Vance Archive   |   Trotskyist Writers Index  |   ETOL Main Page

Permanent War Economy

T.N. Vance

The Permanent War Economy

Part II – Declining Standards of Living
[Section A]

From New International, Vol. XVII No. 2, March–April 1951, pp. 67–92.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The general law of accumulation of capital under the Permanent War Economy [see January–February issue, Basic Characteristics of the Permanent War Economy] is that an increase in capital, instead of causing an increase in unemployment, is accompanied by relatively full employment and declining standards of living. This new and fundamental law of motion increasingly governs all human and class relations under this latest stage in the decline of capitalist society. Because of its tremendous significance we shall attempt to develop the key quantitative measures, however rough and approximate, so as to permit analysis of the various factors underlying the decline in living standards.

Having already obtained total war outlays, both direct and indirect, and the net value of current production, in order to measure the relationship between war outlays, and total output, our starting point in deriving a measure of the average standard of living is clearly to subtract total war outlays from net national product. The difference between the two series, by definition, represents the net output of civilian goods and services. If, from this result, we then subtract net private (civilian) capital formation – a necessary step since net private capital investment is included in total production, and capital in any of its forms does not directly satisfy human wants – we then have a measure of total civilian output of consumer goods and services as produced by both private and government sources.

It is only from this portion of total output, equivalent conceptually to the summation of personal consumption expenditures and government nonwar purchases, that the ingredients comprising the standard of living can come. For, aside from conceptual and statistical limitations inherent in many of the components of gross national product, especially as calculated by the Department of Commerce, the total output of consumer goods and services (shown in column five of Table I) theoretically expresses the market value of nil commodities consumed by consumers. Unless food, clothing, housing, consumer durables, etc., etc. are purchased by consumers and, it must be assumed, thereby consumed, production does not currently and directly satisfy human wants and is therefore outside our definition of standard of living.

In other words, we make a sharp distinction between personal wealth and standard of living. The former indicates possession or ownership that may ultimately be converted into consumption of want-satisfying commodities. But savings, factories, stores, real estate, and other forms of capital or property, including money, cannot be eaten or worn or utilized to satisfy human wants unless they are first transformed from exchange values into use values or employed to produce use values capable of directly entering into the process of human consumption. It is true that the greater one’s personal wealth, the higher his standard of living. This, however, does not follow because personal wealth is directly consumed by its owner, except in the rare case where a capitalist lives by using up his principal, but rather as a result of high personal incomes which simultaneously permit high consumption and accumulation of personal wealth or claims upon capital. The true gauge, therefore, of relative standards of living is the amount of commodities and services, both material and intangible, economic and cultural, actually consumed.

Table I portrays civilian output of consumer goods and services from 1939 to 1953, the first step in computing standards of living under the Permanent War Economy.

Net private capital formation was obtained by taking gross investment, as reported by the Department of Commerce, and subtracting from it Commerce’s figures for capital consumption allowances. The projections were based on a study of the individual components and are consistent, both as to understatement of price inflation and the magnitude of war outlays and their impact on capital accumulation, with the methods used to forecast war outlays and total output. If anything, our forecast minimizes the quantity of private capital that may be expected to be accumulated during 1951–1953, thus maximizing the volume of consumer goods and services that will be available for civilian consumption. This was deliberately done in order to present the trend in the average standard of living in as favorable a light as possible.
 

THAT CIVILIAN STANDARDS HAVE lagged well behind total output can readily be seen by comparing columns five and one in Table I. Over the entire period, from 1939 to 1953, the net value of production will have increased 3.6 times in current dollars, while the portion available for civilian consumption will have risen less than 2.8 times. It is axiomatic that production for war purposes cannot contribute to civilian standards of living. During the first fifteen years of the Permanent War Economy a total of almost $659 billion will have been spent on direct and indirect war outlays, an average of $44 billion each year. Even if full allowance is made for the production of food, clothing and other consumer goods for the armed forces, and granting as much validity as possible to the socially necessary character of certain indirect war outlays, it is still impossible to escape the conclusion that approximately three years total production has been completely wasted. Had it been possible for a rational economic system to have prevailed, producing and distributing an equivalent amount of commodities to consumers, the national debt of $257 billion could be completely retired and a dividend of $10,000 could be allotted to each family!

It may be wondered why we have not confined our measure of the average standard of living to personal consumption expenditures expressed in constant dollars on a per capita basis. Such an approach, usually without considering the growth in population, is generally adopted by those who seek to depict the “benefits of a free enterprise economy.” This could provide a first approximation provided that proper allowance was made for changes in the price level, but it would entirely omit from consideration the contribution made by the various levels of government to the average standard of living. Government nonwar purchases of goods and services, especially expenditures by state and local governments for education, utilities, transportation, and similar services, including the net postal deficit, are supported by taxes (except when government operates at a deficit) and presumably benefit more or less equally the entire population. While there may always be room for improvement, it must be assumed that such expenditures are an integral part of the average individual’s total want satisfactions and therefore of his standard of living. As a matter of fact, to the extent that such government services are provided free of charge and therefore excluded from personal consumption expenditures or simultaneously included in capital formation as part of new public construction activity (school buildings, public hospital buildings, highways, etc.), the contribution of government to the average standard of living is understated.

Nevertheless, we could have added government nonwar purchases to personal consumption expenditures and theoretically obtained an identical result for civilian output of consumer goods and services. There are two major reasons why this procedure was not followed, aside from the minor inconvenience that would be caused by the failure of Commerce to publish the breakdown between Federal war and nonwar purchases since 1946: (1) our estimate of total war outlays is higher than that of Commerce chiefly, as explained in the previous article, because of our inclusion of the concept of “indirect” war outlays; and (2) while, on balance, the official figures for total output, as represented by the national product series, appear to be reasonable, we take exception to the inclusion and exclusion of certain items and to the classification of owner-occupied residential construction as a capital expenditure.

Thus, for example, we see no justification for the inclusion of imputed rent (of owner-occupied houses), imputed interest, or payments in kind in a national product series that is attempting to estimate the market value of current production. One might just as logically include the imputed value of housewives’ services. This type of inclusion tends to overstate both total output and consumer outlay. On the other hand, exclusion of virtually all the expenditures of the Veterans Administration, net government interest payments and government subsidies tends to understate total output (to the extent that such activities, like any other government activity, are supported by taxes) and total war outlays. The exclusions, in general, ought to be reflected in total output but not in consumer output, as for the most part they belong to the war sector. To treat residential construction (except when it is income-producing property) as part of capital formation is to identify wealth with capital and to betray a lack of understanding of the nature and functioning of capital. One might just as well include any other consumer durable possessed of a relatively long lifetime, such as personal passenger cars, radios, television sets, furniture, etc. Owner-occupied residential construction, therefore, ought to be shifted from gross private domestic investment to personal consumption expenditures.

In short, we feel that the official figures for personal consumption expenditures are overstated by approximately the same amount as total war outlays are understated. This is particularly true for 1946, where our biggest difference of more than $12 billion occurs. Consequently, the method used to obtain civilian output of consumer goods and services maintains a proper aggregate for total production while at the same time assuring a more realistic apportionment between the war and civilian sectors of the economy. It also enjoys the additional merit of facilitating the projection of Chilian output of consumer goods and services. The residual method employed does, it is true, understate the level of government nonwar purchases, particularly since 1915, but we prefer to maintain the official series for personal consumption expenditures rather than to make all the adjustments that would be required to conform with our criticisms. There is no difference in the average standard of living and the differences in per capita standards of living by classes would be negligible.
 

IT MAY BE HELPFUL AT THIS POINT to present the figures for personal consumption expenditures, both because they are by far the largest component in the formation of the average standard of living and because we subsequently base our class analysis of trends in living standards on a class breakdown of the official data for personal consumption expenditures. What consumers are officially reported to have spent in current dollars from 1939–1949, together with our projections for 1950–1953, is shown in Table II, which also expresses consumer outlay in constant dollars by using the BLS Consumers’ Price Index as deflator.

It will be noted that the trend in personal consumption expenditures is not too dissimilar from that shown by civilian output of consumer goods and services, with the noteworthy exception of 1945–1947. As a matter of overall comparison, during the entire period from 1939 to 1953, personal consumption expenditures will increase almost three times on a current dollar basis, whereas our series for civilian output of consumer goods and services rises 2.8 times, hardly a significant difference. Far more important in evaluating what has happened to the average standard of living is the allowance made for the increase in consumer prices. The Chamber of Commerce of the United States, for example, in a recent pamphlet entitled Policies and Controls in a War-Burdened Economy, obviously uses the BLS Consumers’ Price Index as its measure of changes in prices paid by consumers and thus is able to conclude that “real consumer purchasing power also increased (during the war)!” While there was a slight increase during the war, to indicate that there was a 41 per cent rise in real consumer purchasing power or the average standard of living between 1939 and 1945 is highly misleading, just as much as to indicate that the average consumer in 1950 was more than 65 per cent better off than in 1939.

The Consumers’ Price Index for Moderate Income Families in Large Cities of the Bureau of Labor Statistics, despite its widespread use by trade unions in collective bargaining contracts as a measure of the rise in the cost of living to which wage rates are linked, is not an accurate indicator of changes in the average cost of living, especially of factory workers. It may record fairly accurately typical consumer price trends in a period when government controls and inflationary shortages are non-existent, but in the epoch of the Permanent War Economy it is extremely insensitive to quality depreciation, evasions of controls, changes in controls, and the disappearance or relative disappearance of basic consumer commodities from the market. Moreover, it fails utterly to take into account changes in consumer buying habits and consumption patterns. Since 1941 it has markedly understated the rise in the average cost of living, with the deviations from reality becoming cumulative. Accordingly, any attempt to assess changes in living standards by the use of the Consumers’ Price Index necessarily lacks validity.

It is obvious, however, that analysis of standards of living cannot be intelligently undertaken on the basis of current dollars and that we must discuss in terms of dollars possessing constant purchasing power. We therefore need a price index that reflects as accurately as possible the changes in average prices paid by average consumers. Unfortunately, no such index exists and we are reluctantly compelled to devise one arbitrarily. This has been done by calculating the arithmetic average between the Consumers’ Price Index and the BLS Wholesale Price Index, on the theory that the former represents the minimum change in consumer price levels and the latter the maximum possible change due to the well-known greater flexibility of wholesale prices compared with retail prices. The arbitrary part of the approach consists in giving equal weight to both indexes, whereas it may well be that one should weigh more heavily than the other in trying to achieve our objective. We are aware of no evidence, however, that would warrant unequal weighting. [1]

It is necessary to emphasize that the selection of a price index far outweighs any other factor in analyzing living standards. If, for example, we had applied the Consumers’ Price Index to our series on civilian output of consumer goods and services, the results would not differ too greatly from, the picture shown in Table II. For 1950, the growth in the consumption sector of the economy would be 52.6 per cent over 1939 instead of 65.7 per cent. Our thesis that the workers have suffered a decline in their living standards as a result of the Permanent War Economy would be greatly weakened, even though a relative decline compared with the growth in total output is apparent.
 

WE NOW PROCEED TO THE SECOND basic step in our analysis, which is to develop an index of the output of the consumption sector of the economy, by which term we distinguish from the war sector and the capital sector. The results are shown in Table III.

While the wholesale price index evidences the same difficulty in surmounting official failure to recognize the prevalence of black markets during price control as does the Consumers’ Price Index, it is a much more comprehensive and more sensitive index. Our derived average price index, except for the later stages of the war, is probably as satisfactory a measure of price changes in the consumption sector as can be obtained. A 35 per cent rise in the output of the consumption sector from 1939 to 1950 is certainly more plausible than a 65 per cent rise. Moreover, our series now shows a decline in consumption output from 1941 to 1942–43, as well as a decline from 1946 to 1947, both movements conforming far more closely to common experience than the highly misleading series represented by personal consumption expenditures deflated by the Consumers’ Price Index.

It is thus apparent that the rise in output of consumer goods and services, from both private and government sources, rose very modestly indeed during the war. With the exception of 1947, which was a year of unbridled inflation following the abandonment of price control in 1946, there was then a further steady growth until the outbreak of the Korean war. Now, we can expect a noticeable decline in 1951 followed by a leveling off at about the 1950 rates in 1952–53 – this, on the basic assumption stipulated in the projection of war outlays that the armed forces of the United States will not be engaged in any major conflict prior to 1954. It will be noted that the movement of real consumption output (the basis of all living standards) follows the trends in the ratio of war outlays to total output – but in reverse. This is only natural inasmuch as war output must take place at the expense of civilian output unless there is a corresponding increase in total output, which is never possible and which at the present historic juncture is severely limited in its potential by a whole host of factors.

The relative decline in standards of living is beyond dispute, regardless of the figures chosen or statistical methods used. Even if one were to deflate total output by the wholesale price index, on the ground that price inflation in the war and capital sectors of the economy is more severe under the Permanent War Economy than in the consumption sector, the contrast is obvious and dramatic in its implications. Consider the following brief tabulation, which deflates total output as reflected by net national product (column one of Table I) by the BLS wholesale price index (column two of Table III) in comparison wtih our index of consumption output in 1939 dollars for the key historical years in our fifteen-year period:

From 1939 to 1945, or during World War II, total real output in the United States rose 78 per cent, while the output of the consumption sector increased but 18 per cent. Had such a phenomenal increase in production been possible without the stimulus provided by the war or, in other words, had the rise in consumption kept pace with the upsurge in production, there would have been a further 50 per cent increase in the output of consumer goods and services from both private and government sources! In spite of the idle resources that existed at the outbreak of the war, the expansion of the war sector necessitated an actual decline in certain types of consumer production such as automobiles, radios, refrigerators, most consumer durables, and even some types of clothing and food, not to mention many services, especially those made available by government. Had the war lasted much longer, it is highly probable that the great lag in consumption output compared with total output would have been followed by an absolute decline in the output of consumer goods and services.

History under the Permanent War Economy has so far been very kind to the American capitalist class. The major turns have occurred at just the right time. World War II lasted long enough, but not too long. Sharp class dissensions were thus avoided. In the postwar period from 1945 to 1950, there was a further growth in consumption output of 15 per cent. The rate of growth in the production of consumer goods and services was thus maintained at about 3 per cent per annum. Since, at the same time, there was a decline of 19 per cent in total output, by 1950 output in the consumption sector had almost caught up with total production, the relative lag in growth being only 6 per cent. Maintenance of these trends for another year would have resulted in a reversal of position, with the growth in consumption output exceeding the increase in total production. Under capitalist conditions of production, a first-rate crisis would have developed by the end of 1951, thereby revealing that a 10 per cent ratio of war outlays to total output is inadequate to sustain economic equilibrium at a high level for more than a limited number of years. As we have previously indicated, the outbreak of the Korean war came in the nick of time. The threatened crisis due to relative overproduction of consumer goods was averted and the dominance of the Permanent War Economy guaranteed.

The current increase in the ratio of war outlays to total output will bring to a halt the steadily rising trend in the output of consumer goods and services. While we expect a leveling off to take place until such time as American imperialism is engaged in full-scale war, there will actually be a decline of almost 5 per cent from 1950 to 1951 in the output of consumer goods and services. From 1950 to 1953, a period of mobilization for World War III according to our assumption, we have projected a modest increase of 10 per cent in total real output. If certain bottlenecks to increased production are removed and if war outlays prove to be larger than we have forecast, the increase in total output may be somewhat larger. None of it, however, would go to the consumption sector, so that the relative decline in production for consumer account compared with the increase in total output would be even greater than we have projected. If 1953 be considered representative of a typical year under the Permanent War Economy, with total war outlays taking almost 24 per cent of current production, the relative decline in consumption output compared with total output for the entire period since the advent of the Permanent War Economy is accurately measured by the 35 per cent increase in consumption output compared with the 58 per cent increase in total output. This is merely another way of saying that had the growth in consumption paralleled the rise in total output, which is the minimum performance to be expected from a satisfactory economic system once the basic productive forces are fairly well developed, there would have been a further increase of 17 per cent in the output of consumer goods and services.
 

PRODUCTION FIGURES BY THEMSELVES, although the basis of living standards, cannot accurately portray what has happened to individual standards of living for they ignore any changes that may have occurred in the size of the population. Since there has historically been a steady growth in the American population, for the average individual merely to be as well off as at the beginning of any period of years under analysis the growth in consumption output must at least equal the growth in population. In other words, we cannot intelligently talk about trends in average living standards unless we have first obtained a measure of per capita consumption output. This brings us to the third basic step in our analysis, which consists of deriving population figures representing the average total population for each year from 1939 to 1953 and applying them to the annual series for consumption output. The results, summarized in Table IV, provide per capita consumption output in both current and constant dollars and enable us to see what has happened from 1939 to 1953 in the average standard of living.

The growth in the American population has been substantial, far in excess of most predictions, especially since the end of World War II. We calculate an average increase of 2,000,000 annually for the fourteen-year period from mid–1939 to mid–1953, or a total of about 28 million. Merely to support this increase in population in the style to which the average person is accustomed requires an annual increment on the average in the consumption sector of the economy of more than 1.5 per cent, or a total of more than 21 per cent from 1939 to 1953. Thus, by 1953, about two-thirds of the growth in consumption output will have been devoted to satisfying the wants of the net increase in population, assuming that there is no marked variation in the living standards of net additions to the population compared with old members of the population. The entire picture of what has happened to the average American standard of living under the Permanent War Economy is obviously altered to a significant extent by the introduction of the per capita concept in our analysis.

The American standard of living may be the highest in the world, but it is a complete delusion to claim any marked expansion in average living standards since the beginning of the Permanent War Economy in 1939, or for that matter since American capitalism entered the permanent world crisis of capitalism in 1929. So far as average standards of living are concerned, the vaunted economy of American capitalism has been virtually stagnant for more than two decades. In this fact is reflected all the ills and contradictions of American imperialism. Now, as the Permanent War Economy becomes more thoroughly entrenched, it is good-bye to the New Deal and to the Fair Deal and to all significant attempts to raise average living standards. Is any more dramatic confirmation required of the Marxian thesis that capitalism cannot be reformed into a rational and workable economic system?

Constant reference to the “growth in consumption,” as mirrored by the indisputable and very sizable increase in personal consumption expenditures or in our series on consumption output, on the completely acceptable theory that consumer outlay represents actual consumption, is of no avail in appraising trends in the average standard of living. There can be no growth in real consumption or living standards unless the increase in dollar expenditures by consumers and government for consumer goods and services exceeds the loss in the purchasing power of the dollar and the growth in the population. It may be-comforting to defenders of capitalism to be able to state that average per capita consumption has exceeded $1,300 since 1948, which is equivalent to almost $5,000 per family, but this is meaningless by itself. Only per capita consumption output in constant dollars, the index of which is shown in column six of Table IV, can be used to discover what has happened to average living standards.
 

THE AVERAGE AMERICAN has experienced a slight improvement in his standard of living since 1939, but the lag behind the increase in total production has been enormous. For the entire period from 1939 to 1953, our analysis indicates only an 11½ per cent betterment in the per capita average real standard of living, or less than one per cent a year. The various ups and downs within this over-all picture are most revealing. From 1939 to 1941, as idle resources were put to work under the stimulus of increasing war outlays, the average consumer experienced a 6 per cent rise in his standard of living. Then, in 1942–1943, as rapidly increasing war expenditures caused an actual curtailment in many lines of civilian production, the average standard of living reverted back to approximately the 1939 level. From 1944 to 1946, as war outlays reached their peak and then declined as the war ended, there was a rapid increase of almost 5 per cent a year in the average standard of living as the economy continued to operate at or near capacity levels. However, from 1946 to 1947 the average American suffered a 7 per cent decline in his standard of living as the increase in prices together with the decline in total output outstripped the reduction in war outlays. There then followed from 1947 to 1949 a rise of more than 11 per cent, bringing the average standard of living in 1949 to 19 per cent above the 1939 level, which was the highwater mark under the Permanent War Economy and will undoubtedly remain so. The slight decline in 1950 will be followed by a substantial decline of more than 6 per cent in 1951 as, once again, an actual curtailment in certain industries producing consumer goods and services will be experienced. A leveling off may then be expected at slightly above 1951 levels which may be expected to last until such time as there is a pronounced change in the ratio of war outlays to total output.

It is recognized that many other factors should be taken into consideration in evaluating trends in living standards, such as changes in the length of the working day and the working week, the intensity of labor, the impact of new methods of satisfying consumer wants, the disappearance of existing methods of satisfying consumer wants, especially in the field of consumer durables, and the changing character of distribution – to mention the most obvious. Nevertheless, the index of per capita average real standards of living is both conceptually sound and statistically accurate, at least sufficiently so as to permit confidence in the results. We must stress, however, that all we have succeeded in accomplishing at this point is to obtain a relatively precise view of what has happened and what may be expected to happen to the average American.

It goes without saying that we do not live in a classless society and that there is consequently a sharp differentiation in actual levels of living among the various classes and, equally important, in trends in class standards of living. This brings us to the fourth and final step in our analysis of declining standards of living under the Permanent War Economy. Without some indication of the differences among classes, no matter how tentative the figures must necessarily be, it is impossible to complete our analysis or to understand the most significant causal relationships affecting living standards under the Permanent War Economy.

 
Part IIb
 

Footnote

1. Since this was written, the Department of Commerce has announced (The New York Times of January 22, 1951) gross national product figures in 1939 dollars. The Implicit Price Index thus derived was published for selected years and yields the following comparison with our average price index:

The two indexes apparently correspond quite closely, being identical for 1941 and only three per cent apart in 1949. The Commerce Index, however, indicates a price rise of less than two per cent from 1949 to 1950, whereas our index shows an increase of more than four per cent during the same period.

 
Part II–B

Top of page

Permanent War Economy

Vance Archive   |   Trotskyist Writers Index  |   ETOL Main Page

Last updated: 16 August 2019