Economics, Politics and The Age of Inflation. Paul Mattick 1977

Chapter 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 hut 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 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 he 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[1] 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 traffic 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 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 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 flagging economy into its opposite and to maintain employment at any desired level. Two ways were presumably available to do this; indirect, through easing credit terms to the private sector, and direct, through public spending made possible by deficit financing. And since the new upswing had been marred by periods of recession that were overcome by stepping up state spending, the view that a market economy could be steered by the state and that capitalist crises were things of the past set in more firmly.

If the cause of crises lies in an arrest of the accumulation process, which occurs when the portion of surplus value not earmarked for consumption is not invested in more means of production and labor power, production and employment must necessarily decrease. The repercussions on the overall workings of capital, however, go far beyond the actual cutback effected in production. The extremely intricate market relations cause the cut-backs in production to widen into a general crisis. State-induced augmentation of production and its effect on market relations can doubtless check an ensuing economic recession, provided it is a limited one easily dealt with by limited means. And indeed, the snags that have arisen periodically in the economy during the post-war period have been overcome by countervailing measures from the state. It does not follow, however, that this will continue to be the case for all time to come. It tells us only that the beginning signs of crisis have appeared in a situation in which a fall-off in private production could still be offset by compensatory expansion of public expenditures. Actually, the extremely long period of depression before World War II was followed by an extremely long period of boom whose internal fluctuations the state had been able to control in a positive fashion. These were fluctuations occurring in a general upswing and not in a general crisis resulting from overaccumulation. We have not yet had enough experience to enable us to determine whether it is within the means of the state under capitalism to cope with such a crisis, although the limits to state intervention are clearly discernible.

The surplus value from past production periods, which either remains in money form or is embodied in idle means of production because of the crisis, has lost its capital function. It can regain this function only via the production of profit. When this possibility is closed, the state is able to appropriate uninvested money and thus employ unused means of production. But this does not restore their capital function. The money and means of production thereby mobilized are transformed into products that are used up in public consumption and hence drop out of the reproduction process of total capital.

Whatever else may arise from this process, production geared to public consumption ceases being surplus-value production in the form of additional money and means of production. The surplus value of the larger capital employed is now smaller relative to the total capital. A portion of the already accumulated capital has thereby not only lost its capital function, it also ceases being unused capital. Whereas, however, the destruction of capital during a crisis alters the relationship between total profits and total capital in such a way that the reduced value of capital raises the rate of profit at the expense of the destroyed capital, in the case of state-induced production for public consumption, the profit and interest claims of the money and means of production therein employed remain unchanged – as if this kind of production was actually production for profit and as if the destruction of capital in public consumption had not occurred. Thus in the end this kind of production does not result in the improvement in the rate of profit that ensues during a crisis as a result of the destruction of capital values and the claims on the social profit attached to them; rather capital is destroyed while its profit claims, which can only be met out of the total social surplus value are maintained.

That portion of the total profits of the private sector which accrues to capital entities participating in state-induced production must be subtracted from total profits as it derives from tax revenues; this entails a decrease in the profit rate of productive, i.e., profitable, capital and hence a setback for accumulation. However, these capital entities can compensate for their diminished profits by raising prices, thereby shifting the burden of the costs of state-induced production to society.

Thus this stepped-up public spending takes on the form of price inflation resulting from the attempt to dump the costs of combating the crisis on the population at large, i.e., the working population.

The profitability of private capital is thereby maintained without assuming a further accumulation of capital. All that is accomplished by this route is that more workers are put to work at the expense of the total income of the working population. This is achieved by inflationary means rather than by the deflationary path chosen in the past, which progressively increased unemployment. But since there are definite limits to the burdens the workers can bear, and the drop in real wages due to price inflation meets with their resistance, the financing of public spending at the expense of the working class sooner or later reaches a limit it cannot exceed. From this point onward public consumption can only continue to grow at the expense of capital.

If capital accumulation is not resumed, the crisis deepens and unemployment grows. State-induced production must then expand if it is to continue in its compensatory cycle. The effect is growing pressure on the profit rate of productive capital, which makes the resumption of accumulation ever more difficult, thereby prolonging the depression. If the expansion of state-induced production does not stop, it too becomes a factor aggravating the crisis, although it had originally been intended as a means to beat it, and indeed for a time actually did function as such. But it had this effect only with regard to total material production, without enhancing capital accumulation. It did not yield enough profits to accomplish more than an increase of production through decreasing profitability of capital. As depression continues, even this ability will be lost; as state-induced production expands, private production must decrease and, as a consequence, will lose the ability to cover increased public spending.

The cyclical movement of capital has so far prevented a crisis from setting in permanently, and there is no empirical evidence that profitless production is possible only at the expense of profitable production and is therefore limited by the latter. The point to be gained here, however, is the insight that capital cannot accumulate without sufficient profit. An increase in production without a corresponding increase in profit is of no use to capital as capital, even though for political reasons it may be of use to capitalist society. Even the immediate positive effect state-induced production has on the private sector may be cancelled by the enlarged continuation of compensatory state production. If capital does not autonomously move on to resume accumulation on its own terms, the impetus given to it by state-induced production will gradually lose its driving force, until it finally becomes an obstacle to accumulation.

Production in the state sector is tied to the profits of the private sector, and its expansion is contingent on the latter’s increase. If this does not occur, the situation of the private sector can only continue to grow worse, until it makes further expansion of the state sector objectively impossible. But private capital, which still controls society even in a “mixed economy,” would stop expansion in the public sector long before it reached its objective limits. State-induced production is allowed to expand only to the extent this can be borne by capital, i.e., so long as it does not call into question the continued existence and growth of capital. It may therefore only be regarded as a temporary measure that at a specific point in capitalist decline must be stopped, thereby ceasing to be a factor working against this decline.

Actually, and apart from war production, the expansion of state-induced production has taken place not while capitalism was standing relatively still but during an upswing, which was viewed as the fruit of a mixed economy. But the reality of the situation was just the opposite. The upswing resulting from the restoration of profitability was large enough so that even though public consumption continued to grow steadily, a state of relative prosperity, seen in capitalist terms, was achieved. Since the task of state economic policy was to expand lagging production, the economic upswing should have resulted in a contraction of stated-induced production; this, however, was not the case. To be sure, relative to the overall growth in production, the expansion of the state sector proceeded at a slower pace, the practice of budgetary deficits was curtailed, and the size of these deficits was reduced; the state deficit, however, continued to rise, although more slowly than before. As far as expansion of the private sector was concerned, this situation seemed to be ideal not only from the standpoint of current economic theory but also for capital itself, as well as for those with vested interests in public spending.

But the capital growth that went on independently despite relatively high public consumption remained in large measure under the influence of state economic policy i.e., its monetary and credit, if not so much its fiscal, aspects. The whole of capitalist production had long been based on the credit mechanism. But credit not only remained dependent on the maintenance of a given level of profitability, it was also limited in its expansion by state controls over money and credit, although these limits were flexible. Through credit production can be expanded beyond the limits to which it is subject if there is no credit. Thus additional state-induced production is made possible by credit. i.e., by state debt and similarly production in the private sector can be expanded by widening the credit mechanism. Through its power to create money and extend credit, the state is able to expand or contract the basis of credit in various ways. The credit volume and interest rates can in large measure be controlled, bank lending stimulated, and production accordingly expanded by a cheap money policy, by increasing the money supply, by the discount policy of the central bank, and by the “open market policy,” as it is called.

The boom was accompanied by rapid growth in the money supply and in credit, which sewed in two respects. First, it helped to expand production, and second, it effected a reapportionment of social income in favor of capital. Every expansion of credit tends toward inflation, and a systematic, state-encouraged money and credit expansion is particularly inflationary. To top all this off there is also the inflationary influence of profitless state-induced production. But inflation, which at first only crept along as the boom proceeded apace, was accepted as the price that had to be j paid for economic growth and was thought to be manageable. In any case growth with inflation was to be preferred to a stagnant, deflationary economy; indeed, it was argued, the inflation that went along with growth was only the expression of the secret, discovered by the “new economics,” of permanent full employment and economic stability.

Actually, the increasing rate of inflation pointed to an internal weakness of the boom; namely, it allowed the state neither to cut off its expansive money and credit policy nor to cut back on public spending to any significant extent. Every contraction of credit and every reduction in the money supply, and indeed every decrease in public consumption, had an immediate negative effect on the course of the economy and were discarded in favor of a resumption of an inflationary policy. Thus the waves of prosperity that followed World War II turned out to be movements that depended to some extent on state monetary and fiscal policies, although in a few countries they had been able to raise general demand to the level of full employment.

Obviously money and credit policies can themselves change nothing with regard to profitability or insufficient profits. Profits come only from production, from the surplus value produced by workers. If the surplus value is sufficient for expanded reproduction of capital, a period of capitalist prosperity sets in. But if capitalist expansion must be primed by money and credit policies to stimulate demand, it is not long before it becomes clear that something is wrong with production for profit. The expansion of credit has always been taken as a sign of a coming crisis, in the sense that it reflected the attempt of individual capital entities to expand despite sharpening competition, and hence to survive the crisis. Credit has always been a means of capital concentration whenever profitability falls. Although the expansion of credit has staved off crisis for a short time, it has never prevented it, since ultimately it is the real relationship between total profits and the needs of social capital to expand in value which is the decisive factor, and that cannot be altered by credit.

It is not credit but only the increase in production made possible by it that increases surplus value. It is then the rate of exploitation which determines credit expansion. To stimulate the general demand, the expansive state-imposed money and credit policies must increase profit. If profit does not increase relative to the invested capital and increased production, yet the level of production made possible by credit is to be sustained, the distribution of the social product between capital and labor must be altered to ensure the profitability of capital. If prices rise faster than wages, then could not be extracted from the workers in production is taken from them in the circulation process. This is at once the cause and the consequence of the expansion of money and credit, so that an inflationary growth in profits appears as accelerating inflation.

To the extent that an expansive monetary and credit policy served to increase profits, it furthered capital production, although it was at the same time a sign of inadequate profitability, albeit concealed, and added to the state debt a private debt that was many times greater. The steady growth of debt could be sustained only if capital accumulation could progress uninterrupted by way of credit expansion. Once accumulation stops, the expansion of production through monetary and credit policies stops as well, and their progressive effect is transformed into its opposite. But since accumulation entails a falling rate of profit, management of the economy by way of monetary and credit policies and by means of state-induced production must eventually find its end in the contradictions of the accumulation process.

Another weakness inherent in the postwar boom was the fact that it was unevenly distributed among the various capitalist countries, to say nothing of the negative effects it had on the underdeveloped nations. Although the latter consequence was favorable to growth in the capitalist countries, in that it guaranteed a cheap source of raw materials to the developed countries, it was also a sign that the boom was not strong enough to envelop the entire world economy and thereby become general. The accumulation rate was high only in the Western European countries and Japan; in the United States it remained below its historical average, while the rest of the world for the most part stagnated. But the pace of investments promoted by government policies in Western Europe and Japan did bring about an exceptional and long-lasting prosperity. The overall standard of living rose as a consequence of a rapid increase in labor productivity and the particular structure of European and Japanese capital. Although the high growth rates hit snags from time to time, setbacks were quickly overcome. In the United States, however, full employment and full utilization of production capacity were not achieved.

The creeping inflation that accompanied the economic boom also was the vehicle that carried it along but it was also a sign of an immanent contradiction insofar as continuance of the boom was contingent on an accelerating inflation rate. Inflation is an expression of inadequate profits that must be offset by price and money policies. Therefore in the developing capitalist countries, Brazil, for example, inflation is the measure chosen to bring profits into line with the pace of accumulation, i.e., to accelerate expansion at the expense of working-class consumption, to promote exports, or to do both at once. Thus under any circumstances inflation spells the need for higher profits, whether this be the need of a particular capital entity to obtain profits or a general effort to add steam to accumulation.

Capitalist accumulation is a struggle between labor and capital, and within certain definite limits this struggle determines how much surplus value is produced. At the same time however, accumulation is capital’s competitive struggle at the national and international levels to determine how surplus value is to be apportioned. Monetary policy affects both these contests. Inflation makes labor cheaper, which improves the ability of national capital to compete, although only when the inflation rates vary from country to country, which in turn is dependent on the class struggle in the different countries and on the particular economic position of each nation within the world economy as a whole. The international struggle of competition is also waged over monetary policy. At the same time, however, the bourgeoisie is interested in easing competition, so that attempts are made continually to bring some order into monetary and credit relations through international agreements.

The capitalist economy is a world economy whose existence assumes competition. Competition drives capital concentration forward both nationally and internationally. But the progressive elimination of competition at the national level only makes all the contradictions inherent in the system more acute, since accumulation, expressed in concentration, intensifies the pressure on the profit rate and hence harshens all social conflicts; in like manner, rather than being a sign of diminishing capitalist antagonisms, the international concentration of capital merely gives these antagonisms a more overtly imperialist character, as evidenced so far by two world wars and a number of localized wars.

Like the capitalist crisis imperialist rivalry is both the cause and effect of the capitalist economy and cannot be separated from capital’s need to accumulate. Thus the postwar boom must not be seen just abstractly, as a consequence of capital’s cyclic movement, but as the result as well of changes wrought in the political forces by World War II and the effects these changes had on international competition the boom was also in large measure determined by the rivalries emerging among the victorious powers, who were faced with the task of consolidating their conquests and further extending their positions of power.

There can be no question that the relatively rapid reconstruction of the capitalist economies of Western Europe and Japan was primed initially by American aid, offered out of imperialistic considerations; not only were credits granted, but the export potential of these countries received a powerful shot in the arm from the far-ranging imperialist ambitions of the United States. The relatively low rate of accumulation in the United States and the reduced profit rate occasioned by war and armaments production forced American capital to export capital to countries where more abundant profits awaited them, which further augmented their already inflated rates of investment. But this feverish activity, together with the unabating expansion of credit in the United States, caused inflation to spread to one country after another, until it finally became a world phenomenon.

As economic growth in Japan and Western Europe proceeded, the relations of these countries with the world market, and with the United States in particular, changed. The labor productivity gap between the United States and the other capitalist countries, which depended on the volume of capital invested and on the ends to which it was put, grew narrower, and America’s dominant share in world trade shrunk correspondingly, until the United States found itself with a negative balance of trade on its hands. The balance of payments had already been negative for quite some time because of the cost of imperialist politics and the initial one-way flow of capital exports. Thus European expansion was partly made possible by America’s negative balance of payments and attendant inflationary monetary and credit policies. American monetary policy became an instrument of imperialist expansion not only to secure U.S. spheres of influence in world power politics but also to enlarge direct investments in other countries, especially in growing Western Europe.

From the standpoint of the world economy as a whole, it makes no difference in what nation capital is accumulated, even though from a national perspective this same process will look different. As long as capital can move freely, it invests where it expects the highest profits are to be had and accordingly stimulates general economic activity in favor of the invested capital. Since all capitalist countries export and import capital, one can only say apropos of the extraordinarily large volume of American capital ex-port that the United States merely took advantage of the existing opportunity to gain a foothold in other countries, and that this opportunity emerged from the peculiarities of the postwar situation and from state monetary and credit policies. The direct foreign investments and the volume in which they occurred only accelerated the general inflation that was already under way in the United States. Nonetheless these processes, if they did not contain the secret to the boom itself, in any event were the expression of its pronounced inflationary character.

All the ups and downs of the most recent past and present on the market throughout the world economy are traceable to these processes. It is only the market, of course, to which capital can relate and to which it must react in one way or another. It is also only market processes which the state seeks to influence in whatever ways it deems beneficial or necessary.

Yet the underlying state of things in the sphere of profitable production remains closed to scrutiny and practical action, although it is the factor that determines the course of accumulation. By its nature the capitalist mode of production precludes empirical insight into the production relations of the society as a whole, and the market becomes the point of reference for all capitalist decisions, although these decisions are still subject to the influence of processes taking place in the production sphere. They still must be implemented at the level of the market, however, on the terms set by competition, so that one is left with no way of knowing whether such decisions correspond to realities in the production sphere. Whatever the circumstances, all movements of individual capital, and hence of capital as a totality, are aimed at maintaining a state of expanding profits and hence correspond to processes in the production sphere, without this guaranteeing that they will be successful. The quest for profits is not enough to ensure getting them, and only the surplus value currently being produced to meet the expansion needs of already accumulated capital can produce profits; but the magnitude of this surplus value is an unknown quantity and is only indirectly expressed in the ups and downs of the business cycle.

The business cycle in the Western countries was, it is true, marred by inflation, but it also brought about an economic growth that in the public eye meant prosperity and aroused expectations of a continued and perhaps permanent boom. The accelerating inflation rate, however, was an unmistakable sign that to maintain the level of profitability needed to continue economic growth would require increased reliance on government expansion of money and credit, and that without these government measures, growth would slacken. Thus continued economic growth depended on state money and policies, and to clear the way for them, all the encumbrances that had been placed in its way by past developments had to be removed. The first measure to this end, therefore, was the abolition of commodity money at the national level, later to be followed internationally by the abolition of the gold convertibilitv of the international reserve currency.

Production continued to decline and unemployment to increase, while inflation proceeded unabated, until it finally became evident that the crisis-prone nature of capitalist accumulation could not be eliminated by state manipulations of the economy. The growing inflation rate, which was but the outward reflection of a credit expansion based partly on the anticipation of future profits, was also unable to prevent the decline in real profits. Expansive monetary and credit policies only drove prices upward without notably increasing production. With profits falling capitalists were reluctant to invest and resorted to price rises to recoup their losses. The monopolies’ power to fix prices arbitrarily facilitated this process, which was already contained in embryo in money and credit policies. The growing inflation rate threatened to develop into a gallop ultimately as pernicious to a capitalist economy as was a state of crisis made worse by deflation. Inflation can, of course, be abolished by reversing monetary and credit policies not so, however, the shortage of profits, which accelerates price inflation. Any restriction on the expansion of money and credit is reflected in a further decline in economic activity and in rising unemployment. Governments, therefore, are reluctant to effect a radical reversal in their money and credit policies. Since, however, the crisis is now a tangible reality despite the expansive money and credit policies, governments have a choice between two evils and take what appears to them the lesser of the two in the given circumstances. Brakes are applied to inflation by contracting credit and reducing the supply of money or by state price and wage regulations, although at a critical point the government will revert from deflationary measures back to an inflationary policy. Through applying alternative doses of deflation and inflation efforts are made to arrest the inflationary process and at the same time prevent rapid economic disintegration, in the hopes that sooner or later profitability will improve and the economic recession will be brought to a halt.

The level of integration reached in the world economy ensures that the manifestations of crisis and boom take on international dimensions, although they may appear in one particular country first. The positive effect of the European and Japanese upswing on American capital expansion was reflected, for example, in the spread of multinational corporations, with their higher level of profitability. But every downturn also internationalizes, irrespective of its point of origin. In all the capitalist countries (and not only in the United States), profits over the last five years have been lower than at any other time in the postwar period, with systematic price rises being the means resorted to in attempts to prop them up or boost them Once this process has been set in motion and further supported by government money and credit policies, prices soar cumulatively upward, affecting all capital entities alike The result is not only rising prices on finished products but also a continuing revaluation of capital, the covering of higher production costs in advance by means of capital depreciations, the application of different inflation rates in calculations to secure profits, and overpricing to reduce the increased risk to business brought about by inflation.

The cause of accelerating inflation is not a supply that lags behind demand but a shortage of profits that drives prices up quite independently of supply and demand relations. Even where demand actually is lagging, prices do not fall but on the contrary adjust to this reduced demand by rising further. The need for expanding profits is so great that the supply may be reduced by contrived means, as, for example, was recently done by the international oil industry, which was able to boost its falling profits by holding back on production. Just as each individual capital entity within a country seeks ruthlessly to maintain and to enlarge its share in the contracting sum of social surplus value by pricing measures, at the international level this process assumes an even more blatant form, since the instruments of political power can also be used to supplement international competition. Thus among the first signs of a looming crisis is sharpened international competition, in which each country seeks with all the means at its disposal to secure or increase its share in world profits.

The cooling off of the postwar boom and the ineffectiveness, now becoming apparent, of the monetary and credit policies that had borne it along have brought about some extensive political changes within individual capitalist countries and on a world scale. The first measures taken were aimed at toning down competition by allaying imperialist antagonisms. One of the reasons for American opposition to the war in Indochina on the part of capital was undoubtedly the enormous public consumption, to which there seemed to be no limits and, moreover, no prospects of being offset by real profits in the future. To some capitalists, at least, the growing public spending appeared to hamstring economic expansion and reduce their ability to compete internationally. The end of the war required at least a short-term accord with the rival powers in Southeast Asia. The imperialist contradictions between Russia and China, which also bore on Asia, provided the chance for America to withdraw on the basis of the status quo, and the imperialist solution to Asian power politics was put off until some future time. It was hoped that the pacification of the world situation would relieve at least some of the more threatening signs of crisis by enabling economic relations to expand – a view that the former adversaries in the cold war shared, despite their other differences.

In market theory the removal of political restrictions on world trade should bring at least a partial improvement in the economic situation and moreover, avert a catastrophic crash that could easily plunge a politically explosive world into a third world war. But a crisis that has its origins in production cannot be prevented by measures confined to the level of trade and commerce. Indeed, trade itself becomes an aggravating factor in the crisis when each nation is obliged to tend to its own special interests in opposition to those of other countries. So it happens that the removal of trade restrictions of one kind is attended by the creation of restrictions of another kind, e.g., tariff policies, import prohibitions, the breaking of regional and international agreements, and a growing chaos in all economic relations. The internationalization of economics which the boom had promoted is forced to reverse its course, and once again priority is given to national interests, as the world economy sinks into further disarray.

All the signs of a deepening crisis are currently at hand, but how far they will develop cannot be foretold. They could conceivably assume the catastrophic proportions of the last great crisis; but it is more likely that the economy will go into a slow process of decline, since the state has not exhausted all its means of influencing it. If state measures are not sufficient to induce a new upswing, they are at any rate still capable of preventing a period of precipitous decline at the cost of the future of capitalism. There are limits, however, to how far this policy can go, and the scope of the crisis determines where exactly these limits lie.


1. Through the Istituto per la Riconstruzione Industrielle (IRI) the Italian government owns numerous financial and industrial enterprises, including Alfa Romeo, Alitalia, steel works, oil, telephone and telegraph. radio, television, and banks. IRI enterprises do not differ essentially from private enterprises. They partake of the general capital market. Shares can be bought and sold on the stock exchange.

2. The multiplier effect released through public works was mentioned by O. T. Mallery shortly before and after World War I. he pointed out that public works not only increase employment but that this increase, by creating additional buying power, leads to additional employment ("A National Policy; Public Works to Stabilize Employment,” in The Annals of the American Academy of Political and Social Science, January 1919). Likewise David Friday, “Maintaining Productive Output: a Problem of Reconstruction,” in Journal of Political Economy, January 1919.1. M. Clark investigated the role of the multiplier and published his results in Economics of Planning public Works, 1935.