The Limits of the Mixed Economy. Paul Mattick 1969



As far as laissez-faire capitalism is concerned, Marx’s prediction of its decline and eventual demise is obviously still supported by the actual course of development. The prevalence of the “mixed economy” is an admission that capitalism would find itself in a depression were it not for the expanding government-determined sector of the economy. What does this government intervention imply as regards the private-enterprise economy?

No doubt, state intervention increases production and thus expands the productive apparatus. But if the goal of such intervention is the stabilization of the market economy, government-induced production must be non-competitive. Were the government to purchase consumption goods and durables in order to give them away it would reduce the private market demand for these commodities. If the government owned enterprises were to produce such commodities and offered them for sale, it would increase the difficulties of its private competitors by reducing their shares of a limited market demand. Government purchases must fall out of the market system; the production entailed must be supplementary to market production. The government is therefore predominantly concerned with goods and services that have no place in the market, that is, with public works and public expenditures of all descriptions.

The division between private and public production is, of course, not absolute. Political exigencies induce governments to enter the sphere of private market production, for instance, by subsidizing certain commodities and by purchasing surplus products to be utilized in foreign and domestic aid projects. There is some overlapping of private and public business activities in various branches of production as well as in their marketing and financing. Generally, however, one can speak of the division of the economy into a profit-determined private sector, and a smaller, non-profitable, public sector. The private sector must realize its profits through market transactions. The public sector operates independently of the market; though its existence and its activities affect the private sector’s market relations.

The government increases the “effective demand” through purchases from private industry, financed either with tax money or by borrowings on the capital market. Insofar as it finances its expenditures with tax money, it merely transfers money made in the private sector to the public sector, which may change the character of production but does not necessarily enlarge it. Production will, however, be enlarged through government borrowings and deficit-financing. Capital exists either in “liquid” form, i.e., as money, or in fixed form, i.e., as means and materials of production. The money borrowed by government puts productive resources to work. These resources are private property, which, in order to function as capital, must be reproduced and enlarged. Depreciation charges and profits gained in the course of government-contracted production – not being realizable on the market – are “realized” out of the money borrowed by the government. But this money, too, is private property – on loan to the government at a certain rate of interest. While production is thus increased, its expense piles up as government indebtedness.

To pay off its debts and the attendant interest, the government has to use tax money, or make new borrowings. In other words, the products which the government “purchases” are not really purchased, but given to the government free; for the government has nothing to give in return but its credit standing, which, in turn, has no other base than the government’s taxing-power and ability to increase the supply of credit-money. However the credit expansion is brought about, and however it is dealt with in the course of an expanding government-induced production, one thing is clear – that the national debt, and the interest on it, can be honored only as a reduction of current and future income generated in the private sector of the economy. Although unused productive capacities are put to use by government contracts, “profits” made in this way, and “capital accumulated” in this manner are mere bookkeeping data relating to the national debt. They are not actual profit-yielding new means of production, even where the physical productive apparatus grows with the increase in production. A relatively faster increase in government-induced production than in total social production implies the relative decline of private capital formation. The decline is covered up by the increase in production to government account, the “profits” of which take on the form of claims on the government. In the United States, for instance, “the not-for-profit sector expanded relatively rapidly in the 1930s in response to the multiple problems created by the Great Depression and very rapidly in the first half of the 1940s in response to the challenge of war. While the late 1940s saw a dynamic expansion of the profit sector, at the end of the decade the not-for-profit sector had grown relatively more over the ten-year period than the profit sector. The 1950s saw more of the same: the not-for-profit sector grew much more rapidly than the profit sector ... It is clear that since 1929 the not-for-profit sector has grown relatively more rapidly than the profit sector in terms of the labor force directly employed and in terms of the national income produced.”[1]

The claims on the government that make up the national debt can be repudiated, of course; in this case, the “profits” made via government-induced production are revealed for what they actually are, namely, imaginary. Though this may perhaps be unavoidable some day, governments, representing private capital, will postpone this day as long as possible; particularly because the repudiation of debts does not by itself guarantee the resumption of a profitable capital accumulation. Meanwhile, there is a slow but steady depreciation of incomes and debts due to inflation, a process necessary in connection with the expansion of government-induced production by way of deficit-financing.

Notwithstanding the long duration of rather “prosperous” conditions in the industrially-advanced countries, there is no ground for the assumption that capital production has overcome its inherent contradictions through state interventions in the economy. The interventions themselves point to the persistence of the crisis of capital production, and the growth of government-determined production is a sure sign of the continuing decay of the private-enterprise economy. To arrest this decay would mean to halt the vast expansion of government-induced production and to restore the self-expansive powers of capital production; in short, it implies a reversal of the general developmental trend of twentieth-century capitalism. As this is highly improbable, the state will be forced to extend its economic inroads into the private sector of the economy and thus threaten to become itself the vehicle for the destruction of the market economy. Where the government represents private capital, it will do this only with great hesitation and against growing opposition on the part of private capital. This hesitation may be enough to change the conditions of an apparent “prosperity” into conditions of economic crisis.

There was always opposition to government controls as exemplified in laissez-faire ideology, yet the present objective conflict between government and business is of a different character because of the relatively faster growth of the government-determined production in the course of the general expansion of capital. The quantitative change points to an undesired yet inescapable qualitative change, for extensive state control of the economy forecasts the end of private enterprise. This objective opposition between state-control and private capital is still clouded and appears as the subjective cooperation of business and government in the nominally market-determined economy. The “cooperation” is possible only because it still subordinates government policies to the specific needs of big business. But the specific needs of big business contradict the general needs of society, and the social conflicts thereby released will turn into conflicts about the role of government in economic affairs, that is, will be political struggles for the control of government in order either to restrict or to extend its interventions in the economy.

Although the economic role of government seems to divide the whole of the economy into a “public sector” and a “private sector,” actually there is of course just one economy, in which the government intervenes; for it is not government ownership but government control which characterizes the mixed economy. There is in addition, to be sure, a great and growing amount of direct government ownership, just as there was government ownership in laissez-faire capitalism. But no matter how self-supporting, self-liquidating, or even profitable some government undertakings are, governments still require an increasingly larger portion of privately-produced wealth.

The “mixed” character of present-day capitalism is thus only an appearance, due to the fact that government-induced production stimulates the whole of the economy. It is obvious that public works and waste-production employ machinery, materials, and labor. Production is generally increased as the government’s initiative creates additional markets for all capitals involved in producing goods that enter into government-induced production, including the consumption goods of the laborers employed therein. However, the final product of government-induced production, resulting from a long chain of intermediary production processes, does not have the form of a commodity which could profitably be sold on the market. Whatever entered into its production counts as its production cost and cannot be recovered in a sales price, for there are no buyers of public works and waste-production.

Nonetheless, the dual-economy, with its public and private sectors, will appear as a “mixed” economy benefiting both private capital and society at large. Although each sector goes its separate way, in that the one is profitable and the other not, they are never the less inseparably intertwined in the actual production and marketing process. For all practical reasons, then, the economy is a “mixed” economy, even though government-induced production cannot add but can only subtract from the total profit of total social production.

In laissez-faire capitalism the social character of various individual labor processes came to light only awkwardly and indirectly in the supply-and-demand fluctuations of the market. The growth of the banking and credit system, as well as the growth of the stock-company, reflected in a similar awkward and indirect fashion an increasing “de-privatization” of capital. However, it made possible an expansion of production beyond the limitations of dispersed privately-owned enterprises, and beyond the limitations which the market mechanism placed on the expansion of particular capital entities. The modern system of finance has, among other things, centralized the control of capital so that the need for immediate profits can be overruled in favor of policies which provide for larger future profits. Even here, of course, profits must finally be shown. They are then “measured” on the invested capital: if its profit-claims cannot be met, the investment is deemed “unproductive,” even though it has created new productive apparatus.

What is called capital formation is this “anticipatory” expansion of production. It was the slackening rate of capital formation which induced Keynes and the Keynesians to recommend government interventions: the government should step into the picture as soon as private capital endangered the present by neglecting the future. Since government was not bound to specific sub-groups of capital, which were expected to yield customary profits, Keynes thought it could command a production limited by nothing but existing productive resources. In doing so, it would only carry on where private capital left off; it would not really encroach upon private interests whose limitations had already been revealed by the declining rate of investments.

Employment can be increased when the government pays out more money for its expenditures than it receives by way of taxes. This is deficit-financing, or the expansion of production by way of credits. There is really no need, it is said, for a regularly balanced government budget. In times of depression, the government should run a budgetary deficit; and in times of prosperity it should try for a surplus by taxing more money out of the system. This surplus would retire the government debt. In this manner there would still be a budgetary balance, but it would be spread over a longer period of time. Meanwhile, the business-cycle would be flattened out, neither deflation nor inflation would become excessive, and current depressions could be halted at the expense of future propensities. Instead of the violent fluctuations of the business-cycle there would be a steady and balanced growth of the economy.

This argument overlooks the fact that only an accelerated capital formation creates conditions such as are designated by the name prosperity, and that these conditions require – as a precondition – severe depressions bringing a vast destruction of capital values. Keynes himself envisioned a stationary state of capital production in “mature” capitalism, wherein there is neither depression nor prosperity in the traditional sense but a continuing government created “quasi-boom” with a declining rate of capital formation. Most of his disciples, however, deny the stationary tendencies of capital production. But they do suggest that the rate of capital accumulation should not be “maximized” but “optimized,” i.e., kept in bounds most suitable to economic and social stability. Despite the theory, however, experiences with deficit-financing have shown that intervening in the course of depression hinders the return of a state of capitalist prosperity rich enough to yield a budgetary surplus. There has been, then, no alternation between deficits and surpluses but merely an accumulation of the national debt.

The national debt, Marx pointed out, “finds its support in the public revenue, which must cover the payments for interests. The modern system of taxation was the necessary complement of the system of national loans. These loans enable the government to meet extraordinary expenses without the taxpayers feeling it immediately, but they necessitate, as a consequence, increased taxes. On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government to have recourse to new loans for extraordinary expenses. Modern facility, whose pivot is formed by taxes on the most necessary means of subsistence, thus contains within itself the germ of automatic progression.”[2] Under conditions of enhanced private capital accumulation, however, deficit-financing of government activities may “benefit” the “national economy.” This will be the case if the activities in question serve to create or improve the conditions for expanding and extending the national private capital. The extraordinary government expenses contracted for international loans, colonization, or war exemplify this situation, as they are devoted to undertakings outside the proper realm of private capital production but to its ultimate benefit.

Capital will object to government deficit-financing if it violates the principle of profitability in favor of a larger national production which does not serve the specific needs of capital. The Keynesians argue, of course, that the “test of profitability,” decisive in the case of private investments, is not adequate when applied to public investments. “An investment may be highly remunerative from the social point of view,” it is said, “even if its direct return is nil; if, in consequence of the investment, the real income of the community is increased.”[3] In addition, it is supposed that “whenever the government spends money, income is created for the producers of what is bought. The income thus created results in more spending by those who have received it and this in turn creates extra income for still others so that the total income is increased by several times the initial increase in spending. The two hundred and ninety billion dollars of government spending (in the United States) – which was financed by borrowing that built the national debt to its present size – has thus resulted in contributing several times that amount to our total national income up to date – perhaps a thousand billion dollars.”[4]

This is the notion, already mentioned, of the “multiplier,” i.e., the idea that an increased income resulting from government expenditures will have subsequent income effects, which will add up to a sum greater than the original spending. The multiple repercussions of investments result from the fact that the employment thus provided will increase income and thus consumption. The suppliers of consumption goods are in this way also provided with additional income, with which they can increase their own consumption; and their suppliers, in turn, can repeat the procedure. Thus a chain reaction of income creations is released by the initial spending. However, people will not spend all their income on consumption. What they do spend is supposedly determined by the prevailing “propensity to consume.” If the latter is low, that is, if a relatively small part of the new income is spent on consumption, the multiplier ratio between changes in income and investments will also be low; and if the propensity to consume is high, the multiplier ratio between investments and income will also be high. In other words, the smaller the additional saving called forth by additional income, the greater will be the multiplier.

The income-creating effect of investments diminishes progressively, it is said, because its income-generating power “leaks” away through savings, taxation, and foreign trade. With a low propensity to consume – which current economic theory says is characteristic of a highly-developed market economy – the income-creating effect of new investments is small, so that additional spending is required. It is expected that government spending will encourage entrepreneurs to maintain, or to increase, their own investment. Government spending will thus create additional income by way of consumption as well as private investments, and the budgetary deficit, which made the spending possible, results not only in a larger national income but also in a larger productive capacity. Although the income created by deficit-spending is offset by the increase of the national debt, it is assumed that new savings, resulting from the increased income, will in turn offset the national debt. It is held, in other words, that deficit-spending can be financed out of the savings it has itself created.

By suggesting that the sum total of subsequent increases in income is larger than the total amount of deficit-spending, the multiplier concept creates the illusion (by analogy with the velocity of money) that any given amount of additional income can multiply itself merely by traveling from one income group to another. Actually, of course, this is not so, just as a change in the velocity of money does not imply a change in its quantity or in the quantity of commodities in circulation. The same quantity of money merely serves more exchange transactions from the commodity-form to the money-form and vice versa.

The new government-induced investment does not fall from the sky but represents commodity-values in money form to be exchanged for other commodities. If a government spends a billion dollars, this sum has been either collected in taxes or borrowed on the capital market. In either case, this sum represents the equivalent of previously-produced commodity-values. On the unrealistic assumption that this billion dollars will be spent on consumption, these consumption goods must already exist or must be produced to make the transaction possible. Their owners, or producers, will exchange them for the one billion dollars. If they in turn spend this billion on consumption goods, they merely spend what in another form they already possessed and exchanged for the one billion dollars of the initial spenders. The same holds true for all the following exchange transactions. In each case, the commodities either already exist or must first be produced to make the trans action possible. There is no multiplication of income through the initial spending itself, though there may be the production of new income; and it is only insofar as the original spending leads to increased production that it can increase income.

All investments, whether of a private or a public character, will increase the national income as they increase national production. Capital, however, cannot accumulate except through profitability: no increase of production which is not also an increase of profits can increase capital. Since it does not depend on profitability, government-induced production can enlarge total social production; but it cannot enlarge the total capital. It is conceivable, however, that the mere increase or maintenance of a given level of production regardless of profitability may arrest a downward business trend, and may even be instrumental in reversing the trend. Although deficit-financing of non-profitable production increases only the economic activity of total capital, it does affect the profitability of those individual capitals which partake in government induced production, and it allows for the accumulation of interest-bearing claims on the government. This may create a business climate more favorable to the resumption of private capital investments. And because any depression releases endeavors to recreate the conditions for a new prosperity, the combination of governmental and private efforts to reverse a downward trend may actually succeed. (In fact, deficit-spending was first conceived of as a temporary and limited anti-depression policy to alleviate social misery and halt an economic decline, itself conceived of as a temporary event.) As deficit-spending reduces unemployment and in creases production, it may, under special conditions, induce an acceleration of private investments. If this should be the case, it would increase total income by more than that brought forth by deficit-spending, but this “multiplication” would be due directly to the additional profitable investments, not to the initial spending.

However, deficit-spending as a “regulator” of economic activity has found almost general acceptance and is widely practiced by conviction as well as by necessity. The remaining ambivalence toward deficit-spending stems from the fact that it involves an element of income redistribution because it channels funds into non-profitable spheres of production. Although the lack of investments for lack of profitability kept these funds idle in the first place, from a capitalistic point of view, they are nonetheless misused when used for non-profitable undertakings. For capital functions as such only insofar as it yields profit. Whatever the rates of profit may be, the more of the total social capital is engaged in non-profitable production, the smaller the total profit on the total capital. Although its profits would not be any greater were there no non-profitable government spending, they cannot be in creased by way of such spending. From the larger total production both profitable and non-profitable – a larger share falls now, as it were, in the sphere of consumption, and a correspondingly smaller share can be capitalized as additional profit-yielding capital.

The change in the amount of employment brought forth by government-induced production decreases the profitability of total capital relative to the magnitude of total social production. It is this decreasing profitability which shows up in the mounting national debt, and it is the latter which indicates the decline of private capital formation despite and because of the increased production. In bourgeois theory, the gross national product, or aggregate demand, is equal to the sum of consumption, investments, and government spending. Government deficit-spending, however, is not part of the actual aggregate demand, but a deliberate policy of producing beyond it. To be sure, individual businessmen are not concerned with the nature of the demand which they supply. To them, it makes no difference whether it stems from government or from private spending. Likewise, the financiers do not care whether loans are made to private entrepreneurs or to the government, so long as the loans are secure and yield the desired rate of interest. And to the individual it makes no difference whether he is employed by the government or by private enterprise, whether he produces commodities for the market or for “public consumption.” In practice, no distinction is made between the public and the private sectors of the economy, and in both all transactions are money transactions, which veils their underlying social implications. From the individual’s point of view, government-induced production may be no less lucrative and important than production for the market; and the accumulation of the national debt appears to him as an accumulation of private claims on the government equivalent to the accumulation of money and capital.

Deficit-spending means the spending of money derived from the sale of government bonds. Like consumption in general, “public consumption” does not add to the formation of capital. It does, however, increase the national debt. The costs of the debt, that is, the interest paid to the bondholders, must come out of the profits of the relatively diminishing private sector of the economy. The payment of interest transfers a portion of profits from productive to loan capital. But while in private capital production interest is always a part of realized profit, the interest paid to the holders of government bonds has no such profit counterpart, for this interest is paid on capital which yields no profit. The growing national debt and its interest burden cannot be related to total income as determined by both public and private production, but only to that part of the total which has not been injected into the economy by way of deficit-spending. That part which has been injected falls out of the economy as a profit-producing system. It yields income but, being unprofitable, yields no taxable income and, for that reason, cannot be considered a compensatory factor vis-à-vis the national debt.

What does the government actually do by bringing together labor and idle capital for the production of non-marketable goods? Taxes are a part of realized income through market transactions; if taken from capital they reduce its profits, regardless of whether or not these profits would have been consumed or reinvested into additional capital. If not, idle capital in its money form would exist as a private hoard. As such it cannot function capitalistically; but neither can it function capitalistically when taken by government to finance the non-profitable production of public works and government waste. Instead of a capitalistically-useless money hoard there is then a capitalistically-useless production of goods and services. There is a difference, however: Whereas without taxation capitalists would be in possession of a money hoard, with taxation for purposes of public spending capital is actually “expropriated” to the extent of the otherwise possible hoard.

When used for government purposes, taxes taken from capital flow back to the capitalists in the form of government contracts. The production resulting from these contracts is paid for by the capitalists through their taxes. Getting their money back through government orders, the capitalists provide the government with an equivalent quantity of products. It is this quantity of products which the government “expropriates” from capital. The size of this quantity determines the extent to which production has ceased being capital production, and the growth of production by way of taxation indicates the decline of the capitalist system as a profit-determined private enterprise system. Not only is this type of production non-profitable, it is made possible only through that part of total social production which is still sufficiently profitable to yield taxes large enough to extend government production by way of taxation. With the decline of profitability it becomes increasingly more difficult to expand production in this particular way.

But the government can borrow additional funds. These funds also flow back to the capitalists as payments for production contracted by government. The expense of government-induced production piles up, in part, as the national debt. The increase of the debt is held to be quite harmless as long as the national income increases faster than the debt. The growing national debt is then usually compared with the growing national income, to substantiate the claim that deficit-finding will be accompanied by a rising national income. This claim rests, however, on a curious way of accounting, for, to repeat, the growing national debt cannot be related to total national income, but only to that part of the total which has not been injected into the economy by the government. It is by counting an expense as an income that the illusion arises that the growing national debt is neutralized by a rising national income.

Unless the national debt is actually recovered through additional income in the private sector of the economy, that is, additional income apart from that injected into the economy by government, the “income” derived from the latter procedure remains, as far as capital is concerned, merely an expense of government. The utilization of privately-owned productive resources for non-profitable purposes is a partial “expropriation” of capital. The “expropriated” capital was no longer able to function on its own behalf, but that does not prevent the capitalists from demanding compensation for the government’s use of their productive resources, even though the possibility of honoring the government debt depends on the future profitability of private capital. Unless this profitability actually materializes, the debt cannot be paid and today’s additional income becomes tomorrow’s loss.

The private sector of the economy must be taxed for current government needs and for the costs of the national debt. A larger part of its profits are taken by taxes and a correspondingly smaller part can be capitalized. Deficit-spending was resorted to in the first place because of an insufficient rate of capital growth. While taxation cannot increase this rate it can increase non-profitable production. The increase of taxation is made possible through the increasing productivity, which now benefits government-induced production rather than private capital accumulation. Instead of being capitalized, an increasing part of the social profit dissipates in additional government spending.

If not accompanied by significant expansions of private capital, the increase of productivity thus merely increases the capacity for non-profitable government-induced production, i.e., the government’s ability to tax and borrow. How much can the government tax and borrow? Obviously not the whole of the national income. Yet the non-profit sectors of the economy have constantly risen in all capitalist nations. In the United States, for example, it rose from 12.5 per cent of the Gross National Product in 1929 to 27.3 per cent in 1963. If this trend continues, there must come a time when the non-profit sector outweighs the profitable sector and therewith endangers the latter’s existence. There must then be a limit to the expansion of the non-profitable part of the economy. When this limit is reached, deficit-financing and government-induced production as policies to counteract the social consequences of a declining rate of accumulation must come to an end. The Keynesian solution will stand exposed as a pseudo-solution, capable of postponing but not of preventing the contradictory course of capital accumulation as predicted by Marx.

Government-induced production is thus limited by the limitations of private profit production itself. To change this situation through farther-reaching interventions in the economy would require the existence of governments willing and able to destroy the social dominance of private capital and assume control over the whole of the economy. It is for this reason that a continuous rapid growth of taxes and the national debt is viewed with some apprehension even by the advocates of compensatory fiscal policies. But so long as government spending merely affects unused productive resources and not the mass of labor and capital which can still be profitably employed, non-profit production is held to be preferable to an otherwise existing condition of economic depression. It is hopefully assumed that production via government deficit-financing will always remain a minor part of total social production, an aid rather than a hindrance to the further expansion of private capital. But to limit government-induced production in order not to destroy the market structure it is designed to defend means, of course, to limit the effectiveness of government interventions and to expose the capitalist development sooner or later once more to the vicissitudes of the business-cycle and, perhaps, to permanent crisis conditions.

As previously pointed out, Keynes did expect the return of pre-war conditions after the Second World War; he died before his proposals for full employment became government policies in the post-war world. Perhaps the manner in which his theory was put in practice would not have been to his own taste; still, the practice proved that even in “mature” capitalism employment can be in creased through government initiative. There have been, however, short depressions (or recessions, as they are now called) since the end of the war, and a state of full employment has been the exception rather than the rule. This has caused much apprehension and frequent warnings that “all the structural changes and the new appearances of the movement of prices and production should not tempt us to draw hasty conclusions about the disappearance of the old cycles.”[5] In the Keynesian view, of course, the return to depressions finds its cause in the government’s failure to apply the Keynesian remedies with sufficient resolution, and particularly in their neglecting to increase the propensity to consume by a planned redistribution of income in favor of the poorer classes. Suggestions are constantly made to strengthen the so-called “built- in-stabilizers,” i.e., the monetary and fiscal reactions to emerging economic imbalances, which would increase the social demand and employment.

There are two wings of Keynesian economics, a conservative one and a radical one. Keynesian economists out of government office generally advocate increasing useful public works through more government spending and a general rise of living standards until full employment is reached – even if this should mean government interventions on a scale such as occurs only under war-time conditions. Keynesian economists in government office generally confess to the same goal, but hope to achieve it by less drastic means, i.e., through government policies which strengthen rather than weaken the private enterprise economy. The “radical” Keynesians seem to look upon government as an independent and neutral force, concerned only with the welfare of society and possessing the ability to take measures suited to this end. Actually, of course, the government has no intention of altering existing social relations and for that reason, will not institute the degree of “socialization” necessary to fulfill the “radical” Keynesian dream.

The demand to raise the buying-power of the low-income classes disregards the fact that “mature” capitalism, even as a mixed economy, is still a profit-producing economic system. While it is true that this system’s actual or potential productive capacity allows for a production of “abundance,” with regard to its profit requirements it remains a “scarcity-economy.” Because in capitalism the production of useful objects is merely a necessary medium for the production of profits and the augmentation of capital, the system’s success or failure is measured not by the abundance or shortage of commodities, but by the rate of profit and the rate of accumulation.

Wages are “costs of production.” Any increase in wages without a corresponding larger increase in the productivity of labor will reduce the profitability of capital. Wages do rise under capitalism, but only under conditions of rapid capital formation. Capital formation represents an excess of production over consumption. It may, and generally does, lead to increased consumption, but consumption itself cannot lead to capital formation. Each capital entity, large or small, must try to keep its production costs at a minimum in order to reach the profit maximum. Extra profits gained through monopolization and price manipulation increase competition between the less privileged capital entities and transfer profits from the weaker to the stronger enterprises. Although a partial escape from competition frees some enterprises from a steady and pressing concern with production costs, it magnifies this concern for other enterprises. In the long run, of course, the resulting decrease of profitability of the more competitive enterprises will also decrease the amount of profit that can be transferred to the less competitive capitals. As long as competition prevails it will center on the costs of production and will, thus, determine wages to the extent that they cannot be larger than is compatible with an enterprise’s profitability. To the extent that greater profitability is reached through profit transfers via the marketing and price mechanism higher wages in some enterprises are based on correspondingly lower wages in others. Just as the total social profit cannot be increased by the “inequality” of profit distribution, so total wages at any one time remain what they are no matter how they may be distributed among different laboring groups.

Government determination of wages presupposes government determination of prices, and vice versa; the two are equally impossible (aside from taxation) within the market economy whether mixed or not. The demand for a higher propensity to consume by way of higher wages amounts to a request for ending the market economy. If taken seriously, it would require centralized control of the whole of the economy and a planned determination of its production, consumption, and expansion. Short of this, the propensity to consume will vary with the ability to accumulate capital. It is for this reason that government-manipulated wage increases are not among the various “built-in-stabilizers” of the mixed economy, and that it is always the lowest wage which sets the standard for government minimum wage legislation.

Any increase in the propensity to consume achieved by redistributing income in favor of the poorer classes should show up in income statistics. It is now generally admitted that in the pre-Keynesian economy, the distribution of income between the different class did not change in spite of growing wages. It is, however, asserted that in the Keynesian economy there is a tendency toward a distribution of income favoring the poorer classes. This statistical tendency relates to what is called the real produce, which is that part of the gross national product which represents actually disposable income for consumption and savings purposes. Here, in some countries, the income falling to the capitalists as a whole has decreased relative to that of the workers as a whole. As there are now relatively fewer capitalists than before, due to the capital concentration process, and consequently more wage- and salary-earners, this is not surprising; particularly not under conditions approaching full employment. This statistical shift of disposable income from “capital” to “labor” as a whole does not tell much about the relationship between profit and wages; the less so, as the reduction of the capitalist’s income share is due to some extent to their tax-evasion practices. Rather than part with dividends by way of tax payments, they reinvest them as undistributed profits, hoping to recoup present “losses” of directly disposable income at a more favorable future time. Recent American studies of income distribution have revealed that, although wages have increased, the distribution of national income among the different classes has not changed. There have been shifts within the high-income brackets, some of which undoubtedly reflect the expansion of the economy’s public sector at the expense of the private sector. Despite these shifts, however, and with regard to total social production, both private and public, the gap between production and consumption is getting wider, not narrower. Because an increasing part of social production is of a non-profitable nature, the decline of private capital production appears as an apparent redistribution of income without, however, increasing the propensity to consume, least of all by way of higher wages.

Social welfare measures such as unemployment insurance, old-age insurance and health-insurance are also credited to the prevailing Keynesian spirit, even though most of them were instituted in the pre-Keynesian laissez-faire economy. These measures have nothing to do with any kind of income redistribution, even though in some countries special interests still combat them as anti-capitalist policies. They are “social” only insofar as they are legislated and, by that token, support the general trend toward increasing government control over social life. They do not increase the income of the workers; for the workers pay out far more in taxes and contributions to the various welfare-funds than what is expended for welfare purposes. In the United States, for example, “welfare spending has not changed the nature of income inequality, nor raised the standard of living of the lower-income classes above what it would have reached if they had not been subjected to Federal taxation.”[6]

Because the profitability principle of private enterprise excludes the distribution of surplus products by way of the wage system, surplus-production increases in the form of waste-production.

Government promotion of production by way of subsidization consists predominantly of “defense” expenditures, “military capital formation,” and non-profitable endeavors such as nuclear and space technology, which have no conceivable application in other fields and cannot directly find commercial exploitation. This type of production diverts labor, materials and machinery into products that serve political-military functions. If these products are not utilized, they have no function at all. This production can serve neither the augmentation of profit-producing capital nor the general welfare, unlike other public works such as schools, parks, roads, etc. Because such a large part of government-induced production serves the alleged “defense” needs of the nation, the military enter into the picture as a third partner in the co-determination of public funds, acting not only in the military but also in the industrial sphere. The existence of a “military-industrial complex” is reflected in the fact that the top echelons of industry and business are largely occupied by former military professionals. The interests of the latter, just like those of government and private enterprise, are all vested in the perpetuation of the prevailing corporate structure of the economy and its continued profitability under conditions of relative capital stagnation.

1. E. Ginzberg, The Pluralistic Economy, p. 195.

2. Capital, Vol. I, p. 829.

3. W. H. Beveridge, Full Employment in a Free Society, p. 401.

4. A. P. Lerner, Everybody’s Business, New York, 1964, p. 112.

5. E. Lundberg, ed., The Business Cycle in the Post-War World, New York,

6. G. Kolko, Wealth and Power in America, New York, 1961, p. 39.