Economics, Politics and the Age of Inflation

Paul Mattick

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317281887
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1978, the essays in this text discuss issues surrounding inflation, governmental roles in economic matters and varying economic systems and theories with a particular lean towards discussing capitalism evaluating how all of these factors affect the economic state of America. Mattick takes on the view that Economics is not an exact science and calls into question its predictive powers and as such, emphasises the issues that he felt needed most attention at the time of writing. This title will be of interest to students of economics and politics.

1
The Crisis of the Mixed Economy

To understand the present economic situation and where it is going, one must take a look into the events of the recent past. Developments since the end of World War II have taken place entirely within a new kind of capitalism calling itself a "mixed economy." This implies state economic interventions that differ from the interventionist policies of the past century in extent but not so much in the means applied.

State interventions under a mixed economy find their reasons as well as their limits in the conditions of existence and accumulation of private capital. Quite apart from the instruments of power that the state uses to secure social stability on the domestic front and to support national interests in international competition, it has always exercised economic functions as well, e.g., as a means of obtaining revenue (customs policies and state monopolies over certain branches of industry, etc.) or of creating the general conditions of production the burden for which private capital either did not or could not assume itself (e.g., construction of roads, harbors, railroads, posts, and so on, i..e., what in the economic jargon is called infrastructure).

Thus in limited measure the state is also a producer of surplus value and is therefore able to pay for a portion of its expenditures with its own profits. To the extent that the production of state enterprises enters into general competition, it differs in no way from private production; and the state share in total surplus value depends on the mass of capital it invests and on the average rate of profit. State monopoly over certain products and services may lead to monopolistic profits, but this is only another form of consumer taxation.

For historical and other reasons the relationship between state and private production is changeable and, moreover, varies from country to country. State enterprises may be turned over to private concerns, and private enterprises may be nationalized; the state may be a shareholder in private concerns or keep them alive through subsidies. The interpenetration of private and state production occurs in a variety of combinations, and the state share need not be restricted to the infrastructure. In the industrially developing countries state participation in production is often relatively extensive, as for example, in Italy, an archetypal country in this respect, where state-owned production! competing with private capital represents 15 percent of total production. Yet no matter how much state production may expand, it can never be more than a minor fraction of total production if it is not to call into question the very existence of a market economy. In all countries, therefore, a "mixed economy," to the extent that it is a mixture, leaves the private enterprise nature of the economy intact.

Even an increase in state production through expansion of the infrastructure can change nothing, since this expansion takes place within the framework of capitalist accumulation, which reproduces the relationship between state and private production in consonance with accumulation needs. Expanding automobile production entails the construction of new highways, and growing air traffice requires more airports, etc., if expansion of the economy as a whole is not to lag behind the infrastructure. Though it is correct to say that state-organized creation of the general conditions of production benefits private capital, albeit quite unevenly, this does not mean that it improves the profitability of capital beyond the costs of the infrastructure. Since the costs of the infrastructure are borne by private capital, the infrastructure depends on the profitability of capital, not vice versa.

The general conditions of production demonstrate the unsocial nature of capitalist production, namely, that it is impossible for the general needs of society to be taken care of by private production. The capitalist ideal would be for every form of production, even production for the infrastructure, to be run privately. As, however, this is in practical terms impossible, capital leaves it to the state to balance private production with social production. Capital must still, however, bear the costs of this production, and it is therefore little interested in expanding the infrastructure beyond the narrow scope it finds useful. The result is that, in general, infrastructural production lags behind production for the market — a state often lamented in the economic literature as an irremediable contradiction between private wealth and public poverty.

In a crisis situation state-induced production is not primarily production for further expansion of the infrastructure in anticipation of and preparation for expected future capitalist accumulation. Its purpose is to create jobs immediately, with a view toward increasing general demand. In order not to compound further the existing problems of private production, state-induced production must concentrate on things outside of the market and on public spending, which may partly go toward expanding the general conditions of production and partly be used up in "public consumption." This type of state-induced production must be distinguished from the state production that already exists, whether it is geared to the creation of the general conditions of production or to the general market.

Private production is not on that account driven out of business by state production; the latter is merely a policy undertaken to combat crisis. It is financed by a state budget deficit, even if in the end this only means an added tax burden apportioned to the private sector over the long term. The state must strive to expand total production beyond its own production capacities, which is why when we investigate the effect of state-induced production, normal state production may be disregarded.

The state does not have any means of production of its own to cover the additional state-induced production. Even for production of the general conditions of production, the state must for the most part rely on the services of private enterprise, which are then paid for from taxes and state loans. To the extent that the general conditions of production are a prerequisite for capitalist production for profit, their cost is objectively a part of the costs of capitalist production. Where this is not the case, the costs of state-induced production must be subtracted from total surplus value and cannot be included in either capitalist consumption or capitalist accumulation.

Crisis brings capitalist accumulation to a halt, and at the level of the market this shows up as overproduction and unemployment, Crisis occurs because profits are not sufficient to meet the expansion needs of the existing capital structure. In this situation any further deductions from the mass of surplus value, which is already inadequate, can only worsen the predicament of capital. Any increase in demand through public works projects must therefore be financed by state loans, and the additional state-induced production shows up as a mounting public debt.

That government spending is for the most part covered by deductions from the mass of surplus value is brought to light by taxation. Capital is always demanding a reduction in its tax burden. However, it is not necessary to balance the state budget every year; debts incurred during a depression may be paid off during times of prosperity. If they are not, the interest on state loans constitutes an additional tax burden which, however, may be stabilized at a low level by expanding production. As long as social production expands faster than the state debt, the latter poses no serious problem for the economy. If the opposite is the case, the state debt becomes a burden on the economy and another obstacle to the resumption of accumulation.

State-induced production to make up for deficient demand was initially conceived as a temporary relief measure for waiting out the depression on a safer note until the next business upswing, and it was therefore used only in limited measure. If capital could not create the conditions for a new economic upswing from its own resources, expansion of the infrastructure through public works would be of little use to it. Two empty harbors are no better than one, and two highways without traffic no better than one without traffic. During the Great Depression public works reduced unemployment but did not eliminate it, and the long depression ended with World War II, not with a new economic upswing. It took the war to bring about full employment without capitalist accumulation. Capital was not only destroyed in terms of values, it was also destroyed physically. In the United States as well accumulation came to a halt when about half of production went into "public consumption," that is, wartime production. Nonetheless this arrest of accumulation and the enormous destruction of capital created the conditions for the economic boom of the postwar period.

Periodic crises have been a part of capitalism as long as it has existed, but because capital does develop, the periods of crisis differ, if not in essence, at least in outward form. The postwar boom was such a surprise because it came right on the heels of the long years of depression, which had deeply shaken confidence in the ability of capital to survive and grow. How was this boom to be explained? The Marxist theory of crisis explains it by the fact that capital was once more able to restore the vital link between profit and accumulation which had been lost. The worldwide destruction of capital values and the changes it wrought in the structure of capital, together with the expansion of surplus value made possible by technical improvements in the means of production, permitted the capital that had survived and the capital that had been newly created to achieve a rate of profit sufficient for capital to expand. Thus the new boom, like all those in the past, was seen as the outcome of the crisis situation preceding it, which in turn was seen as a disproportionality between the creation of profit and the accumulation requirements of capital.

At issue here was the contradiction, inherent in the production of surplus value, that the amount of capital invested in wages decreases relative to the amount of capital invested in means of production, so that total surplus value accordingly diminishes relative to total capital. Capital accumulation is not only a necessity born of competition, it also derives from the never ending struggle against the tendential decline in the rate of profit inherent in the capitalist mode of production, and this struggle grows more difficult as accumulation proceeds. While surplus value is, on the one hand, increased by accumulation, and on the other hand, accumulation causes the rate of profit to decline, at any particular time actual profits may fail to reach the level required for further accumulation. Since Marx describes this process in Capital, we need not repeat the description here. It will suffice to point out that prosperity and depression constitute the contradictory outward garb of the development of the social forces of production under conditions of capital production.

Bourgeois economic theory sees these events in a different light. For it price relations on the market, not production and production relations, are the essential factors to be considered. The great crisis of 1929 forced the abandonment of the equilibrium theory of a self-regulating economy. The crisis was interpreted as based on a lack of effective demand due to a decline in consumer needs, showing up as a lack of new investments and hence unemployment. But this peculiar explanation aside, bourgeois theory also agreed that production had to be stimulated if the crisis, which seemed to have set in permanently, was to be overcome. If this was not achieved of itself from profit-determined market relations, state interventions could be used to stimulate production — the full employment of the war years was a persuasive example of this. Since it seemed that capital was no longer capable of extracting itself from the crisis by means of its own resources, and since the continuation and deepening of the crisis began to undermine social stability, both bourgeois practitioners and theoreticians opted for an interventionist policy to prime the pump, as it were, and eliminate unemployment.

If profitable expansion of production was not possible, expansion independent of profit was; and although this could not promote capital accumulation directly, it could perhaps get production going again. Production even without profit seemed better than standing still, especially when it was tied to the expectation that it would provide the impetus for the resumption of the accumulation process.

The multiplier effect theory was invented to substantiate this reasoning. The notion of a multiplier had appeared before,² although it had not been taken as seriously or formulated as precisely as by R. F. Kahn and J. M. Keynes. Their particular formulation aside, it is obvious that any significant new investment, no matter of what kind, must increase production if it is not immediately offset by the withdrawal of other investments, and that, moreover, this added production will also generate some surplus value. If the additional surplus value is reinvested in means of production and labor power, capital accumulation also increases.

But surplus value is transformed into additional capital only when existing capital is profitable enough to justify further capitalist expansion. The crisis was a sign that capital was not profitable enough to allow for more accumulation. And since state production yields no profit, its effect on profitable production in the private sector can only very marginally increase total surplus value. Although surplus value expands in the private sector as a result of state-induced production, this growth itself must be measured against the production costs of the latter to determine if it can actually influence the social surplus value positively.

To avoid misunderstandings we should point out that just as creditors of the state debt obtain their interest, so do the private enterprises engaged in state-induced production receive an average, and often an above-average, profit. These interests and profits, however, are not generated via the market but through state purchases of the output the state itself set into motion, i.e., the added output, which includes surplus value, is "exchanged" for a capitalist surplus value in money form that had been created at an earlier period. The money which flows from the hands of capital to the state returns from whence it came in an amount commensurate with the volume of state-induced production. In other words, surplus value that was already part of capital is "exchanged" for state-induced output.

Money becomes capital by being transformed into means of production and labor power used for the production of surplus value; this process, which constitutes capital accumulation, is reproduced continuously. In themselves money and means of production have none of the properties of capital; they first acquire such properties through the production of surplus value. Money and means of production lie idle during times of crisis because nowhere would their employment yield sufficient surplus value. But though they are not utilized, they still remain private property that the state must appropriate to begin state-induced production

The latter comes under the heading of neither private consumption nor capitalist accumulation. However, consumption also expands with production via the surplus value "realized" through state-induced production and through the wages of the workers employed in producing the increased output, as well as through the effects of state-induced production on production in general. The final product, however, which ends up in public consumption, still embodies the totality of its production costs. If, for example, the American space research program costs $20 billion, this sum represents a portion of the state budget that must be raised by society as a whole. It cannot be capitalized, whatever ultimate technical benefit may accrue to commodity-producing capital from the achievements of space research. It must also be taken into account that while in capitalist production existing capital is amortized within a certain period by the commodities it produces, and in this way survives to expand by way of the surplus value, under state-induced production, production of surplus value and amortization of capital can take place only through the state budget, i.e., via the surplus value extracted from the private sector.

However, state-induced production and private production are so complexly interwoven that no clear-cut line can be drawn between them. Enterprises operate in both sectors at the same time and make as little distinction as does economic theory between income coming from state-induced production and that accruing from production for the private sector. National income is calculated on the basis of total production, without regard for the origin or the destination of its individual components. But if the state budget grows more rapidly than total income, the gap between profitless and profitable production widens. The fact that in the capitalist countries about one third of the national income goes into the state budget and is supplemented by deficit financing shows that more and more of the total surplus value is being kept out of private capital formation.

Conversely, if national income grows more rapidly than the state budget and the state debt, it means that the proportion of state-induced production within total production is on the decrease, and that capitalist accumulation may be correspondingly enlarged. It must, however, be remembered that at issue here is a state-induced production undertaken to compensate for sagging private production, and not just the expansion of state spending in itself, which may also have other reasons, e.g., the exigencies of war or imperialist policies.

The imperialist rivalries of nationally organized capital have also given birth to a state apparatus which, in close collaboration with the capital entities benefiting from state-induced production, has established itself in a relatively independent position of power it secures by maintaining and expanding its control over the economy. Thus it is not always clear to what extent continuing expansion of the state budget derives from the objective need for state induced production and to what extent it is forced on society by special interests allied to the state.

By far the greater part of state-induced production is in the war and armaments industry, i.e., production for public consumption. This production is at once a cause and the expression of the low rate of capital expansion. Specifically, on the one hand it can be claimed that public consumption detracts from accumulation, yet it is also arguable that without it economic activity would be even more depressed than it actually is. Since war and armaments have so far in fact been inseparable from capital, it is impossible to ascertain to what extent curbs on state-induced production would further capital accumulation or diminish productive activity.

Though this question may resist an empirical answer, we can nonetheless explore it theoretically. Assuming that there are no objective obstacles in the way of capitalist accumulation, which could grow by the available mass of surplus value, any loss of surplus value through public consumption would mean less accumulation. In principle the less consumption there is of any kind, the more can be accumulated. This may be the case, but not necessarily so. The profit requirements of further accumulation may surpass the actual surplus value obtained at the expense of consumption because of an existing discrepancy between the existing capital structure and the given rate of exploitation, so that only a change in the structure of capital and an increase in labor productivity can expand the value of capital. Under such conditions curbs on public consumption would have no effect on accumulation. A capitalist crisis would then be needed to effect the social changes under which capital could continue the accumulation process.

The resurgence of economic activity following World War II was not due to state-induced production alone; a far weightier factor was the fact that despite increased public consumption, capital was once again able to emerge from the depression to begin a new era of prosperity. As already stated, the changes wrought in the international structure of capital by war and depression, rapid technological advances, and a cutback in consumption on a world scale led to a high rate of accumulation in several countries at once. The restoration of the war-devastated infrastructure and the resumption of capital reproduction, neglected during the war, together with a steady, relatively high level of public consumption necessitated by continuing imperialist power politics, produced the "economic miracles" in the reconstruction countries and saw American capital expand across the globe. But all this says no more than that the surplus value generated in production was sufficient to meet the needs of both capitalist accumulation and public spending.

But capitalism's regaining of its own internal dynamic had to contend with the theory of a generally static capitalism, developed during the depression, according to which full employment could only be achieved through state intervention. The fact that some countries were approaching while others, for the time at least, were enjoying full employment was proof enough for the "new economics" that the state does in fact possess the power to eliminate the capitalist business cycle. By means of monetary and fiscal policies it was possible at any time, it was asserted, for the state to transform a ...

Table of contents

• Cover
• Title
• Copyright
• Half Title
• Original Title
• Original Copyright
• Contents
• Preface
• 1 The Crisis of the Mixed Economy
• 2 Deflationary Inflation
• 3 The Destruction of Money
• 4 On the Concept of State-Monopoly Capitalism
• 5 State Capitalism and the Mixed Economy
• 6 The Great Depression and the New Deal
• About the Author