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John G. Wright

“Welfare State” and Depression

(June 1949)

From Fourth International, Vol.10 No.6, June 1949, pp.167-172.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Growing economic difficulties of American capitalism are focusing attention upon that school of liberal economists who claim to have diagnosed the causes and discovered a painless cure for the ailments of capitalism. Prominent public figures head this influential trend of economic thought which draws its principal ideas and inspiration from the work of the late Sir John Maynard Keynes, English economist and former director of the Bank of England. Three Keynesian convert’s, Edwin G. Nourse, Leon H. Keyserling and John D. Clark, comprise the President’s Economic Council. In his major pronouncements and actions on economic matters, Truman has largely relied upon the analysis and advice of these men.

Along with a lengthy list of professors and a few liberal Democratic politicians like Chester Bowles, governor of Connecticut, top union officials like Walter Reuther, Dubinsky and others draft upon the Keynesians for arguments and rationalization for their policies in the labor movement. From Truman to the union bureaucracy, this grouping has been noisily promoting a newfangled, depression-proof capitalism under such labels as “welfare state,” “regulated economy” or “mixed economy.”

Saving American Capitalism, a compendium of articles by 25 different writers, ranging over a wide variety of topics, is a representative product of this school. (Saving American Capitalism, edited by Prof. Seymour E. Harris, Knopf, New York, 1948. All quotations not otherwise indicated are from this book.) The authors are primarily moved, not by any alleged discoveries in economic theory, but by fear of another major collapse of American economy and by concern over the people s reaction, to such a depression. This is frankly admitted by Chester. Bowles:

The conviction that we cannot again accept a major depression -is not a mere, theory. It is a fact which will have a profound effect on our economic future. I have ,been face to face with it in every section of America. Today, our people -are determined that we must not and cannot accept the economic waste and heartbreak that go hand in hand with depression; and with this, new conviction, for better or for worse, goes the knowledge that, if our private-enterprise, system fails, other alternatives are possible.” (p.17)

This expresses a changed attitude on the part of self-avowed champions of. capitalism. Not long ago, no defender of “free enterprise” would admit that crises were anything more than growing pains, annoying but quite in the nature, of things, and even beneficial. Crises used to be discounted as incidental “overhead expenditures.” With time, they explained, crises would tend to grow milder and eventually disappear as capitalism approached perfection.

The Specter of Depression

The mass revulsion against economic catastrophes of capitalism has compelled these American followers of Keynes to discard the old doctrine of predestined harmony” and automatic progress. The advocates of a “welfare state” recognize the profound and lasting impact of the crisis “of the Thirties on the American people who will not passively await and accept the disastrous consequences of a new depression. They are no less troubled by the damage a new collapse would inflict upon the entire structure of world capitalism.

Unless we perform surgery on our economic system, it will not survive,” says Prof. Seymour E. Harris of Harvard. (p.4). All of the 25 authors are of course opposed to “surgery” that would remove capitalism itself, the central source of disease. What they want are safe-and-sane operations which will eliminate crises. That’s the point of all their talk of “regulating the economy,” “stabilizing demand,” “adjusting monetary policy,” etc.

We do not intend to follow these “unorthodox” saviors of capitalism through their many variations and disagreements. We propose to examine the more important basic tenets on which they by and large agree. They agree that crises can be abolished or at least, by counteracting their worst effects, “leveled off.” They agree that economic life can be so regulated by government intervention and controls that, by manipulating “spending,” demand can be adjusted to levels adequate for keeping the economy on an even keel. Flexible policies governing taxation, credit and the monetary system generally would play a central role in such government intervention. In this article we shall deal only with their doctrine of crises, reserving for later treatment other aspects of their rather elaborate system.

The Doctors Disagree

Wendell Berge, who had charge of fruitless anti-trust prosecutions for the Department of justice, believes that monopolies create crises because they destroy free competition.

“When competition is eliminated from a capitalist society, the system is in danger of breaking down. With competition, prices tend to find their fair level, and maximum production and employment result.” (p.203)

If this is so, why did crises erupt long before monopolies appeared on the capitalist scene? Ironically enough, other saviors of capitalism once acclaimed the advent of monopolies as the antidote to the anarchy of free competition in which they saw the main cause of crises.

His colleagues disagree with Berge. Although they are hot for competition, they see nothing wrong in “bigness” as such, provided it is properly “regulated.” But neither Berge nor his dissenters bother to explain just how monopolies can either be removed or effectively regulated under capitalism.

Chester Bowles pegs the whole matter on “the problem of spending and demand.” He restates this basic Keynesian proposition as follows:

“For every dollar’s worth of goods or services, there is created one dollar of potential purchasing power. ... If the level of production is to be maintained and increased all of money must be spent currently by individuals, groups and institutions. Otherwise, our economy will slip into a depression.” (p.20)

Associate Professor Lorie Tarshis of Stanford University uses the very same formula of total spending as a sure-fire cure for depression: He admits, however, that “we cannot expect consumers alone to create the whole of the demand.” The way to get around this obstacle is by increasing “non-consumer spending.”

“In short,” he concludes, “in order to turn depression into prosperity, we must somehow get an increase in total spending or total demand. Perhaps we can operate directly on consumers’ spending; if so, well and good. But if not, we must contrive to increase non-consumer demand – the total spending of firms, governments and foreigners. Failing in that effort, depression continues.” (pp.232-3)

In this entire volume of 367 pages, Prof. Alvin H. Hansen of Harvard is the only other writer who touches directly upon the problem of crises. But he denies what the others affirm. He refuses to be “complacent about the prospect of eliminating the boom-bust cycle by making desirable corrections in the structure of our economy; and it is not true that the correction of structural imbalances will prevent the onward march of the business cycle” (p.221). In Prof. Hansen’s opinion, technological advances by themselves give rise to the biggest disproportions, laying the basis for bigger and better busts. He is frankly pessimistic and appeals for a long-range “cycle policy.” He does not say what this program should be but merely pleads:

“This means a program which can quickly be put into motion, highly flexible and subject to quick adjustment and change. It is this area that we are in danger currently of neglecting.”

It is instructive to note that these healers of capitalism and builders of a “welfare state” begin by sharply differing on what it is they must cure. One says, get rid of the monopolies; others say, keep the monopolies but make sure they are “regulated” and that spending and demand are correctly adjusted; a third wants to achieve this by increasing non-consumer demand; and a fourth fears the effects of technological advances. In their thinking about crises, each singles out some isolated disproportion or set of disproportions generated by capitalism for which each offers one or another nostrum. But none goes to the heart of the problem, i.e., that crises arise from the contradictions of capitalism and the operation of its laws. This fumbling around is in the tradition of the bourgeois economists and politicians who have grappled with the problem of crises in the past – and with no more successful theoretical or practical results.

Manipulating the Credit System

For a long time it was believed that dislocations of monetary and credit systems, commonly observed during depressions, were at the bottom of the whole trouble. There followed all sorts of theories on and manipulations with currency emission, bank and credit regulations, etc., including the setting up of government controls, such as the Federal Reserve System.

AH the while, it was overlooked that disturbances of the fiscal structure, stringency of money and credit and panics were primarily the effect and not the cause of convulsions. It was also ignored that crises erupted in times when credit was easy as well as when it was tight.

The organizers of our Federal Reserve System drew heavily on the methods and experience of European countries where similar government fiscal regulations had been applied; but they dismissed off-hand the fact that crises had already engulfed the best as well as the worst tun banking systems. The Federal Reserve System showed .its incapacity to prevent crises in 1921 and again in 1929 although it had been confidently proclaimed in 1914 that the boom and bust cycle had been forever abolished by this fiscal reorganization.

Naturally disproportions in economy are dangerous. But crises cannot be understood exclusively in terms of disproportions as is believed by all capitalist economists, including the Keynesians. They ignore the fact that economic life may be subjected to grave dislocations not only during depressions but also in times of prosperity. Such a threat to US economy today is an imminent collapse of agriculture. The most sanguine believer in a “regulated economy” would concede that another agricultural collapse virtually assures a major depression. Yet the greatest period of peacetime prosperity previously enjoyed in this country unfolded amid the chronic crisis of agriculture in the Twenties. Far from endangering that boom, this grave dislocation actually supplied the basis for eight years of prosperity after 1921, although this chronic farm crisis helped, at a later stage, to undermine the economy.

Or take another set of “maladjustments.” The fast-fading postwar boom evinced throughout highly inflationary tendencies, expressed sharply in the gap between wages and prices. Wages and profits showed an even bigger gap, which has unquestionably served to feed the speculative boom. Yet during the prosperity of the Twenties neither of these two disproportions appeared so pronounced, although profits soared just the same.

The one and the same disparity between wages and prices assumed in the Forties markedly different aspects than it did in the Twenties. So did the second disparity between wages and profits. The main reasons for both disparities in the Twenties came from the great increase in productivity by almost 40%, while wages and prices remained relatively stationary. Prof. Harris evidently ascribes this disproportion to a lapse of memory by the capitalists, for he writes:

“Failing to adhere to competitive principles, business absorbed a large part of the gains of technological progress ... This disproportion between falling costs, on the one hand, and relatively stable wages and prices on the other, was bound to lead to collapse.”

Let us add that the price-wage disparities, which Harris and his friends single out as the prime causes of crises, manifest themselves is chronically in depressions as in periods of upswing.

Let us now return to Mr. Bowles who offers the magic key to crises which reads: “For every dollar’s worth of goods or services there is created one dollar of potential purchasing power,” etc.

If this means anything at all it means that there is some direct connection between expanding production and the expansion of purchasing power. Expand production and you automatically get a more or less harmonious expansion of purchasing power, believes Mr. Bowles. This is a rather pat conclusion, but what resemblance does it bear to the realities of capitalist enterprise?

“Every dollar’s worth of goods or services” is not something mysterious. It is technically known as the gross national product, and the Federal Reserve Board has for years issued quarterly figures on it. Purchasing power, potential or otherwise, is fixed by national income over any given period.

On the other hand the overwhelming majority of purchasers – in the Keynesian lingo, “spenders” – consists of workers and farmers. Every child knows there is more money floating around in prosperity than during depressions. Perhaps it was on the basis of this kindergarten wisdom that Keynes, Bowles, Tarshis and the rest draw the conclusion that there is some direct and even harmonious relation between production and the purchasing power of the masses. Is it really so?

The Keynesians love to cite all sorts of figures relating to production and national income, but they sedulously refrain from comparing and analyzing them in the light of their own contentions. We shall have to take the trouble of doing it for them, much as we dislike to burden our readers with dry statistics.

In the first table are listed the latest available figures for the last three years (1946-48) and for purposes of comparison a typical war year (1944) and a typical depression year (1933).

(in billions)
(Source: Federal Reserve Bulletin, Nov. 1948-Apr. 1949)





Total for
Farmers &


























* Excludes employee payments to social insurance funds.

The income figures listed above are grossly overstated. No deductions are made for taxes. Included under the heading of wages and salaries are payments to military and “government civilian” employees as well as high salaried corporation executives and managerial personnel. On the other hand, giant farm enterprises are lumped together with the farmers. But even these doctored figures cannot hide the real state of affairs.

These columns of billions do show that mass incomes rise and fall quantitatively and absolutely with the expansion and contraction of available “goods and services.” But what is decisive here is how much, of the gross annual output are the workers and farmers able to buy with whatever money they may have in their hands. Are they able to buy more of the increased production as their own funds increase? Are they able to buy as much as they did before? Or less? Let us refer to this second table for the answer.


(Based on Table I)


Gross National

(in billions)


Wages and

(in percent
of output)



























Purchasing Power Stationary

It can be seen that farmers in the present postwar period do not stand in the same relation to expanding production as do the workers. From 1944 to 1948 the farmers recorded a sizable gain in the share of total production they could purchase while the share of the workers remained unchanged or declined in the face of sharply expanding production. Worse yet, in 1948, when the national economy passed the quarter of a trillion dollar mark, the relative share of the workers was 51.9%. This relative share does not differ significantly from their position of 51.6% in 1933 when the country was at the bottom of the depression.

Even more shocking is the table’s disclosure that the undeniable recent gains of the farmers have been canceled out by the sag in workers’ purchasing power since 1944. As a consequence the combined purchasing power of the workers and farmers has been stagnating or declining since 1944, despite the sharply increased volume of production!

These comparative figures show that the direct and even harmonious connection which the Keynesians try. to establish between expanding production and the corresponding growth of mass purchasing power does not prevail in real life. The crux of the matter is that under capitalism, with the expansion of production, mass purchasing power tends to stagnate or contract. Fluctuations may at certain times occur, particularly in agriculture, but these are episodic. Temporary gains, as the most recent experience confirms, are swallowed up in the further process of expansion.

Thus the actual connection between production and mass incomes is not direct and harmonious, as is glibly assumed; it is an indirect and highly contradictory one. More important still, their real relation discloses just the opposite tendency to the one claimed by the theoreticians of the “welfare state.”

The disparity between expanding production on the one hand and the stagnating or shrinking ability of the masses to buy on the other, is just as grave as the wage-price disparity which Prof. Harris and others correctly find so calamitous, Or more accurately, both of these disparities flow from one and the same source. That is the grabbing of wealth and national income by the rich. It is not the masses but a tiny minority which invariably absorbs a large part of all gains – those accruing from technological progress from expanding production, as well as from price-gouging.

Despite this, the main disproportions which led to past crises continue to manifest themselves, such as the lag of wages behind prices, the shrinking of mass “spending power” in the face of amplified production, etc. Underlying all these is the cleavage of capitalism into private owners of the productive facilities on the one hand and the mass of the people on the other. So long as this basic antagonism remains, the boom-bust cycle cannot be averted.

When professors like Tarshis echo Keynes by insisting that “we must somehow get an increase in total spending or total demand,” it apparently never enters their heads that they are not saying anything new but simply restating in their own species of jive-talk another chronic problem under capitalism. It is always “somehow” necessary to bring consumption into harmony with production, otherwise the boom-bust cycle recurs. But they ignore the fact that the groundwork for the bust is prepared during the boom, just as the bust “normally” prepares the soil for the next revival.

It is this boom-bust mechanism – and no other – that provides the “somehow” under capitalism in temporarily reestablishing a precarious balance between consumption and production. But the trouble today is that this mechanism of adjustment itself has broken down. As the experience of the Thirties has demonstrated, capitalist has now no way except through war to instil new vigor into its sclerotic organism. (In an article elsewhere in this issue Louis T. Gordon deals with this particular phase.)

Consumption and Production

The bankruptcy of Keynesian theoreticians becomes most abject when it comes to dealing with problems of consumption and production. They try to solve these problems, too, by “spending.” Bowles, for example, divides the “groups in our economy” into three, to wit: business, government plus everybody else, “the American people themselves.” How each group spends is really unimportant. How much each has to spend is likewise blithely dismissed. What is really important is that everybody must spend everything:

Although each of these three groups will change its patterns of expenditures from year to year, the total spent by all three must add up to the]total income earned by everyone in the production of goods and services.” (p.21. Emphasis in the original.)

In the case of an isolated individual one might look upon production and consumption as different aspects of one and the same act. An individual is relatively free to consume more or less harmoniously as his own production rises and falls. But to view society as if it were a single individual or imaginary groups of individuals (Bowles does both) is to misrepresent economic reality.

To begin with, there is once again the decisive fact that the lion’s share of the national income – and therefore of power to consume – invariably falls not into the hands of “all of us,” as Bowles pretends, but into the hands of less than 5% of the population. Tarshis correctly includes this upper crust among the “non-consumers.” The capitalists and their retainers could not possibly spend their entire Share of the national income on themselves even by indulging in the wildest luxuries.

Not Bowles alone but all the Keynesians discuss national income in terms of “annual spending power,” “flow of spending and its determinants,” or “spending groups.” But they never talk in terms of the real and highly contradictory divisions in our society which actually determine the income, and thereby the consuming power, of the various classes. The following table discloses what has been happening in the division of national income while these theorists discuss spending “all of it” – on paper:


(Same Source)



(in billions)


Wages and

(in percent)



























The above figures show that the division of national income is weighted just as unfavorably against the bulk of population and in favor of the rich as in the previously examined relation between mass incomes and gross production. Although national income expanded from 1944 to 1948 at a somewhat faster rate than the gross national output (see Table II), the relative share going to workers and farmers did hot rise appreciably in the same interval. On the contrary, it declined from 69.4% in 1944. to 67.1% in 1948, even though the farmers recorded substantial gains during this period. Ironically enough, the table also shows that the masses obtained by far their largest proportional share of the national income – 78.5% – in the depression year 1933! This does not mean that they were better off then than now; it simply serves to underscore the tendency inherent in capitalism for the people’s share of the national income to contract.

The panacea of “total spending” as a means of averting crises not only runs up against the fact that the mass of consumers are rigidly limited in their capacity to spend. It also flies in the face of the fact that, under the most favorable circumstances, consumption must of necessity lag behind production. Reserves are needed for the means of production, for fixed capita], etc. Replacements are required to resume production on a previous scale, let alone expand it. These reserves can, in the last analysis, come only from national income. This unavoidable lag between consumption and production has been understood by many conservative capitalist economists. But not by the “unorthodox” Keynesians.

Far from surpassing, as they believe, the older schools of capitalist economics, these followers of Keynes, the sage of Blobmsbury, relapse into errors long ago refuted by their predecessors. The German economist H.F. Storch, who criticized the French economist J.B. Say on this very point early in the nineteenth century, knew it was false to maintain that the national income can be or must be expended each time, let alone basing any policy on such a proposition.

Why is it impossible for the capitalist system under a “welfare state” or any other, to solve the complex problem of adjusting consumption harmoniously to production?

It cannot be done, in the first place, because production under capitalism is carried on only through its own specific and unchanging forms of distribution. As for consumption, it is determined by production and its dependent distribution.

Distribution is not so simple a matter as the Keynesians picture it. Far more is embraced by distribution than the allotment of goods to customers. Before there is any distribution of goods produced, there in a specific distribution of the means of production. Today the all-important fact is that these means of production are distributed exclusively among private owners and concentrated in monopolist hands. This capitalist type of distribution constitutes one of the internal and insurmountable barriers to achieving any lasting equilibrium between production and consumption. The disciples of Keynes disregard all this. [1]

As for consumption, capitalism here, too, injects its own forms of distribution (interest, profit, etc.) just as pre-capitalist economies, say feudalism, injected into consumption their peculiar distributive forms, (e.g., tithes, rent in kind; etc.). As a consequence, in our society where the means of production are distributed among private owners and where the goods produced are allocated and consumed not in response to social needs but according to the size of pocketbooks, both production and consumption are periodically brought to a standstill whenever “fair” profits are not forthcoming and whenever it becomes difficult to realize these profits in the shape of money-capital. Millions of jobless and hungry – basic producers and consumers – are living evidence of how self-destructive are these capitalist forms of distribution.

As the biggest obstacle of all to a harmonious relationship between production and consumption there is exchange, which, stands, under capitalism, as the intermediary between production arid its dependent distribution on the one hand, and consumption on the other. The planlessness of production finds its crassest expression in the anarchy of the market. Each individual capitalist as well as each giant corporation produces independently of the others for an unknown number of buyers, never knowing whether his products will be found socially useful. Not until his products enter the market can he tell whether his capital will be realized or expanded. The highly complex transactions bound up with this form of exchange are governed by a set of laws which the capitalists themselves must submit to. These laws cannot be changed or controlled by any amount of tinkering

To sum up. Much the same situation prevails in production and consumption as we previously noted in the relation between mass incomes and expanding gross output and in the relative share of the mass of the people in national income. In each instance the needs of the people are subordinated to the narrow interests of a plutocratic minority. Such a setup, as Marx and Engels long ago explained, cannot help but produce disparities, maladjustments and disproportions which culminate in periodic explosions or crises.

The founders of Marxism pointed out that in the sphere of production the tendency of capitalism is toward an absolute expansion of the productive forces without regard for the needs of consumption. At the same time, this absolute tendency to expand collides head on with barriers raised by capitalism itself.

Outcome of Blind Development

What the Keynesians are least able to grasp is this self-contradictory and self-destroying nature of capitalism. They try to reason as though “free enterprise” is a rationally conceived and consciously administered mode of economy. They further believe that any of its parts can be repaired and its functions regulated whenever something goes wrong. Capitalism, however, is not like a piece of machinery deliberately designed to meet the needs of society. On the contrary, from its elementary cell-form – the commodity – to its most highly developed form – finance capital – capitalism is the product of blind, instinctive activity carried on for many centuries by human beings. Like Topsy, capitalism “just grew.”

No one thought up the commodity; it came into existence as an extension of direct barter which was itself destroyed by the growth of exchange.

Money was not devised by some ingenious contriver but was likewise produced instinctively, as the sphere of exchange in pre-capitalist societies broadened and deepened and commodities multiplied.

Capital itself grew out of the extension of commerce, first appearing historically in the form of merchants’ capital.

As for the monopolies, no one set out to invent them either; they arose as an unavoidable outgrowth of free competition, completely dominating the latter. But monopolies are powerless to eliminate competition completely, just as competition itself is unable to abolish monopolies.

The outcome of this long historical process is the existing capitalist order with its accumulation of one set of contradictions upon another, one irrationality generating the next. Among the extreme expressions of this irrational state of affairs are – crises.

Irrationality of Capitalism

Everyone nowadays senses how paradoxical crises are, even those who are able neither to understand nor to explain them. How staggering indeed is the contrast between our progress in conquering the forces of nature and our seeming impotence ,to avert man-made economic catastrophes!

The Keynesians, taking cognizance of the irrationality of crises, try to “cure” them while leaving all the other irrationalities of capitalism untouched. They seek to straighten out one or another contradiction while preserving the biggest of all contradictions – the capitalist structure.

This enterprise is as absurd in theory as it is hopeless in practice.

The Keynesians find themselves unable to move a step beyond their predecessors in the field of economic theory. Essentially they do no more than paint up the “common-sense” notions of corporation lawyers and capitalist statesmen regarding the existing economic system. Karl Marx long ago solved the secret of how these “common sense notions” were arrived at.

He wrote that

“... the reconciliation of the irrational forms, in which certain economic conditions appear and assert themselves in practice, does not concern the active agents of these [economic] relations in their everyday life. And as they are accustomed to moving about in them, they do not find anything strange about them. A complete contradiction has not the least mystery for them. They are as much at home among the manifestations, which separated from their internal connections and isolated by themselves, seem absurd as a fish in the water.” (Capital, Vol.III, p.905)

Our 25 authors remain so blind not out of stupidity or malice. It is the end-result of their expressed starting point – their “common disposition to save capitalism” – and their complete immersion in the capitalist world around them. This world is made up of contradictory relations and those who accept it are forced to interpret the abysmally irrational as the height of human reason.


1. What about government control? Can’t this alter the nature and consequences of such a form of distribution of the means of production? Even government-owned industry, as in England, does not basically change such a distribution because the stateized sectors continue to operate for the benefit of private owners. As in privately owned industry, the capitalist claims for compensation, interest payments and the like continue to be the first charge on government-owned industry. It may make considerable difference to an individual capitalist whether he or the government runs a given enterprise, but it makes no significant difference to the capitalist class arid the operation of its economy. Besides, the 25 writers in this book all agree that government intervention must be limited to the minimum. (We leave aside for treatment in another article a detailed discussion of the role and limits of government intervention in economic life.)

Last updated: 29.12.2005