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 that 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., p. ix]

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]

Section C - What are the myths of capitalist economics?

Introduction

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 affects 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 capitalism just?

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 within companies?

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 efficiency?

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 else affects 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 supporters of "free market" capitalism claim?

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 political freedom"?

C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

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 striking.

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). Afterall, 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 foundation.

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 questions.

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 reality.

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" equilibrium.

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, p. 34]

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., p. 416]

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 -- afterall, 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 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 that freedom.

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 in 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 society. 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 consumer needs.

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. Afterall, 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 as such. Stripped of the metaphysical baggage which many (particularly Marxists) have placed on the LTV (and correctly attacked as unscientific by Kropotkin), it is essentially an 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 values.

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.2.2, 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. 100]

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 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 and demand.

Lastly, we must stress that to state that market price tends toward production 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. Thus Proudhon:

"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, p. 189]

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, p. 55]

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, pp. 495-6]

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., p. 206]).

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. profit.

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 farmer.

"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 profits.

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 (nevermind a surplus) unless used by labour and so profits do not represent the productivity of capital.

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. Afterall, 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 less.

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 profits).

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, p. 96]

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. 98-9]

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 consumption!

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 this statement.

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 rich.

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 deprive himself.

"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 moneylending 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 companies?

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 C.7).

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 create.

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 [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 [RCO 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 customer.

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 people.

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 options.

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 words).

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 later evidence:

"[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 competitors.

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 again.

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 bigger, ones).

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 monopoly" 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 3000 strikes in 1963 to nearly 6000 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 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 that period.

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, pp. 44-45]

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 capitalism.

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 disruption.

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 slumps).

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, remain constant.

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, chart 2]

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 period.

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 and wealth.

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 capitalism does.

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 will see.

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. Kindleburger comments:

"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 to predict).

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 liability structure.

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., p. 267]

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 and disportionalities.

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 commonplace.

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 two sections.

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 class.

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 before.

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 (for a good, if somewhat economic, critique of Baran and Sweezy see Paul Mattick's "Monopoly Capital" in Anti-Bolshevik Communism).

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 always faces.

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 labour.

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, 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 being part-time.

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 Pentagon-style Keynesianism.

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 to die.

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 [1993]," 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 out:

"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 assumptions!

(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 section).

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 of unemployment.

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 ulterior consequences.

"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, p. 102]

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, p. 113]

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 lives 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 are 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" will have little effect on unemployment (although not on profits) as a reduction of labour's bargaining power many 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 full employment.

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 notes 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 trap." [Ibid.]

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, 1994].

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 Schweickart concludes:

"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, noble).

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" techniques.

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 repression).

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, Routledge, 1989, 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 profit.

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 government.

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 this.

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.), p. 90]

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, edited Robert Skidelsky, 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 market requires.

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, p. 332]

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 Central America.

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 "capitalism in action"?