Paul Mattick 1971

The American Economy: Crisis and Policy

Source: Root and Branch, No. 3, 1971, pp. 14-18.
Transcribed: by Thomas Schmidt;

Since capitalist economic policy must make no mention of the exploitation relations underlying the capitalist mode of production, economists and politicians must seek “solutions” to economic problems in terms of market phenomena. It all seems quite simple. The periodic shortage of profit which results from the laws of capitalist development appears on the market as a lack of demand, which hinders the expansion of production and so of new investments. When this state of affairs takes on a protracted character, the state jumps in to increase demand through public spending.

This indeed revives production, but has no effect on the profit situation itself. Goods produced in the “public” sector are paid for by the government with funds taxed or borrowed from the private sector; so that what appear as new profits for the businesses with government contracts are subtracted from the profits already realized on the private market by other businesses.[1] Nevertheless, the economists measure capitalist “progress” by the increase of production as a whole, lumping together profitable and unprofitable production. Although only the profitable part of production makes possible the accumulation of additional capital, growing total production simulates the conditions of a general upswing. The conditions experienced since the second world war can thus be celebrated as a boom, and taken as proof that capitalism has succeeded in abolishing the crisis cycle through state interventions in the economy.

This optimism was to an extent borne out by the facts, thanks to a rapid rise in the productivity of labor resulting from the extended application of science to technique during and after the war. However, unprofitable production has grown more quickly than profitable. The diversion of profits to the former has led to a further decline in accumulation, and the “solution” to this problem is now in turn sought in a restriction of public expenditures. The increased production based on governmental deficit financing which is, on the one hand, held to be a solution to crisis, is on the other, also held responsible for a continuing crisis situation, perceived in the form of growing inflation.

The bourgeois economists cannot understand their own economy. Just as they see insufficient demand as the cause of stagnation, they see inflation as the result of an increased demand, effected by the state-induced production, meeting a supply which ostensibly has not grown. Prices rise, it is said, because too much money seeks too few goods. It follows that a decline in demand through the restriction of public spending will end the inflation, if at the cost of growing unemployment. If public spending cannot be reduced, demand for new private capital must be diminished through higher interest rates, which also brings unemployment. Nothing can be done about this. For under today’s conditions there is only the choice between inflation and unemployment. To be sure a market equilibrium could be produced through a general reduction of wages and a further increase in labor productivity. But this solution is blocked by the wages policy of the trade unions and the prices policy of the monopolies; such a solution would require bringing prices and wages under government control.

The facts, however, contradict such explanations. That prices are not determined by impossibly high labor costs is shown by the fact that despite increasing productivity workers’ real wages have not risen since 1967. That the problem is not one of an excessive demand is implicit in the fact that almost a fourth of American productive capacity lies unused. (If more goods aren’t produced it’s because they couldn’t be profitably sold.) Supply has exceeded Demand and nevertheless prices have risen yearly by around 7.2%. The deflationist policy of the last two years has not affected this situation in the least, though hope springs eternal that it will slow the tempo of inflation. In reality supply and demand have nothing to do with the inflation, just as monopolistic price and wage policies are not causes of the inflation but its results.

Inflation and deflation have always been forced on capital as means by which workers’ wages may be adjusted to meet profit requirements. The capitalist ideal is stability; this, however, comes into conflict with the necessities of accumulation, so that capitalism develops through a crisis cycle. Up to the second world war capitalist crises were principally characterized by deflation: production would be curtailed, workers fired, wages cut, capital values destroyed, and prices lowered. Through this process of decline and ruin a new balance would be struck between the profit requirements of the surviving (and now more highly concentrated) capital and the actual production. The increasing intensity of these crises led to attempts to neutralize them by means of inflation. With inflation, prices can be made to rise faster than wages. This reduces labor’s share of the social product and so augments profits and furthers capital accumulation.

With the growth of the public sector inflation acquires another role: as the means by which the non-profitable character of government-induced production finds partial compensation in higher prices for goods produced in the private sector. The unproductive expenditures of the state are financed in part through loans and in part through taxes. The government money- and credit-expansion in itself implies rising commodity prices and the depreciation of money. As the capitalists see it, lack of profit derives on the one hand from existing wage levels and on the other from the imposition of taxes on capital. The burden of unprofitable on profitable production, then, appears to the individual capitalist as a decrease in his earnings, which he seeks to offset by raising his prices. What is really happening is that total production is growing faster than total profit; this shows up in the fall of the average rate of profit. Under these conditions, a monopolistic price policy secures the needed profit at the expense of competitive capitals. (Its ability to do this must however disappear in the course of time as total profits continue to shrink.) The workers, finally, only try to adjust their wages to the higher prices.

If private capital does not succeed in outstripping the expansion of the unprofitable state sector through a relatively faster private capital accumulation, then what lies behind the continuing inflationary trend is the slow decline of the profit-oriented market economy. In the absence of an accelerated capital accumulation, a renewed deflation seems required as the basis for a new prosperity. The novelty of the present situation lies in the fact that deflation and inflation are being applied at the same time. Higher prices accompany diminishing production, the appearance of prosperity that of crisis. This double attack on the existing wage and working conditions expresses American capital’s need for accelerated accumulation within its own borders and in the framework of the world economy. The sharpened international competition, including the imperialist policy, requires as basis the greater exploitation of workers in this country.

Since the capitalist state is not to compete in the market with the private capitalists it serves, its contribution to production must take the form of public spending which is useful to capital. This means first of all paying the expenses of imperialist power politics, which works in the best interests of private capital. The costs involved can be considered a kind of “social investment,” which may open up new profit possibilities or keep existing ones safe. It must be remembered that America has through two world wars become the strongest imperialist power. American capital has to a great extent replaced European capital in Canada and South America, made large investments in nearly all European countries, and brought colonies formerly under European control under its own. The oil of the Middle East is now for the most part in American hands, and in SE Asia American capital is trying to win supremacy over this area of great promise. Without imperialist competition America would not have become what it is today. Capital’s need to expand makes imperialism as necessary as it is desirous, and the power already won determines the degree of imperialist aggressiveness.


To be sure, the imperialist policy contains its own contradictions, which in the end can be traced back to those of capitalist production. While imperialism is a necessity, it is also a danger which can lead to deeper economic disorder. Public spending can somehow be controlled within a national framework; this is no longer possible in the case of war, since the enemy has a share in the decision-making. In the great wars of the past everything, so to speak, was at stake; they ended after a couple of years with the destruction of one side and the victory of the other, permitting rearrangements of international economic and political power. In the era of the atomic bomb, however, the imperialist powers themselves draw back in fright from such a war, with the result that their actual war activities threaten to take on a permanent character, and therefore yield no visible fruits. The American war in Indochina has led to the disappointment of imperialist expectations. Instead of creating possibilities for further expansion it has only deepened the difficulties of profit production and has enlarged public expenditures.

Since the individual corporations do not participate equally in the state-controlled production, one part of capital subsidizes another part. The capitals which do not profit from the war turn, if not on ideological then on economic grounds, against the apparently unsuccessful war policy. Since the war involves continuing inflation, a part of the middle class has also lost interest in it. The workers have up to now been the least opposed to it, perhaps since many fear that their jobs depend on war and armaments. Obviously opposition to or acceptance of the war are not determined only by economic motives, but such considerations are bound to give one attitude or the other particularly expressive force. At any rate a growing war-weariness is developing which under certain circumstances can be dangerous for the imperialist policy.

It would however be incorrect to trace America’s economic difficulties exclusively back to the war in Indochina. They are due, as pointed out above, to a tendency to crisis inherent in the capitalist mode of production and relatively independent of this war. The success achieved through the Second World War is already a thing of the past. The capital increased through this success now requires a correspondingly greater mass of profit in order to continue to expand at the same tempo. Thus yesterday’s success itself becomes tomorrow’s obstacle. When the mass of profit adequate to the expansion of the existing capital can no longer be obtained expansion transforms itself into stagnation. That the gains made through the World War and its aftermath are not sufficient to solve the accumulation problem of American capital is visible in the very fact that it has been necessary throughout the whole post-war period to ward off unemployment through growing public expenditures.

Since the capitalist economy is not centrally coordinated, it is naturally unable to frame policies to control its development: to decide at one time on a rising and at another on a declining state of business. Rather, production expands when profits grow, and contracts when profits shrink. When we speak of economic policy we refer only to measures taken by the state to influence the economy in one direction or another, within the limits imposed by the cyclical nature of capitalist development. The state can use the tax system, state credit, and control of the money supply to affect business conditions. Through the scarcity of money and the rise in the interest rate that goes with it production and investments are slowed down. The same end is accomplished through the raising of direct or indirect taxes on capital. With the limitation of production in general, the profitability of weaker capital is especially lowered, and the resulting restrictions in business activity and bankruptcies produce unemployment which is no longer absorbed by additional public expenditure. The final aim of the whole process is also the primary goal of all capitalist production, namely the increase of profits, in order to achieve a new prosperity on the basis of a changed capital structure.

The deflationary course introduced by the Nixon administration was in this regard successful. According to Arthur F. Burns, head of the Federal Reserve System,

Reductions in employment have occurred among all classes of workers – blue collar, white collar, and professional workers alike. Indeed, employment of so-called non-production workers in manufacturing has shown a decline since March that is unparalleled in the post-war period.

Because of these vigorous efforts to cut costs, the growth of productivity has resumed, after two years of stagnation. In the second quarter of this year, output per man-hour in the private nonfarm economy rose at a 4 per cent annual rate, and the rate advanced to 5 per cent in the third quarter. These productivity gains have served as a sharp brake on the rise in unit labor costs, despite rapid increases in wage rates. [New York Times, Dec. 8, 1970]

Although it has escaped this expert that real wages already ceased to rise since 1967, it cannot be doubted that unemployment, which according to official data affected 6% of all wage workers at the end of 1970, made possible greater exploitation and lowered production costs. But this cost-cutting has had little effect on the continuing rise in prices.

Nixon’s policy was thus a “disappointment” while it indeed slowed the pace of the economy, it did not end inflation. Inflation without unemployment, it is now said, has only given way to inflation with unemployment. But capital must make profits in all situations, and that of inflation with unemployment suits it well. Solomon Fabricant, another expert, drew these conclusions:

In fact, to have maintained an inflationary policy in 1969 would, I believe, have postponed the recession only at the cost of a far worse recession later, when the rate of inflation had accelerated to an altogether intolerable level. [New York Times, Nov. 8, 1970]

The interruption of the inflationary trend appears to be not only a national; but also an international necessity, since the American situation is closely bound to that of the world economy. The dollar is a reserve currency. On its stability hangs that of the international currency system, and so that of the world market. International agreements set the relations of other currencies to the dollar, which itself is – at least theoretically – based on a fixed gold price. During the last ten years, the buying power of the dollar has fallen by more than one fourth. With this the dollar reserves of other countries have also depreciated, and the preference for exchanging dollars for gold has risen. The constantly increasing loss of its gold backing makes the dollar continually more problematic as world money and reserve currency, and with it the world’s money system. Thus, while the depreciation of the dollar makes

for higher profitability in so far as prices rise faster than wages, it tends to undermine the existing international money system, which rests on the parity of the dollar with other currencies. A greater efficiency in international competition has up to now granted American capital a positive balance of trade, which however has been accompanied by a negative balance of payments because of great capital exports and the war in Indochina. The dollars spent by the government found their way abroad, since profits promised to be greater there than in America, and an increasing part of the world economy was brought under the control of American exploitation. The acceleration of international economic activity was thus in part tied to America’s inflationary policy and for a long time met with no serious opposition. But with the increasing competitive capability of European and Japanese capital, these countries turned against the American capital export advanced by inflationary means. It is not to be expected that these countries will forever submit their own capitalist interests to the inflationary necessities of America, just in order to preserve the dollar standard.

At all events, the accelerating inflation, national and international, appears to slip from the control of the American regime and to harm capital more than profit it. In addition to de- and re-evaluations of other currencies, it has forced an international inflation. This has undermined the international agreements reached anyway only with difficulty, and points to a general financial crises.[2] In addition the rapidly climbing dollar prices decrease the international competitive ability of American capital and its commodity exports have fallen in relationship to imports. Between 1962 and 1968 American exports grew from $21.4 billion to $34.2 billion. In the same period however, imports climbed from 16.4 to 32.4 billion dollars, so that the positive balance of trade was rapidly disappearing. That it still exists to a small degree is due not to the commodity exchange between Europe and America but to that between America and the underdeveloped countries. With the disappearance of the trade surplus, the pressure is on the payments balance through greater capital exports and the costs of imperialism continued to grow, and thus contributed to the decision to halt the inflationary trend.

This decision came the more easily as the war situations in Indochina and in the Middle East had seemingly lost much of their menace, allowing America to stabilize the costs involved. The temporary limitation of capital exports poses no great problems for the capital already invested, since the latter can now make use of a newly developed European capital market to find funds for further growth. An artificial reserve forced on the International Monetary Fund, the so-called Paper Gold, serves as backup to the American gold reserves, and resumed European capital exports to America aid the payments balance. In the breathing space produced by this conjunction of factors it appeared quite possible to brake the inflation. The social consequences – such as unemployment – will be put up with as a necessary price to pay in order to push forward from the inflationary to a more stable form of capital production.


This appears to be an illusion. Indeed, total production fell in 1970 for the first time since 1958 – but without change in the price level. By the end of the year there were 5 million unemployed and nearly 15 million on welfare. Every week around 300 firms and more than 3,000 independent businessmen declare bankruptcy. The increasing productivity of labor has certainly improved profitability, but not by enough to make new investments attractive. Orders in the machine tool industry are lower today than they have been for twelve years. The “calculated” reduction of economic activity has turned into a general decline, the social consequences of which cannot be foreseen. The Nixon administration’s first response was an attempt to push the economy up again by means of a greater reduction of taxes on capital, and a lowering of the interest rate; but it was quickly compelled to return to the inflationary tactics of the past. For 1971 a deficit of between 15 and 20 billion dollars and a corresponding expansion of the money supply is foreseen in order to return to full employment.

To be sure, “full employment” is defined as allowing up to 4% unemployment. But in order to do justice even to this definition, according to economic experts, yearly production must climb by 6% in real values. But in view of the decline in production at the year’s end, even this 6% growth rate – itself unrealistic – would not suffice to produce full employment, and this the less so as, in so far as planned new investments are known, all industries are striving to lower their investments for 1971 by between 5% and 9%. The unemployed will not find jobs in the private sector of the economy, so that the full employment program can be realized only through a new wave of inflation (i.e., government-induced production).

Inflation, war, and unemployment lead to a general dissatisfaction which makes itself felt not only politically but also in the demoralization of the army. The return of part of the troops from Indochina is traceable not only to the desire to stabilize military expenditures but also to the growing unreliability of the soldiers stationed in Vietnam. Of course it is made possible only by the apparent inability of North Vietnam and the NLF to carry on the war on an expanding scale.’ The return of the troops, and the implied promise of a full withdrawal from Vietnam, awakened new illusions and brought the American antiwar movement, at the end of 1970, to a nearly full halt. In addition, the student movement, which focused its opposition nearly exclusively on American imperialism, without much concern with the capitalist system itself, became a victim of its own programmatic limitations and its present inability to have any real influence over the pace of events. Through the interventions into Cambodia and Laos it received a new impetus, which however lagged behind the activity developed earlier.

The economic and political difficulties of American capital should not be overestimated. In general, the discontented are opposed not to the capitalist system but only to the policy of the present administration. Likewise, the Nixon administration is concerned not so much about

the breakdown of capitalism as about its own continued existence, and constructs its policy, insofar as this is objectively possible, with an eye to the coming election. To be sure, this viewpoint is possible only with respect to domestic issues, but here it is quite feasible to increase total production and lower unemployment, if at the cost of greater governmental indebtedness. The resulting impairment of capitalist accumulation can not yet upset the system itself, since the sphere of state-induced waste production in the totality of production is still relatively small.

Control over foreign policy does not, however, rest in America’s hands alone. Without doubt the Nixon regime would welcome an end to the war on America’s terms, particularly as a situation critical for American capital is beginning to develop in South America, and as the situation in the Middle East has not lost its explosiveness. The invasions into Cambodia and Laos show that for America the war in Indochina can end only with the defeat of the NLF and North Vietnam, i.e., with the end of the attempt to unite South and North Vietnam. It depends on the behavior of Russia and China, whether US military dominance of S.E. Asia will be followed by the consolidation of American power in that area. As things stand, the renewed inflationary trend coincides with sharpened imperialist aggressiveness. Both phenomena can only drive the internal social contradictions to extremes, so that American capitalism is bound to continue in its long standing condition of social crisis.


1. This is obviously the briefest form possible of a fairly controversial argument. For a detailed exposition of the latter, see Paul Mattick’s Marx and Keynes, Boston (Porter Sargent): 1969. – The Editors

2. This was written before the dollar crisis of May, 1971. – The Editors