existed with the absence of anything resembling an
American-style underclass. It does not touch at virtually any point the
experience of other Anglo-Saxon countries." [Op.Cit., p. 42] He goes on
to note that:
"In New Zealand, the theories of the American New Right achieved a
rare and curious feat - self-refutation by their practical application.
Contrary to the New Right's claims, the abolition of nearly all universal
social services and the stratification of income groups for the purpose
of targeting welfare benefits selectively created a neo-liberal poverty
So while the level of unemployment benefits and the welfare state may
have little impact on the level of unemployment (which is to be expected
if the nature of unemployment is essentially involuntary), it *does* have
an effect on the nature, length and persistency of poverty. Cutting
the welfare state increases poverty and the time spent in poverty
(and by cutting redistribution, it would also increase inequality).
If we look at the relative size of a nation's social security transfers
as a percentage of Gross Domestic Product and its relative poverty rate
we find a correlation. Those nations with a high level of spending have
lower rates of poverty. In addition, there is a correlation between the
spending level and the number of persistent poor. Those nations with
high spending levels have more of their citizens escape poverty. For
example, Sweden has a single-year poverty rate of 3% and a poverty
escape rate of 45% and Germany has figures of 8% and 24% (and
a persistent poverty rate of 2%). In contrast, the USA has figures
of 20% and 15% (and a persistent poverty rate of 42%) [Greg J.
Duncan of the University of Michigan Institute for Social Research,
Given that a strong welfare state acts as a kind of floor under the
wage and working conditions of labour, it is easy to see why
capitalists and the supporters of "free market" capitalism seek
to undermine it. By undermining the welfare state, by making
labour "flexible," profits and power can be protected from working
people standing up for their rights and interests. Little wonder the
claimed benefits of "flexibility" have proved to be so elusive for the
vast majority while inequality has exploded. The welfare state, in
other words, reduces the attempts of the capitalist system to commodify
labour and increases the options available to working class people. While
it did not reduce the need to get a job, the welfare state did undermine
dependence on any particular employee and so increased workers'
independence and power. It is no coincidence that the attacks
on unions and the welfare state was and is framed in the rhetoric
of protecting the "right of management to manage" and of driving
people back into wage slavery. In other words, an attempt to increase
the commodification of labour by making work so insecure that
workers will not stand up for their rights.
The human costs of unemployment are well documented. There is a stable
correlation between rates of unemployment and the rates of mental-hospital
admissions. There is a connection between unemployment and juvenile and
young-adult crime. The effects on an individual's self-respect and the
wider implications for their community and society are massive. As David
"The costs of unemployment, whether measured in terms of the cold cash
of lost production and lost taxes or in the hotter unions of alienation,
violence, and despair, are likely to be large under Laissez Faire"
[_Against Capitalism_, p. 109]
Of course, it could be argued that the unemployed should look for work and
leave their families, home towns, and communities in order to find it.
However, this argument merely states that people should change their whole
lives as required by "market forces" (and the wishes -- "animal spirits,"
to use Keynes' term -- of those who own capital). In other words, it just
acknowledges that capitalism results in people losing their ability to
plan ahead and organise their lives (and that, in addition, it can deprive
them of their sense of identity, dignity and self-respect as well),
portraying this as somehow a requirement of life (or even, in some cases,
It seems that capitalism is logically committed to viciously contravening
the very values upon which it claims it be built, namely the respect for
the innate worth and separateness of individuals. This is hardly
surprising, as capitalism is based on reducing individuals to the level of
another commodity (called "labour"). To requote Karl Polanyi:
"In human terms such a postulate [of a labour market] implied for the
worker extreme instability of earnings, utter absence of professional
standards, abject readiness to be shoved and pushed about indiscriminately,
complete dependence on the whims of the market. [Ludwig Von] Mises justly
argued that if workers 'did not act as trade unionists, but reduced their
demands and changed their locations and occupations according to the labour
market, they would eventually find work.' This sums up the position under
a system based on the postulate of the commodity character of labour. It
is not for the commodity to decide where it should be offered for sale, to
what purpose it should be used, at what price it should be allowed to
change hands, and in what manner it should be consumed or destroyed."
[_The Great Transformation_, p. 176]
However, people are *not* commodities but living, thinking, feeling
individuals. The "labour market" is more a social institution than an
economic one and people and work more than mere commodities. If we reject
the neo-liberals' assumptions for the nonsense they are, their case fails.
Capitalism, ultimately, cannot provide full employment simply because
labour is *not* a commodity (and as we discussed in section C.7, this
revolt against commodification is a key part of understanding the business
cycle and so unemployment).
C.10 Will "free market" capitalism benefit everyone, *especially* the poor?
Murray Rothbard and a host of other supporters of "free-market" capitalism
make this claim. Again, it does contain an element of truth. As capitalism
is a "grow or die" economy (see section D.4.1), obviously the amount of
wealth available to society increases for *all* as the economy expands.
So the poor will be better off *absolutely* in any growing economy (at
least in economic terms). This was the case under Soviet state capitalism
as well: the poorest worker in the 1980's was obviously far better off
economically than one in the 1920's.
However, what counts is *relative* differences between classes and periods
within a growth economy. Given the thesis that free-market capitalism will
benefit the poor *especially,* we have to ask: can the other classes
benefit equally well?
As noted above, wages are dependent on productivity, with increases in the
wages lagging behind increases in productivity. If, in a free market, the
poor "especially" benefited, wages would need to increase *faster* than
productivity in order for the worker to obtain an increased share of
social wealth. However, if this were the case, the amount of profit going
to the upper classes would be proportionally smaller. Hence if capitalism
"especially" benefited the poor, it could not do the same for those who live
off the profit generated by workers.
For the reasons indicated above, productivity *must* rise faster than
wages or companies will fail and recession could result. This is why wages
(usually) lag behind productivity gains. In other words, workers produce more
but do not receive a corresponding increase in wages. This is graphically
illustrated by Taylor's first experiment in his "scientific management"
Taylor's theory was that when workers controlled their own work, they did
not produce to the degree wanted by management. His solution was simple.
The job of management was to discover the "one best way" of doing a
specific work task and then ensure that workers followed these (management
defined) working practices. The results of his experiment was a 360%
increase in productivity for a 60% increase in wages. Very efficient.
However, from looking at the figures, we see that the immediate result of
Taylor's experiment is lost. The worker is turned into a robot and
effectively deskilled (see section D.10). While this is good for profits
and the economy, it has the effect of dehumanising and alienating the
workers involved as well as increasing the power of capital in the labour
market. But only those ignorant of economic science or infected with
anarchism would make the obvious point that what is good for the economy
may not be good for people.
This brings up another important point related to the question of whether
"free market" capitalism will result in everyone being "better off." The
typical capitalist tendency is to consider quantitative values as being
the most important consideration. Hence the concern over economic growth,
profit levels, and so on, which dominate discussions on modern life.
However, as E.P. Thompson makes clear, this ignores an important aspect
of human life:
"simple points must be made. It is quite possible for statistical
averages and human experiences to run in opposite directions. A per
capita increase in quantitative factors may take place at the same
time as a great qualitative disturbance in people's way of life,
traditional relationships, and sanctions. People may consume more
goods and become less happy or less free at the same time" [_The
Making of the English Working Class_, p. 231]
For example, real wages may increase but at the cost of longer hours
and greater intensity of labour. Thus, "[i]n statistical terms, this
reveals an upward curve. To the families concerned it might feel like
immiseration." [Thompson, Op. Cit., p. 231] In addition, consumerism may
not lead to the happiness or the "better society" which many economists
imply to be its results. If consumerism is an attempt to fill an empty
life, it is clearly doomed to failure. If capitalism results in an
alienated, isolated existence, consuming more will hardly change that. The
problem lies within the individual and the society within which they live.
Hence, quantitative increases in goods and services may not lead to
anyone "benefiting" in any meaningful way.
This is important to remember when listening to "free market" gurus
discussing economic growth from their "gated communities," insulated from
the surrounding deterioration of society and nature caused by the workings
of capitalism (see sections D.1 and D.4 for more on this). In other words,
quality is often more important than quantity. This leads to the important
idea that some (even many) of the requirements for a truly human life
cannot be found on any market, no matter how "free."
However, to go back to the "number crunching" that capitalism so loves, we
see that the system is based on workers producing more profits for "their"
company by creating more commodities than they would by able to buy
back with their wages. If this does not happen, profits fall and capital
dis-invests. As can be seen from the example of Chile (see section C.11)
under Pinochet, "free market" capitalism can and does make the rich richer
and the poor poorer while economic growth was going on. Indeed, the
benefits of economic growth accumulated into the hands of the few.
To put it simply, economic growth in laissez-faire capitalism depends
upon increasing exploitation and inequality. As wealth floods upwards
into the hands of the ruling class, the size of the crumbs falling
downwards will increase (after the economy is getting bigger). This
is the real meaning of "trickle down" economics. Like religion, laissez
faire capitalism promises pie at some future date. Until then we (at
least the working class) must sacrifice, tighten our belts and trust in
the economic powers that be to invest wisely for society. Of course, as
the recent history of the USA or Chile shows, the economy can be made
freer and grow while real wages stagnant (or fall) and inequality increase.
This can also be seen from the results of the activities of the pro-"free
market" government in the UK, where the number of people with less than
half the average income rose from 9% of the population in 1979 to 25% in
1993 and the share of national wealth held by the poorer half of the
population has fallen from one third to one quarter. In addition, between
1979 and 1992-3, the poorest tenth of the UK population experienced a fall
in their real income of 18% after housing costs, compared to an unprecedented
rise of 61% for the top tenth. Of course, the UK is not a "pure" capitalist
system and so the defenders of the faith can argue that their "pure" system
will spread the wealth. However, it seems strange that movements towards the
"free market" always seem to make the rich richer and the poor poorer. In
other words, the evidence from "actually existing" capitalism supports
anarchist arguments that when ones bargaining power is weak (which is
typically the case in the labour market) "free" exchanges tend to magnify
inequalities of wealth and power over time rather than working towards an
equalisation (see section F.3.1, for example). Similarly, it can hardly be
claimed that these movements towards "purer" capitalism have "especially"
benefited the poor, quite the reverse.
This is unsurprising as "free market" capitalism cannot benefit *all*
equally, for if the share of social wealth falling to the working class
increased (i.e. it "especially" benefited them), it would mean that the
ruling class would be *worse off* (and vice versa). Hence the claim that
all would benefit is obviously false if we recognise and reject the
sleight-of-hand of looking at the absolute figures so loved by the
apologists of capitalism. And as the evidence indicates, movements
towards a purer capitalism have resulted in "free" exchanges benefiting
those with (economic) power more than those without, rather than
benefiting all equally. This result is surprising, of course, only
to those who prefer to look at the image of "free exchange" within
capitalism rather than at its content.
In short, to claim that all would benefit from a free market ignores the
fact that capitalism is a profit-driven system and that for profits to
exist, workers *cannot* receive the full fruits of their labour. As the
individualist anarchist Lysander Spooner noted over 100 years ago, "almost
all fortunes are made out of the capital and labour of other men than
those who realise them. Indeed, large fortunes could rarely be made at all
by one individual, except by his sponging capital and labour from others."
[quoted by Martin J. James, _Men Against the State_, p. 173f]
So it can be said that laissez-faire capitalism will benefit all,
*especially* the poor, only in the sense that all can potentially
benefit as an economy increases in size. If we look at actually
existing capitalism, we can start to draw some conclusions about
whether laissez-faire capitalism will actually benefit working
people. The United States has a small public sector by international
standards and in many ways it is the closest large industrial nation
to laissez-faire capitalism. It is also interesting to note that it
is also number one, or close to it, in the following areas [Richard
Du Boff, _Accumulation and Power_, pp. 183-4]:
- lowest level of job security for workers, with greatest
chance of being dismissed without notice or reason.
- greatest chance for a worker to become unemployed without
adequate unemployment and medical insurance.
- less leisure time for workers, such as holiday time.
- one of the most lopsided income distribution profiles.
- lowest ratio of female to male earnings, in 1987 64% of
the male wage.
- highest incidence of poverty in the industrial world.
- among the worse rankings of all advanced industrial nations
for pollutant emissions into the air.
- highest murder rates.
- worse ranking for life expectancy and infant morality.
It seems strange that the more laissez-faire system has the worse job
security, least leisure time, highest poverty and inequality if laissez-faire
will *especially* benefit the poor. Of course, defenders of laissez-faire
capitalism will point out that the United States is far from being
laissez-faire, but it seems strange that the further an economy moves
from that condition the better conditions get for those who, it is claimed,
will *especially* benefit from it.
Even if we look at economic growth (the rationale for claims that laissez
faire will benefit the poor), we find that by the 1960s the rate of
growth of per capita product since the 19th century was not significantly
higher than in France and Germany, only slightly higher than in Britain
and significantly lower than in Sweden and Japan (and do not forget that
France, Germany, Japan and Britain suffered serve damage in two world
wars, unlike America). So the "superior productivity and income levels
in the United States have been accompanied by a mediocre performance
in the rise of those levels over time. The implication is no longer
puzzling: if US per capita incomes did not grow particularly fast
but Americans on average enjoy living standards equal to or above those
of citizens of other developed nations, then the American starting
point must have been higher 100 to 150 years ago. We now know that
before the Civil War per capita incomes in the United States were high
by contemporary standards, surpassed through the 1870s only by the
British. . . To a great extent this initial advantage was a gift
of nature." [Op. Cit., p. 176]
Looking beyond the empirical investigation, we should point out the
slave mentality behind these arguments. Afterall, what does this argument
actually imply? Simply that economic growth is the only way for
working people to get ahead. If working people put up with exploitative
working environments, in the long run capitalists will invest some of
their profits and so increase the economic cake for all. So, like
religion, "free market" economics argue that we must sacrifice in
the short term so that (perhaps) in the future our living standards
will increase ("you'll get pie in the sky when you die" as Joe Hill
said about religion). Moreover, any attempt to change the "laws of
the market" (i.e. the decisions of the rich) by collective action will
only harm the working class. Capital will be frightened away to countries
with a more "realistic" and "flexible" workforce (usually made so by state
In other words, capitalist economics praises servitude over independence,
kow-towing over defiance and altruism over egoism. The "rational" person
of neo-classical economics does not confront authority, rather he
accommodates himself to it. For, in the long run, such self-negation will
pay off with a bigger cake with (it is claimed) correspondingly bigger
crumbs "trickling" downwards. In other words, in the short-term, the gains
may flow to the elite but in the future we will all gain as some of it will
trickle (back) down to the working people who created them in the first
place. But, unfortunately, in the real world uncertainty is the rule
and the future is unknown. The history of capitalism shows that economic
growth is quite compatible with stagnating wages, increasing poverty and
insecurity for workers and their families, rising inequality and wealth
accumulating in fewer and fewer hands (the example of the USA and Chile
from the 1970s to 1990s and Chile spring to mind). And, of course, even
*if* workers kow-tow to bosses, the bosses may just move production
elsewhere anyway (as tens of thousands of "down-sized" workers across
the West can testify). For more details of this process in the USA see
Edward S. Herman's article "Immiserating Growth: The First World" in
Z Magazine, July 1994.
For anarchists it seems strange to wait for a bigger cake when we can
have the whole bakery. If control of investment was in the hands of those
it directly effects (working people) then it could be directed into
socially and ecologically constructive projects rather than being
used as a tool in the class war and to make the rich richer. The
arguments against "rocking the boat" are self-serving (it is obviously
in the interests the rich and powerful to defend a given income and
property distribution) and, ultimately, self-defeating for those working
people who accept them. In the end, even the most self-negating working
class will suffer from the negative effects of treating society as a
resource for the economy, the higher mobility of capital that accompanies
growth and effects of periodic economic and long term ecological crisis.
When it boils down to it, we all have two options -- you can do what is
right or you can do what you are told. "Free market" capitalist economics
opts for the latter.
Finally, the average annual growth rate per capita was 1.4% between 1820
and 1950. This is in sharp contrast to the 3.4% rate between 1950 and
1970. If laissez-faire capitalism would benefit "everyone" more than "really
existing capitalism," the growth rate would be *higher* during the earlier
period, which more closely approximated laissez faire. It is not.
C.11 Doesn't Chile prove that the free market benefits everyone?
This is a common right-wing "Libertarian" argument, one which is supported
by many other supporters of "free market" capitalism. Milton Friedman, for
example, stated that Pinochet "has supported a fully free-market economy
as a matter of principle. Chile is an economic miracle." [_Newsweek_, Jan,
1982] This viewpoint is also commonplace in the more mainstream right,
with US President George Bush praising the Chilean economic record
in 1990 when he visited that country.
General Pinochet was the figure-head of a military coup in 1973 against
the democratically elected left-wing government led by President Allende, a
coup which the CIA helped organise. Thousands of people were murdered
by the forces of "law and order" during the coup and Pinochet's forces
"are conservatively estimated to have killed over 11 000 people in his first
year in power." [P. Gunson, A. Thompson, G. Chamberlain, _The Dictionary
of Contemporary Politics of South America_, p. 228]
The installed police state's record on human rights was denounced as barbaric
across the world. However, we will ignore the obvious contradiction in this
"economic miracle", i.e. why it almost always takes authoritarian/fascistic
states to introduce "economic liberty," and concentrate on the economic facts
of the free-market capitalism imposed on the Chilean people.
Working on a belief in the efficiency and fairness of the free market,
Pinochet desired to put the laws of supply and demand back to work, and
set out to reduce the role of the state and also cut back inflation. He,
and "the Chicago Boys" -- a group of free-market economists -- thought
what had restricted Chile's growth was government intervention in the
economy -- which reduced competition, artificially increased wages, and
led to inflation. The ultimate goal, Pinochet once said, was to make Chile
"a nation of entrepreneurs."
The role of the Chicago Boys cannot be understated. They had a close
relationship with the military from 1972, and according to one expert
had a key role in the coup:
"In August of 1972 a group of ten economists under the leadership of
de Castro began to work on the formulation of an economic programme
that would replace [Allende's one]. . . In fact, the existence of the plan
was essential to any attempt on the part of the armed forces to overthrow
Allende as the Chilean armed forces did not have any economic plan of
their own." [Silvia Bortzutzky, "The Chicago Boys, social security and
welfare in Chile", _The Radical Right and the Welfare State_, Howard
Glennerster and James Midgley (eds.), p. 88]
It is also interesting to note that "[a]ccording to the report of the United
States Senate on covert actions in Chile, the activities of these economists
were financed by the Central Intelligence Agency (CIA)" [Bortzutzky,
Op. Cit., p. 89]
Obviously some forms of state intervention were more acceptable than others.
The actual results of the free market policies introduced by the dictatorship
were far less than the "miracle" claimed by Friedman and a host of other
"Libertarians." The initial effects of introducing free market policies
in 1975 was a shock-induced depression which resulted in national output
falling buy 15 percent, wages sliding to one-third below their 1970 level
and unemployment rising to 20 percent. [Elton Rayack, _Not so Free to
Choose_, p. 57] This meant that, in per capita terms, Chile's GDP only
increased by 1.5% per year between 1974-80. This was considerably less
than the 2.3% achieved in the 1960's. The average growth in GDP was 1.5%
per year between 1974 and 1982, which was lower than the average Latin
American growth rate of 4.3% and lower than the 4.5% of Chile in the 1960's.
Between 1970 and 1980, per capita GDP grew by only 8%, while for Latin
America as a whole, it increased by 40%. Between the years 1980 and 1982
during which all of Latin America was adversely affected by depression
conditions, per capita GDP fell by 12.9 percent, compared to a fall of
4.3 percent for Latin America as a whole. [Op. Cit., p. 64]
In 1982, after 7 years of free market capitalism, Chile faced yet another
economic crisis which, in terms of unemployment and falling GDP was
even greater than that experienced during the terrible shock treatment
of 1975. Real wages dropped sharply, falling in 1983 to 14 percent
below what they had been in 1970. Bankruptcies skyrocketed, as did
foreign debt and unemployment. [Op. Cit., p. 69] By 1983, the Chilean
economy was devastated and it was only by the end of 1986 that Gross
Domestic Product per capita (barely) equalled that of 1970. [Thomas
Skidmore and Peter Smith, "The Pinochet Regime", pp. 137-138,
_Modern Latin America_]
Faced with this massive collapse of a "free market regime designed by
principled believers in a free market" (to use Milton Friedman's words
from an address to the "Smith Centre," a conservative Think Tank at
Cal State entitled "Economic Freedom, Human Freedom, Political
Freedom") the regime organised a massive bailout. The "Chicago Boys"
resisted this measure until the situation become so critical that they
could not avoid it. The IMF offered loans to Chile to help it out of
mess its economic policies had helped create, but under strict
conditions. The total bailout cost 3 per cent of Chile's GNP for
three years, a cost which was passed on to the taxpayers. This follows
the usual pattern of "free market" capitalism -- market discipline for
the working class, state aid for the elite. During the "miracle," the
economic gains had been privatised; during the crash the burden for
repayment was socialised.
The Pinochet regime *did* reduce inflation, from around 500% at the time
of the CIA-backed coup (given that the US undermined the Chilean economy
-- "make the economy scream", Richard Helms, the director of the CIA --
high inflation would be expected), to 10% by 1982. From 1983 to 1987, it
fluctuated between 20 and 31%. The advent of the "free market" led to reduced
barriers to imports "on the ground the quotas and tariffs protected inefficient
industries and kept prices artificially high. The result was that many
local firms lost out to multinational corporations. The Chilean business
community, which strongly supported the coup in 1973, was badly
affected." [Skidmore and Smith, Op. Cit.]
The decline of domestic industry had cost thousands of better-paying
jobs. The ready police repression made strikes and other forms of
protest both impractical and dangerous. According to a report by the Roman
Catholic Church 113 protesters had been killed during social protest against
the economic crisis of the early 1980s, with several thousand detained for
political activity and protests between May 1983 and mid-1984. Thousands
of strikers were also fired and union leaders jailed. [Rayack, Op. Cit.,
p. 70] The law was also changed to reflect the power property owners have
over their wage slaves and the "total overhaul of the labour law system
[which] took place between 1979 and 1981. . . aimed at creating a perfect
labour market, eliminating collective bargaining, allowing massive dismissal
of workers, increasing the daily working hours up to twelve hours and
eliminating the labour courts." [Silvia Borzutzky, Op. Cit., p. 91]
Little wonder, then, that this favourable climate for business operations
resulted in generous lending by international finance institutions.
By far the hardest group hit was the working class, particularly the urban
working class. By 1976, the third year of Junta rule, real wages had fallen
to 35% below their 1970 level. It was only by 1981 that they has risen
to 97.3% of the 1970 level, only to fall again to 86.7% by 1983. Unemployment,
excluding those on state make-work programmes, was 14.8% in 1976, falling
to 11.8% by 1980 (this is still double the average 1960's level) only to
rise to 20.3% by 1982. [Rayack, Op. Cit., p. 65]. Unemployment (including
those on government make-work programmes) had risen to a third of the labour
force by mid-1983. By 1986, per capita consumption was actually 11% lower
than the 1970 level. [Skidmore and Smith, Op. Cit.] Between 1980 and
1988, the real value of wages grew only 1.2 percent while the real value
of the minimum wage declined by 28.5 percent. During this period, urban
unemployment averaged 15.3 percent per year. [Silvia Bortzutzky,
Op. Cit., p. 96] Even by 1989 the unemployment rate was still at 10% (the
rate in 1970 was 5.7%) and the real wage was still 8% lower than in 1970.
Between 1975 and 1989, unemployment averaged 16.7%. In other words,
after nearly 15 years of free market capitalism, real wages had still not
exceeded their 1970 levels and unemployment was still higher. As would
be expected in such circumstances the share of wages in national income
fell from 42.7% in 1970 to 33.9% in 1993. Given that high unemployment
is often attributed by the right to strong unions and other labour market
"imperfections," these figures are doubly significant as the Chilean regime,
as noted above, reformed the labour market to improve its "competitiveness."
Another consequence of Pinochet's neo-classical monetarist policies "was
a contraction of demand, since workers and their families could afford to
purchase fewer goods. The reduction in the market further threatened the
business community, which started producing more goods for export and less
for local consumption. This posed yet another obstacle to economic growth
and led to increased concentration of income and wealth in the hands of a
small elite." [Skidmore and Smith, Op. Cit.]
It is the increased wealth of the elite that we see the true "miracle" of
Chile. According to one expert in the Latin American neo-liberal revolutions,
the elite "had become massively wealthy under Pinochet" and when the leader
of the Christian Democratic Party returned from exile in 1989 he said that
economic growth that benefited the top 10 per cent of the population had
been achieved (Pinochet's official institutions agreed). [Duncan Green,
_The Silent Revolution_, p. 216, Noam Chomsky, _Deterring Democracy_,
p. 231] In 1980, the richest 10% of the population took in 36.5% of the
national income. By 1989, this had risen to 46.8%. By contrast, the
bottom 50% of income earners saw their share fall from 20.4% to 16.8%
over the same period. Household consumption followed the same pattern.
In 1970, the top 20% of households had 44.5% of consumption. This
rose to 51% in 1980 and to 54.6% in 1989. Between 1970 and 1989,
the share going to the other 80% fell. The poorest 20% of households
saw their share fall from 7.6% in 1970 to 4.4% in 1989. The next 20%
saw their share fall from 11.8% to 8.2%, and middle 20% share fell from
15.6% to 12.7%. The next 20% share their share of consumption fall
from 20.5% to 20.1%.
Thus the wealth created by the Chilean economy in during the Pinochet
years did *not* "trickle down" to the working class (as claimed would
happen by "free market" capitalist dogma) but instead accumulated
in the hands of the rich. As in the UK and the USA, with the application
of "trickle down economics" there was a vast skewing of income
distribution in favour of the already-rich. That is, there has
been a 'trickle-up' (or rather, a *flood* upwards). Which is hardly
surprising, as exchanges between the strong and weak will favour the
former (which is why anarchists support working class organisation and
collective action to make us stronger than the capitalists).
In the last years of Pinochet's dictatorship, the richest 10 percent of
the rural population saw their income rise by 90 per cent between 1987
and 1990. The share of the poorest 25 per cent fell from 11 per cent to
7 per cent. [Duncan Green, Op. Cit., p. 108] The legacy of Pinochet's social
inequality could still be found in 1993, with a two-tier health care system
within which infant mortality is 7 per 1000 births for the richest fifth of
the population and 40 per 1000 for the poorest 20 per cent. [Ibid., p. 101]
Per capita consumption fell by 23% from 1972-87. The proportion of the
population below the poverty line (the minimum income required for basic
food and housing) increased from 20% to 44.4% between 1970 and 1987.
Per capita health care spending was more than halved from 1973 to 1985,
setting off explosive growth in poverty-related diseases such as typhoid,
diabetes and viral hepatitis. On the other hand, while consumption for the
poorest 20% of the population of Santiago dropped by 30%, it rose by
15% for the richest 20%. [Noam Chomsky, _Year 501_, pp. 190-191] The
percentage of Chileans without adequate housing increased from 27 to
40 percent between 1972 and 1988, despite the claims of the government
that it would solve homelessness via market friendly policies.
In the face of these facts, only one line of defence is possible on the
Chilean "Miracle" -- the level of economic growth. While the share
of the economic pie may have dropped for most Chileans, the right
argue that the high economic growth of the economy meant that they
were receiving a smaller share of a bigger pie. We will ignore the well
documented facts that the *level* of inequality, rather than absolute
levels of standards of living, has most effect on the health of a
population and that ill-health is inversely correlated with income (i.e.
the poor have worse health that the rich). We will also ignore other
issues related to the distribution of wealth, and so power, in a society
(such as the free market re-enforcing and increasing inequalities via
"free exchange" between strong and weak parties, as the terms of any
exchange will be skewed in favour of the stronger party, an analysis
which the Chilean experience provides extensive evidence for with
its "competitive" and "flexible" labour market). In other words, growth
without equality can have damaging effects which are not, and cannot
be, indicated in growth figures.
So we will consider the claim that the Pinochet regime's record on
growth makes it a "miracle" (as nothing else could). However, when
we look at the regime's growth record we find that it is hardly a "miracle"
at all -- the celebrated economic growth of the 1980s must be viewed in
the light of the two catastrophic recessions which Chile suffered in 1975
and 1982. As Edward Herman points out, this growth was "regularly
exaggerated by measurements from inappropriate bases (like the
1982 trough)." [_The Economics of the Rich_]
This point is essential to understand the actual nature of Chile's "miracle"
growth. For example, supporters of the "miracle" pointed to the period 1978
to 1981 (when the economy grew at 6.6 percent a year) or the post 1982-84
recession up-swing,. However, this is a case of "lies, damn lies, and
statistics" as it does not take into account the catching up an economy
goes through as it leaves a recession. During a recovery, laid-off workers
go back to work and the economy experiences an increase in growth due to
this. This means that the deeper the recession, the higher the subsequent
growth in the up-turn. So to see if Chile's economic growth was a miracle
and worth the decrease in income for the many, we need to look at whole
business cycle, rather than for the upturn. If we do this we find that Chile
had the second worse rate of growth in Latin America between 1975 and
1980. The average growth in GDP was 1.5% per year between 1974 and
1982, which was lower than the average Latin American growth rate of
4.3% and lower than the 4.5% of Chile in the 1960's.
Looking at the entire Pinochet era we discover that only by 1989 -- 14
years into the free-market policies - did per capita output climb back
up to the level of 1970. Between 1970 and 1990, Chile's total GDP
grew by a decidedly average 2% a year. Needless to say, these years
also include the Allende period and the aftermath of the coup and so,
perhaps, this figure presents a false image of the regime's record. If
we look at the 1981-90 period to (i.e. during the height of Pinochet's
rule, beginning 6 years after the start of the Chilean "Miracle"), the
figure is *worse* with the growth rate in GDP just 1.84% a year. This
was slower than Chile during the 1950s (4%) or the 1960s (4.5%). Indeed,
if we take population increase into account, Chile saw a per capita GDP
growth of just 0.3% a year between 1981 and 1990 (in comparison, the UK
GDP per capita grew by 2.4% during the same period and the USA by 1.9%).
Thus the growth "miracles" refer to recoveries from depression-like
collapses, collapses that can be attributed in large part to the free-market
policies imposed on Chile! Overall, the growth "miracle" under Pinochet
turns out to be non-existent. The full time frame illustrates Chile's lack
of significant economic and social process between 1975 and 1989. Indeed,
the economy was characterised by instability rather than real growth.
The high levels of growth during the boom periods (pointed to by
the right as evidence of the "miracle") barely made up for the losses
during the bust periods.
Similar comments are possible in regards to the privatised pension
System, regarded by many as a success and a model for other countries.
However, on closer inspection this system shows its weaknesses -- indeed,
it can be argued that the system is only a success for those companies
making extensive profits from it (administration costs of the Chilean
system are almost 30% of revenues, compared to 1% for the U.S. Social
Security system [Doug Henwood, _Wall Street_, p. 305]). For working people,
it is a disaster. According to SAFP, the government agency which regulates
the system, 96% of the known workforce were enrolled in February 1995, but
43.4% of these were not adding to their funds. Perhaps as many as 60% do
not contribute regularly (given the nature of the labour market, this is
unsurprising). Unfortunately, regular contributions are required to
receive full benefits. Critics argue that only 20% of contributors
will actually receive good pensions.
It is interesting to note that when this programme was introduced, the
armed forces and police were allowed to keep their own generous public
plans. If the plans *were* are good as their supporters claim, you would
think that those introducing them would have joined them. Obviously
what was good enough for the masses were not suitable for the rulers.
The impact on individuals extended beyond purely financial considerations,
with the Chilean labour force "once accustomed to secure, unionised jobs
[before Pinochet] . . . [being turned] into a nation of anxious individualists
. . . [with] over half of all visits to Chile's public health system
involv[ing] psychological ailments, mainly depression. 'The repression
isn't physical any more, it's economic - feeding your family, educating
your child,' says Maria Pena, who works in a fishmeal factory in Concepcion.
'I feel real anxiety about the future', she adds, 'They can chuck us out
at any time. You can't think five years ahead. If you've got money you can
get an education and health care; money is everything here now.'" [Duncan
Green, Op. Cit., p. 96]
Little wonder, then, that "adjustment has created an atomised society, where
increased stress and individualism have damaged its traditionally strong
and caring community life. . . suicides have increased threefold between
1970 and 1991 and the number of alcoholics has quadrupled in the last 30
years . . . [and] family breakdowns are increasing, while opinion polls
show the current crime wave to be the most widely condemned aspect of
life in the new Chile. 'Relationships are changing,' says Betty Bizamar, a
26-year-old trade union leader. 'People use each other, spend less time
with their family. All they talk about is money, things. True friendship
is difficult now.'" [Ibid., p. 166]
The experiment with free market capitalism also had serious impacts for
Chile's environment. The capital city of Santiago became one of "the most
polluted cities in the world" due the free reign of market forces. [Nathanial
Nash, cited by Noam Chomsky, _Year 501_, p. 190] With no environmental
regulation there is general environmental ruin and water supplies have
severe pollution problems. [Noam Chomsky, Ibid.] With the bulk of the
country's experts being based on the extraction and low processing of
natural resources, eco-systems and the environment have been plundered
in the name of profit and property. The depletion of natural resources,
particularly in forestry and fishing, is accelerating due to the
self-interested behaviour of a few large firms looking for short term
All in all, the experience of Chile under Pinochet and its "economic
miracle" indicates that the costs involved in creating a free market
capitalist regime are heavy, at least for the majority. Rather than
being transitional, these problems have proven to be structural and
enduring in nature, as the social, environmental, economic and political
costs become embedded into society. The murky side of the Chilean
"miracle" is simply not reflected in the impressive macroeconomic
indictors used to market "free market" capitalism, indicators themselves
subject to manipulation as we have seen.
Since Chile has become (mostly) a democracy (with the armed forces still
holding considerable influence) some movement towards economic reforms
have begun and been very successful. Increased social spending on health,
education and poverty relief has occurred since the end of the dictatorship
and has lifted over a million Chileans out of poverty between 1987 and
1992 (the poverty rate has dropped from 44.6% in 1987 to 23.2% in 1996,
although this is still higher than in 1970). However, inequality is still
a major problem as are other legacies from the Pinochet era, such as
the nature of the labour market, income insecurity, family separations,
alcoholism, and so on.
Chile has moved away from Pinochet's "free-market" model in other
ways to. In 1991, Chile introduced a range of controls over capital,
including a provision for 30% of all non-equity capital entering Chile
to be deposited without interest at the central bank for one year. This
reserve requirement - known locally as the encaje - amounts to a tax
on capital flows that is higher the shorter the term of the loan.
As William Greider points out, Chile "has managed in the last
decade to achieve rapid economic growth by abandoning the pure
free-market theory taught by American economists and emulating
major elements of the Asian strategy, including forced savings and
the purposeful control of capital. The Chilean government tells
foreign investors where they may invest, keeps them out of certain
financial assets and prohibits them from withdrawing their capital
rapidly." [_One World, Ready or Not_, p. 280]
Thus the Chilean state post-Pinochet has violated its "free market"
credentials, in many ways, very successfully too. Thus the claims
of free-market advocates that Chile's rapid growth in the 1990s is
evidence for their model are false (just as their claims concerning
South-East Asia also proved false, claims conveniently forgotten
when those economies went into crisis). Needless to say, Chile is
under pressure to change its ways and conform to the dictates of
global finance. In 1998, Chile eased its controls, following heavy
speculative pressure on its currency, the peso.
So even the neo-liberal jaguar has had to move away from a purely
free market approach on social issues and the Chilean government
has had to intervene into the economy in order to start putting back
together the society ripped apart by market forces and authoritarian
So, for all but the tiny elite at the top, the Pinochet regime of "economic
liberty" was a nightmare. Economic "liberty" only seemed to benefit one
group in society, an obvious "miracle." For the vast majority, the "miracle"
of economic "liberty" resulted, as it usually does, in increased poverty,
pollution, crime and social alienation. The irony is that many right-wing
"libertarians" point to it as a model of the benefits of the free market.
C.11.1 But didn't Pinochet's Chile prove that "economic freedom is an
indispensable means toward the achievement of political freedom"?
Pinochet did introduce free-market capitalism, but this meant real liberty
only for the rich. For the working class, "economic liberty" did not exist,
as they did not manage their own work nor control their workplaces and
lived under a fascist state.
The liberty to take economic (never mind political) action in the forms
of forming unions, going on strike, organising go-slows and so on was
severely curtailed by the very likely threat of repression. Of course, the
supporters of the Chilean "Miracle" and its "economic liberty" did not
bother to question how the suppression of political liberty effected the
economy or how people acted within it. They maintained that the
repression of labour, the death squads, the fear installed in rebel
workers could be ignored when looking at the economy. But in the
real world, people will put up with a lot more if they face the barrel
of a gun than if they do not.
The claim that "economic liberty" existed in Chile makes sense only
if we take into account that there was only *real* liberty for one class.
The bosses may have been "left alone" but the workers were not, unless
they submitted to authority (capitalist or state). Hardly what most people
would term as "liberty."
As far as political liberty goes, it was only re-introduced once it was
certain that it could not be used by ordinary people. As Cathy Scheider
notes, "economic liberty" has resulted in most Chileans having "little
contact with other workers or with their neighbours, and only limited time
with their family. Their exposure to political or labour organisations is
minimal. . . they lack either the political resources or the disposition
to confront the state. The fragmentation of opposition communities has
accomplished what brute military repression could not. It has transformed
Chile, both culturally and politically, from a country of active
participatory grassroots communities, to a land of disconnected,
apolitical individuals. The cumulative impact of this change is such that
we are unlikely to see any concerted challenge to the current ideology in
the near future." [_Report on the Americas_, (NACLA) XXVI, 4/4/93]
In such circumstances, political liberty can be re-introduced, as no one
is in a position to effectively use it. In addition, Chileans live with the
memory that challenging the state in the near past resulted in a fascist
dictatorship murdering thousands of people as well as repeated and
persistent violations of human rights by the junta, not to mention the
existence of "anti-Marxist" death squads -- for example in 1986 "Amnesty
International accused the Chilean government of employing death squads."
[P. Gunson, A. Thompson, G. Chamberlain, Op. Cit., p. 86] According to
one Human Rights group, the Pinochet regime was responsible for 11,536
human rights violations between 1984 and 1988 alone. [Calculation of
"Comite Nacional de Defensa do los Derechos del Pueblo," reported in
_Fortin_, September 23, 1988]
These facts that would have a strongly deterrent effect on people
contemplating the use of political liberty to actually *change* the
status quo in ways that the military and economic elites did not approve
of. In addition, it would make free speech, striking and other forms of
social action almost impossible, thus protecting and increasing the power,
wealth and authority of the employer over their wage slaves. The claim
that such a regime was based on "economic liberty" suggests that those
who make such claims have no idea what liberty actually is.
As Kropotkin pointed out years ago, "freedom of press. . . and all the rest,
are only respected if the people do not make use of them against the
privileged classes. But the day the people begin to take advantage of them
to undermine those privileges, then the so-called liberties will be cast
overboard." [_Words of a Rebel_, p. 42] Chile is a classic example of
Moreover, post-Pinochet Chile is not your typical "democracy." Pinochet is
a senator for life, for example, and he has appointed one third of the
senate (who have veto power - and the will to use it - to halt efforts to
achieve changes that the military do not like). In addition, the threat of
military intervention is always at the forefront of political discussions.
This was seen in 1998, when Pinochet was arrested in Britain in regard
of a warrant issued by a Spanish Judge for the murders of Spanish
citizens during his regime. Commentators, particularly those on the
right, stressed that Pinochet's arrest could undermine Chile's "fragile
democracy" by provoking the military. In other words, Chile was
only a democracy in-so-far as the military let it be. Of course, few
commentators acknowledged the fact that this meant that Chile
was not, in fact, a democracy after all. Needless to say, Milton
Friedman considers Chile to have "political freedom" now.
It is interesting to note that the leading expert of the Chilean
"economic miracle" (to use Milton Friedman's words) did not
consider that political liberty could lead to "economic liberty"
(i.e. free market capitalism). According to Sergio de Castro, the
architect of the economic programme Pinochet imposed, fascism
was required to introduce "economic liberty" because:
"it provided a lasting regime; it gave the authorities a degree of
efficiency that it was not possible to obtain in a democratic regime;
and it made possible the application of a model developed by experts
and that did not depend upon the social reactions produced by its
implementation." [quoted by Silvia Bortzutzky, "The Chicago Boys,
social security and welfare in Chile", _The Radical Right and the
Welfare State_, Howard Glennerster and James Midgley (eds.),
In other words, fascism was an ideal political environment to introduce
"economic liberty" *because* it had destroyed political liberty. Perhaps
we should conclude that the denial of political liberty is both necessary
and sufficient in order to create (and preserve) "free market" capitalism?
And perhaps to create a police state in order to control industrial disputes,
social protest, unions, political associations, and so on, is no more than to
introduce the minimum force necessary to ensure that the ground rules the
capitalist market requires for its operation are observed?
As Brian Barry argues in relation to the Thatcher regime in Britain which was
also heavily influenced by the ideas of "free market" capitalists like Milton
Friedman and Frederick von Hayek, perhaps it is:
"Some observers claim to have found something paradoxical in the fact
that the Thatcher regime combines liberal individualist rhetoric with
authoritarian action. But there is no paradox at all. Even under the
most repressive conditions . . . people seek to act collectively in order
to improve things for themselves, and it requires an enormous exercise
of brutal power to fragment these efforts at organisation and to force
people to pursue their interests individually. . . left to themselves,
people will inevitably tend to pursue their interests through collective
action - in trade unions, tenants' associations, community organisations
and local government. Only the pretty ruthless exercise of central power
can defeat these tendencies: hence the common association between
individualism and authoritarianism, well exemplified in the fact that
the countries held up as models by the free-marketers are, without
exception, authoritarian regimes" ["The Continuing Relevance of
Socialism", in _Thatcherism_, Robert Skidelsky (ed.), p. 146]
Little wonder, then, that Pinochet's regime was marked by authoritarianism,
terror and rule by savants. Indeed, "[t]he Chicago-trained economists
emphasised the scientific nature of their programme and the need to replace
politics by economics and the politicians by economists. Thus, the decisions
made were not the result of the will of the authority, but they were
determined by their scientific knowledge. The use of the scientific knowledge,
in turn, would reduce the power of government since decisions will be made
by technocrats and by the individuals in the private sector." [Silvia
Borzutzky, Op. Cit., p. 90]
Of course, turning authority over to technocrats and private power does
not change its nature - only who has it. Pinochet's regime saw a marked
shift of governmental power away from protection of individual rights to
a protection of capital and property rather than an abolition of that power
altogether. As would be expected, only the wealthy benefited. The working
class were subjected to attempts to create a "perfect labour market" -
and only terror can turn people into the atomised commodities such a
Perhaps when looking over the nightmare of Pinochet's regime we should
ponder these words of Bakunin in which he indicates the negative effects
of running society by means of science books and "experts":
"human science is always and necessarily imperfect. . . were we to force
the practical life of men - collective as well as individual - into rigorous
and exclusive conformity with the latest data of science, we would thus
condemn society as well as individuals to suffer martyrdom on a
Procrustean bed, which would soon dislocate and stifle them, since life
is always an infinitely greater thing than science." [_The Political
Philosophy of Bakunin_, p. 79]
The Chilean experience of rule by free market ideologues prove Bakunin's
points beyond doubt. Chilean society was forced onto the Procrustean
bed by the use of terror and life was forced to conform to the assumptions
found in economics textbooks. And as we proved in the last section, only
those with power or wealth did well out of the experiment.
C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?
Given the general lack of laissez-faire in the world, examples to show
the benefits of free market capitalism are few and far between. However,
Hong Kong is often pointed to as an example of the power of capitalism
and how a "pure" capitalism will benefit all.
It is undeniable that the figures for Hong Kong's economy are impressive.
Per-capita GDP by end 1996 should reach US$ 25,300, one of the highest in
Asia and higher than many western nations. Enviable tax rates - 16.5%
corporate profits tax, 15% salaries tax. In the first 5 years of the
1990's Hong Kong's economy grew at a tremendous rate -- nominal per
capita income and GDP levels (where inflation is not factored in) almost
doubled. Even accounting for inflation, growth was brisk. The average
annual growth rate in real terms of total GDP in the 10 years to 1995
was six per cent, growing by 4.6 per cent in 1995.
However, looking more closely, we find a somewhat different picture than
that painted by those claim it as an example of the wonders of free
market capitalism (for the example of Chile, see section C.11).
Firstly, like most examples of the wonders of a free market, it is not
a democracy, it was a relatively liberal colonial dictatorship run
from Britain. But political liberty does not rate highly with many
supporters of laissez-faire capitalism (such as right-libertarians,
for example). Secondly, the government owns all the land, which is
hardly capitalistic, and the state has intervened into the economy many
times (for example, in the 1950s, one of the largest public housing schemes
in history was launched to house the influx of about 2 million people
fleeing Communist China). Thirdly, Hong Kong is a city state and cities
have a higher economic growth rate than regions (which are held back by
large rural areas). Fourthly, according to an expert in the Asian
Tiger economies, "to conclude . . . that Hong Kong is close to a free
market economy is misleading." [Robert Wade, _Governing the Market_,
Wade notes that:
"Not only is the economy managed from outside the formal institutions
of government by the informal coalition of peak private economic
organisations [notably the major banks and trading companies, which
are closely linked to the life-time expatriates who largely run the
government. This provides a "point of concentration" to conduct
negotiations in line with an implicit development strategy], but
government itself also has available some unusual instruments for
influencing industrial activity. It owns all the land. . . It controls
rents in part of the public housing market and supplies subsidised
public housing to roughly half the population, thereby helping to
keep down the cost of labour. And its ability to increase or decrease
the flow of immigrants from China also gives it a way of affecting
labour costs." [Ibid.]
Wade notes that "its economic growth is a function of its service
role in a wider regional economy, as entrepot trader, regional
headquarters for multinational companies, and refuge for nervous
money." [Op. Cit., p. 331] In other words, an essential part of
its success is that it gets surplus value produced elsewhere in
the world. Handling other people's money is a sure-fire way of
getting rich (see Henwood's _Wall Street_ to get an idea of the
sums involved) and this will have a nice impact on per-capita
income figures (as will selling goods produced sweat-shops in
dictatorships like China).
By 1995, Hong Kong was the world's 10th largest exporter of services
with the industry embracing everything from accounting and legal services,
insurance and maritime to telecommunications and media. The contribution of
the services sectors as a whole to GDP increased from 60 per cent in 1970 to
83 per cent in 1994. Manufacturing industry has moved to low wage countries
such as southern China (by the end of the 1970's, Hong Kong's manufacturing
base was less competitive, facing increasing costs in land and labour -- in
other words, workers were starting to benefit from economic growth and so
capital moved elsewhere). The economic reforms introduced by Deng Xiaoping
in southern China in 1978 where important, as this allowed capital access
to labour living under a dictatorship (just as American capitalists invested
heavily in Nazi Germany -- labour rights were null, profits were high). It
is estimated about 42,000 enterprises in the province have Hong Kong
participation and 4,000,000 workers (nine times larger than the territory's
own manufacturing workforce) are now directly or indirectly employed by Hong
Kong companies. In the late 1980's Hong Kong trading and manufacturing
companies began to expand further afield than just southern China. By
the mid 1990's they were operating across Asia, in Eastern Europe and
The gradual shift in economic direction to a more service-oriented economy
has stamped Hong Kong as one of the world's foremost financial centres.
This highly developed sector is served by some 565 banks and deposit-taking
companies from over 40 countries, including 85 of the world's top 100 in
terms of assets. In addition, it is the 8th largest stock market in the
world (in terms of capitalisation) and the 2nd largest in Asia.
Therefore it is pretty clear that Hong Kong does not really show the
benefits of "free market" capitalism. Wade indicates that we can consider
Hong Kong as a "special case or as a less successful variant of the
authoritarian-capitalist state." [Op. Cit., p. 333] Its success lies
in the fact that it has access to the surplus value produced elsewhere
in the world (particularly that from the workers under the dictatorship
in China and from the stock market) which gives its economy a nice boost.
Given that everywhere cannot be such a service provider, it does not
provide much of an indication of how "free market" capitalism would
work in, say, the United States. And as there is in fact extensive
(if informal) economic management and that the state owns all the
land and subsidies rent and health care, how can it be even considered
an example of "free market" capitalism in action?