Section C - What are the myths of capitalist economics?

C.1 What is wrong with economics?

   C.1.1 Is economics really value free?
   C.1.2 Is economics a science?
   C.1.3 Can you have an economics based on individualism?
   C.1.4 What is wrong with equilibrium analysis?
   C.1.5 Does economics really reflect the reality of capitalism?
   C.1.6 Is it possible to have non-equilibrium based capitalist 
         economics?

C.2 Why is capitalism exploitative?
   C.2.1 What is "surplus-value"?
   C.2.2 How does exploitation happen?
   C.2.3 Is owning capital sufficient reason to justify profits?
   C.2.4 Do profits represent the productivity of capital?
   C.2.5 Do profits represent the contribution of capital to 
         production?
   C.2.6 Does the "time value" of money justify interest?
   C.2.7 Are interest and profits not the reward for waiting?
   C.2.8 Are profits the result of innovation and entrepreneurial 
         activity?
   C.2.9 Do profits reflect a reward for risk?

C.3 What determines the distribution of income between labour and 
    capital?

C.4 Why does the market become dominated by Big Business? 
    C.4.1 How extensive is Big Business?
    C.4.2 What are the effects of Big Business on society?
    C.4.3 What does the existence of Big Business mean for economic 
          theory and wage labour?

C.5 Why does Big Business get a bigger slice of profits?
    C.5.1 Aren't the super-profits of Big Business due to its higher 
          efficiency?

C.6 Can market dominance by Big Business change? 

C.7 What causes the capitalist business cycle?
    C.7.1 What role does class struggle play in the business cycle? 
    C.7.2 What role does the market play in the business cycle?
    C.7.3 What role does investment play in the business cycle?

C.8 Is state control of money the cause of the business cycle? 
    C.8.1 Does this mean that Keynesianism works?
    C.8.2 What happened to Keynesianism in the 1970s?
    C.8.3 How did capitalism adjust to the crisis in Keynesianism?

C.9 Would laissez-faire policies reduce unemployment, as "free market"
    capitalists claim?
   C.9.1 Would cutting wages reduce unemployment? 
   C.9.2 Is unemployment caused by wages being too high?
   C.9.3 Are "flexible" labour markets the answer to unemployment?
   C.9.4 Is unemployment voluntary?

C.10 Will "free market" capitalism benefit everyone, *especially* the poor? 
   C.10.1 Hasn't globalisation benefited the world's poor?

C.11 Doesn't Chile prove that the free market benefits everyone? 
     C.11.1 But didn't Pinochet's Chile prove that "economic freedom 
            is an indispensable means toward the achievement of 
            political freedom"? 

C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

Section C - What are the myths of capitalist economics?

Within capitalism, economics plays an important ideological role. Economics
has been used to construct a theory from which exploitation and oppression 
are excluded, by definition. We will attempt here to explain why capitalism 
is deeply exploitative. Elsewhere, in section B, we have indicated why 
capitalism is oppressive and will not repeat ourselves here.

In many ways economics plays the role within capitalism that religion 
played in the Middle Ages, namely to provide justification for the dominant
social system and hierarchies. "The priest keeps you docile and subjected,"
argued Malatesta, "telling you everything is God's will; the economist
say it's the law of nature." They "end up saying that no one is responsible
for poverty, so there's no point rebelling against it." [_Fra Contadini_,
p. 21] Even worse, they usually argue that collective action by working
class people is counterproductive and, like the priest, urge us to tolerate 
current oppression and exploitation with promises of a better future (in 
heaven for the priest, for the economist it is an unspecified "long run"). 
It would be no generalisation to state that if you want to find someone 
to rationalise and justify an obvious injustice or form of oppression 
then you should turn to an economist (preferably a "free market" one). 

That is not the only similarity between the "science" of economics 
and religion. Like religion, its basis in science is usually lacking 
and its theories more based upon "leaps of faith" than empirical 
fact. Indeed, it is hard to find a "science" more unconcerned about 
empirical evidence or building realistic models than economics. Just 
looking at the assumptions made in "perfect competition" shows that 
(see section C.1 for details. This means that economics is immune to
such trivialities as evidence and fact, although that does not stop
economics being used to rationalise and justify certain of these 
facts (such as exploitation and inequality). A classic example is 
the various ways economists have sought to explain what anarchists
and other socialists have tended to call "surplus value" (i.e.
profits, interest and rent). Rather than seek to explain its origin
by an empirical study of the society it exists in (capitalism), 
economists have preferred to invent "just-so" stories, little 
a-historic parables about a past which never existed is used to
illustrate (and so defend) a present class system and its inequalities
and injustices. The lessons of a fairy tale about a society that has 
never existed are used as a guide for one which does and, by some 
strange co-incidence, they happen to justify the existing class 
system and its distribution of income. Hence the love of Robinson
Crusoe in economics.

Ironically, this favouring of theory (ideology would be a better
term) is selective as their exposure as fundamentally flawed does 
not stop them being repeated. As we discuss in section C.2, the 
neo-classical theory of capital was proven to be incorrect by 
left-wing economists. This was admitted by their opponents: "The 
question that confronts us is not whether the Cambridge Criticism 
is theoretically valid. It is. Rather the question is an empirical 
or econometric one: is there sufficient substitutability within 
the system to establish neo-classical results?" Yet this did not 
stop this theory being taught to this day and the successful critique
forgotten. Nor has econometrics successfully refuted the analysis,
as capital specified in terms of money cannot reflect a theoretical
substance (neo-classical "capital") which could not exist in reality. 
However, that is unimportant for "[u]ntil the econometricians have 
the answer for us, placing reliance upon neo-classical economic theory 
is a matter of faith," which, of course, he had [C. E. Ferguson, _The 
Neo-classical Theory of Production and Distribution_, p. 266 and p. 
xvii] 

Little wonder that Joan Robinson, one of the left-wing economists who 
helped expose the bankruptcy of the neo-capital theory of capital,
stated that economics was "back where it was, a branch of theology."
[_Collected Economic Papers_, Vol. 4, p. 127] It remains there more 
than thirty years later:

"Economics is not a science. Many economists -- particularly those who
believe that decisions on whether to get married can be reduced to an
equation -- see the world as a complex organism that can be understood
using the right differential calculus. Yet everything we know about
economics suggests that it is a branch and not a particularly advanced
one, of witchcraft." [Larry Elliot and Dan Atkinson, _The Age of 
Insecurity_, p. 226]

The weakness of economics is even acknowledged by some within the 
profession itself. According to Paul Ormerod, "orthodox economics 
is in many ways an empty box. Its understanding of the world is 
similar to that of the physical sciences in the Middle Ages. A few 
insights have been obtained which stand the test of time, but they 
are very few indeed, and the whole basis of conventional economics 
is deeply flawed." Moreover, he notes the "overwhelming empirical 
evidence against the validity of its theories." It is rare to see 
an economist be so honest. The majority of economists seem happy 
to go on with their theories, trying to squeeze life into the 
Procrustean bed of their models. And, like the priests of old, 
make it hard for non-academics to question their dogmas as 
"economics is often intimidating. Its practitioners . . . have 
erected around the discipline a barrier of jargon and mathematics 
which makes the subject difficult to penetrate for the 
non-initiated." [_The Death of Economics_, p. ix, p. 67 and p. ix]

So in this section of our FAQ, we will try to get to the heart of 
modern capitalism, cutting through the ideological myths that 
supporters of the system have created around it. This will be a 
difficult task, as the divergence of the reality of capitalism 
and the economics that is used to explain (justify, more correctly)
it is large. For example, the preferred model used in neo-classical
economics is that of "perfect competition" which is based on a 
multitude of small firms producing homogenous products in a market
which none of them are big enough to influence (i.e. have no market
power). This theory was developed in the late 19th century when the
real economy was marked by the rise of big business, a dominance
which continues to this day. Nor can it be said that even small
firms produce identical products -- product differentiation and
brand loyalty are key factors for any business. In other words, 
the model reflected (and still reflects) the exact opposite of 
reality. 

In spite of the theoretical models of economics having little or
no relation to reality, they are used to both explain and justify
the current system. As for the former, the truly staggering aspect
of economics for those who value the scientific method is the 
immunity of its doctrines to empirical refutation (and, in some
cases, theoretical refutation). The latter is the key to 
not only understanding why economics is in such a bad state but
also why it stays like that. While economists like to portray 
themselves as objective scientists, merely analysing the system, 
the development of their "science" has always been marked with 
apologetics, with rationalising the injustices of the existing 
system. This can be seen best in attempts by economists to show
that Chief Executive Officers (CEOs) of firms, capitalists and 
landlords all deserve their riches while workers should be 
grateful for what they get. As such, economics has never been
value free simply because what it says affects people and society.
This produces a market for economic ideology in which those 
economists who supply the demand will prosper. Thus we find many
"fields of economics and economic policy where the responses of 
important economic professionals and the publicity given economic 
findings are correlated with the increased market demand for 
specific conclusions and a particular ideology." [Edward S. 
Herman, "The Selling of Market Economics," pp. 173-199, _New 
Ways of Knowing_, Marcus G. Raskin and Herbert J. Bernstein
(eds.), p.192]

Even if we assume the impossible, namely that economists and their
ideology can truly be objective in the face of market demand for 
their services, there is a root problem with capitalist economics.
This is that it the specific social relations and classes produced 
by capitalism have become embedded into the theory. Thus, as an 
example, the concepts of the marginal productivity of land and 
capital are assumed to universal in spite the fact that neither 
makes any sense outside an economy where one class of people owns 
the means of life while another sells their labour to them. Thus
in an artisan/peasant society or one based around co-operatives,
there would be no need for such concepts for in such societies, 
the distinction between wages and profits has no meaning and, as 
a result, there is no income to the owners of machinery and land
and no need to explain it in terms of the "marginal productivity" 
of either. Thus mainstream economics takes the class structure of
capitalism as a natural, eternal, fact and builds up from there.
Anarchists, like other socialists, stress the opposite, namely
that capitalism is a specific historical phase and, consequently,
there are no universal economic laws and if you change the system 
the laws of economics change. Unless you are a capitalist economist, 
of course, when the same laws apply no matter what.

In our discussion, it is important to remember that capitalist 
economics is *not* the same as the capitalist economy. The latter
exists quite independently of the former (and, ironically, usually
flourishes best when the policy makers ignore it). Dissident economist
Steve Keen provides a telling analogy between economics and meteorology.
Just as "the climate would exist even if there were no intellectual
discipline of meteorology, the economy itself would exist whether or
not the intellectual pursuit of economics existed." Both share "a 
fundamental raison d'etre," namely "that of attempting to understand
a complex system." However, there are differences. Like weather 
forecasters, "economists frequently get their forecasts of the 
economic future wrong. But in fact, though weather forecasts are
sometimes incorrect, overall meteorologists have an enviable record
of accurate prediction -- whereas the economic record is tragically
bad." This means it is impossible to ignore economics ("to treat
it and its practitioners as we these days treat astrologers") as it is
a social discipline and so what we "believe about economics therefore
has an impact upon human society and the way we relate to one another."
Despite "the abysmal predictive record of their discipline," 
economists "are forever recommending ways in which the institutional
environment should be altered to make the economy work better." By
that they mean make the real economy more like their models, as 
"the hypothetical pure market performs better than the mixed economy
in which we live." [_Debunking Economics_, pp. 6-8] Whether this 
actually makes the world a better place is irrelevant (indeed, 
economics has been so developed as to make such questions irrelevant
as what happens on the market is, by definition, for the best).

Here we expose the apologetics for what they are, expose the 
ideological role of economics as a means to justify, indeed ignore, 
exploitation and oppression. In the process of our discussion we 
will often expose the ideological apologetics that capitalist 
economics create to defend the status quo and the system of 
oppression and exploitation it produces. We will also attempt to 
show the deep flaws in the internal inconsistencies of mainstream 
economics. In addition, we will show how important reality is when 
evaluating the claims of economics. 

That this needs to be done can be seen by comparing the promise of 
economics with its actual results when applied in reality. Mainstream 
economics argues that it is based on the idea of "utility" in 
consumption, i.e. the subjective pleasure of individuals. Thus 
production is, it is claimed, aimed at meeting the demands of 
consumers. Yet for a system supposedly based on maximising individual 
happiness ("utility"), capitalism produces a hell of a lot of unhappy 
people. Some radical economists have tried to indicate this and have 
created an all-embracing measure of well-being called the Index of 
Sustainable Economic Welfare (ISEW). Their conclusions, as summarised 
by Elliot and Atkinson, are significant:

"In the 1950s and 1960s the ISEW rose in tandem with per capita 
GDP. It was a time not just of rising incomes, but of greater 
social equity, low crime, full employment and expanding welfare 
states. But from the mid-1970s onwards the two measures started 
to move apart. GDP per head continued its inexorable rise, but 
the ISEW started to decline as a result of lengthening dole 
queues, social exclusion, the explosion in crime, habitat loss,
environmental degradation and the growth of environment- and 
stress-related illness. By the start of the 1990s, the ISEW was 
almost back to the levels at which it started in the early 1950s." 
[Larry Elliot and Dan Atkinson, Op. Cit., p. 248] 

So while capitalism continues to produce more and more goods and, 
presumably, maximises more and more individual utility, actual 
real people are being "irrational" and not realising they are, 
in fact, better off and happier. Ironically, when such unhappiness
is pointed out most defenders of capitalism dismiss people's 
expressed woe's as irrelevant. Apparently *some* subjective 
evaluations are considered more important than others!

Given that the mid-1970s marked the start of neo-liberalism, the 
promotion of the market and the reduction of government interference 
in the economy, this is surely significant. After all, the "global 
economy of the early 21st century looks a lot more like the economic 
textbook ideal that did the world of the 1950s . . . All these 
changes have followed the advance of economists that the unfettered 
market is the best way to allocate resources, and that well-intentioned 
interventions which oppose market forces will actually do more harm 
than good." As such, "[w]ith the market so much more in control of 
the global economy now than fifty years ago, then if economists are 
right, the world *should be* a manifestly better place: it should 
be growing faster, with more stability, and income should go to those 
who deserve it." However, "[u]nfortunately, the world refuses to dance 
the expected tune. In particularly, the final ten years of the 20th 
century were marked, not by tranquil growth, but by crises." [Steve 
Keen, Op. Cit., p. 2] 

These problems and the general unhappiness with the way society is 
going is related to various factors, most of which are impossible to 
reflect in mainstream economic analysis. They flow from the fact that 
capitalism is a system marked by inequalities of wealth and power and 
so how it develops is based on them, not the subjective evaluations of
atomised individuals that economics starts with. This in itself is 
enough to suggest that capitalist economics is deeply flawed and 
presents a distinctly flawed picture of capitalism and how it 
actually works. 

Anarchists argue that this is unsurprising as economics, rather than
being a science is, in fact, little more than an ideology whose main
aim is to justify and rationalise the existing system. We agree with
libertarian Marxist Paul Mattick's summation that economics is "actually
no more than a sophisticated apology for the social and economic 
*status quo*" and hence the "growing discrepancy between [its] theories
and reality." [_Economics, Politics and the Age of Inflation_, p. vii]
Anarchists, unsurprisingly, see capitalism as a fundamentally exploitative
system rooted in inequalities of power and wealth dominated by hierarchical
structures (capitalist firms). In the sections that follow, the exploitative 
nature of capitalism is explained in greater detail. We would like to point 
out that for anarchists, exploitation is not more important than domination. 
Anarchists are opposed to both equally and consider them to be two sides 
of the same coin. You cannot have domination without exploitation nor 
exploitation without domination. As Emma Goldman pointed out, under 
capitalism:

"wealth means power; the power to subdue, to crush, to exploit, the power
to enslave, to outrage, to degrade . . . Nor is this the only crime . . .
Still more fatal is the crime of turning the producer into a mere particle
of a machine, with less will and decision than his master of steel and
iron. Man is being robbed not merely of the products of his labour, but 
of the power of free initiative, of originality, and the interest in, 
or desire for, the things he is making." [_Red Emma Speaks_, pp. 66-7]

Needless to say, it would be impossible to discuss or refute *every* 
issue covered in a standard economics book or every school of economics. 
As economist Nicholas Kaldor notes, "[e]ach year new fashions sweep
the 'politico-economic complex' only to disappear again with equal 
suddenness . . . These sudden bursts of fashion are a sure sign of
the 'pre-scientific' stage [economics is in], where any crazy idea 
can get a hearing simply because nothing is known with sufficient 
confidence to rule it out." [_The Essential Kaldor_, p. 377] We will 
have to concentrate on key issues like the flaws in mainstream economics, 
why capitalism is exploitative, the existence and role of economic power, 
the business cycle, unemployment and inequality.

Nor do we wish to suggest that all forms of economics are useless or
equally bad. Our critique of capitalist economics does not suggest 
that no economist has contributed worthwhile and important work to 
social knowledge or our understanding of the economy. Far from it. 
As Bakunin put it, property "is a god" and has "its metaphysics. It
is the science of the bourgeois economists. Like any metaphysics
it is a sort of twilight, a compromise between truth and falsehood,
with the latter benefiting from it. It seeks to give falsehood the
appearance of truth and leads truth to falsehood." [_The Political
Philosophy of Bakunin_, p. 179] How far this is true varies form 
school to school, economist to economist. Some have a better 
understanding of certain aspects of capitalism than others. Some
are more prone to apologetics than others. Some are aware of the
problems of modern economics and "some of the most committed 
economists have concluded that, if economics is to become less
of a religion and more of a science, then the foundations
of economics should be torn down and replaced" (although, 
"left to [their] own devices", economists "would continue to
build an apparently grand edifice upon rotten foundations.").
[Keen, Op. Cit., p. 19]

As a rule of thumb, the more free market a particular economist 
or school of economics is, the more likely they will be prone to 
apologetics and unrealistic assumptions and models. Nor are we 
suggesting that if someone has made a positive contribution in 
one or more areas of economic analysis that their opinions on 
other subjects are correct or compatible with anarchist ideas. 
It is possible to present a correct analysis of capitalism or 
capitalist economics while, at the same time, being blind to 
the problems of Keynesian economics or the horrors of Stalinism.
As such, our quoting of certain critical economists does not 
imply agreement with their political opinions or policy 
suggestions.

Then there is the issue of what do we mean by the term "capitalist 
economics"? Basically, any form of economic theory which seeks to 
rationalise and defend capitalism. This can go from the extreme of 
free market capitalist economics (such as the so-called "Austrian" 
school and Monetarists) to those who advocate state intervention 
to keep capitalism going (Keynesian economists). We will not be 
discussing those economists who advocate state capitalism. As
a default, we will take "capitalist economics" to refer to the 
mainstream "neo-classical" school as this is the dominant form of
the ideology and many of its key features are accepted by the others.
This seems applicable, given that the current version of capitalism
being promoted is neo-liberalism where state intervention is minimised
and, when it does happen, directed towards benefiting the ruling 
elite.

Lastly, one of the constant refrains of economists is the notion that 
the public is ignorant of economics. The implicit assumption behind 
this bemoaning of ignorance by economists is that the world should 
be run either by economists or on their recommendations. In section C.11 
we present a case study of a nation, Chile, unlucky enough to have that 
fate subjected upon it. Unsurprisingly, this rule by economists could 
only be imposed as a result of a military coup and subsequent 
dictatorship. As would be expected, given the biases of economics, 
the wealthy did very well, workers less so (to put it mildly), in 
this experiment. Equally unsurprising, the system was proclaimed 
an economic miracle -- before it promptly collapsed.

So this section of the FAQ is our modest contribution to making 
economists happier by making working class people less ignorant 
of their subject. As Joan Robinson put it:

"In short, no economic theory gives us ready-made answers. Any theory
that we follow blindly will lead us astray. To make good use of an
economic theory, we must first sort out the relations of the 
propagandist and the scientific elements in it, then by checking 
with experience, see how far the scientific element appears convincing,
and finally recombine it with our own political views. The purpose of
studying economics is not to acquire a set of ready-made answers to
economic questions, but to learn how to avoid being deceived by 
economists." [_Contributions to Modern Economics_, p. 75]

C.1 What is wrong with economics?

In a nutshell, a lot. While economists like to portray their discipline
as "scientific" and "value free", the reality is very different. It is,
in fact, very far from a science and hardly "value free." Instead it is,
to a large degree, deeply ideological and its conclusions almost always
(by a strange co-incidence) what the wealthy, landlords, bosses and 
managers of capital want to hear. The words of Kropotkin still ring 
true today:

"Political Economy has always confined itself to stating facts occurring
in society, and justifying them in the interest of the dominant class 
. . . Having found [something] profitable to capitalists, it has set it 
up as a *principle.*" [_The Conquest of Bread_, p. 181]

This is at its best, of course. At its worse economics does not even 
bother with the facts and simply makes the most appropriate assumptions
necessary to justify the particular beliefs of the economists and,
usually, the interests of the ruling class. This is the key problem
with economics: it is *not* a science. It is *not* independent of the 
class nature of society, either in the theoretical models it builds 
or in the questions it raises and tries to answer. This is due, in 
part, to the pressures of the market, in part due to the assumptions
and methodology of the dominant forms of economics. It is a mishmash 
of ideology and genuine science, with the former (unfortunately) being 
the bulk of it. 

The argument that economics, in the main, is not a science it not 
one restricted to anarchists or other critics of capitalism. Some 
economists are well aware of the limitations of their profession. 
For example, Steve Keen lists many of the flaws of mainstream 
(neoclassical) economics in his excellent book _Debunking 
Economics_, noting that (for example) it is based on a "dynamically 
irrelevant and factually incorrect instantaneous static snap-shot" 
of the real capitalist economy. [_Debunking Economics_, p. 197] The 
late Joan Robinson argued forcefully that the neoclassical economist 
"sets up a 'model' on arbitrarily constructed assumptions, and then 
applies 'results' from it to current affairs, without even trying 
to pretend that the assumptions conform to reality." [_Collected 
Economic Papers_, vol. 4, p. 25] More recently, economist Mark 
Blaug has summarised many of the problems he sees with the current 
state of economics:

"Economics has increasing become an intellectual games played for
its own sake and not for its practical consequences. Economists have 
gradually converted the subject into a sort of social mathematics
in which analytical rigor as understood in math departments is 
everything and empirical relevance (as understood in physics 
departments) is nothing . . . general equilibrium theory . . . 
using economic terms like 'prices', 'quantities', 'factors of 
production,' and so on, but that nevertheless is clearly and even 
scandalously unrepresentative of any recognisable economic system. . .

"Perfect competition never did exist and never could exist because, 
even when firms are small, they do not just take the price but strive
to make the price. All the current textbooks say as much, but then
immediately go on to say that the 'cloud-cuckoo' fantasyland of
perfect competition is the benchmark against which we may say 
something significant about real-world competition . . . But how
can an idealised state of perfection be a benchmark when we are 
never told how to measure the gap between it and real-world
competition? It is implied that all real-world competition is 
'approximately' like perfect competition, but the degree of the 
approximation is never specified, even vaguely . . .

"Think of the following typical assumptions: perfectly infallible,
utterly omniscient, infinitely long-lived identical consumers; zero
transaction costs; complete markets for all time-stated claims for
all conceivable events, no trading of any kind at disequilibrium prices;
infinitely rapid velocities of prices and quantities; no radical, 
incalculable uncertainty in real time but only probabilistically
calculable risk in logical time; only linearly homogeneous production
functions; no technical progress requiring embodied capital investment,
and so on, and so on -- all these are not just unrealistic but also
unrobust assumptions. And yet they figure critically in leading 
economic theories." ["Disturbing Currents in Modern Economics", 
_Challenge!_, Vol. 41, No. 3, May-June, 1998]

So neoclassical ideology is based upon special, virtually ad hoc, 
assumptions. Many of the assumptions are impossible, such as the
popular assertion that individuals can accurately predict the future
(as required by "rational expectations" and general equilibrium theory),
that there are a infinite number of small firms in every market or 
that time is an unimportant concept which can be abstracted from.
Even when we ignore those assumptions which are obviously nonsense,
the remaining ones are hardly much better. Here we have a collection
of apparently valid positions which, in fact, rarely have any basis 
in reality. As we discuss in section C.1.2, an essential one, without
which neoclassical economics simply disintegrates, has very little 
basis in the real world (in fact, it was invented simply to ensure 
the theory worked as desired). Similarly, markets often adjust in 
terms of quantities rather than price, a fact overlooked in general
equilibrium theory. Some of the assumptions are mutually exclusive. 
For example, the neo-classical theory of the supply curve is based on 
the assumption that some factor of production cannot be changed in 
the short run. This is essential to get the concept of diminishing
marginal productivity which, in turn, generates a rising marginal 
cost and so a rising supply curve. This means that firms *within* 
an industry cannot change their capital equipment. However, the 
theory of perfect competition requires that in the short period 
there are no barriers to entry, i.e. that anyone *outside* the 
industry can create capital equipment and move into the market. 
These two positions are logically inconsistent.

In other words, although the symbols used in mainstream may have 
economic sounding names, the theory has no point of contact with 
empirical reality (or, at times, basic logic):

"Nothing in these abstract economic models actually *works* in the
real world. It doesn't matter how many footnotes they put in, or
how many ways they tinker around the edges. The whole enterprise
is totally rotten at the core: it has no relation to reality."
[Noam Chomsky, _Understanding Power_, pp. 254-5]

As we will indicate, while its theoretical underpinnings are claimed
to be universal, they are specific to capitalism and, ironically,
they fail to even provide an accurate model of that system as it
ignores most of the real features of an actual capitalist economy.
So if an economist does not say that mainstream economics has no 
bearing to reality, you can be sure that what he or she tells you 
will be more likely ideology than anything else. "Economic reality" 
is not about facts; it's about faith in capitalism. Even worse, it 
is about blind faith in what the economic ideologues say about 
capitalism. The key to understanding economists is that they believe 
that if it is in an economic textbook, then it must be true -- 
particularly if it confirms any initial prejudices. The opposite
is usually the case. 

The obvious fact that the real world is not like that described by
economic text books can have some funny results, particularly
when events in the real world contradict the textbooks. For most
economists, or those who consider themselves as such, the textbook
is usually preferred. As such, much of capitalist apologetics is 
faith-driven. Reality has to be adjusted accordingly.

A classic example was the changing positions of pundits and "experts" 
on the East Asian economic miracle. As these economies grew spectacularly 
during the 1970s and 1980s, the experts universally applauded them as 
examples of the power of free markets. In 1995, for example, the 
right-wing Heritage Foundation's index of economic freedom had four 
Asian countries in its top seven countries. The _Economist_ explained 
at the start of 1990s that Taiwan and South Korea had among the least 
price-distorting regimes in the world. Both the Word Bank and IMF
agreed, downplaying the presence of industrial policy in the region. 
This was unsurprising. After all, their ideology said that free markets 
would produce high growth and stability and so, logically, the presence
of both in East Asia must be driven by the free market. This meant that,
for the true believers, these nations were paradigms of the free market,
reality not withstanding. The markets agreed, putting billions into 
Asian equity markets while foreign banks loaned similar vast amounts.

In 1997, however, all this changed when all the Asian countries previously
qualified as "free" saw their economies collapse. Overnight the same 
experts who had praised these economies as paradigms of the free market 
found the cause of the problem -- extensive state intervention. The free 
market paradise had become transformed into a state regulated hell! Why? 
Because of ideology -- the free market is stable and produces high growth 
and, consequently, it was impossible for any economy facing crisis to be 
a free market one! Hence the need to disown what was previously praised,
without (of course) mentioning the very obvious contradiction.

In reality, these economies had always been far from the free market. The 
role of the state in these "free market" miracles was extensive and well 
documented. So while East Asia "had not only grown faster and done 
better at reducing poverty than any other region of the world . . . it 
had also been more stable," these countries "had been successful not 
only in spite of the fact that they had not followed most of the 
dictates of the Washington Consensus [i.e. neo-liberalism], but *because* 
they had not." The government had played "important roles . . . far from 
the minimalist [ones] beloved" of neo-liberalism. During the 1990s, 
things had changed as the IMF had urged a "excessively rapid financial 
and capital market liberalisation" for these countries as sound economic 
policies. This "was probably the single most important cause of the [1997] 
crisis" which saw these economies suffer meltdown, "the greatest economic 
crisis since the Great Depression" (a meltdown worsened by IMF aid and its 
underlying dogmas). Even worse for the believers in market fundamentalism, 
those nations (like Malaysia) that refused IMF suggestions and used state 
intervention has a "shorter and shallower" downturn than those who did not.
[Joseph Stiglitz, _Globalisation and its Discontents_, p. 89, p. 90, p. 91
and p. 93] Even worse, the obvious conclusion from these events is more
than just the ideological perspective of economists, it is that "the market" 
is not all-knowing as investors (like the experts) failed to see the statist 
policies so bemoaned by the ideologues of capitalism *after* 1997.

This is not to say that the models produced by neoclassical economists are 
not wonders of mathematics or logic. Few people would deny that a lot of 
very intelligent people have spent a lot of time producing some quite 
impressive mathematical models in economics. It is a shame that they are
utterly irrelevant to reality. Ironically, for a theory claims to be so 
concerned about allocating scarce resources efficiently, economics has 
used a lot of time and energy refining the analyses of economies which 
have not, do not, and will not ever exist. In other words, scare resources 
have been inefficiently allocated to produce waste. 

Why? Perhaps because there is a demand for such nonsense? Some economists 
are extremely keen to apply their methodology in all sorts of areas outside 
the economy. No matter how inappropriate, they seek to colonise every aspect 
of life. One area, however, seems immune to such analysis. This is the market 
for economic theory. If, as economists stress, every human activity can be 
analysed by economics then why not the demand and supply of economics itself? 
Perhaps because if that was done some uncomfortable truths would be discovered?

Basic supply and demand theory would indicate that those economic theories 
which have utility to others would be provided by economists. In a system 
with inequalities of wealth, effective demand is skewed in favour of the 
wealthy. Given these basic assumptions, we would predict that only these 
forms of economists which favour the requirements of the wealthy would 
gain dominance as these meet the (effective) demand. By a strange 
co-incidence, this is *precisely* what has happened. This did and does 
not stop economists complaining that dissidents and radicals were and
are biased. As Edward Herman points out:

"Back in 1849, the British economist Nassau Senior chided those
defending trade unions and minimum wage regulations for expounding
an 'economics of the poor.' The idea that he and his establishment
confreres were putting forth an 'economics of the rich' never
occurred to him; he thought of himself as a scientist and
spokesperson of true principles. This self-deception pervaded
mainstream economics up to the time of the Keynesian Revolution 
of the 1930s. Keynesian economics, though quickly tamed into an
instrument of service to the capitalist state, was disturbing in
its stress on the inherent instability of capitalism, the tendency
toward chronic unemployment, and the need for substantial
government intervention to maintain viability. With the resurgent
capitalism of the past 50 years, Keynesian ideas, and their
implicit call for intervention, have been under incessant attack,
and, in the intellectual counterrevolution led by the Chicago
School, the traditional laissez-faire ('let-the-fur-fly')
economics of the rich has been re-established as the core of
mainstream economics." [_The Economics of the Rich_]

Herman goes on to ask "[w]hy do the economists serve the rich?" and
argues that "[f]or one thing, the leading economists are among the 
rich, and others seek advancement to similar heights. Chicago School 
economist Gary Becker was on to something when he argued that economic 
motives explain a lot of actions frequently attributed to other forces. 
He of course never applied this idea to economics as a profession . . ." 
There are a great many well paying think tanks, research posts, 
consultancies and so on that create an "'effective demand' that 
should elicit an appropriate supply resource."

Elsewhere, Herman notes the "class links of these professionals to the 
business community were strong and the ideological element was realised 
in the neoclassical competitive model . . . Spin-off negative effects on 
the lower classes were part of the 'price of progress.' It was the elite 
orientation of these questions [asked by economics], premises, and the 
central paradigm [of economic theory] that caused matters like unemployment, 
mass poverty, and work hazards to escape the net of mainstream economist
interest until well into the twentieth century." Moreover, "the economics 
profession in the years 1880-1930 was by and large strongly conservative, 
reflecting in its core paradigm its class links and sympathy with the 
dominant business community, fundamentally anti-union and suspicious of 
government, and tending to view competition as the true and durable state 
of nature." [Edward S. Herman, "The Selling of Market Economics," 
pp. 173-199, _New Ways of Knowing_, Marcus G. Raskin and Herbert J. 
Bernstein (eds.),p. 179-80 and p. 180]

Rather than scientific analysis, economics has always been driven by 
the demands of the wealthy ("How did [economics] get instituted? As a 
weapon of class warfare." [Chomsky, Op. Cit., p. 252]). This works
on numerous levels. The most obvious is that most economists take 
the current class system and wealth/income distribution as granted
and generate general "laws" of economics from a specific historical
society. As we discuss in the next section, this inevitably skews 
the "science" into ideology and apologetics. The analysis is also
(almost inevitably) based on individualistic assumptions, ignoring or 
downplaying the key issues of groups, organisations, class and the
economic and social power they generate. Then there are the assumptions 
used and questions raised. As Herman argues, this has hardly been a 
neutral process: 

"the theorists explicating these systems, such as Carl Menger, Leon 
Walras, and Alfred Marshall, were knowingly assuming away formulations 
that raised disturbing questions (income distribution, class and market 
power, instability, and unemployment) and creating theoretical models 
compatible with their own policy biases of status quo or modest 
reformism . . . Given the choice of 'problem,' ideology and other 
sources of bias may still enter economic analysis if the answer is 
predetermined by the structure of the theory or premises, or if the 
facts are selected or bent to prove the desired answer." [Op. Cit.,
p. 176]

Needless to say, economics is a "science" with deep ramifications within
society. As a result, it comes under pressure from outside influences 
and vested interests far more than, say, anthropology or physics. This
has meant that the wealthy have always taken a keen interest that the
"science" teaches the appropriate lessons. This has resulted in a demand
for a "science" which reflects the interests of the few, not the many.
Is it *really* just a co-incidence that the lessons of economics are just
what the bosses and the wealthy would like to hear? As non-neoclassical 
economist John Kenneth Galbraith noted in 1972:

"Economic instruction in the United States is about a hundred years
old. In its first half century economists were subject to censorship
by outsiders. Businessmen and their political and ideological acolytes 
kept watch on departments of economics and reacted promptly to heresy,
the latter being anything that seemed to threaten the sanctity of 
property, profits, a proper tariff policy and a balanced budget, or
that suggested sympathy for unions, public ownership, public regulation 
or, in any organised way, for the poor." [_The Essential Galbraith_,
p. 135]

It is *really* surprising that having the wealthy fund (and so control) 
the development of a "science" has produced a body of theory which so 
benefits their interests? Or that they would be keen to educate the
masses in the lessons of said "science", lessons which happen to 
conclude that the best thing workers should do is obey the dictates
of the bosses, sorry, the market? It is really just a co-incidence 
that the repeated use of economics is to spread the message that
strikes, unions, resistance and so forth are counter-productive and
that the best thing worker can do is simply wait patiently for wealth
to trickle down? 

This co-incidence has been a feature of the "science" from the start.
The French Second Empire in the 1850s and 60s saw "numerous private 
individuals and organisation, municipalities, and the central government 
encouraged and founded institutions to instruct workers in economic
principles." The aim was to "impress upon [workers] the salutary
lessons of economics." Significantly, the "weightiest motive" for
so doing "was fear that the influence of socialist ideas upon the
working class threatened the social order." The revolution of 1848
"convinced many of the upper classes that the must prove to workers
that attacks upon the economic order were both unjustified and
futile." Another reason was the recognition of the right to strike
in 1864 and so workers "had to be warned against abuse of the new
weapon." The instruction "was always with the aim of refuting 
socialist doctrines and exposing popular misconceptions. As one
economist stated, it was not the purpose of a certain course to
initiate workers into the complexities of economic science, but
to define principles useful for 'our conduct in the social order.'"
The interest in such classes was related to the level of "worker
discontent and agitation." The impact was less than desired:
"The future Communard Lefrancais referred mockingly to the economists
. . . and the 'banality' and 'platitudes' of the doctrine they 
taught. A newspaper account of the reception given to the economist
Joseph Garnier states that Garnier was greeted with shouts of:
'He is an economist' . . . It took courage, said the article, to
admit that one was an economist before a public meeting." [David 
I. Kulstein, "Economics Instruction for Workers during the
Second Empire," pp. 225-234, _French Historical Studies_, vol. 1, 
no. 2, p. 225, p. 226, p. 227 and p. 233]

This process is still at work, with corporations and the wealthy funding
university departments and posts as well as their own "think tanks" and
paid PR economists. The control of funds for research and teaching plays
it part in keeping economics the "economics of the rich." Analysing the
situation in the 1970s, Herman notes that the "enlarged private demand 
for the services of economists by the business community . . . met a 
warm supply response." He stressed that "if the demand in the market is 
for specific policy conclusions and particular viewpoints that will 
serve such conclusions, the market will accommodate this demand." Hence 
"blatantly ideological models . . . are being spewed forth on a large
scale, approved and often funded by large vested interests" which
helps "shift the balance between ideology and science even more firmly
toward the former." [Op. Cit., p. 184, p. 185 and p. 179] The idea 
that "experts" funded and approved by the wealthy would be objective 
scientists is hardly worth considering. Unfortunately, many people 
fail to exercise sufficient scepticism about economists and the 
economics they support. As with most experts, there are two obvious 
questions with which any analysis of economics should begin: "Who is 
funding it?" and "Who benefits from it?" 

However, there are other factors as well, namely the hierarchical 
organisation of the university system. The heads of economics departments 
have the power to ensure the continuation of their ideological position 
due to the position as hirer and promoter of staff. As economics "has 
mixed its ideology into the subject so well that the ideologically 
unconventional usually appear to appointment committees to be 
scientifically incompetent." [Benjamin Ward, _What's Wrong with 
Economics?_, p. 250] Galbraith termed this "a new despotism," which 
consisted of "defining scientific excellence in economics not as 
what is true but as whatever is closest to belief and method to 
the scholarly tendency of the people who already have tenure in 
the subject. This is a pervasive test, not the less oppress for 
being, in the frequent case, both self-righteous and unconscious. 
It helps ensure, needless to say, the perpetuation of the neoclassical 
orthodoxy." [Op. Cit., p. 135] This plays a key role in keeping 
economics an ideology rather than a science:

"The power inherent in this system of quality control within the
economics profession is obviously very great. The discipline's
censors occupy leading posts in economics departments at the 
major institutions . . . Any economist with serious hopes of 
obtaining a tenured position in one of these departments will soon
be made aware of the criteria by which he is to be judged . . .
the entire academic program . . . consists of indoctrination in 
the ideas and techniques of the science." [Ward, Op. Cit., pp. 29-30]

All this has meant that the "science" of economics has hardly changed
in its basics in over one hundred years. Even notions which have been 
debunked (and have been acknowledged as such) continue to be taught:

"The so-called mainline teaching of economic theory has a curious 
self-sealing capacity. Every breach that is made in it by criticism 
is somehow filled up by admitting the point but refusing to draw any 
consequence from it, so that the old doctrines can be repeated as 
before. Thus the Keynesian revolution was absorbed into the doctrine 
that, 'in the long run,' there is a natural tendency for a market 
economy to achieve full employment of available labour and full 
utilisation of equipment; that the rate of accumulation is determined 
by household saving; and that the rate of interest is identical with 
the rate of profit on capital. Similarly, Piero Sraffa's demolition 
of the neoclassical production function in labour and 'capital' was 
admitted to be unanswerable, but it has not been allowed to affect 
the propagation of the 'marginal productivity' theory of wages and 
profits.

"The most sophisticated practitioners of orthodoxy maintain that the
whole structure is an exercise in pure logic which has no application
to real life at all. All the same they give their pupils the impression
that they are being provided with an instrument which is valuable,
indeed necessary, for the analysis of actual problems." [Joan Robinson, 
Op. Cit., vol. 5, p. 222]

The social role of economics explains this process, for "orthodox 
traditional economics . . . was a plan for explaining to the 
privileged class that their position was morally right and was 
necessary for the welfare of society. Even the poor were better off 
under the existing system that they would be under any other . . .
the doctrine [argued] that increased wealth of the propertied class 
brings about an automatic increase of income to the poor, so that, 
if the rich were made poorer, the poor would necessarily become poorer
too." [Robinson, Op. Cit., vol. 4, p. 242]

In such a situation, debunked theories would continue to be taught
simply because what they say has a utility to certain sections of
society:

"Few issues provide better examples of the negative impact of economic
theory on society than the distribution of income. Economists are forever
opposing 'market interventions' which might raise the wages of the poor,
while defending astronomical salary levels for top executives on the basis
that if the market is willing to pay them so much, they must be worth it.
In fact, the inequality which is so much a characteristic of modern 
society reflects power rather than justice. This is one of the many
instances where unsound economic theory makes economists the champions
of policies which, is anything, undermine the economic foundations of
modern society." [Keen, Op. Cit., p. 126]

This argument is based on the notion that wages equal the marginal 
productivity of labour. This is supposed to mean that as the 
output of workers increase, their wages rise. However, as we note
in section C.1.5, this law of economics has been violated for the 
last thirty-odd years in the US. Has this resulted in a change in 
the theory? Of course not. Not that the theory is actually correct. 
As we discuss in section C.2.5, marginal productivity theory has 
been exposed as nonsense (and acknowledged as flawed by leading 
neo-classical economists) since the early 1960s. However, its 
utility in defending inequality is such that its continued use 
does not really come as a surprise. 

This is not to suggest that mainstream economics is monolithic.
Far from it. It is riddled with argument and competing policy
recommendations. Some theories rise to prominence, simply to 
disappear again ("See, the 'science' happens to be a very flexible 
one: you can change it to do whatever you feel like, it's that kind 
of 'science.'" [Chomsky, Op. Cit., p. 253]). Given our analysis that
economics is a commodity and subject to demand, this comes as no
surprise. Given that the capitalist class is always in competition 
within itself and different sections have different needs at different 
times, we would expect a diversity of economics beliefs within the 
"science" which rise and fall depending on the needs and relative 
strengths of different sections of capital. While, overall, the 
"science" will support basic things (such as profits, interest and
rent are *not* the result of exploitation) but the actual policy 
recommendations will vary. This is not to say that certain individuals 
or schools will not have their own particular dogmas or that individuals 
rise above such influences and act as real scientists, of course, just 
that (in general) supply is not independent of demand or class 
influence.

Nor should we dismiss the role of popular dissent in shaping the
"science." The class struggle has resulted in a few changes to
economics, if only in terms of the apologetics used to justify
non-labour income. Popular struggles and organisation play their 
role as the success of, say, union organising to reduce the working 
day obviously refutes the claims made against such movements by
economists. Similarly, the need for economics to justify reforms 
can become a pressing issue when the alternative (revolution) 
is a possibility. As Chomsky notes, during the 19th century (as
today) popular struggle played as much of a role as the needs 
of the ruling class in the development of the "science":

"[Economics] changed for a number of reasons. For one thing, these 
guys had won, so they didn't need it so much as an ideological weapon
anymore. For another, they recognised that they themselves needed
a powerful interventionist state to defend industry form the
hardships of competition in the open market -- as they had always
*had* in fact. And beyond that, eliminating people's 'right to
live' was starting to have some negative side-effects. First of
all, it was causing riots all over the place . . . Then something
even worse happened -- the population started to organise: you 
got the beginning of an organised labour movement . . . then a
socialist movement developed. And at that point, the elites . . .
recognised that the game had to be called off, else they *really*
would be in trouble . . . it wasn't until recent years that 
laissez-faire ideology was revived again -- and again, it was a 
weapon of class warfare . . . And it doesn't have any more validity 
than it had in the early nineteenth century -- in fact it has even 
*less.* At least in the early nineteenth century . . . [the] 
assumptions had *some* relation to reality. Today those assumptions 
have *not* relation to reality." [Op. Cit., pp. 253-4]

Whether the "economics of the rich" or the "economics of the poor"
win out in academia is driven far more by the state of the class
war than by abstract debating about unreal models. Thus the rise
of monetarism came about due to its utility to the dominant sections
of the ruling class rather than it winning any intellectual battles 
(it was decisively refuted by leading Keynesians like Nicholas Kaldor 
who saw their predicted fears become true when it was applied -- 
see section C.8). Hopefully by analysing the myths of capitalist
economics we will aid those fighting for a better world by giving 
them the means of counteracting those who claim the mantle of 
"science" to foster the "economics of the rich" onto society.

To conclude, neo-classical economics shows the viability of an unreal 
system and this is translated into assertions about the world that we 
live in. Rather than analyse reality, economics evades it and asserts 
that the economy works "as if" it matched the unreal assumptions of 
neoclassical economics. No other science would take such an approach 
seriously. In biology, for example, the notion that the world can be 
analysed "as if" God created it is called Creationism and rightly 
dismissed. In economics, such people are generally awarded 
professorships or even the (so-called) Nobel prize in economics 
(Keen critiques the "as if" methodology of economics in chapter 7 
of his _Debunking Economics_). Moreover, and even worse, policy 
decisions will be enacted based on a model which has no bearing in 
reality -- with disastrous results (for example, the rise and fall 
of Monetarism). 

Its net effect to justify the current class system and diverts 
serious attention from critical questions facing working class 
people (for example, inequality and market power, what goes on in 
production, how authority relations impact on society and in the 
workplace). Rather than looking to how things are produced, the 
conflicts generated in the production process and the generation
as well as division of products/surplus, economics takes what was 
produced as given, as well as the capitalist workplace, the division 
of labour and authority relations and so on. The individualistic 
neoclassical analysis by definition ignores such key issues as 
economic power, the possibility of a structural imbalance in 
the way economic growth is distributed, organisation structure, 
and so on. 

Given its social role, it comes as no surprise that economics is not 
a genuine science. For most economists, the "scientific method (the 
inductive method of natural sciences) [is] utterly unknown to them."
[Kropotkin, _Anarchism_, p. 179] The argument that most economics is 
not a science is not limited to just anarchists or other critics of 
capitalism. Many dissident economics recognise this fact as well, 
arguing that the profession needs to get its act together if it is to
be taken seriously. Whether it could retain its position as defender
of capitalism if this happens is a moot point as many of the theorems
developed were done so explicitly as part of this role (particularly 
to defend non-labour income -- see section C.2). That economics can 
become much broader and more relevant is always a possibility, but 
to do so would mean to take into account an unpleasant reality marked 
by class, hierarchy and inequality rather than logic deductions 
derived from Robinson Crusoe. While the latter can produce 
mathematical models to reach the conclusions that the market is 
already doing a good job (or, at best, there are some imperfections 
which can be counterbalanced by the state), the former cannot.

Anarchists, unsurprisingly, take a different approach to economics. As
Kropotkin put it, "we think that to become a science, Political Economy 
has to be built up in a different way. It must be treated as a natural 
science, and use the methods used in all exact, empirical sciences." 
[_Evolution and Environment_, p. 93] This means that we must start 
with the world as it is, not as economics would like it to be. It
must be placed in historical context and key facts of capitalism,
like wage labour, not taken for granted. It must not abstract from 
such key facts of life as economic and social power. In a word, 
economics must reject those features which turn it into a sophisticated
defence of the status quo. Given its social role within capitalism
(and the history and evolution of economic thought), it is doubtful it 
will ever become a real science simply because it if did it would 
hardly be used to defend that system. 

C.1.1 Is economics really value free?

Modern economists try and portray economics as a "value-free science." 
Of course, it rarely dawns on them that they are usually just taking 
existing social structures for granted and building economic dogmas 
around them, so justifying them. At best, as Kropotkin pointed out: 

"[A]ll the so-called laws and theories of political economy are in reality 
no more than statements of the following nature: 'Granting that there are 
always in a country a considerable number of people who cannot subsist a 
month, or even a fortnight, without earning a salary and accepting for 
that purpose the conditions of work  imposed upon them by the State, or 
offered to them by those whom the State recognises as owners of land, 
factories, railways, etc., then the results will be so and so.'

"So far academic political economy has been only an enumeration of
what happens under these conditions -- without distinctly stating the 
conditions themselves. And then, having described *the facts* which 
arise in our society under these conditions, they represent to us 
these *facts* as rigid, *inevitable economic laws.*" [_Anarchism_, 
p. 179]

In other words, economists usually take the political and economic 
aspects of capitalist society (such as property rights, inequality 
and so on) as given and construct their theories around it. At best. 
At worse, economics is simply speculation based on the necessary 
assumptions required to prove the desired end. By some strange 
coincidence these ends usually bolster the power and profits of 
the few and show that the free market is the best of all possible 
worlds. Alfred Marshall, one of the founders of neoclassical economics, 
once noted the usefulness of economics to the elite:

"From Metaphysics I went to Ethics, and found that the justification
of the existing conditions of society was not easy. A friend, who
had read a great deal of what are called the Moral Sciences, 
constantly said: 'Ah! if you understood Political Economy you 
would not say that'" [quoted by Joan Robinson, _Collected Economic 
Papers_, vol. 4, p. 129]

Joan Robinson added that "[n]owadays, of course, no one would put it 
so crudely. Nowadays, the hidden persuaders are concealed behind 
scientific objectivity, carefully avoiding value judgements; they are 
persuading all the better so." [Op. Cit., p. 129] The way which economic 
theory systematically says what bosses and the wealthy want to hear is 
just one of those strange co-incidences of life, one which seems to 
befall economics with alarming regularity.

How does economics achieve this strange co-incidence, how does the
"value free" "science" end up being wedded to producing apologetics
for the current system? A key reason is the lack of concern about 
history, about how the current distribution of income and wealth 
was created. Instead, the current distribution of wealth and income
is taken for granted.

This flows, in part, from the static nature of neoclassical economics.
If your economic analysis starts and ends with a snapshot of time,
with a given set of commodities, then how those commodities get into
a specific set of hands can be considered irrelevant -- particularly
when you modify your theory to exclude the possibility of proving
income redistribution will increase overall utility (see section 
C.1.3). It also flows from the social role of economics as defender 
of capitalism. By taking the current distribution of income and 
wealth as given, then many awkward questions can be automatically
excluded from the "science." 

This can be seen from the rise of neoclassical economics in the 
1870s and 1880s. The break between classical political economy 
and economics was marked by a change in the kind of questions 
being asked. In the former, the central focus was on distribution, 
growth, production and the relations between social classes. The 
exact determination of individual prices was of little concern, 
particularly in the short run. For the new economics, the focus 
became developing a rigorous theory of price determination. This 
meant abstracting from production and looking at the amount of 
goods available at any given moment of time. Thus economics 
avoided questions about class relations by asking questions 
about individual utility, so narrowing the field of analysis 
by asking politically harmless questions based on unrealistic 
models (for all its talk of rigour, the new economics did not 
provide an answer to how real prices were determined any more 
than classical economics had simply because its abstract models 
had no relation to reality).

It did, however, provide a naturalistic justification for capitalist 
social relations by arguing that profit, interest and rent are the 
result of individual decisions rather than the product of a 
specific social system. In other words, economics took the classes 
of capitalism, internalised them within itself, gave them universal 
application and, by taking for granted the existing distribution of 
wealth, justified the class structure and differences in market power 
this produces. It does not ask (or investigate) *why* some people own 
all the land and capital while the vast majority have to sell their 
labour on the market to survive. As such, it internalises the class 
structure of capitalism. Taking this class structure as a given, 
economics simply asks the question how much does each "factor" 
(labour, land, capital) contribute to the production of goods. 

Alfred Marshall justified this perspective as follows:

"In the long run the earnings of each agent (of production) are, as 
a rule, sufficient only to recompense the sum total of the efforts 
and sacrifices required to produce them . . . with a partial exception
in the case of land . . . especially much land in old countries,
if we could trace its record back to their earliest origins. But
the attempt would raise controversial questions in history and ethics
as well as in economics; and the aims of our present inquiry are
prospective rather than retrospective." [_Principles of Economics_,
p. 832]

Which is wonderfully handy for those who benefited from the theft 
of the common heritage of humanity. Particularly as Marshall himself 
notes the dire consequences for those without access to the means of 
life on the market:

"When a workman is in fear of hunger, his need of money is very great;
and, if at starting he gets the worst of the bargaining, it remains
great . . . That is all the more probably because, while the advantage 
in bargaining is likely to be pretty well distributed between the 
two sides of a market for commodities, it is more often on the side
of the buyers than on that of the sellers in a market for labour."
[Op. Cit., pp. 335-6]

Given that market exchanges will benefit the stronger of the parties 
involved, this means that inequalities become stronger and more 
secure over time. Taking the current distribution of property as a 
given (and, moreover, something that must not be changed) then
the market does not correct this sort of injustice. In fact, it 
perpetuates it and, moreover, it has no way of compensating the 
victims as there is no mechanism for ensuring reparations. So the 
impact of previous acts of aggression has an impact on how
a specific society developed and the current state of the world. To
dismiss "retrospective" analysis as it raises "controversial questions"
and "ethics" is not value-free or objective science, it is pure 
ideology and skews any "prospective" enquiry into apologetics.

This can be seen when Marshall noted that labour "is often sold under 
special disadvantages, arising from the closely connected group of facts 
that labour power is 'perishable,' that the sellers of it are commonly 
poor and have no reserve fund, and that they cannot easily withhold it 
from the market." Moreover, the "disadvantage, wherever it exists, is 
likely to be cumulative in its effects." Yet, for some reason, he still 
maintains that "wages of every class of labour tend to be equal to the 
net product due to the additional labourer of this class." [Op. Cit., 
p. 567, p. 569 and p. 518] Why should it, given the noted fact that 
workers are at a disadvantage in the market place? 

As such, how could it possibly be considered "scientific" or "value-free"
to ignore history? It is hardly "retrospective" to analyse the roots of
the current disadvantage working class people have in the current and
"prospective" labour market, particularly given that Marshall himself 
notes their results. This is a striking example of what Kropotkin 
deplored in economics, namely that in the rare situations when social 
conditions were "mentioned, they were forgotten immediately, to be spoken 
of no more." Thus reality is mentioned, but any impact this may have on 
the distribution of income is forgotten for otherwise you would have to
conclude, with the anarchists, that the "appropriation of the produce of 
human labour by the owners of capital [and land] exists only because 
millions of men [and women] have literally nothing to live upon, unless 
they sell their labour force and their intelligence at a price that 
will make the net profit of the capitalist and 'surplus value' possible." 
[_Evolution and Environment_, p. 92 and p. 106]

This is important, for respecting property rights is easy to talk 
about but it only faintly holds some water if the existing property 
ownership distribution is legitimate. If it is illegitimate, if the 
current property titles were the result of theft, corruption, 
colonial conquest, state intervention, and other forms of coercion 
then things are obviously different. That is why economics rarely, 
if ever, discusses this. This does not, of course, stop economists
arguing against current interventions in the market (particularly
those associated with the welfare state). In effect, they are arguing
that it is okay to reap the benefits of past initiations of force but 
it is wrong to try and rectify them. It is as if someone walks into 
a room of people, robs them at gun point and then asks that they should 
respect each others property rights from now on and only engage in 
voluntary exchanges with what they had left. Any attempt to establish 
a moral case for the "free market" in such circumstances would be 
unlikely to succeed. This is free market capitalist economics in a 
nutshell: never mind past injustices, let us all do the best we can 
given the current allocations of resources. 

Many economists go one better. Not content in ignoring history, 
they create little fictional stories in order to justify their 
theories or the current distribution of wealth and income. Usually, 
they start from isolated individual or a community of approximately
equal individuals (a community usually without any communal 
institutions). For example, the "waiting" theories of profit and 
interest (see section C.2.7) requires such a fiction to be remotely 
convincing. It needs to assume a community marked by basic equality 
of wealth and income yet divided into two groups of people, one of 
which was industrious and farsighted who abstained from directly 
consuming the products created by their *own* labour while the 
other was lazy and consumed their income without thought of the 
future. Over time, the descendents of the diligent came to own 
the means of life while the descendants of the lazy and the prodigal 
have, to quote Marx, "nothing to sell but themselves." In that way, 
modern day profits and interest can be justified by appealing to 
such "insipid childishness." [_Capital_, vol. 1, p. 873] The
real history of the rise of capitalism is, as we discuss in
section F.8, grim.

Of course, it may be argued that this is just a model and an 
abstraction and, consequently, valid to illustrate a point. 
Anarchists disagree. Yes, there is often the need for abstraction 
in studying an economy or any other complex system, but this is 
not an abstraction, it is propaganda and a historical invention 
used not to illustrate an abstract point but rather a specific 
system of power and class. That these little parables and stories 
have all the necessary assumptions and abstractions required to 
reach the desired conclusions is just one of those co-incidences 
which seem to regularly befall economics. 

The strange thing about these fictional stories is that they are 
given much more credence than real history within economics. Almost 
always, fictional "history" will always top actual history in 
economics. If the actual history of capitalism is mentioned, then the
defenders of capitalism will simply say that we should not penalise
current holders of capital for actions in the dim and distant past
(that current and future generations of workers are penalised goes
unmentioned). However, the fictional "history" of capitalism suffers
from no such dismissal, for invented actions in the dim and distant
past justify the current owners holdings of wealth and the income
that generates. In other words, heads I win, tails you loose. 

Needless to say, this (selective) myopia is not restricted to just 
history. It is applied to current situations as well. Thus we find 
economists defending current economic systems as "free market" regimes 
in spite of obvious forms of state intervention. As Chomsky notes:

"when people talk about . . . free-market 'trade forces' inevitably
kicking all these people out of work and driving the whole world 
towards a kind of a Third World-type polarisation of wealth . . .
that's true if you take a narrow enough perspective on it. But if 
you look into the factors that *made* things the way they are, 
it doesn't even come *close* to being true, it's not remotely
in touch with reality. But when you're studying economics in the
ideological institutions, that's all irrelevant and you're not
supposed to ask questions like these." [_Understanding Power_, 
p. 260]

To ignore all that and simply take the current distribution of wealth
and income as given and then argue that the "free market" produces
the best allocation of resources is staggering. Particularly as the
claim of "efficient allocation" does not address the obvious question:
"efficient" for whose benefit? For the idealisation of freedom in and 
through the market ignores the fact that this freedom is very limited 
in scope to great numbers of people as well as the consequences to the 
individuals concerned by the distribution of purchasing power amongst 
them that the market throws up (rooted, of course in the original 
endowments). Which, of course, explains why, even *if* these parables 
of economics were true, anarchists would still oppose capitalism. We 
extend Thomas Jefferson's comment that the "earth belongs always to the 
living generation" to economic institutions as well as political -- the 
past should not dominate the present and the future (Jefferson: "Can 
one generation bind another and all others in succession forever? I 
think not. The Creator has made the earth for the living, not for the 
dead. Rights and powers can only belong to persons, not to things, not 
to mere matter unendowed with will"). For, as Malatesta argued, people
should "not have the right . . . to subject people to their rule and
even less of bequeathing to the countless successions of their
descendants the right to dominate and exploit future generations."
[_At the Cafe_, p. 48]

Then there is the strange co-incidence that "value free" economics 
generally ends up blaming all the problems of capitalism on workers. 
Unemployment? Recession? Low growth? Wages are too high! Proudhon summed 
up capitalist economic theory well when he stated that "Political economy 
-- that is, proprietary despotism -- can never be in the wrong: it must 
be the proletariat." [_System of Economical Contradictions_, p. 187] And 
little has changed since 1846 (or 1776!) when it comes to economics 
"explaining" capitalism's problems (such as the business cycle or 
unemployment). 

As such, it is hard to consider economics as "value free" when economists 
regularly attack unions while being silent or supportive of big business. 
According to neo-classical economic theory, both are meant to be equally 
bad for the economy but you would be hard pressed to find many economists 
who would urge the breaking up of corporations into a multitude of small 
firms as their theory demands, the number who will thunder against 
"monopolistic" labour is substantially higher (ironically, as we note in 
section C.1.4, their own theory shows that they must urge the break up of
corporations or support unions for, otherwise, unorganised labour *is* 
exploited). Apparently arguing that high wages are always bad but high 
profits are always good is value free.

So while big business is generally ignored (in favour of arguments 
that the economy works "as if" it did not exist), unions are rarely
given such favours. Unlike, say, transnational corporations, unions
are considered monopolistic. Thus we see the strange situation of 
economists (or economics influenced ideologies like right-wing 
"libertarians") enthusiastically defending companies that raise 
their prices in the wake of, say, a natural disaster and making 
windfall profits while, at the same time, attacking workers who 
decide to raise their wages by striking for being selfish. It 
is, of course, unlikely that they would let similar charges against 
bosses pass without comment. But what can you expect from an ideology 
which presents unemployment as a good thing (namely, increased leisure 
-- see section C.1.5) and being rich as, essentially, a *disutility* 
(the pain of abstaining from present consumption falls heaviest on 
those with wealth -- see section C.2.7).

Ultimately, only economists would argue, with a straight face, that 
the billionaire owner of a transnational corporation is exploited 
when the workers in his sweatshops successfully form a union 
(usually in the face of the economic and political power wielded
by their boss). Yet that is what many economists argue: the 
transnational corporation is not a monopoly but the union is
and monopolies exploit others! Of course, they rarely state it
as bluntly as that. Instead they suggest that unions get higher 
wages for their members be forcing other workers to take less 
pay (i.e. by exploiting them). So when bosses break unions they 
are doing this *not* to defend their profits and power but really 
to raise the standard of other, less fortunate, workers? Hardly.
In reality, of course, the reason why unions are so disliked by
economics is that bosses, in general, hate them. Under capitalism,
labour is a cost and higher wages means less profits (all things 
being equal). Hence the need to demonise unions, for one of the 
less understood facts is that while unions increase wages for 
members, they also increase wages for non-union workers. This 
should not be surprising as non-union companies have to raise 
wages stop their workers unionising and to compete for the best 
workers who will be drawn to the better pay and conditions of
union shops (as we discuss in section C.9, the neoclassical 
model of the labour market is seriously flawed). 

Which brings us to another key problem with the claim that economics 
is "value free," namely the fact that it takes the current class 
system of capitalism and its distribution of wealth as not only a 
fact but as an ideal. This is because economics is based on the 
need to be able to differentiate between each factor of production 
in order to determine if it is being used optimally. In other words, 
the given class structure of capitalism is required to show that an 
economy uses the available resources efficiently or not. It
claims to be "value free" simply because it embeds the economic 
relationships of capitalist society into its assumptions about 
nature.

Yet it is impossible to define profit, rent and interest independently 
of the class structure of any given society. Therefore, this "type of 
distribution is the peculiarity of capitalism. Under feudalism the 
surplus was extracted as land rent. In an artisan economy each commodity 
is produced by a men with his own tools; the distinction between wages 
and profits has no meaning there." This means that "the very essence of 
the theory is bound up with a particular institution -- wage labour. 
The central doctrine is that 'wages tend to equal marginal product of 
labour.' Obviously this has no meaning for a peasant household where 
all share the work and the income of their holding according to the 
rules of family life; nor does it apply in a [co-operative] where, 
the workers' council has to decide what part of net proceeds to allot 
to investment, what part to a welfare found and what part to distribute 
as wage." [Joan Robinson, _Collected Economic Papers_, p. 26 and p. 130]

This means that the "universal" principles of economics end up by making
any economy which does *not* share the core social relations of capitalism
inherently "inefficient." If, for example, workers own all three "factors
of production" (labour, land and capital) then the "value-free" laws of
economics concludes that this will be inefficient. As there is only 
"income", it is impossible to say which part of it is attributable to 
labour, land or machinery and, consequently, if these factors are being
efficiently used. This means that the "science" of economics is bound
up with the current system and its specific class structure and, 
therefore, as a "ruling class paradigm, the competitive model" has 
the "substantial" merit that "it can be used to rule off the agenda 
any proposals for substantial reform or intervention detrimental to 
large economic interests . . . as the model allows (on its assumptions) 
a formal demonstration that these would reduce efficiency." [Edward S. 
Herman, "The Selling of Market Economics," pp. 173-199, _New 
Ways of Knowing_, Marcus G. Raskin and Herbert J. Bernstein
(eds.), p. 178]

Then there are the methodological assumptions based on individualism.
By concentrating on individual choices, economics abstracts from 
the social system within which such choices are made and what 
influences them. Thus, for example, the analysis of the causes of 
poverty is turned towards the failings of individuals rather than 
the system as a whole (to be poor becomes a personal stigma). That 
the reality on the ground bears little resemblance to the myth 
matters little -- when people with two jobs still fail to earn 
enough to feed their families, it seems ridiculous to call them 
lazy or selfish. It suggests a failure in the system, not in the 
poor themselves. An individualistic analysis is guaranteed to 
exclude, by definition, the impact of class, inequality, social 
hierarchies and economic/social power and any analysis of any
inherent biases in a given economic system, its distribution of
wealth and, consequently, its distribution of income between 
classes.

This abstracting of individuals from their social surroundings results 
in the generating economic "laws" which are applicable for all 
individuals, in all societies, for all times. This results in all 
concrete instances, no matter how historically different, being 
treated as expressions of the same universal concept. In this way the 
uniqueness of contemporary society, namely its basis in wage labour, 
is ignored ("The period through which we are passing . . . is 
distinguished by a special characteristic -- WAGES." [Proudhon, 
_System of Economical Contradictions_, p. 199]). Such a perspective 
cannot help being ideological rather than scientific. By trying to 
create a theory applicable for all time (and so, apparently, value 
free) they just hide the fact their theory assumes and justifies 
the inequalities of capitalism (for example, the assumption of given 
needs and distribution of wealth and income secretly introduces the 
social relations of the current society back into the model, something 
which the model had supposedly abstracted from). By stressing 
individualism, scarcity and competition, in reality economic analysis 
reflects nothing more than the dominant ideological conceptions found 
in capitalist society. Every few economic systems or societies in 
the history of humanity have actually reflected these aspects of 
capitalism (indeed, a lot of state violence has been used to create 
these conditions by breaking up traditional forms of society, property 
rights and customs in favour of those desired by the current ruling 
elite). 

The very general nature of the various theories of profit, interest 
and rent should send alarm bells ringing. Their authors 
construct these theories based on the deductive method and stress 
how they are applicable in *every* social and economic system. In 
other words, the theories are just that, theories derived independently 
of the facts of the society they are in. It seems somewhat strange, to 
say the least, to develop a theory of, say, interest independently
of the class system within which it is charged but this is precisely 
what these "scientists" do. It is understandable why. By ignoring 
the current system and its classes and hierarchies, the economic 
aspects of this system can be justified in terms of appeals to 
universal human existence. This will raise less objections than 
saying, for example, that interest exists because the rich will 
only part with their money if they get more in return and the 
poor will pay for this because they have little choice due to
their socio-economic situation. Far better to talk about "time
preference" rather than the reality of class society (see 
section C.2.6).

Neoclassical economics, in effect, took the "political" out of 
"political economy" by taking capitalist society for granted along 
with its class system, its hierarchies and its inequalities. This
is reflected in the terminology used. These days even the term 
capitalism has gone out of fashion, replaced with the approved 
terms "market system," the "free market" or "free enterprise." Yet,
as Chomsky noted, terms such as "free enterprise" are used "to 
designate a system of autocratic governance of the economy in 
which neither the community nor the workforce has any role (a
system we would call 'fascist' if translated to the political 
sphere)." [_Language and Politics_, p. 175] As such, it seems 
hardly "value-free" to proclaim a system free when, in reality,
most people are distinctly not free for most of their waking 
hours and whose choices outside production are influenced by 
the inequality of wealth and power which that system of production
create.

This shift in terminology reflects a political necessity. It 
effectively removes the role of wealth (capital) from the economy. 
Instead of the owners and manager of capital being in control or, 
at the very least, having significant impact on social events, we 
have the impersonal activity of "the markets" or "market forces." 
That such a change in terminology is the interest of those whose 
money accords them power and influence goes without saying. By 
focusing on the market, economics helps hide the real sources of 
power in an economy and attention is drawn away from such a key 
questions of how money (wealth) produces power and how it skews 
the "free market" in its favour. All in all, as dissident economist 
John Kenneth Galbraith once put it, "[w]hat economists believe and 
teach is rarely hostile to the institutions that reflect the 
dominant economic power. Not to notice this takes effort, although 
many succeed." [_The Essential Galbraith_, p. 180]

This becomes obvious when we look at how the advice economics gives 
to working class people. In theory, economics is based on individualism 
and competition yet when it comes to what workers should do, the 
"laws" of economics suddenly switch. The economist will now deny 
that competition is a good idea and instead urge that the workers 
co-operate (i.e. obey) their boss rather than compete (i.e. struggle 
over the division of output and authority in the workplace). They 
will argue that there is "harmony of interests" between worker 
and boss, that it is in the *self*-interest of workers *not* to be
selfish but rather to do whatever the boss asks to further *the
bosses* interests (i.e. profits). 

That this perspective implicitly recognises the *dependent* position 
of workers, goes without saying. So while the sale of labour is 
portrayed as a market exchange between equals, it is in fact an 
authority relation between servant and master. The conclusions 
of economics is simply implicitly acknowledging that authoritarian 
relationship by identifying with the authority figure in the 
relationship and urging obedience to them. It simply suggests 
workers make the best of it by refusing to be independent individuals
who need freedom to flourish (at least during working hours, outside
they can express their individuality by shopping). 

This should come as no surprise, for, as Chomsky notes, economics 
is rooted in the notion that "you only harm the poor by making 
them believe that they have rights other than what they can win 
on the market, like a basic right to live, because that kind 
of right interferes with the market, and with efficiency, and 
with growth and so on -- so ultimately people will just be worse off 
if you try to recognise them." [Op. Cit., p. 251] Economics teaches 
that you must accept change without regard to whether it is appropriate 
it not. It teaches that you must not struggle, you must not fight. You 
must simply accept whatever change happens. Worse, it teaches that 
resisting and fighting back are utterly counter-productive. In other
words, it teaches a servile mentality to those subject to authority.
For business, economics is ideal for getting their employees to change 
their attitudes rather than collectively change how their bosses treat 
them, structure their jobs or how they are paid -- or, of course, 
change the system.

Of course, the economist who says that they are conducting "value free"
analysis are indifferent to the kinds of relationships within society is 
being less than honest. Capitalist economic theory is rooted in very
specific assumptions and concepts such as "economic man" and "perfect 
competition." It claims to be "value-free" yet its preferred terminology 
is riddled with value connotations. For example, the behaviour of "economic 
man" (i.e., people who are self-interested utility maximisation machines) 
is described as "rational." By implication, then, the behaviour of real 
people is "irrational" whenever they depart from this severely truncated 
account of human nature and society. Our lives consist of much more than 
buying and selling. We have goals and concerns which cannot be bought or 
sold in markets. In other words, humanity and liberty transcend the limits
of property and, as a result, economics. This, unsurprisingly, affects 
those who study the "science" as well:

"Studying economics also seems to make you a nastier person. Psychological
studies have shown that economics graduate students are more likely to
'free ride' -- shirk contributions to an experimental 'public goods'
account in the pursuit of higher private returns -- than the general
public. Economists also are less generous that other academics in
charitable giving. Undergraduate economics majors are more likely to
defect in the classic prisoner's dilemma game that are other majors.
And on other tests, students grow less honest -- expressing less of
a tendency, for example, to return found money -- after studying 
economics, but not studying a control subject like astronomy.

"This is no surprise, really. Mainstream economics is built entirely
on a notion of self-interested individuals, rational self-maximisers
who can order their wants and spend accordingly. There's little room
for sentiment, uncertainty, selflessness, and social institutions.
Whether this is an accurate picture of the average human is open to
question, but there's no question that capitalism as a system and
economics as a discipline both reward people who conform to the
model." [Doug Henwood, _Wall Street_, p, 143]

So is economics "value free"? Far from it. Given its social role, it
would be surprising that it were. That it tends to produce policy 
recommendations that benefit the capitalist class is not an accident. 
It is rooted in the fibre of the "science" as it reflects the 
assumptions of capitalist society and its class structure. Not only
does it take the power and class structures of capitalism for granted, 
it also makes them the ideal for any and every economy. Given this,
it should come as no surprise that economists will tend to support 
policies which will make the real world conform more closely to 
the standard (usually neoclassical) economic model. Thus the 
models of economics become more than a set of abstract assumptions, 
used simply as a tool in theoretical analysis of the casual
relations of facts. Rather they become political goals, an ideal
towards which reality should be forced to travel. 

This means that economics has a dual character. On the one hand, 
it attempts to prove that certain things (for example, that free 
market capitalism produces an optimum allocation of resources or 
that, given free competition, price formation will ensure that each 
person's income corresponds to their productive contribution). On 
the other, economists stress that economic "science" has nothing to
do with the question of the justice of existing institutions,
class structures or the current economic system. And some people
seem surprised that this results in policy recommendations which 
consistently and systematically favour the ruling class.

C.1.2 Is economics a science?

In a word, no. If by "scientific" it is meant in the usual sense of 
being based on empirical observation and on developing an analysis 
that was consistent with and made sense of the data, then most forms
of economics are not a science. 

Rather than base itself on a study of reality and the generalisation 
of theory based on the data gathered, economics has almost always been
based on generating theories rooted on whatever assumptions were required
to make the theory work. Empirical confirmation, if it happens at all, 
is usually done decades later and if the facts contradict the economics, 
so much the worse for the facts. 

A classic example of this is the neo-classical theory of production. 
As noted previously, neoclassical economics is focused on individual
evaluations of existing products and, unsurprisingly, economics is
indelibly marked by "the dominance of a theoretical vision that treats 
the inner workings of the production process as a 'black box.'" This
means that the "neoclassical theory of the 'capitalist' economy makes 
no qualitative distinction between the corporate enterprise that
employs tens of thousands of people and the small family undertaking
that does no employ any wage labour at all. As far as theory is
concerned, it is technology and market forces, not structures of
social power, that govern the activities of corporate capitalists
and petty proprietors alike." [David Lazonick, _Competitive Advantage 
on the Shop Floor_, p. 34 and pp. 33-4] Production in this schema
just happens -- inputs go in, outputs go out -- and what happens 
inside is considered irrelevant, a technical issue independent of the
social relationships those who do the actual production form between
themselves -- and the conflicts that ensure. 

The theory does have a few key assumptions associated with it, however.
First, there are diminishing returns. This plays a central role. In
mainstream diminishing returns are required to produce a downward
sloping demand curve for a given factor. Second, there is a rising
supply curve based on rising marginal costs produced by diminishing
returns. The average variable cost curve for a firm is assumed to be 
U-shaped, the result of first increasing and then diminishing returns. 
These are logically necessary for the neo-classical theory to work.

Non-economists would, of course, think that these assumptions are
generalisations based on empirical evidence. However, they are not.
Take the U-shaped average cost curve. This was simply invented by
A. C. Pigou, "a loyal disciple of [leading neo-classical Alfred]
Marshall and quite innocent of any knowledge of industry. He therefore 
constructed a U-shaped average cost curve for a firm, showing economies 
of scale up to a certain size and rising costs beyond it." [Joan 
Robinson, _Collected Economic Papers_, vol. 5, p. 11] The invention
was driven by need of the theory, not the facts. With increasing 
returns to scale, then large firms would have cost advantages against
small ones and would drive them out of business in competition. This
would destroy the concept of perfect competition. However, the 
invention of the average cost curve allowed the theory to work as 
"proved" that a competitive market could *not* become dominated by 
a few large firms, as feared. 

The model, in other words, was adjusted to ensure that it produced 
the desired result rather than reflect reality. The theory was 
required to prove that markets remained competitive and the 
existence of diminishing marginal returns to scale of production 
*did* tend by itself to limit the size of individual firms. That 
markets did become dominated by a few large firms was neither here 
nor there. It did not happen in theory and, consequently, that 
was the important thing and so "when the great concentrations of 
power in the multinational corporations are bringing the age of 
national employment policy to an end, the text books are still 
illustrated by U-shaped curves showing the limitation on the 
size of firms in a perfectly competitive market." [Joan Robinson,
_Contributions to Modern Economics_, p. 5]

To be good, a theory must have two attributes: They accurately describe 
the phenomena in question and they make accurate predictions. Neither
holds for Pigou's invention: reality keeps getting in the way. Not only
did the rise of a few large firms dominating markets indirectly show that
the theory was nonsense, when empirical testing was finally done decades
after the theory was proposed it showed that in most cases the opposite 
is the case: that there were constant or even falling costs in production.
Just as the theories of marginality and diminishing marginal returns 
taking over economics, the real world was showing how wrong it was with
the rise of corporations across the world. 

So the reason why the market become dominated by a few firms should be 
obvious enough: actual corporate price is utterly different from the 
economic theory. This was discovered when researchers did what the 
original theorists did not think was relevant: they actually asked 
firms what they did and the researchers consistently found that, for 
the vast majority of manufacturing firms their average costs of 
production declined as output rose, their marginal costs were 
always well below their average costs, and substantially smaller 
than 'marginal revenue', and the concept of a 'demand curve' (and 
therefore its derivative 'marginal revenue') was simply irrelevant. 

Unsurprisingly, real firms set their prices prior to sales, based on a 
mark-up on costs at a target rate of output. In other words, they did 
not passively react to the market. These prices are an essential feature 
of capitalism as prices are set to maintain the long-term viability of 
the firm. This, and the underlying reality that per-unit costs fell as 
output levels rose, resulted in far more stable prices than were 
predicted by traditional economic theory. One researcher concluded 
that administered prices "differ so sharply from the behaviour to be 
expected from" the theory "as to challenge the basic conclusions" of 
it. He warned that until such time as "economic theory can explain
and take into account the implications" of this empirical data, "it
provides a poor basis for public policy." Needless to say, this did
not disturb neo-classical economists or stop them providing public
policy recommendations. [Gardiner C. Means, "The Administered-Price 
Thesis Reconfirmed", _The American Economic Review_, pp. 292-306, 
Vol. 62, No. 3, p. 304]

One study in 1952 showed firms a range of hypothetical cost curves, 
and asked firms which ones most closely approximated their own costs. 
Over 90% of firms chose a graph with a declining average cost rather 
than one showing the conventional economic theory of rising marginal 
costs. These firms faced declining average cost, and their marginal 
revenues were much greater than marginal cost at all levels of output. 
Unsurprisingly, the study's authors concluded if this sample was typical 
then it was "obvious that short-run marginal price theory should be
revised in the light of reality." We are still waiting. [Eiteman and 
Guthrie, "The Shape of the Average Cost Curve", _The American Economic
Review_, pp. 832-8, Vol. 42, No. 5, p. 838]

A more recent study of the empirical data came to the same conclusions,
arguing that it is "overwhelming bad news . . . for economic theory."
While economists treat rising marginal cost as the rule, 89% of firms
in the study reported marginal costs which were either constant or
declined with output. As for price elasticity, it is not a vital
operational concept for corporations. In other words, the "firms
that sell 40 percent of GDP believe their demand is totally 
insensitive to price" while "only about one-sixth of GDP is sold
under conditions of elastic demand." [A.S. Blinder, E. Cabetti,
D. Lebow and J. Rudd, _Asking About Prices_, p. 102 and p. 101] 

Thus empirical research has concluded that actual price setting has nothing 
to do with clearing the market by equating market supply to market demand 
(i.e. what economic theory sees as the role of prices). Rather, prices 
are set to enable the firm to continue as a going concern and equating 
supply and demand in any arbitrary period of time is irrelevant to a firm 
which hopes to exist for the indefinite future. As Lee put it, basing 
himself on extensive use of empirical research, "market prices are not 
market-clearing or profit-maximising prices, but rather are enterprise-, 
and hence transaction-reproducing prices." Rather than a non-existent
equilibrium or profit maximisation at a given moment determining prices,
the market price is "set and the market managed for the purpose of 
ensuring continual transactions for those enterprises in the market,
that is for the benefit of the business leaders and their enterprises."
A significant proportion of goods have prices based on mark-up, normal
cost and target rate of return pricing procedures and are relatively
stable over time. Thus "the existence of stable, administered market
prices implies that the markets in which they exist are not organised
like auction markets or like the early retail markets and oriental 
bazaars" as imagined in mainstream economic ideology. [Frederic S. 
Lee, _Post Keynesian Price Theory_, p. 228 and p. 212]

Unsurprisingly, most of these researchers were highly critical the 
conventional economic theory of markets and price setting. One viewed 
the economists' concepts of perfect competition and monopoly as virtual 
nonsense and "the product of the itching imaginations of uninformed and 
inexperienced armchair theorisers." [Tucker, quoted by Lee, Op. Cit., 
p. 73f] Which *was* exactly how it was produced.

No other science would think it appropriate to develop theory utterly
independently of phenomenon under analysis. No other science would wait
decades before testing a theory against reality. No other science would
then simply ignore the facts which utterly contradicted the theory and
continue to teach that theory as if it were a valid generalisation of
the facts. But, then, economics is not a science.

This strange perspective makes sense once it is realised how key the
notion of diminishing costs is to economics. In fact, if the assumption
of increasing marginal costs is abandoned then so is perfect competition
and "the basis of which economic laws can be constructed . . . is shorn 
away," causing the "wreckage of the greater part of general equilibrium 
theory." This will have "a very destructive consequence for economic 
theory," in the words of one leading neo-classical economist. [John 
Hicks, _Value and Capital_, pp. 83-4] As Steve Keen notes, this is 
extremely significant:

"Strange as it may seem . . . this is a very big deal. If marginal
returns are constant rather than falling, then the neo-classical 
explanation of everything collapses. Not only can economic theory 
no longer explain how much a firm produces, it can explain nothing
else.

"Take, for example, the economic theory of employment and wage
determination . . . The theory asserts that the real wage is 
equivalent to the marginal product of labour . . . An employer
will employ an additional worker if the amount the worker adds
to output -- the worker's marginal product -- exceeds the real
wage . . . [This] explains the economic predilection for blaming
everything on wages being too high -- neo-classical economics
can be summed up, as [John Kenneth] Galbraith once remarked, 
in the twin propositions that the poor don't work hard enough
because they're paid too much, and the rich don't work hard
enough because they're not paid enough . . .

"If in fact the output to employment relationship is relatively
constant, then the neo-classical explanation for employment and
output determination collapses. With a flat production function,
the marginal product of labour will be constant, and it will
*never* intersect the real wage. The output of the form then
can't be explained by the cost of employing labour. . . [This
means that] neo-classical economics simply cannot explain 
anything: neither the level of employment, nor output, nor,
ultimately, what determines the real wage . . .the entire
edifice of economics collapses." [_Debunking Economics_,
pp. 76-7]

It should be noted that the empirical research simply confirmed
an earlier critique of neo-classical economics presented by
Piero Sraffa in 1926. He argued that while the neo-classical
model of production works in theory only if we accept its 
assumptions. If those assumptions do not apply in practice,
then it is irrelevant. He therefore "focussed upon the economic
assumptions that there were 'factors of production' which were
fixed in the short run, and that supply and demand were 
independent of each other. He argued that these two assumptions 
could be fulfilled simultaneously. In circumstances where it
was valid to say some factor of production was fixed in the short 
term, supply and demand could not independent, so that every 
point on the supply curve would be associated with a different
demand curve. On the other hand, in circumstances where supply
and demand could justifiably be treated as independent, then it
would be impossible for any factor of production to be fixed.
Hence the marginal costs of production would be constant."
He stressed firms would have to be irrational to act otherwise,
foregoing the chance to make profits simply to allow economists
to build their models of how they should act. [Keen, Op. Cit., 
pp. 66-72] 

Another key problem in economics is that of time. This has been known, 
and admitted, by economists for some time. Marshall, for example, stated
that "the element of *time*" was "the source of many of the greatest
difficulties of economics." [_Principles of Economics_, p. 109] The
founder of general equilibrium theory, Walras, recognised that the
passage of time wrecked his whole model and stated that we "shall 
resolve the . . . difficulty purely and simply by ignoring the time 
element at this point." This was due, in part, because production
"requires a certain lapse of time." [_Elements of Pure Economics_, 
p. 242] This was generalised by Gerard Debreu (in his Nobel Prize
for economics winning _Theory of Value_) who postulated that everyone
makes their sales and purchases for all time in one instant. 

Thus the cutting edge of neo-classical economics, general equilibrium 
ignores both time *and* production. It is based on making time 
stop, looking at finished goods, getting individuals to bid for 
them and, once all goods are at equilibrium, allowing the transactions 
to take place. For Walras, this was for a certain moment of time and
was repeated, for his followers it happened once for all eternity. 
This is obviously not the way markets work in the real world and, 
consequently, the dominant branch of economics is hardly scientific.
Sadly, the notion of individuals having full knowledge of both now
and the future crops up with alarming regularly in the "science"
of economics.

Even if we ignore such minor issues as empirical evidence and time,
economics has problems even with its favoured tool, mathematics. As
Steve Keen has indicated, economists have "obscured reality using 
mathematics because they have practised mathematics badly, and
because they have not realised the limits of mathematics." indeed,
there are "numerous theorems in economics that reply upon 
mathematically fallacious propositions." [Op. Cit., p. 258 and 
p. 259] For a theory born from the desire to apply calculus to 
economics, this is deeply ironic. As an example, Keen points to 
the theory of perfect competition which assumes that while the 
demand curve for the market as a whole is downward sloping, an 
individual firm in perfect competition is so small that it cannot 
affect the market price and, consequently, faces a horizontal 
demand curve. Which is utterly impossible. In other words, 
economics breaks the laws of mathematics. 

These are just two examples, there are many, many more. However, these
two are pretty fundamental to the whole edifice of modern economic
theory. Much, if not most, of mainstream economics is based upon 
theories which have little or no relation to reality. Kropotkin's 
dismissal of "the metaphysical definitions of the academical 
economists" is as applicable today. [_Evolution and Environment_,
p. 92] Little wonder dissident economist Nicholas Kaldor argued that:

"The Walrasian [i.e. general] equilibrium theory is a highly developed
intellectual system, much refined and elaborated by mathematical 
economists since World War II -- an intellectual experiment . . . But 
it does not constitute a scientific hypothesis, like Einstein's theory 
of relativity or Newton's law of gravitation, in that its basic assumptions 
are axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be tested. 
The assumptions make assertions about reality in their implications, but 
these are not founded on direct observation, and, in the opinion of 
practitioners of the theory at any rate, they cannot be contradicted by 
observation or experiment." [_The Essential Kaldor_, p. 416]

C.1.3 Can you have an economics based on individualism?

In a word, no. No economic system is simply the sum of its parts. The 
idea that capitalism is based on the subjective evaluations of individuals 
for goods flies in the face of both logic and the way capitalism works. 
In other words, modern economists is based on a fallacy. While it would 
be expected for critics of capitalism to conclude this, the ironic thing 
is that economists themselves have proven this to be the case. 

Neoclassical theory argues that marginal utility determines demand and
price, i.e. the price of a good is dependent on the intensity of demand
for the marginal unit consumed. This was in contrast to classic economics,
which argued that price (exchange value) was regulated by the cost of
production, ultimately the amount of labour used to create it. While
realistic, this had the political drawback of implying that profit,
rent and interest were the product of unpaid labour and so capitalism 
was exploitative. This conclusion was quickly seized upon by numerous 
critics of capitalism, including Proudhon and Marx. The rise of marginal 
utility theory meant that such critiques could be ignored. 

However, this change was not unproblematic. The most obvious problem with 
it is that it leads to circular reasoning. Prices are supposed to measure 
the "marginal utility" of the commodity, yet consumers need to know the 
price *first* in order to evaluate how best to maximise their satisfaction. 
Hence it "obviously rest[s] on circular reasoning. Although it tries to 
explain prices, prices [are] necessary to explain marginal utility." 
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p.58] 
In the end, as Jevons (one of the founders of the new economics) 
acknowledged, the price of a commodity is the only test we have of the 
utility of the commodity to the producer. Given that marginality utility 
was meant to explain those prices, the failure of the theory could not 
be more striking.

However, this is the least of its problems. At first, the neoclassical 
economists used cardinal utility as their analysis tool. Cardinal utility 
meant that it was measurable  between individuals, i.e. that the utility 
of a given good was the same for all. While this allowed prices to be 
determined, it caused obvious political problems as it obviously justified 
the taxation of the wealthy. As cardinal utility implied that the "utility" 
of an extra dollar to a poor person was clearly greater than the loss of 
one dollar to a rich man, it was appropriated by reformists precisely to 
justify social reforms and taxation. 

Capitalist economists had, yet again, created a theory that could be used 
to attack capitalism and the income and wealth hierarchy it produces. As
with classical economics, socialists and other social reformists used the
new theories to do precisely that, appropriating it to justify the 
redistribution of income and wealth downward (i.e. back into the hands of 
the class who had created it in the first place). Combine this with
the high levels of class conflict at the time and it should come as 
no surprise that the "science" of economics was suitably revised.

There was, of course, a suitable "scientific" rationale for this revision.
It was noted that as individual evaluations are inherently subjective,
it is obvious that cardinal utility was impossible in practice. Of 
course, cardinality was not totally rejected. Neoclassical economics 
retained the idea that capitalists maximise profits, which is a cardinal 
quantity. However for demand utility became "ordinal," that is utility 
was considered an individual thing and so could not be measured. This 
resulted in the conclusion that there was no way of making interpersonal 
comparisons between individuals and, consequently, no basis for saying
a pound in the hands of a poor person had more utility than if it had 
remained in the pocket of a billionaire. The economic case for taxation
was now, apparently, closed. While you may think that income redistribution
was a good idea, it was now proven by "science" that this little more
than a belief as all interpersonal comparisons were now impossible. 
That this was music to the ears of the wealthy was, of course, just 
one of those strange co-incidences which always seems to plague 
economic "science."

The next stage of the process was to abandon then ordinal utility in 
favour of "indifference curves" (the continued discussion of "utility" 
in economics textbooks is primarily heuristic). In this theory 
consumers are supposed to maximise their utility by working out which 
bundle of goods gives them the highest level of satisfaction based
on the twin constraints of income and given prices (let us forget, for
the moment, that marginal utility was meant to determines prices in the
first place). To do this, it is assumed that incomes and tastes are
independent and that consumers have pre-existing preferences for all
possible bundles.

This produces a graph that shows different quantities of two different goods, 
with the "indifference curves" showing the combinations of goods which give
the consumer the same level of satisfaction (hence the name, as the consumer
is "indifferent" to any combination along the curve). There is also a straight 
line representing relative prices and the consumer's income and this budget 
line shows the uppermost curve the consumer can afford to reach. That these
indifference curves could not be observed was not an issue although leading 
neo-classical economist Paul Samuelson provided an apparent means see these
curves by his concept of "revealed preference" (a basic tautology). There 
is a reason why "indifference curves" cannot be observed. They are literally 
impossible for human beings to calculate once you move beyond a trivially 
small set of alternatives and it is impossible for actual people to act as 
economists argue they do. Ignoring this slight problem, the "indifference 
curve" approach to demand can be faulted for another, even more basic, 
reason. It does not prove what it seeks to show:

"Though mainstream economics began by assuming that this hedonistic,
individualist approach to analysing consumer demand was intellectually
sound, *it ended up proving that it was not.* The critics were right:
society is more than the sum of its individual members." [Steve Keen,
_Debunking Economics_, p. 23]

As noted above, to fight the conclusion that redistributing wealth would 
result in a different level of social well-being, economists had to show 
that "altering the distribution of income did not alter social welfare.
They worked out that two conditions were necessary for this to be
true: (a) that all people have the same tastes; (b) that each person's
tastes remain the same as her income changes, so that every additional
dollar of income was spent exactly the same way as all previous dollars."
The former assumption "in fact amounts to assuming that there is only
one person in society" or that "society consists of a multitude of
identical drones" or clones. The latter assumption "amounts to assuming
that there is only one commodity -- since otherwise spending patterns 
would necessary change as income rose." [Keen, Op. Cit., p. 24] This
is the real meaning of the assumption that all goods and consumers 
can be considered "representative." Sadly, such individuals and goods
do not exist. Thus:

"Economics can prove that 'the demand curve slows downward in price'
for a single individual and a single commodity. But in a society 
consisting of many different individuals with many different 
commodities, the 'market demand curve' is more probably jagged, and
slopes every which way. One essential building block of the economic
analysis of markets, the demand curve, therefore does not have the
characteristics needed for economic theory to be internally 
consistent . . . most mainstream academic economists are aware of 
this problem, but they pretend that the failure can be managed with a 
couple of assumptions. Yet the assumptions themselves are so absurd 
that only someone with a grossly distorted sense of logic could accept 
them. That grossly distorted sense of logic is acquired in the course of
a standard education in economics." [Op. Cit., pp. 25-7]

Rather than produce a "social indifference map which had the same
properties as the individual indifference maps" by adding up all the 
individual maps, economics "proved that this consistent summation from 
individual to society could *not* be achieved." Any sane person would 
have rejected the theory at this stage, but not economists. Keen states 
the obvious: "That economists, in general, failed to draw this inference 
speaks volumes for the unscientific nature of economic theory." They 
simply invented "some fudge to disguise the gapping hole they have 
uncovered in the theory." [Op. Cit., p. 40 and p. 48] Ironically, it
took over one hundred years and advanced mathematical logic to reach 
the same conclusion that the classical economists took for granted, 
namely that individual utility could not be measured and compared. 
However, instead of seeking exchange value (price) in the process of
production, neoclassical economists simply that made a few absurd 
assumptions and continued on its way as if nothing was wrong. 

This is important because "economists are trying to prove that a
market economy necessarily maximises social welfare. If they can't
prove that the market demand curve falls smoothly as price rises,
they can't prove that the market maximises social welfare." In
addition, "the concept of a social indifference curve is crucial
to many of the key notions of economics: the argument that free 
trade is necessarily superior to regulated trade, for example,
is first constructed using a social indifference curve. Therefore,
if the concept of a social indifference curve itself is invalid,
then so too are many of the most treasured notions of economics."
[Keen, Op. Cit., p. 50] This means much of economic theory is 
invalidated and with it the policy recommendations based on it. 

This elimination of individual differences in favour of a society
of clones by marginalism is not restricted to demand. Take the 
concept of the "representative firm" used to explain supply. Rather
than a theoretical device to deal with variety, it ignores diversity.
It is a heuristic concept which deals with a varied collection of
firms by identifying a single set of distinct characteristics which
are deemed to represent the essential qualities of the industry 
as a whole. It is *not* a single firm or even a typical or average
firm. It is an imaginary firm which exhibits the "representative"
features of the entire industry, i.e. it treats an industry as if 
it were just one firm. Moreover, it should be stressed that 
this concept is driven by the needs to prove the model, not by any 
concern over reality. The "real weakness" of the "representative 
firm" in neo-classical economics is that it is "no more than
a firm which answers the requirements expected from it by the
supply curve" and because it is "nothing more than a small-scale
replica of the industry's supply curve that it is unsuitable for
the purpose it has been called into being." [Kaldor, _The
Essential Kaldor_, p. 50] 

Then there is neoclassical analysis of the finance market. According 
to the Efficient Market Hypothesis, information is disseminated 
equally among all market participants, they all hold similar
interpretations of that information and all can get access to all
the credit they need at any time at the same rate. In other words, 
everyone is considered to be identical in terms of what they know, 
what they can get and what they do with that knowledge and cash. 
This results in a theory which argues that stock markets accurately 
price stocks on the basis of their unknown future earnings, i.e. 
that these identical expectations by identical investors are correct. 
In other words, investors are able to correctly predict the future 
and act in the same way to the same information. Yet if everyone 
held identical opinions then there would be no trading of shares 
as trading obviously implies *different* opinions on how a stock 
will perform. Similarly, in reality investors are credit rationed, 
the rate of borrowing tends to rise as the amount borrowed increases 
and the borrowing rate normally exceeds the leading rate. The 
developer of the theory was honest enough to state that the "consequence 
of accommodating such aspects of reality are likely to be disastrous 
in terms of the usefulness of the resulting theory . . . The theory 
is in a shambles." [W.F Sharpe, quoted by Keen, Op. Cit., p. 233] 

Thus the world was turned into a single person simply to provide a 
theory which showed that stock markets were "efficient" (i.e. accurately 
reflect unknown future earnings). In spite of these slight problems, 
the theory was accepted in the mainstream as an accurate reflection 
of finance markets. Why? Well, the implications of this theory are 
deeply political as it suggests that finance markets will never 
experience bubbles and deep slumps. That this contradicts the 
well-known history of the stock market was considered unimportant. 
Unsurprisingly, "as time went on, more and more data turned up which
was not consistent with" the theory. This is because the model's 
world "is clearly not our world." The theory "cannot apply in a
world in which investors differ in their expectations, in which the
future is uncertain, and in which borrowing is rationed." It 
"should never have been given any credibility -- yet instead it
became an article of faith for academics in finance, and a
common belief in the commercial world of finance." [Keen, Op. Cit.,
p. 246 and p. 234] 

This theory is at the root of the argument that finance markets should 
be deregulated and as many funds as possible invested in them. While 
the theory may benefit the minority of share holders who own 
the bulk of shares and help them pressurise government policy, it 
is hard to see how it benefits the rest of society. Alternative, 
more realistic theories, argue that finance markets show endogenous 
instability, result in bad investment as well as reducing the overall 
level of investment as investors will not fund investments which are 
not predicted to have a sufficiently high rate of return. All of 
which has a large and negative impact on the real economy. Instead, 
the economic profession embraced a highly unreal economic theory 
which has encouraged the world to indulge in stock market 
speculation as it argues that they do not have bubbles, booms 
or bursts (that the 1990s stock market bubble finally burst like 
many previous ones is unlikely to stop this). Perhaps this has to do 
the implications for economic theory for this farcical analysis of 
the stock market? As two mainstream economists put it:

"To reject the Efficient Market Hypothesis for the whole stock
market . . . implies broadly that production decisions based on
stock prices will lead to inefficient capital allocations. More
generally, if the application of rational expectations theory to
the virtually 'idea' conditions provided by the stock market fails,
then what confidence can economists have in its application to
other areas of economics . . . ?" [Marsh and Merton, quoted by
Doug Henwood, _Wall Street_, p. 161]

Ultimately, neoclassical economics, by means of the concept of 
"representative" agent, has proved that subjective evaluations 
could not be aggregated and, as a result, a market supply and 
demand curves cannot be produced. In other words, neoclassical 
economics has shown that if society were comprised of one individual, 
buying one good produced by one factory then it could accurately reflect
what happened in it. "It is stating the obvious," states Keen, "to 
call the representative agent an 'ad hoc' assumption, made simply 
so that economists can pretend to have a sound basis for their 
analysis, when in reality they have no grounding whatsoever." 
[Op. Cit., p. 188]

There is a certain irony about the change from cardinal to ordinal
utility and finally the rise of the impossible nonsense which are
"indifference curves." While these changes were driven by the need
to deny the advocates of redistributive taxation policies the mantel
of economic science to justify their schemes, the fact is by rejecting 
cardinal utility, it becomes impossible to say whether state action 
like taxes decreases utility at all. With ordinal utility and its
related concepts, you cannot actually show that government intervention 
actually harms "social utility." All you can say is that they are 
indeterminate. While the rich may lose income and the poor gain, it 
is impossible to say anything about social utility without making an 
interpersonal (cardinal) utility comparison. Thus, ironically, ordinal 
utility based economics provides a much weaker defence of free market 
capitalism by removing the economist of the ability to call any act of 
government "inefficient" and they would have to be evaluated in, horror
of horrors, non-economic terms. As Keen notes, it is "ironic that this
ancient defence of inequality ultimately backfires on economics, by
making its impossible to construct a market demand curve which is 
independent on the distribution of income . . . economics cannot defend 
any one distribution of income over any other. A redistribution of 
income that favours the poor over the rich cannot be formally 
opposed by economic theory." [Op. Cit., p. 51]

Neoclassical economics has also confirmed that the classical perspective 
of analysing society in terms of classes is also more valid than the 
individualistic approach it values. As one leading neo-classical economist
has noted, if economics is "to progress further we may well be forced
to theorise in terms of groups who have collectively coherent behaviour."
Moreover, the classical economists would not be surprised by the 
admission that "the addition of production *can* help" economic analysis
nor the conclusion that the "idea that we should start at the level of
the isolated individual is one which we may well have to abandon . . .
If we aggregate over several individuals, such a model is unjustified."
[Alan Kirman, "The Intrinsic Limits of Modern Economy Theory", pp. 126-139,
_The Economic Journal_, Vol. 99, No. 395, p. 138, p. 136 and p. 138]

So why all the bother? Why spend over 100 years driving economics into
a dead-end? Simply because of political reasons. The advantage of 
the neoclassical approach was that it abstracted away from production 
(where power relations are clear) and concentrated on exchange (where 
power works indirectly). As libertarian Marxist Paul Mattick notes,
the "problems of bourgeois economics seemed to disappear as soon as one 
ignored production and attended only to the market . . . Viewed apart from 
production, the price problem can be dealt with purely in terms of the 
market." [_Economic Crisis and Crisis Theory_, p. 9] By ignoring 
production, the obvious inequalities of power produced by the dominant 
social relations within capitalism could be ignored in favour of 
looking at abstract individuals as buyers and sellers. That this meant 
ignoring such key concepts as time by forcing economics into a static, 
freeze frame, model of the economy was a price worth paying as it 
allowed capitalism to be justified as the best of all possible worlds:

"On the one hand, it was thought essential to represent the winning of 
profit, interest, and rent as participation in the creation of wealth. 
On the other, it was thought desirable to found the authority of economics 
on the procedures of natural science. This second desire prompted a search 
for general economic laws independent of time and circumstances. If such 
laws could be proven, the existing society would thereby be legitimated 
and every idea of changing it refuted. Subjective value theory promised 
to accomplish both tasks at once. Disregarding the exchange relationship 
peculiar to capitalism -- that between the sellers and buyers of labour 
power -- it could explain the division of the social product, under 
whatever forms, as resulting from the needs of the exchangers themselves."
[Mattick, Op. Cit., p. 11]

The attempt to ignore production implied in capitalist economics comes 
from a desire to hide the exploitative and class nature of capitalism. 
By concentrating upon the "subjective" evaluations of individuals, 
those individuals are abstracted away from real economic activity (i.e. 
production) so the source of profits and power in the economy can be 
ignored (section C.2 indicates why exploitation of labour in production 
is the source of profit, interest and rent and *not* exchanges in the 
market). 

Hence the flight from classical economics to the static, timeless
world of individuals exchanging pre-existing goods on the market. The 
evolution of capitalist economics has always been towards removing any
theory which could be used to attack capitalism. Thus classical economics 
was rejected in favour of utility theory once socialists and anarchists 
used it to show that capitalism was exploitative. Then this utility theory
was modified over time in order to purge it of undesirable political
consequences. In so doing, they ended up not only proving that an economics
based on individualism was impossible but also that it cannot be used to
oppose redistribution policies after all. 

C.1.4 What is wrong with equilibrium analysis?

The dominant form of economic analysis since the 1880s has been equilibrium 
analysis. While equilibrium had been used by classical economics to explain 
what regulated market prices, it did not consider it as reflecting any real 
economy. This was because classical economics analysed capitalism as a 
mode of production rather than as a mode of exchange, as a mode of 
circulation, as neo-classical economics does. It looked at the process of 
creating products while neo-classical economics looked at the price 
ratios between already existing goods (this explains why neo-classical 
economists have such a hard time understanding  classical or Marxist 
economics, the schools are talking about different things and why they
tend to call any market system "capitalism" regardless of whether wage
labour predominates of not). The classical school is based on an analysis 
of markets based on production of commodities through time. The 
neo-classical school is based on an analysis of markets based on the 
exchange of the goods which exist at any moment of time.

This indicates what is wrong with equilibrium analysis, it is essentially
a static tool used to analyse a dynamic system. It assumes stability 
where none exists. Capitalism is always unstable, always out of equilibrium, 
since "growing out of capitalist competition, to heighten exploitation, 
. . . the relations of production . . . [are] in a state of perpetual 
transformation, which manifests itself in changing relative prices of 
goods on the market. Therefore the market is continuously in 
disequilibrium, although with different degrees of severity, thus giving 
rise, by its occasional approach to an equilibrium state, to the illusion 
of a tendency toward equilibrium." [Mattick, Op. Cit., p. 51] Given 
this obvious fact of the real economy, it comes as no surprise that 
dissident economists consider equilibrium analysis as "a major 
obstacle to the development of economics as a *science* -- meaning 
by the term 'science' a body of theorems based on assumptions that are
*empirically* derived (from observations) and which embody hypotheses that 
are capable of verification both in regard to the assumptions and the 
predictions." [Kaldor, _The Essential Kaldor_, p. 373]

Thus the whole concept is an unreal rather than valid abstraction of
reality. Sadly, the notions of "perfect competition" and (Walrasian) "general 
equilibrium" are part and parcel of neoclassical economics. It attempts 
to show, in the words of Paul Ormerod, "that under certain assumptions the 
free market system would lead to an allocation of a given set of resources 
which was in a very particular and restricted sense optimal from the point
of view of every individual and company in the economy." [_The Death
of Economics_, p. 45] This was what Walrasian general equilibrium proved.
However, the assumptions required prove to be somewhat unrealistic (to 
understate the point). As Ormerod points out:

"[i]t cannot be emphasised too strongly that . . . the competitive model 
is far removed from being a reasonable representation of Western
economies in practice. . . [It is] a travesty of reality. The world
does not consist, for example, of an enormous number of small firms,
none of which has any degree of control over the market . . . The
theory introduced by the marginal revolution was based upon a series
of postulates about human behaviour and the workings of the economy.
It was very much an experiment in pure thought, with little empirical
rationalisation of the assumptions." [Op. Cit., p. 48]

Indeed, "the weight of evidence" is "against the validity of the model 
of competitive general equilibrium as a plausible representation of
reality." [Op. Cit., p. 62] For example, to this day, economists 
still start with the assumption of a multitude of firms, even worse, a 
"continuum" of them exist in *every* market. How many markets are there 
in which there is an infinite number of traders? This means that from
the start the issues and problems associated with oligopoly and imperfect 
competition have been abstracted from. This means the theory does not 
allow one to answer interesting questions which turn on the asymmetry of 
information and bargaining power among economic agents, whether due 
to size, or organisation, or social stigmas, or whatever else. In the 
real world, oligopoly is common place and asymmetry of information and 
bargaining power the norm. To abstract from these means to present an 
economic vision at odds with the reality people face and, therefore, 
can only propose solutions which harm those with weaker bargaining 
positions and without information. 

General equilibrium is an entirely static concept, a market marked
by perfect knowledge and so inhabited by people who are under no
inducement or need to act. It is also timeless, a world without a 
future and so with no uncertainty (any attempt to include time, and 
so uncertainty, ensures that the model ceases to be of value). At
best, economists include "time" by means of comparing one static
state to another, i.e. "the features of one non-existent equilibrium 
were compared with those of a later non-existent equilibrium." [Mattick,
Op. Cit., p. 22] How the economy actually changed from one stable
state to another is left to the imagination. Indeed, the idea of 
any long-run equilibrium is rendered irrelevant by the movement 
towards it as the  equilibrium also moves. Unsurprisingly, therefore, 
to construct an equilibrium path through time requires all prices for 
all periods to be determined at the start and that everyone foresees 
future prices correctly for eternity -- including for goods not 
invented yet. Thus the model cannot easily or usefully account for 
the reality that economic agents do not actually know such things as 
future prices, future availability of goods, changes in production 
techniques or in markets to occur in the future, etc. Instead, to 
achieve its results -- proofs about equilibrium conditions -- the 
model assumes that actors have perfect knowledge at least of the 
probabilities of all possible outcomes for the economy. The opposite 
is obviously the case in reality:

"Yet the main lessons of these increasingly abstract and unreal
theoretical constructions are also increasingly taken on trust
. . . It is generally taken for granted by the great majority
of academic economists that the economy always approaches, or
is near to, a state of 'equilibrium' . . . all propositions
which the *pure* mathematical economist has shown to be valid
only on assumptions that are manifestly unreal -- that is to
say, directly contrary to experience and not just 'abstract.' 
In fact, equilibrium theory has reached the stage where the 
pure theorist has successfully (though perhaps inadvertently)
demonstrated that the main implications of this theory cannot
possibly hold in reality, but has not yet managed to pass his
message down the line to the textbook writer and to the classroom."
[Kaldor, Op. Cit., pp. 376-7]

In this timeless, perfect world, "free market" capitalism will prove
itself an efficient method of allocating resources and all markets will 
clear. In part at least, General Equilibrium Theory is an abstract answer 
to an abstract and important question: Can an economy relying only on 
price signals for market information be orderly? The answer of general 
equilibrium is clear and definitive -- one can describe such an economy 
with these properties. However, no actual economy has been described and,
given the assumptions involved, none could ever exist. A theoretical 
question has been answered involving some amount of intellectual 
achievement, but it is a answer which has no bearing to reality. And 
this is often termed the "high theory" of equilibrium. Obviously most 
economists must treat the real world as a special case.

Little wonder, then, that Kaldor argued that his "basic objection
to the theory of general equilibrium is not that it is abstract -- 
all theory is abstract and must necessarily be so since there can
be no analysis without abstraction -- but that it starts from the
wrong kind of abstraction, and therefore gives a misleading
'paradigm' . . . of the world as it is; it gives a misleading
impression of the nature and the manner of operation of economic
forces." Moreover, belief that equilibrium theory is the only 
starting point for economic analysis has survived "despite the 
increasing (*not* diminishing) arbitrariness of its based 
assumptions -- which was forced upon its practitioners by the ever 
more precise cognition of the needs of logical consistency. In 
terms of gradually converting an 'intellectual experiment' . . . 
into a scientific theory -- in other words, a set of theorems 
directly related to observable phenomena -- the development of 
theoretical economics was one of continual *de*gress, not *pro*gress 
. . . The process . . . of *relaxing* the unreal basis assumptions 
. . . has not yet started. Indeed, [they get] . . . thicker and more 
impenetrable with every successive reformation of the theory." 
[Op. Cit., p. 399 and pp. 375-6]

Thus General Equilibrium theory analyses an economic state which 
there is no reason to suppose will ever, or has ever, come about.
It is, therefore, an abstraction which has no discernible applicability 
or relevance to the world as it is. To argue that it can give insights
into the real world is ridiculous. While it is true that there are 
certain imaginary intellectual problems for which the general 
equilibrium model is well designed to provide precise answers (if 
anything really could), in practice this means the same as saying 
that if one insists on analysing a problem which has no real world 
equivalent or solution, it may be appropriate to use a model which 
has no real-world application. Models derived to provide answers to 
imaginary problems will be unsuitable for resolving practical, 
real-world economic problems or even providing a useful insight 
into how capitalism works and develops. 

This can have devastating real world impact, as can be seen from the
results of neoclassical advice to Eastern Europe and other countries
in their transition from state capitalism (Stalinism) to private
capitalism. As Joseph Stiglitz documents it was a disaster for all 
but the elite due to the "market fundamentalism preached" by economists
It resulted in "a marked deterioration" in most peoples "basic standard
of living, reflected in a host of social indicators" and well as 
large drops in GDP. [_Globalisation and its discontents_, p. 138 
and p. 152] Thus real people can be harmed by unreal theory. That 
the advice of neoclassical economists has made millions of
people look back at Stalinism as "the good old days" should be 
enough to show its intellectual and moral bankruptcy.

What can you expect? Mainstream economic theory begins with 
axioms and assumptions and uses a deductive methodology to
arrive at conclusions, its usefulness in discovering how the world 
works is limited. The deductive method is *pre-scientific* in nature. 
The axioms and assumptions can be considered fictitious (as they 
have negligible empirical relevance) and the conclusions of 
deductive models can only really have relevance to the structure 
of those models as the models themselves bear no relation to economic 
reality:

"Some theorists, even among those who reject general equilibrium as
useless, praise its logical elegance and completeness . . . But if
any proposition drawn from it is applied to an economy inhabited
by human beings, it immediately becomes self-contradictory. Human 
life does not exist outside history and no one had correct foresight 
of his own future behaviour, let alone of the behaviour of all the
other individuals which will impinge upon his. I do not think that
it is right to praise the logical elegance of a system which 
becomes self-contradictory when it is applied to the question that 
it was designed to answer." [Joan Robinson, _Contributions to Modern 
Economics_, pp. 127-8]

Not that this deductive model is internally sound. For example, the 
assumptions required for perfect competition are mutually exclusive. 
In order for the market reach equilibrium, economic actors need to 
able to affect it. So, for example, if there is an excess supply some 
companies must lower their prices. However, such acts contradict the 
basic assumption of "perfect competition," namely that the number of 
buyers and sellers is so huge that no one individual actor (a firm 
or a consumer) can determine the market price by their actions. In 
other words, economists assume that the impact of each firm is zero 
but yet when these zeroes are summed up over the whole market the 
total is greater than zero. This is impossible. Moreover, the 
"requirements of equilibrium are carefully examined in the
Walrasian argument but there is no way of demonstrating that a 
market which starts in an out-of-equilibrium position will tend
to get into equilibrium, except by putting further very severe
restrictions on the already highly abstract argument." [Joan 
Robinson, _Collected Economic Papers_, vol. 5, p. 154] Nor does 
the stable unique equilibrium actually exist for, ironically, 
"mathematicians have shown that, under fairly general conditions, 
general equilibrium is unstable." [Keen, _Debunking Economics_, 
p. 173] 

Another major problem with equilibrium theory is the fact that it 
does not, in fact, describe a capitalist economy. It should go 
without saying that models which focus purely on exchange cannot, 
by definition, offer a realistic analysis, never mind description, 
of the capitalism or the generation of income in an industrialised 
economy. As Joan Robinson summarises:

"The neo-classical theory . . . pretends to derive a system of prices
from the relative scarcity of commodities in relation to the demand
for them. I say *pretend* because this system cannot be applied to
capitalist production.

"The Walrasian conception of equilibrium arrived at by higgling and 
haggling in a  market illuminates the account of prisoners of war
swapping the contents of their Red Cross parcels.

"It makes sense also, with some modifications, in an economy of
artisans and small traders . . .

"Two essential characteristics of industrial capitalism are absent 
in these economic systems -- the distinction between income from work
and income from property and the nature of investments made in the
light of uncertain expectations about a long future." [_Collected 
Economic Papers_, vol. 5, p. 34]

Even such basic things as profits and money have a hard time 
fitting into general equilibrium theory. In a perfectly competitive 
equilibrium, super-normal profit is zero so profit fails to appear. 
Normal profit is assumed to be the contribution capital makes to 
output and is treated as a cost of production and notionally set 
as the zero mark. A capitalism without profit? Or growth, "since 
there is no profit or any other sort of surplus in the neoclassical 
equilibrium, there can be no expanded reproduction of the system." 
[Mattick, Op. Cit., p. 22] It also treats capitalism as little 
more than a barter economy. The concept of general equilibrium 
is incompatible with the actual role of money in a capitalist 
economy. The assumption of "perfect knowledge" makes the 
keeping of cash reserves as a precaution against unexpected 
developments would not be necessary as the future is already 
known. In a world where there was absolute certainty about
the present and future there would be no need for a medium of 
exchange like money at all. In the real world, money has a real
effect on production an economic stability. It is, in other words,
not neutral (although, conveniently, in a fictional world with
neutral money "crises *do not occur*" and it "assumed away the
very matter under investigation," namely depressions. [Keynes,
quoted by Doug Henwood, _Wall Street_, p. 199]).

Given that general equilibrium theory does not satisfactorily 
encompass such things as profit, money, growth, instability or 
even firms, how it can be considered as even an adequate 
representation of any real capitalist economy is hard to 
understand. Yet, sadly, this perspective has dominated economics 
for over 100 years. There is almost no discussion of how scarce 
means are organised to yield outputs, the whole emphasis is on 
exchanges of ready made goods. This is unsurprising, as this 
allows economics to abstract from such key concepts as power, 
class and hierarchy. It shows the "the bankruptcy of academic 
economic teaching. The structure of thought which it expounds 
was long ago proven to be hollow. It consisted of a set of 
propositions which bore hardly any relation to the structure 
and evolution of the economy that they were supposed to 
depict." [Joan Robinson, Op. Cit., p. 90]

Ultimately, equilibrium analysis simply presents an unreal picture
of the real world. Economics treat a dynamic system as a static one, 
building models rooted in the concept of equilibrium when a 
non-equilibrium analysis makes obvious sense. As Steven Keen notes,
it is not only the real world that has suffered, so has economics: 

"This obsession with equilibrium has imposed enormous costs on
economics . . . unreal assumptions are needed to maintain conditions
under which there will be a unique, 'optimal' equilibrium . . . If
you believe you can use unreality to model reality, then eventually
your grip on reality itself can become tenuous." [Op. Cit., p. 177]

Ironically, given economists usual role in society as defenders of
big business and the elite in general, there is one conclusion of 
general equilibrium theory which does have some relevance to the 
real world. In 1956, two economists "demonstrated that serious 
problems exist for the model of competitive equilibrium if any 
of its assumptions are breached." They were "not dealing with the
fundamental problem of whether a competitive equilibrium exists,"
rather they wanted to know what happens if the assumptions of the
model were violated. Assuming that two violations existed, they 
worked out what would happen if only one of them were removed. The
answer was a shock for economists -- "If just one of many, or even
just one of two [violations] is removed, it is not possible to 
prejudge the outcome. The economy as a whole can theoretically be
worse off it just one violation exists than it is when two such
violations exist." In other words, any single move towards the
economists' ideal market may make the world worse off. [Ormerod,
Op. Cit., pp. 82-4]

What Kelvin Lancaster and Richard Lipsey had shown in their paper
"The General Theory of the Second Best" [_Review of Economic Studies_, 
December 1956] has one obvious implication, namely that neoclassical
economics itself has shown that trade unions were essential to stop 
workers being exploited under capitalism. This is because the 
neoclassical model requires there to be a multitude of small firms
and no unions. In the real world, most markets are dominated by a
few big firms. Getting rid of unions in such a less than competitive
market would result in the wage being less than the price for which
the marginal worker's output can be sold, i.e. workers are exploited
by capital. In other words, economics has *itself* disproved 
the neoclassical case against trade unions. Not that you would know
that from neoclassical economists, of course. In spite of knowing 
that, in their own terms, breaking union power while retaining big 
business would result, in the exploitation of labour, neoclassical
economists lead the attack on "union power" in the 1970s and 1980s.
The subsequent explosion in inequality as wealth flooded upwards
provided empirical confirmation of this analysis. 

Strangely, though, most neoclassical economists are still as anti-union 
as ever -- in spite of both their own ideology and the empirical 
evidence. That the anti-union message is just what the bosses want 
to hear can just be marked up as yet another one of those strange 
co-incidences which the value-free science of economics is so prone 
to. Suffice to say, if the economics profession ever questions 
general equilibrium theory it will be due to conclusions like this
becoming better known in the general population.

C.1.5 Does economics really reflect the reality of capitalism?

As we discussed in section C.1.2, mainstream economics is rooted in 
capitalism and capitalist social relations. It takes the current 
division of society into classes as both given *as well as* producing
the highest form of efficiency. In other words, mainstream economics
is rooted in capitalist assumptions and, unsurprisingly, its conclusions
are, almost always, beneficial to capitalists, managers, landlords, 
lenders and the rich rather than workers, tenants, borrowers and the
poor.

However, on another level mainstream capitalist economics simply does
*not* reflect capitalism at all. While this may seem paradoxical, it 
is not. Neoclassical economics has always been marked by apologetics.
Consequently, it must abstract or ignore from the more unpleasant 
and awkward aspects of capitalism in order to present it in the best
possible light.

Take, for example, the labour market. Anarchists, like other socialists,
have always stressed that under capitalism workers have the choice 
between selling their liberty/labour to a boss or starving to death
(or extreme poverty, assuming some kind of welfare state). This is
because they do not have access to the means of life (land and 
workplaces) unless they sell their labour to those who own them. In 
such circumstances, it makes little sense to talk of liberty as the 
only real liberty working people have is, if they are lucky, agreeing 
to be exploited by one boss rather than another. How much an person 
works, like their wages, will be based on the relative balance of power 
between the working and capitalist classes in a given situation.

Unsurprisingly, neoclassical economics does not portray the choice 
facing working class people in such a realistic light. Rather, it
argues that the amount of hours an individual works is based on 
their preference for income and leisure time. Thus the standard 
model of the labour market is somewhat paradoxical in that there 
is no actual labour in it. There is only income, leisure and the 
preference of the individual for more of one or the other. It is 
leisure that is assumed to be a "normal good" and labour is just what 
is left over after the individual "consumes" all the leisure they 
want. This means that working resolves itself into the vacuous double 
negative of not-not-working and the notion that all unemployment is
voluntary.

That this is nonsense should be obvious. How much "leisure" can someone
indulge in without an income? How can an economic theory be considered
remotely valid when it presents unemployment (i.e. no income) as the 
ultimate utility in an economy where everything is (or should be) subject
to a price? Income, then, has an overwhelming impact upon the marginal
utility of leisure time. Equally, this perspective cannot explain why
the prospect of job loss is seen with such fear by most workers. If the
neoclassical (non-)analysis of the labour market were true, workers would
be happy to be made unemployed. In reality, fear of the sack is a major
disciplining tool within capitalism. That capitalist economists have
succeeded in making unemployment appear as a desirable situation suggests
that its grip on the reality of capitalism is slim to say the least (here,
as in many other areas, Keynes is more realistic although most of his 
followers have capitulated faced with neoclassical criticism that standard 
Keynesian theory had bad micro-economic foundations rather than admit that 
later was nonsense and the former "an emasculated version of Keynes" 
inflicted on the world by J.R. Hicks. [Keen, Op. Cit., p. 211]). 

However, this picture of the "labour" market does hide the reality of 
working class dependency and, consequently, the power of the capitalist 
class. To admit that workers do not exercise any free choice over whether 
they work or not and, once in work, have to accept the work hours set by 
their employers makes capitalism seem less wonderful than its supporters 
claim. Ultimately, this fiction of the labour market being driven by the
workers' desire for "leisure" and that all unemployment is "voluntary"
is rooted in the need to obscure the fact that unemployment is an
essential feature of capitalism and, consequently, is endemic to it. 
This is because it is the fundamental disciplinary mechanism of the 
system ("it is a whip in [the bosses'] hands, constantly held over
over you, so you will slave hard for him and 'behave' yourself," to
quote Alexander Berkman). As we argued in section B.4.3, capitalism 
*must* have unemployment in order to ensure that workers will obey 
their bosses and not demand better pay and conditions (or, even worse, 
question why they have bosses in the first place). It is, in other
words, "inherent in the wage system" and "the fundamental condition
of successful capitalist production." While it is "dangerous and
degrading" to the worker, it is "very advantageous to the boss" and
so capitalism "can't exist without it." [Berkman, _What is Anarchism?_,
p. 26] The experience of state managed full employment between 
(approximately) 1950 and 1970 confirms this analysis, as does the 
subsequent period (see section C.7.1).

For the choice of leisure and labour to be a reality, then workers need
an independent source of income. The model, in other words, assumes that
workers need to be enticed by the given wage and this is only the case
when workers have the option of working for themselves, i.e. that they
own their own means of production. If this were the case, then it would
not be capitalism. In other words, the vision of the labour market in
capitalist economics assumes a non-capitalist economy of artisans and
peasant farmers -- precisely the kind of economy capitalism destroyed
(with the help of the state). An additional irony of this neoclassical 
analysis is that those who subscribe to it most are also those who attack 
the notion of a generous welfare state (or oppose the idea of welfare 
state in all forms). Their compliant is that with a welfare state, the 
labour market becomes "inefficient" as people can claim benefits and so 
need not seek work. Yet, logically, they should support a generous welfare
state as it gives working people a genuine choice between labour and
leisure. That bosses find it hard to hire people should be seen as
a good thing as work is obviously being evaluated as a "disutility"
rather than as a necessity. As an added irony, as we discuss in 
section C.9, the capitalist analysis of the labour market is *not*
based on any firm empirical evidence nor does it have any real logical 
basis (it is just an assumption). In fact, the evidence we do have 
points against it and in favour of the socialist analysis of unemployment
and the labour market.

One of the reasons why neoclassical economics is so blas about 
unemployment is because it argues that it should never happen. 
That capitalism has always been marked by unemployment and that this
rises and falls as part of the business cycle is a inconvenient 
fact which neoclassical economics avoided seriously analysing until 
the 1930s. This flows from Say's law, the argument that supply creates 
its own demand. This theory, and its more formally put Walras' Law, is 
the basis on which the idea that capitalism could never face a general
economic crisis is rooted in. That capitalism has *always* been marked
by boom and bust has never put Say's Law into question except during 
the 1930s and even then it was quickly put back into the centre of 
economic ideology.

For Say, "every producer asks for money in exchange for his products
only for the purpose of employing that money again immediately in 
the purchase of another product." However, this is not the case in
a capitalist economy as capitalists seek to accumulate wealth and
this involves creating a difference between the value of commodities
someone desired to sell and buy on the market. While Say asserts 
that people simply want to consume commodities, capitalism is marked
by the desire (the need) to accumulate. The ultimate aim is *not*
consumption, as Say asserted (and today's economists repeat), but 
rather to make as much profit as possible. To ignore this is to
ignore the essence of capitalism and while it may allow the economist
to reason away the contradictions of that system, the reality of
the business cycle cannot be ignored. 

Say's law, in other words, assumes a world without *capital*:

"what is a given stock of capital? In this context, clearly, it is
the actual equipment and stocks of commodities that happen to be
in existence today, the result of recent or remote past history, 
together with the know-how, skill of labour, etc., that makes up
the state of technology. Equipment . . . is designed for a particular
range of uses, to be operated by a particular labour force. There
is not a great deal of play in it. The description of the stock of
equipment in existence at any moment as 'scare means with alternative
uses' is rather exaggerated. The uses in fact are fairly specific, 
though they may be changed over time. But they *can* be utilised,
at any moment, by offering less or more employment to labour. This
is a characteristic of the wage economy. In an artisan economy, where
each producer owns his own equipment, each produces what he can and
sells it for what it will fetch. Say's law, that goods are the demand
for goods, was ceasing to be true at the time he formulated it."
[Joan Robinson, _Collected Economic Papers_, vol. 4, p. 133]

As Keen notes, Say's law "evisage[s] an exchange-only economy: an
economy in which goods exist at the outset, but where no production
takes place. The market simply enables the exchange of pre-existing
goods." However, once we had capital to the economy, things change
as capitalists wish "to supply more than they demand, and to 
accumulate the difference as profit which adds to their wealth." 
This results in an excess demand and, consequently, the possibility
of a crisis. Thus mainstream capitalist economics "is best suited to 
the economic irrelevance of an exchange-only economy, or a production
economy in which growth does not occur. If production and growth
do occur, then they take place outside the market, when ironically
the market is the main intellectual focus of neoclassical economics.
Conventional economics is this a theory which suits a state economy
. .  .when what is needed are theories to analyse dynamic economies."
[Keen, _Debunking Economics_, p. 194, p. 195 and p. 197]

Ultimately, capital assets are not produced for their own stake but 
in expectation of profits. This obvious fact is ignored by Say's
law, but was recognised by Marx (and subsequently acknowledged by
Keynes as being correct). As Keen notes, unlike Say and his 
followers, "Marx's perspective thus integrates production, exchange 
and credit as holistic aspects of a capitalist economy, and therefore 
as essential elements of any theory of capitalism. Conventional
economics, in contrast, can only analyse an exchange economy in
which money is simply a means to make barter easier." [Op. Cit., 
pp. 195-6] 

Rejecting Say's Law as being applicable to capitalism means recognising 
that the capitalist economy is not stable, that it can experience booms 
and slumps. That this reflects the reality of that economy should go 
without saying. It also involves recognising that it can take time for 
unemployed workers to find new employment, that unemployment can by 
involuntary and that bosses can gain advantages from the fear of 
unemployment by workers.

That last fact, the fear of unemployment is used by bosses to get 
workers to accept reductions in wages, hours and benefits, is key
factor facing workers in any real economy. Yet, according to 
the economic textbooks, workers should have been falling over
themselves to maximise the utility of leisure and minimise the
disutility of work. Similarly, workers should not fear being made
unemployed by globalisation as the export of any jobs would simply
have generated more economic activity and so the displaced workers 
would immediately be re-employed (albeit at a lower wage, perhaps). 
Again, according to the economic textbooks, these lower wages would 
generate even more economic activity and thus lead, in the long run, 
to higher wages. If only workers had only listened to the economists
then they would realise that that not only did they actually gain (in 
the long run) by their wages, hours and benefits being cut, many of
them also gained (in the short term) increased utility by not having
to go to work. That is, assuming the economists know what they are 
talking about. 

Then there is the question of income. For most capitalist economics, 
a given wage is supposed to be equal to the "marginal contribution" 
that an individual makes to a given company. Are we *really* expected 
to believe this? Common sense (and empirical evidence) suggests 
otherwise. Consider Mr. Rand Araskog, the CEO of ITT in 1990, who in 
that year was paid a salary of $7 million. Is it conceivable that an 
ITT accountant calculated that, all else being the same, the company's 
$20.4 billion in revenues that year would have been $7 million less 
without Mr. Araskog -- hence determining his marginal contribution 
to be $7 million? This seems highly unlikely. 

Which feeds into the question of exploding CEO pay. While this has affected
most countries, the US has seen the largest increases (followed by the UK).
In 1979 the CEO of a UK company earned slightly less than 10 times as much 
as the average worker on the shop floor. By 2002 a boss of a FTSE 100 
company could expect to make 54 times as much as the typical worker. 
This means that while the wages for those on the shopfloor went up a 
little, once inflation is taken into account, the bosses wages arose 
from 200,000 per year to around 1.4m a year. In America, the 
increase was even worse. In 1980, the ratio of CEO to worker pay 
50 to 1. Twenty years later it was 525 to 1, before falling back to 
281 to 1 in 2002 following the collapse of the share price bubble. 
[Larry Elliott, "Nice work if you can get it: chief executives quietly 
enrich themselves for mediocrity," _The Guardian_, 23 January, 2006]

The notion of marginal productivity is used to justify many things on the 
market. For example, the widening gap between high-paid and low-paid 
Americans (it is argued) simply reflects a labour market efficiently 
rewarding more productive people. Thus the compensation for corporate 
chief executives climbs so sharply because it reflects their marginal 
productivity. The strange thing about this kind of argument is that,
as we indicate in section C.2.5, the problem of defining and measuring
capital wrecked the entire neoclassical theory of marginal factor
productivity and with it the associated marginal productivity theory
of income back in the 1960s -- and was admitted as the leading 
neo-classical economists of the time. That marginal productivity theory 
is still invoked to justify capitalist inequalities shows not only how 
economics ignores the reality of capitalism but also the intellectual
bankruptcy of the "science" and whose interests it, ultimately, serves.

In spite of this awkward little fact, what of the claims made based on
it? Is this pay *really* the result of any increased productivity on 
the part of CEOs? The evidence points the other way. This can be seen 
from the performance of the economies and companies in question. In 
Britain trend growth was a bit more than 2% in 1980 and is still a bit 
more than 2% a quarter of a century later. A study of corporate 
performance in Britain and the United States looked at the companies 
that make up the FTSE 100 index in Britain and the S&P 500 in the US 
and found that executive income is rarely justified by improved 
performance. [Julie Froud, Sukhdev Johal, Adam Leaver and Karel 
Williams, _Financialisation and Strategy: Narrative and Number_] 
Rising stock prices in the 1990s, for example, were the product of 
one of the financial market's irrational bubbles over which the CEO's
had no control or role in creating. 

During the same period as soaring CEO pay, workers' real wages remained 
flat. Are we to believe that since the 1980s, the marginal contribution of 
CEOs has increased massively whereas workers' marginal contributions remained 
stagnant? According to economists, in a free market wages should increase
until they reach their marginal productivity. In the US, however, during
the 1960s "pay and productivity grew in tandem, but they separated in the
1970s. In the 1990s boom, pay growth lagged behind productivity by almost
30%." Looking purely at direct pay, "overall productivity rose four times
as fast as the average real hourly wage -- and twenty times as fast in
manufacturing." Pay did catch up a bit in the late 1990s, but after 2000
"pay returned to its lagging position." [Doug Henwood, _After the New 
Economy_, pp. 45-6] In other words, over two decades of free market 
reforms has produced a situation which has refuted the idea that a
workers wage equals their marginal productivity.

The standard response by economists would be to state that the US economy
is not a free market. Yet the 1970s, after all, saw the start of reforms 
based on the recommendations of free market capitalist economists. The 
1980s and 1990s saw even more. Regulation was reduced, if not effectively
eliminated, the welfare state rolled back and unions marginalised. So 
it staggers belief to state that the US was *more* free market in the 
1950s and 1960s than in the 1980s and 1990s but, logically, this is what
economists suggest. Moreover, this explanation sits ill at ease with the 
multitude of economists who justified growing inequality and skyrocketing 
CEO pay and company profits during this period in terms of free market 
economics. What is it to be? If the US is not a free market, then the
incomes of companies and the wealth are *not* the result of their marginal
contribution but rather are gained at the expense of the working class.
If the US is a free market, then the rich are justified (in terms of 
economic theory) in their income but workers' wages do not equal their
marginal productivity. Unsurprisingly, most economists do not raise the
question, never mind answer it.

So what is the reason for this extreme wage difference? Simply put, 
it's due to the totalitarian nature of capitalist firms (see section 
B.4). Those at the bottom of the company have no say in what happens 
within it; so as long as the share-owners are happy, wage differentials 
will rise and rise (particularly when top management own large amounts 
of shares!). It is capitalist property relations that allow this 
monopolisation of wealth by the few who own (or boss) but do not produce. 
The workers do not get the full value of what they produce, nor do they 
have a say in how the surplus value produced by their labour gets used 
(e.g. investment decisions). Others have monopolised both the wealth 
produced by workers and the decision-making power within the company
(see section C.2 for more discussion). This is a private form of 
taxation without representation, just as the company is a private 
form of statism. Unlike the typical economist, most people would not 
consider it too strange a coincidence that the people with power in 
a company, when working out who contributes most to a product, decide 
it's themselves!

Whether workers will tolerate stagnating wages depends, of course, on
the general economic climate. High unemployment and job insecurity help
make workers obedient and grateful for any job and this has been the
case for most of the 1980s and 1990s in both America and the UK. So a 
key reason for the exploding pay is to be found in the successful
class struggle the ruling class has been waging since the 1970s. There 
has "been a real shift in focus, so that the beneficiaries of corporate 
success (such as it is) are no longer the workers and the general public 
as a whole but shareholders. And given that there is evidence that only 
households in the top half of the income distribution in the UK and the 
US hold shares, this represents a significant redistribution of money 
and power." [Larry Elliott, Op. Cit.] That economics ignores the social
context of rising CEO pay says a lot about the limitations of modern
economics and how it can be used to justify the current system.

Then there is the trivial little thing of production. Economics used 
to be called "political economy" and was production orientated. This 
was replaced by an economics based on marginalism and subjective 
evaluations of a given supply of goods is fixed. For classical
economics, to focus on an instant of time was meaningless as time 
does not stop. To exclude production meant to exclude time, which 
as we noted in section C.1.2 this is precisely and knowingly what 
marginalist economics did do. This means modern economics simply 
ignores production as well as time and given that profit making is 
a key concern for any firm in the real world, such a position shows 
how irrelevant neoclassical economics really is. 

Indeed, the neo-classical theory falls flat on its face. Basing itself, 
in effect, on a snapshot of time its principles for the rational 
firm are, likewise, based on time standing still. It argues that 
profit is maximised where marginal cost equals marginal revenue
yet this is only applicable when you hold time constant. However, a
real firm will not maximise profit with respect to quantity but also
in respect to time. The neoclassical rule about how to maximise profit
"is therefore correct if the quantity produced never changes" and 
"by ignoring time in its analysis of the firm, economic theory ignores 
some of the most important issues facing a firm." Neo-classical economics 
exposes its essentially static nature again. It "ignores time, and is 
therefore only relevant in a world in which time does no matter." 
[Keen, Op. Cit., pp. 80-1] 

Then there is the issue of consumption. While capitalist apologists 
go on about "consumer sovereignty" and the market as a "consumers
democracy," the reality is somewhat different. Firstly, and most
obviously, big business spends a lot of money trying to shape and
influence demand by means of advertising. Not for them the neoclassical
assumption of "given" needs, determined outside the system. So the
reality of capitalism is one where the "sovereign" is manipulated by
others. Secondly, there is the distribution of resources within society. 

Market demand is usually discussed in terms of tastes, not in the 
distribution of purchasing power required to satisfy those tastes. 
Income distribution is taken as given, which is very handy for those 
with the most wealth. Needless to say, those who have a lot of money 
will be able to maximise their satisfactions far easier than those 
who have little. Also, of course, they can out-bid those with less 
money. If capitalism is a "consumers" democracy then it is a strange 
one, based on "one dollar, one vote." It should be obvious whose 
values are going to be reflected most strongly in the market. If we 
start with the orthodox economics (convenient) assumption of a "given 
distribution of income" then any attempt to determine the best allocation 
of resources is flawed to start with as money replaces utility from the 
start. To claim after that the market based distribution is the best 
one is question begging in the extreme.

In other words, under capitalism, it is not individual need or "utility" as 
such that is maximised, rather it is *effective* utility (usually called 
"effective demand") -- namely utility that is backed up with money. This 
is the reality behind all the appeals to the marvels of the market. As 
right-wing guru von Hayek put, the "[s]pontaneous order produced by the 
market does not ensure that what general opinion regards as more important 
needs are always met before the less important ones." ["Competition as a 
discovery process", _The Essence of Hayek_, p. 258] Which is just a polite 
way of referring to the process by which millionaires build a new mansion 
while thousands are homeless or live in slums or feed luxury food to their 
pets while humans go hungry. It is, in effect, to dismiss the needs of, 
for example, the 37 million Americans who lived below the poverty line 
in 2005 (12.7% of the population, the highest percentage in the developed 
world and is based on the American state's absolute definition of poverty, 
looking at relative levels, the figures are worse). Similarly, the 46 
million Americans without health insurance may, of course, think that 
their need to live should be considered as "more important" than, say, 
allowing Paris Hilton to buy a new designer outfit. Or, at the most 
extreme, when agribusiness grow cash crops for foreign markets while 
the landless starve to death. As E.P. Thompson argues, Hayek's answer:

"promote[s] the notion that high prices were a (painful) remedy for dearth, 
in drawing supplies to the afflicted region of scarcity. But what draws 
supply are not high prices but sufficient money in their purses to pay 
high prices. A characteristic phenomenon in times of dearth is that it 
generates unemployment and empty pursues; in purchasing necessities at 
inflated prices people cease to be able to buy inessentials [causing 
unemployment] . . . Hence the number of those able to pay the inflated 
prices declines in the afflicted regions, and food may be exported to 
neighbouring, less afflicted, regions where employment is holding up 
and consumers still have money with which to pay. In this sequence, 
high prices can actually withdraw supply from the most afflicted area." 
[_Customs in Common_, pp. 283-4]

Therefore "the law of supply and demand" may not be the "most efficient"
means of distribution in a society based on inequality. This is clearly
reflected in the "rationing" by purse which this system is based on. While
in the economics books, price is the means by which scare resources are
"rationed" in reality this creates many errors. As Thompson notes, 
"[h]owever persuasive the metaphor, there is an elision of the real 
Relationships assigned by price, which suggests . . . ideological 
sleight-of-mind. Rationing by price does not allocate resources equally 
among those in need; it reserves the supply to those who can pay the 
price and excludes  those who can't . . . The raising of prices during 
dearth could 'ration' them [the poor] out of the market altogether." 
[Op. Cit., p. 285] Which is precisely what does happen. As economist 
(and famine expert) Amartya Sen notes:

"Take a theory of entitlements based on a set of rights of 'ownership, 
transfer and rectification.' In this system a set of holdings of 
different people are judged to be just (or unjust) by looking at past
history, and not by checking the consequences of that set of holdings.
But what if the consequences are recognisably terrible? . . .[R]efer[ing]
to some empirical findings in a work on famines . . . evidence [is
presented] to indicate that in many large famines in the recent past,
in which millions of people have died, there was no over-all decline
in food availability at all, and the famines occurred precisely because
of shifts in entitlement resulting from exercises of rights that are
perfectly legitimate. . . . [Can] famines . . . occur with a system of
rights of the kind morally defended in various ethical theories, including
Nozick's. I believe the answer is straightforwardly yes, since for many
people the only resource that they legitimately possess, viz. their
labour-power, may well turn out to be unsaleable in the market, giving
the person no command over food . . . [i]f results such as starvations
and famines were to occur, would the distribution of holdings still
be morally acceptable despite their disastrous consequences? There is
something deeply implausible in the affirmative answer." [_Resources,
Values and Development_, pp. 311-2]

Recurring famines were a constant problem during the lassiez-faire 
period of the British Empire. While the Irish Potato famine is
probably the best known, the fact is that millions died due to 
starvation mostly due to a firm believe in the power of the
market. In British India, according to the most reliable estimates, 
the deaths from the 1876-1878 famine were in the range of 6-8 million
and between 1896 and 1900, were between 17 to 20 million. According 
to a British statistician who analysed Indian food security measures 
in the two millennia prior to 1800, there was one major famine a 
century in India. Under British rule there was one every four years.
Over all, the late 1870s and the late 1890s saw somewhere between 30 
to 60 million people die in famines in India, China and Brazil (not 
including the many more who died elsewhere). While bad weather 
started the problem by placing the price of food above the reach 
of the poorest, the market and political decisions based on profound 
belief in it made the famine worse. Simply put, had the authorities 
distributed what food existed, most of the victims would have survived 
yet they did not as this would have, they argued, broke the laws of 
the market and produced a culture of dependency. [Mike Davis, _Late 
Victorian Holocausts_] This pattern, incidentally, has been repeated 
in third world countries to this day with famine countries exporting 
food as the there is no "demand" for it at home.

All of which puts Hayek's glib comments about "spontaneous order" into
a more realistic context. As Kropotkin put it:

"The very essence of the present economic system is that the worker
can never enjoy the well-being he [or she] has produced . . . Inevitably,
industry is directed . . . not towards what is needed to satisfy the 
needs of all, but towards that which, at a given moment, brings in the
greatest profit for a few. Of necessity, the abundance of some will be
based on the poverty of others, and the straitened circumstances of the
greater number will have to be maintained at all costs, that there may
be hands to sell themselves for a part only of what which they are 
capable of producing; without which private accumulation of capital is
impossible." [_Anarchism_, p. 128]

In other words, the market cannot be isolated and abstracted from the network
of political, social and legal relations within which it is situated. This
means that all that "supply and demand" tells us is that those with money
can demand more, and be supplied with more, than those without. Whether this
is the "most efficient" result for society cannot be determined (unless, of
course, you assume that rich people are more valuable than working class
ones *because* they are rich). This has an obvious effect on production, 
with "effective demand" twisting economic activity and so, under capitalism, 
meeting needs is secondary as the "only aim is to increase the profits of 
the capitalist." [Kropotkin, Op. Cit., p. 55]). George Barrett brings home 
of evil effects of such a system:

"To-day the scramble is to compete for the greatest profits. If there is 
more profit to be made in satisfying my lady's passing whim than there is 
in feeding hungry children, then competition brings us in feverish haste 
to supply the former, whilst cold charity or the poor law can supply the 
latter, or leave it unsupplied, just as it feels disposed. That is how it 
works out." [_Objections to Anarchism_, p. 347] 
 
Therefore, as far as consumption is concerned, anarchists are well aware 
of the need to create and distribute necessary goods to those who require 
them. This, however, cannot be achieved under capitalism and for all its
talk of "utility," "demand", "consumer sovereignty" and so forth the real
facts are those with most money determine what is an "efficient" allocation 
of resources. This is directly, in terms of their control over the means
of life as well as indirectly, by means of skewing market demand. For if 
financial profit is the sole consideration for resource allocation, then 
the wealthy can outbid the poor and ensure the highest returns. The less 
wealthy can do without. 

All in all, the world assumed by neo-classical economics is not the one 
we actually live in, and so applying that theory is both misleading and 
(usually) disastrous (at least to the "have-nots"). While this may seen 
surprisingly, it is not once we take into account its role as apologist 
and defender of capitalism. Once that is recognised, any apparent 
contradiction falls away.

C.1.6 Is it possible to a non-equilibrium based capitalist economics?

Yes, it is but it would be unlikely to be free-market based as the
reality of capitalism would get the better of its apologetics. This
can be seen from the two current schools of economics which, rightly, 
reject the notion of equilibrium -- the post-Keynesian school and
the so-called Austrian school.

The former has few illusions in the nature of capitalism. At its best, 
this school combines the valid insights of classical economics, Marx 
and Keynes to produce a robust radical (even socialist) critique of both 
capitalism and capitalist economics. At its worse, it argues for state 
intervention to save capitalism from itself and, politically, aligns 
itself with social democratic ("liberal", in the USA) movements and 
parties. If economics does become a science, then this school of economics 
will play a key role in its development. Economists of this school include 
Joan Robinson, Nicholas Kaldor, John Kenneth Galbraith, Paul Davidson and 
Steven Keen. Due to its non-apologetic nature, we will not discuss it
here.

The Austrian school has a radically different perspective. This school,
so named because its founders were Austrian, is passionately pro-capitalist
and argues against *any* form of state intervention (bar, of course, the
definition and defence of capitalist property rights and the power that
these create). Economists of this school include Eugen von Bhm-Bawerk,
Lugwig von Mises, Murray Rothbard, Israel Kirzner and Frederick von Hayek 
(the latter is often attacked by other Austrian economists as not being 
sufficiently robust in his opposition to state intervention). It is very 
much a minority school.

As it shares many of the same founding fathers as neoclassical economics
and is rooted in marginalism, the Austrian school is close to neoclassical 
economics in many ways. The key difference is that it rejects the notion 
that the economy is in equilibrium and embraces a more dynamic model of 
capitalism. It is rooted in the notion of entrepreneurial activity, the 
idea that entrepreneurs act on information and disequilibrium to make  
super profits and bring the system closer to equilibrium. Thus, to use 
their expression, their focus is on the market process rather than a 
non-existent end state. As such, it defends capitalism in terms of
how it reacts of *dis*-equilibrium and presents a theory of the market 
process that brings the economy closer to equilibrium. And fails.

The claim that markets tend continually towards equilibrium, as the 
consequence of entrepreneurial actions, is hard to justify in terms of
its own assumptions. While the adjustments of a firm may bring the specific 
market it operates in more towards equilibrium, their ramifications may 
take other markets away from it and so any action will have stabilising 
and destabilising aspects to it. It strains belief to assume that 
entrepreneurial activity will only push an economy more towards 
equilibrium as any change in the supply and demand for any specific good 
leads to changes in the markets for other goods (including money). That 
these adjustments will all (mostly) tend towards equilibrium is little 
more than wishful thinking. 

While being more realistic than mainstream neo-classical theory, this method 
abandons the possibility of demonstrating that the market outcome is in any 
sense a realisation of the individual preferences of whose interaction it 
is an expression. It has no way of establishing the supposedly stabilising 
character of entrepreneurial activity or its alleged socially beneficial 
character as the dynamic process could lead to a divergence rather than a 
convergence of behaviour. A dynamic system need not be self-correcting, 
particularly in the labour market, nor show any sign of self-equilibrium 
(i.e. it will be subject to the business cycle). 

Given that the Austrian theory is, in part, based on Say's Law the critique
we presented in the last section also applies here. However, there is
another reason to think the Austrian self-adjusting perspective on 
capitalism is flawed and this is rooted in their own analysis. Ironically 
enough, economists of this school often maintain that while equilibrium 
does not exist their analysis is rooted on two key markets being 
in such a state: the labour market and the market for credit. The 
reason for these strange exceptions to their general assumption is, 
fundamentally, political. The former is required to deflect claims that 
"pure" capitalism would result in the exploitation of the working class, 
the latter is required to show that such a system would be stable.

Looking at the labour market, the "Austrians" argue that free market capitalism
would experience full employment. That this condition is one of equilibrium 
does not seem to cause them much concern. Thus we find von Hayek, for example, 
arguing that the "cause of unemployment . . . is a deviation of prices and 
wages from their equilibrium position which would establish itself with a 
free market and stable money. But we can never know at what system of relative 
prices and wages such an equilibrium would establish itself." Therefore, "the 
deviation of existing prices from that equilibrium position . . . is the cause 
of the impossibility of selling part of the labour supply." [_New Studies_, 
p. 201] Therefore, we see the usual embrace of equilibrium theory to defend 
capitalism against the evils it creates even by those who claim to know better. 

Of course, the need to argue that there would be full employment under 
"pure" capitalism is required to maintain the fiction that everyone will
be better off under it. It is hard to say that working class people will
benefit if they are subject to high levels of unemployment and the 
resulting fear and insecurity that produces. As would be expected, the
Austrian school shares the same perspective on unemployment as the
neoclassical school, arguing that it is "voluntary" and the result of
the price of labour being too high (who knew that depressions were so
beneficial to workers, what with some having more leisure to enjoy
and the others having higher than normal wages?). The reality of 
capitalism is very different than this abstract model.

Anarchists have long realised that the capitalist market is based upon 
inequalities and changes in power. Proudhon argued that "[t]he manufacturer 
says to the labourer, 'You are as free to go elsewhere with your services 
as I am to receive them. I offer you so much.' The merchant says to the 
customer, 'Take it or leave it; you are master of your money, as I am of 
my goods. I want so much.' Who will yield? The weaker." He, like all 
anarchists, saw that domination, oppression and exploitation flow from 
inequalities of market/economic power and that the "power of invasion 
lies in superior strength." [_What is Property?_, p. 216 and p. 215] 
This is particularly the case in the labour market, as we argued in
section B.4.3. 

As such, it is unlikely that "pure" capitalism would experience full 
employment for under such conditions the employers loose the upper hand. 
To permanently experience a condition which, as we indicate in section 
C.7, causes "actually existing" capitalism so many problems seems more
like wishful thinking than a serious analysis. If unemployment is 
included in the Austrian model (as it should) then the bargaining 
position of labour is obviously weakened and, as a consequence, capital 
will take advantage and gather profits at the expense of labour. 
Conversely, if labour is empowered by full employment then they can 
use their position to erode the profits and managerial powers of their 
bosses. Logically, therefore, we would expect less than full unemployment 
and job insecurity to be the normal state of the economy with short 
periods of full unemployment before a slump. Given this, we would expect 
"pure" capitalism to be unstable, just as the approximations to it in 
history have always been. Austrian economics gives no reason to believe 
that would change in the slightest. Indeed, given their obvious hatred 
of trade unions and the welfare state, the bargaining power of labour 
would be weakened further during most of the business cycle and, contra 
Hayek, unemployment would remain and its level would fluctuate 
significantly throughout the business cycle. 

Which brings us to the next atypical market in Austrian theory, namely
the credit market. According to the Austrian school, "pure" capitalism 
would not suffer from a business cycle (or, at worse, a very mild one). 
This is due to the lack of equilibrium in the credit market due to 
state intervention (or, more correctly, state non-intervention). Austrian 
economist W. Duncan Reekie provides a summary:

"The business cycle is generated by monetary expansion and contraction . . . 
When new money is printed it appears as if the supply of savings has 
increased. Interest rates fall and businessmen are misled into borrowing 
additional founds to finance extra investment activity . . . This would 
be of no consequence if it had been the outcome of [genuine saving] 
. . . - but the change was government induced. The new money reaches 
factor owners in the form of wages, rent and interest . . . the factor 
owners will then spend the higher money incomes in their existing 
consumption:investment proportions . . . Capital goods industries will 
find their expansion has been in error and malinvestments have been 
incurred." [_Markets, Entrepreneurs and Liberty_, pp. 68-9] 

This analysis is based on their notion that the interest rate reflects the 
"time preference" of individuals between present and future goods (see 
section C.2.6 for more details). The argument is that banks or governments 
manipulate the money supply or interest rates, making the actual interest 
rate different from the "real" interest rate which equates savings and loans.
Of course, that analysis is dependent on the interest rate equating 
savings and loans which is, of course, an equilibrium position. If we
assume that the market for credit shows the same disequilibrium tendencies
as other markets, then the possibility for malinvestment is extremely 
likely as banks and other businesses extend credit based on inaccurate
assumptions about present conditions and uncertain future developments
in order to secure greater profits. Unsurprisingly, the Austrians (like
most economists) expect the working class to bear the price for any 
recession in terms of real wage cuts in spite of their theory indicating
that its roots lie in capitalists and bankers seeking more profits and,
consequently, the former demanding and the latter supplying more credit
than the "natural" interest rate would supply.

Ironically, therefore, the Austrian business cycle is rooted in the
concept of *dis*-equilibrium in the credit market, the condition it 
argues is the standard situation in all other markets. In effect, 
they think that the money supply and interest rates are determined 
exogenously (i.e. outside the economy) by the state. However, this 
is unlikely as the evidence points the other way, i.e. to the 
endogenous nature of the money supply itself. This account of 
money (proposed strongly by, among others, the post-Keynesian school) 
argues that the money supply is a function of the demand for credit, 
which itself is a function of the level of economic activity. In other 
words, the banking system creates as much money as people need and any 
attempt to control that creation will cause economic problems and, 
perhaps, crisis. Money, in other words, emerges from *within* the system 
and so the Austrian attempt to "blame the state" is simply wrong.
As we discuss in section C.8, attempts by the state to control the money 
during the Monetarist disasters of the early 1980s failed and it is
unlikely that this would change in a "pure" capitalism marked by a
totally privatised banking system. 

It should also be noted that in the 1930s, the Austrian theory of the 
business cycle lost the theoretical battle with the Keynesian one (not
to be confused with the neoclassical-Keynesian synthesis of the 
post-war years). This was for three reasons. Firstly, it was irrelevant 
(its conclusion was do nothing). Secondly, it was arrogant (it essentially 
argued that the slump would not have happened if people had listened to 
them and the pain of depression was fully deserved for not doing so). 
Thirdly, and most importantly, the leading Austrian theorist on the
business cycle was completely refuted by Piero Sraffa and Nicholas 
Kaldor (Hayek's own follower who turned Keynesian) both of whom exposed
the internal contradictions of his analysis. 

The empirical record backs our critique of the Austrian claims on the
stability of capitalism and unemployment. Throughout the nineteenth 
century there were a continual economic booms and slumps. This was 
the case in the USA, often pointed to as an approximately lassiez-faire 
economy, where the last third of the 19th century (often considered as 
a heyday of private enterprise) was a period of profound instability 
and anxiety. Between 1867 and 1900 there were 8 complete business cycles. 
Over these 396 months, the economy expanded during 199 months and 
contracted during 197. Hardly a sign of great stability (since the 
end of world war II, only about a fifth of the time has spent in 
periods of recession or depression, by way of comparison). Overall, 
the economy went into a slump, panic or crisis in 1807, 1817, 1828, 
1834, 1837, 1854, 1857, 1873, 1882, and 1893 (in addition, 1903 and 
1907 were also crisis years). Full employment, needless to say, was 
not the normal situation (during the 1890s, for example, the 
unemployment rate exceeded 10% for 6 consecutive years, reaching a
peak of 18.4% in 1894, and was under 4% for just one, 1892). So much 
for temporary and mild slumps, prices adjusting fast and markets 
clearing quickly in pre-Keynesian economies!

Luckily, though, the Austrian school's methodology allows it to ignore
such irritating constrictions as facts, statistics, data, history or 
experimental confirmation. While neoclassical economics at least 
*pretends* to be scientific, the Austrian school displays its deductive 
(i.e. pre-scientific) methodology as a badge of pride along side its 
fanatical love of free market capitalism. For the Austrians, in the 
words of von Mises, economic theory "is not derived from experience; 
it is prior to experience" and "no kind of experience can ever force 
us to discard or modify *a priori* theorems; they are logically prior 
to it and cannot be either proved by corroborative experience or 
disproved by experience to the contrary." And if this does not do 
justice to a full exposition of the phantasmagoria of von Mises' 
*a priorism*, the reader may take some joy (or horror) from the 
following statement:

"If a contradiction appears between a theory and experience, *we must 
always assume* that a condition pre-supposed by the theory was not 
present, or else there is some error in our observation. The disagreement 
between the theory and the facts of experience frequently forces us to think
through the problems of the theory again. *But so long as a rethinking of 
the theory uncovers no errors in our thinking, we are not entitled to doubt 
its truth*" [emphasis added, quoted by Homa Katouzian, _Ideology and Method 
in Economics_, pp. 39-40]

In other words, if reality is in conflict with your ideas, do not adjust 
your views because reality must be at fault! The scientific method would 
be to revise the theory in light of the facts. It is not scientific to
reject the facts in light of the theory! Without experience, any theory 
is just a flight of fantasy. For the higher a deductive edifice is built, 
the more likely it is that errors will creep in and these can only be 
corrected by checking the analysis against reality. Starting assumptions 
and trains of logic may contain inaccuracies so small as to be undetectable, 
yet will yield entirely false conclusions. Similarly, trains of logic may 
miss things which are only brought to light by actual experiences or be
correct, but incomplete or concentrate on or stress inappropriate factors.
To ignore actual experience is to loose that input when evaluating a theory. 

Ignoring the obvious problems of the empirical record, as any consistent
Austrian would, the question does arise why does the Austrian school make 
exceptions to its disequilibrium analysis for these two markets. Perhaps 
this is a case of political expediency, allowing the ideological supporters 
of free market capitalism to attack the notion of equilibrium when it 
clearly clashes with reality but being able to return to it when attacking, 
say, trade unions, welfare programmes and other schemes which aim to aid 
working class people against the ravages of the capitalist market? Given 
the self-appointed role of Austrian economics as the defender of "pure" 
(and, illogically, not so pure) capitalism that conclusion is not hard to 
deny.

Rejecting equilibrium is not as straightforward as the Austrians hope,
both in terms of logic and in justifying capitalism. Equilibrium plays a 
role in neo-classical economics for a reason. A disequilibrium trade means 
that people on the winning side of the bargain will gain real income at 
the expense of the losers. In other words, Austrian economics is rooted 
(in most markets, at least) in the idea that trading benefits one side 
more than the other which flies in the face of the repeated dogma that 
trade benefits both parties. Moreover, rejecting the idea of equilibrium 
means rejecting any attempt to claim that workers' wages equal their 
just contribution to production and so to society. If equilibrium does
not exist or is never actually reached then the various economic laws 
which "prove" that workers are not exploited under capitalism do not 
apply. This also applies to accepting that any real market is unlike 
the ideal market of perfect competition. In other words, by recognising 
and taking into account reality capitalist economics cannot show that 
capitalism is stable, non-exploitative or that it meets the needs of all.

Given that they reject the notion of equilibrium as well as the concept
of empirical testing of their theories and the economy, their defence 
of capitalism rests on two things: "freedom" and anything else would be
worse. Neither are particularly convincing.

Taking the first option, this superficially appears appealing, particularly
to anarchists. However this stress on "freedom" -- the freedom of individuals 
to make their own decisions -- flounders on the rocks of capitalist reality. 
Who can deny that individuals, when free to choose, will pick the option 
they consider best for themselves? However, what this praise for individual 
freedom ignores is that capitalism often reduces choice to picking the lesser 
of two (or more) evils due to the inequalities it creates (hence our reference 
to the *quality* of the decisions available to us). The worker who agrees to 
work in a sweatshop does "maximise" her "utility" by so doing -- after all, 
this option is better than starving to death --  but only an ideologue blinded 
by capitalist economics will think that she is free or that her decision 
is not made under (economic) compulsion. 

The Austrian school is so in love with markets they even see them where
they do not exist, namely inside capitalist firms. There, hierarchy reigns
and so for all their talk of "liberty" the Austrian school at best ignores,
at worse exalts, factory fascism (see section F.2.1) For them, management 
is there to manage and workers are there to obey. Ironically, the Austrian 
(like the neo-liberal) ethic of "freedom" is based on an utterly credulous 
faith in authority in the workplace. Thus we have the defenders of "freedom" 
defending the hierarchical and autocratic capitalist managerial structure, 
i.e. "free" workers subject to a relationship distinctly *lacking* freedom. 
If your personal life were as closely monitored and regulated as your work 
life, you would rightly consider it oppression. 

In other words, this idealisation of freedom through the market completely 
ignores the fact that this freedom can be, to a large number of people, very 
limited in scope. Moreover, the freedom associated with capitalism, as far 
as the labour market goes, becomes little more than the freedom to pick your 
master. All in all, this defence of capitalism ignores the existence of economic 
inequality (and so power) which infringes the freedom and opportunities of 
others. Social inequalities can ensure that people end up "wanting what 
they get" rather than "getting what they want" simply because they have 
to adjust their expectations and behaviour to fit into the patterns 
determined by concentrations of economic power. This is particularly the 
case within the labour market, where sellers of labour power are usually 
at a disadvantage when compared to buyers due to the existence of unemployment 
as we have discussed.

As such, their claims to be defenders of "liberty" ring hollow in anarchist
ears. This can be seen from the 1920s. For all their talk of "freedom", when 
push came to shove, they end up defending authoritarian regimes in order to
save capitalism when the working classes rebel against the "natural" order. 
Thus we find von Mises, for example, arguing in the 1920s that it "cannot be 
denied that Fascism and similar movements aiming at the establishment of 
dictatorships are full of the best intentions and that their intervention 
has, for the moment, saved European civilisation. The merit that Fascism 
has thereby won for itself will live eternally in history." [_Liberalism_, 
p. 51] Faced with the Nazis in the 1930s, von Mises changed his tune 
somewhat as, being Jewish, he faced the same state repression he was happy 
to see inflicted upon rebellious workers the previous decade. Unsurprisingly, 
he started to stress that Nazi was short for "National Socialism" and so 
the horrors of fascism could be blamed on "socialism" rather than the 
capitalists who funded the fascist parties and made extensive profits 
under them once the labour, anarchist and socialist movements had been 
crushed. 

Similarly, when right-wing governments influenced by the Austrian school
were elected in various countries in the 1980s, those countries saw an
increase in state authoritarianism and centralisation. In the UK, for
example, Thatcher's government strengthened the state and used it to 
break the labour movement (in order to ensure management authority over
their workers). In other words, instead of regulating capital and the 
people, the state just regulates the people. The general public will 
have the freedom of doing what the market dictates and if they object 
to the market's "invisible hand", then the very visible fist of the 
state (or private defence companies) will ensure they do. We can be 
sure if a large anarchist movement developed the Austrian economists 
will, like von Mises in the 1920s, back whatever state violence was 
required to defend "civilisation" against it. All in the name of 
"freedom," of course. 

Then there is the idea that anything else that "pure" capitalism would be
worse. Given their ideological embrace of the free market, the "Austrians" 
attack those economists (like Keynes) who tried to save capitalism from 
itself. For the Austrian school, there is only capitalism or "socialism" 
(i.e. state intervention) and they cannot be combined. Any attempt to
do so would, as Hayek put it in his book _The Road to Serfdom_, inevitably
lead to totalitarianism. Hence the Austrians are at the forefront in 
attacking the welfare state as not only counterproductive but inherently
leading to fascism or, even worse, some form of state socialism. Needless 
to say, the state's role in creating capitalism in the first place is 
skilfully ignored in favour of endless praise for the "natural" system 
of capitalism. Nor do they realise that the victory of state intervention 
they so bemoan is, in part, necessary to keep capitalism going and, in part, 
a consequence of attempts to approximate their utopia (see section D.1
for a discussion).

Not that Hayek's thesis has any empirical grounding. No state has ever
become fascist due to intervening in the economy (unless a right-wing 
coup happens, as in Chile, but that was not his argument). Rather, 
dictatorial states have implemented planning rather than democratic
states becoming dictatorial after intervening in the economy. Moreover,
looking at the Western welfare states, the key compliant by the capitalist 
class in the 1960s and 1970s was not a lack of general freedom but rather 
too much. Workers and other previously oppressed but obedient sections 
of society were standing up for themselves and fighting the traditional 
hierarchies within society. This hardly fits in with serfdom, although 
the industrial relations which emerged in Pinochet's Chile, Thatcher's 
Britain and Reagan's America does. The call was for the state to defend 
the "management's right to manage" against rebellious wage slaves by 
breaking their spirit and organisation while, at the same time, intervening 
to bolster capitalist authority in the workplace. That this required an 
increase in state power and centralisation would only come as a surprise
to those who confuse the rhetoric of capitalism with its reality.

Similarly, it goes without saying Hayek's thesis was extremely selectively 
applied. It is strange to see, for example, Conservative politicians 
clutching Hayek's _Road to Serfdom_ with one hand and using it to defend 
cutting the welfare state while, with the other, implementing policies which 
give billions to the Military Industrial Complex. Apparently "planning" 
is only dangerous to liberty when it is in the interests of the many.
Luckily, defence spending (for example) has no such problems. As Chomsky 
stresses, "the 'free market' ideology is very *useful* -- it's a weapon
against the general population . . . because it's an argument against 
social spending, and it's a weapon against poor people abroad . . . But 
nobody [in the ruling class] really pays attention to this stuff when it 
comes to actual planning -- and no one ever has." [_Understanding Power_,
p. 256] That is why anarchists stress the importance of reforms from *below* 
rather than from above -- as long as we have a state, any reforms should be 
directed first and foremost to the (much more generous) welfare state for 
the rich rather than the general population (the experience of the 1980s 
onwards shows what happens when reforms are left to the capitalist class).

This is not to say that Hayek's attack upon those who refer to 
totalitarian serfdom as a "new freedom" was not fully justified. Nor is 
his critique of central planning and state "socialism" without merit. 
Far from it. Anarchists would agree that any valid economic system must 
be based on freedom and decentralisation in order to be dynamic and meet 
needs, they simply apply such a critique to capitalism *as well as* state 
socialism. The ironic thing about Hayek's argument is that he did 
not see how his theory of tacit knowledge, used to such good effect 
against state socialist ideas of central planning, were just as 
applicable to critiquing the highly centralised and top-down capitalist 
company and economy. Nor, ironically enough, that it was just as 
applicable to the price mechanism he defended so vigorously (as we note 
in section I.1.2, the price system hides as much, if not more, necessary 
information than it provides). As such, his defence of capitalism can
be turned against it and the centralised, autocratic structures it is
based on.

To conclude, while its open and extreme support for free market 
capitalism and its inequalities is, to say the least, refreshing, 
it is not remotely convincing or scientific. In fact, it amounts to 
little more than a vigorous defence of business power hidden behind 
a thin rhetoric of "free markets." As it preaches the infallibility of 
capitalism, this requires a nearly unyielding defence of corporations, 
economic and social power and workplace hierarchy. It must dismiss the 
obvious fact that allowing big business to flourish into oligopoly and 
monopoly (as it does, see section C.4) reduces the possibility of 
competition solving the problem of unethical business practices and 
worker exploitation, as they claim. This is unsurprising, as the 
Austrian school (like economics in general) identifies "freedom" with 
the "freedom" of private enterprise, i.e. the lack of accountability 
of the economically privileged and powerful. This simply becomes a 
defence of the economically powerful to do what they want (within 
the laws specified by their peers in government).

Ironically, the Austrian defence of capitalism is dependent on the belief 
that it will remain close to equilibrium. However, as seems likely, 
capitalism is endogenously unstable, then any real "pure" capitalism 
will be distant from equilibrium and, as a result, marked by unemployment 
and, of course, booms and slumps. So it is possible to have a capitalist
economics based on non-equilibrium, but it is unlikely to convince anyone
that does not already believe that capitalism is the best system ever
unless they are unconcerned about unemployment (and so worker exploitation)
and instability. As Steve Keen notes, it is "an alternative way to 
ideologically support a capitalist economy . . . If neoclassical economics 
becomes untenable for any reason, the Austrians are well placed to provide 
an alternative religion for believers in the primacy of the market over all 
other forms of social organisation." [Keen, _Debunking Economics_, p. 304]

Those who seek freedom for all and want to base themselves on more than 
faith in an economic system marked by hierarchy, inequality and oppression 
would be better seeking a more realistic and less apologetic economic theory.

C.2 Why is capitalism exploitative?

For anarchists, capitalism is marked by the exploitation of labour
by capital. While this is most famously expressed by Proudhon's 
"property is theft," this perspective can be found in all forms 
of anarchism. For Bakunin, capitalism was marked by an "economic
relationship between the exploiter and exploited" as it meant the
few have "the power and right to live by exploiting the labour of
someone else, the right to exploit the labour of those who possess
neither property nor capital and who thus are forced to sell their
productive power to the lucky owners of both." [_The Political
Philosophy of Bakunin_, p. 183] This means that when a worker
"sells his labour to an employee . . . some part of the value of
his produce will be unjustly taken by the employer." [Kropotkin, 
_Anarchism and Anarchist-Communism_, p. 52]

At the root this criticism is based, ironically enough, on the
*capitalist* defence of private property as the product of labour.
As noted in section B.4.2, Locke defended private property in terms
of labour yet allowed that labour to be sold to others. This allowed
the buyers of labour to appropriate the product of other people's
labour and so, in the words of dissident economist David Ellerman, 
"capitalist production, i.e. production based on the employment 
contract denies workers the right to the (positive and negative) 
fruit of their labour. Yet people's right to the fruits of their 
labour has always been the natural basis for private property 
appropriation. Thus capitalist production, far from being founded 
on private property, in fact denies the natural basis for private 
property appropriation." [_The Democratic worker-owned firm_, 
p. 59] This was expressed by Proudhon in the following way:

"Whoever labours becomes a proprietor -- this is an inevitable
deduction from the principles of political economy and 
jurisprudence. And when I say proprietor, I do not mean simply
(as do our hypocritical economists) proprietor of his allowance,
his salary, his wages, -- I mean proprietor of the value his 
creates, and by which the master alone profits . . . *The 
labourer retains, even after he has received his wages, a natural
right in the thing he was produced.*" [_What is Property?_, 
pp. 123-4]

In other words, taking the moral justification for capitalism,
anarchists argue that it fails to meet its own criteria. Whether
this principle should be applied in a free society is a moot point
within anarchism. Individualist and mutualist anarchists argue it
should be and, therefore, say that individual workers should receive
the product of their toil (and so argue for distribution according to 
deed). Communist-anarchists argue that "social ownership and sharing
according to need . . . would be the best and most just economic
arrangement." This is for two reasons. Firstly, because "in modern 
industry" there is "no such thing" as an individual product as "all 
labour and the products of labour are social." [Berkman, _What is 
Anarchism?_, pp. 169-70] Secondly, in terms of simple justice need
is not related to the ability to work and, of course, it would 
be wrong to penalise those who cannot work (i.e. the sick, the 
young and the old). Yet, while anarchists disagree over exactly 
how this should be most justly realised, they all agree that labour 
should control *all* that it produces (either individually or 
collectively) and, consequently, non-labour income is exploitation 
(it should be stressed that as both schemes are voluntary, there 
is no real contradiction between them). Anarchists tend to call 
non-labour income "surplus-value" or "usury" and these terms 
are used to group together profits, rent and interest (see 
section C.2.1 for details).

That this critique is a problem for capitalism can be seen from the many 
varied and wonderful defences created by economists to justify non-labour
income. Economists, at least in the past, saw the problem clear 
enough. John Stuart Mill, the final great economist of the classical 
school, presented the typical moral justification of capitalism, 
along with the problems it causes. As he explains in his classic 
introduction to economics, the "institution of property, when 
limited to its essential elements, consists in the recognition, in 
each person, of a right to the exclusive disposal of what he or she 
have produced by their own exertions . . . The foundation of the whole 
is, the right of producers to what they themselves have produced." He 
then notes the obvious contradiction -- workers do *not* receive what 
they have produced. Thus it "may be objected" that capitalist society
"recognises rights of property in individuals over which they have 
not produced," for example "the operatives in a manufactory create, by 
their labour and skill, the whole produce; yet, instead of it belonging 
to them, the law gives them only their stipulated hire [wages], and 
transfers the produce to someone who has merely supplied the funds, 
without perhaps contributing to the work itself." [_Principles of
Political Economy_, p. 25] With the rise of neoclassical economics, 
the problem remained and so did need to justify capitalism continued 
to drive economics. J. B. Clark, for example, knew what was at stake 
and, like Mill, expressed it:

"When a workman leaves the mill, carrying his pay in his pocket, the 
civil law guarantees to him what he thus takes away; but before he 
leaves the mill he is the rightful owner of a part of the wealth 
that the day's industry has brought forth. Does the economic law 
which, in some way that he does not understand, determines what 
his pay shall be, make it to correspond with the amount of his 
portion of the day's product, or does it force him to leave some 
of his rightful share behind him? A plan of living that should 
force men to leave in their employer's hands anything that by 
right of creation is theirs, would be an institutional robbery -- 
a legally established violation of the principle on which property 
is supposed to rest." [_The Distribution of Wealth_, pp. 8-9]

Why should the owners of land, money and machinery get an income in the
first place? Capitalist economics argues that everything involves a cost 
and, as such, people should be rewarded for the sacrifices they suffer 
when they contribute to production. Labour, in this schema, is considered 
a cost to those who labour and, consequently, they should be rewarded for
it. Labour is thought of a disutility, i.e. something people do not want, 
rather than something with utility, i.e. something people do want. Under 
capitalism (like any class system), this perspective makes some sense as 
workers are bossed about and often subject to long and difficult labour.
Most people will happily agree that labour is an obvious cost and should
be rewarded. 

Economists, unsurprisingly, have tended to justify surplus value by 
arguing that it involves as much cost and sacrifice as labour.  For 
Mill, labour "cannot be carried on without materials and machinery . . . 
All these things are the fruits of previous production. If the 
labourers possessed of them, they would not need to divide the 
produce with any one; but while they have them not, an equivalent 
must be given to those who have." [Op. Cit., p. 25] This rationale 
for profits is called the "abstinence" or "waiting" theory. Clark, 
like Mill, expressed a defence of non-labour income in the face of 
socialist and anarchist criticism, namely the idea of marginal 
productivity to explain and justify non-labour income. Other theories 
have been developed as the weaknesses of previous ones have been 
exposed and we will discuss some of them in subsequent sections.

The ironic thing is that, well over 200 years after it came of age 
with Adam Smith's _Wealth of Nations_, economics has no agreed 
explanation for the source of surplus value. As dissident economists 
Michele I. Naples and Nahid Aslanbeigui show, introductory economics 
texts provide "no consistent, widely accepted theory" on the profit 
rate. Looking at the top three introductions to economics, they 
discovered that there was a "strange amalgam" of theories which 
is "often confusing, incomplete and inconsistent." Given that 
internal consistency is usually heralded as one of the hallmarks 
of neoclassical theory, "the theory must be questioned." This 
"failure . . . to provide a coherent theory of the rate of profit 
in the short run or long run" is damning, as the "absence of a 
coherent explanation for the profit rate represents a fundamental 
failure for the neoclassical model." ["What *does* determine the 
profit rate? The neoclassical theories present in introductory 
textbooks," pp. 53-71, _Cambridge Journal of Economics_, vol. 20, 
p. 53, p. 54, p. 69 and p. 70] 

As will become clear, anarchists consider defences of "surplus value" 
to be essentially ideological and without an empirical base. As we will 
attempt to indicate, capitalists are not justified in appropriating 
surplus value from workers for no matter how this appropriation is 
explained by capitalist economics, we find that inequality in wealth 
and power are the real reasons for this appropriation rather than 
some actual productive act on the part of capitalists, investors or
landlords. Mainstream economic theories generally seek to justify the 
distribution of income and wealth rather than to understand it. They 
are parables about what should be rather than what is. We argue that 
any scientific analysis of the source of "surplus value" cannot help 
conclude that it is due, primarily, to inequalities of wealth and, 
consequently, inequalities of power on the market. In other words, 
that Rousseau was right:

"The terms of social compact between these two estates of men may
be summed up in a few words: 'You have need of me, because I am
rich and you are poor. We will therefore come to an agreement. I
will permit you to have the honour of serving me, on condition that
you bestow on me that little you have left, in return for the pains
I shall take to command you.'" [_The Social Contract and Discourses_,
p. 162]

This is the analysis of exploitation we present in more detail in 
section C.2.2. To summarise it, labour faces social inequality 
when it passes from the market to production. In the workplace, 
capitalists exercise social power over how labour is used and this 
allows them to produce more value from the productive efforts of 
workers than they pay for in wages. This social power is rooted in 
social dependence, namely the fact that workers have little choice 
but to sell their liberty to those who own the means of life. To 
ensure the creation and appropriation of surplus-value, capitalists 
must not only own the production process and the product of the 
workers' labour, they must own the labour of the workers itself. 
In other words, they must control the workers. Hence capitalist 
production must be, to use Proudhon's term, "despotism." How much 
surplus-value can be produced depends on the relative economic 
power between bosses and workers as this determines the duration 
of work and the intensity of labour, however its roots are the
same -- the hierarchical and class nature of capitalist society.

C.2.1 What is "surplus value"?

Before discussing how surplus-value exists and the flaws in capitalist
defences of it, we need to be specific about what we mean by the term
"surplus value." To do this we must revisit the difference between 
possession and private property we discussed in section B.3. For 
anarchists, private property (or capital) is "the power to produce 
without labour." [Proudhon, _What is Property?_, p. 161] As such,
surplus value is created when the owners of property let others 
use them and receive an income from so doing. Therefore something 
only becomes capital, producing surplus value, under specific social 
relationships. 

Surplus value is "the difference between the value produced by the
workers and the wages they receive" and is "appropriated by the 
landlord and capitalist class . . . absorbed by the non-producing 
classes as profits, interest, rent, etc." [Charlotte Wilson, 
_Anarchist Essays_, pp. 46-7] It basically refers to any non-labour 
income (some anarchists, particularly individualist anarchists, 
have tended to call "surplus value" usury). As Proudhon noted, it 
"receives different names according to the thing by which it is 
yielded: if by land, *ground-rent*; if by houses and furniture, 
*rent*; if by life-investments, *revenue*; if by money, *interest*; 
if by exchange, *advantage*, *gain*, *profit* (three things which 
must not be confounded with the wages of legitimate price of labour)." 
[Op. Cit., p. 159] 

For simplicity, we will consider "surplus value" to have three component 
parts: profits, interest and rent. All are based on payment for letting 
someone else use your property. Rent is what we pay to be allowed to exist 
on part of the earth (or some other piece of property). Interest is what 
we pay for the use of money. Profit is what we pay to be allowed to work 
a farm or use piece of machinery. Rent and interest are easy to define, 
they are obviously the payment for using someone else's property and have 
existed long before capitalism appeared. Profit is a somewhat more complex 
economic category although, ultimately, is still a payment for using 
someone else's property.

The term "profit" is often used simply, but incorrectly, to mean an 
excess over costs. However, this ignores the key issue, namely how a 
workplace is organised. In a co-operative, for example, while there 
is a surplus over costs, "there is no profit, only income to be divided 
among members. Without employees the labour-managed firm does not have 
a wage bill, and labour costs are not counted among the expenses to be 
extracted from profit, as they are in the capitalist firm." This means 
that the "*economic category of profit does not exist in the 
labour-managed firm,* as it does in the capitalist firm where wages 
are a cost to be subtracted from gross income before a residual 
profit is determined . . . Income shared among all producers
is net income generated by the firm: the total of value added by
human labour applied to the means of production, less payment of
all costs of production and any reserves for depreciation of plant
and equipment." [Christopher Eaton Gunn, _Workers' Self-Management in
the United States_, p. 41 and p. 45] Gunn, it should be noted, follows
both Proudhon and Marx in his analysis ("Let us suppose the workers 
are themselves in possession of their respective means of production 
and exchange their commodities with one another. These commodities 
would not be products of capital." [Marx, _Capital_, vol. 3, p. 276]).

In other words, by profits we mean income that flows to the owner of 
a workplace or land who hires others to do the work. As such returns 
to capital are as unique to capitalism as unemployment is. This means 
that a farmer who works their own land receives a labour income when 
they sell the crop while one who hires labourers to work the land will
receives a non-labour income, profit. Hence the difference between 
*possession* and *private property* (or *capital*) and anarchist 
opposition to "capitalist property, that is, property which allows 
some to live by the work of others and which therefore presupposes a 
class of . . . people, obliged to sell their labour power to the 
property-owners for less than its value." [Malatesta, _Errico Malatesta:
His Life and Ideas_, p. 102]

Another complication arises due to the fact that the owners of private
property sometimes do work on them (i.e. be a boss) or hire others to 
do boss-like work on their behalf (i.e. executives and other managerial
staff). It could be argued that bosses and executives are also "workers" 
and so contribute to the value of the commodities produced. However, 
this is not the case. Exploitation does not just happen, it needs to 
be organised and managed. In other words, exploitation requires labour 
("There is work and there is work," as Bakunin noted, "There is 
productive labour and there is the labour of exploitation." [_The 
Political Philosophy of Bakunin_,  p. 180]). The key is that while 
a workplace would grind to a halt without workers, the workers could 
happily do without a boss by organising themselves into an association 
to manage their own work. As such, while bosses may work, they are not 
taking part in productive activity but rather exploitative activity.

Much the same can be said of executives and managers. Though they may 
not own the instruments of production, they are certainly buyers and 
controllers of labour power, and under their auspices production is 
still *capitalist* production. The creation of a "salary-slave" strata 
of managers does not alter the capitalist relations of production. In 
effect, the management strata are *de facto* capitalists and they are
like "working capitalist" and, consequently, their "wages" come from 
the surplus value appropriated from workers and realised on the
market. Thus the exploitative role of managers, even if they can be 
fired, is no different from capitalists. Moreover, "shareholders and
managers/technocrats share common motives: to make profits and to
reproduce hierarchy relations that exclude most of the employees from
effective decision making" [Takis Fotopoulos, "The Economic Foundations 
of an Ecological Society", pp. 1-40, _Society and Nature_, No.3, p. 16]
They are paid that well because they monopolise power in the company
and can get away with it. In other words, the high pay of the higher
levels of management is a share of profits *not* a labour income based
on their contribution to production but rather due to their position 
in the economic hierarchy and the power that gives them. 

This is not to say that 100 percent of what managers do is exploitative. 
The case is complicated by the fact that there is a legitimate need for 
co-ordination between various aspects of complex production processes -- 
a need that would remain under libertarian socialism and would be filled 
by elected and recallable (and in some cases rotating) managers (see 
Section I.3). But under capitalism, managers become parasitic in proportion 
to their proximity to the top of the pyramid. In fact, the further the 
distance from the production process, the higher the salary; whereas the 
closer the distance, the more likely that a "manager" is a worker with 
a little more power than average. In capitalist organisations, the less 
you do, the more you get. In practice, executives typically call upon 
subordinates to perform managerial (i.e. co-ordinating) functions and 
restrict themselves to broader policy-making decisions. As their 
decision-making power comes from the hierarchical nature of the firm, 
they could be easily replaced if policy making was in the hands of 
those who are affected by it. As such, their role as managers do not 
require them to make vast sums. They are paid that well currently 
because they monopolise power in the company and can, consequently,
get away with deciding that they, unsurprisingly, contribute most to
the production of useful goods rather than those who do the actual
work.

Nor are we talking, as such, of profits generated by buying cheap and
selling dear. We are discussing the situation at the level of the economy
as a whole, *not* individual transactions. The reason is obvious. If 
profits could just explained in terms of buying cheap in order to sell 
dear then, over all, such transactions would cancel each other out when
we look at the market as a whole as any profit will cancel any loss. 
For example, if someone buys a product at, say,20 and sells it at 25 
then there would be no surplus overall as someone else will have to pay 
20 for something which cost 25. In other words, what one person gains 
as a seller, someone else will lose as a buyer and no net surplus has 
been created.  Capitalists, in other words, do not simply profit at 
each others' expense. There is a creation of surplus rather than mere 
redistribution of a given product. This means that we are explaining 
why production results in a aggregate surplus and why it gets distributed 
between social classes under capitalism.

This means that capitalism is based on the creation of surplus rather 
than mere redistribution of a given sum of products. If this were not
the case then the amount of goods in the economy would not increase, 
growth would not exist and all that would happen is that the distribution 
of goods would change, depending on the transactions made. Such a world 
would be one without production and, consequently, not realistic. 
Unsurprisingly, as we noted in section C.1, this is the world of 
neoclassical economics. This shows the weakness of attempts to explain 
the source of profits in terms of the market rather than production. 
While the market can explain how, perhaps, a specific set of goods 
and surplus is distributed, it cannot explain how a surplus is generated 
in the first place. To understand how a surplus is created we need to 
look at the process of value creation. For this, it is necessary to 
look at production to see if there is something which produces more 
than it gets paid for. Anarchists, like other socialists, argue that 
this is labour and, consequently, that capitalism is an exploitative 
system. We discuss why in the next section.

Obviously, pro-capitalist economics argues against this theory of how a
surplus arises and the conclusion that capitalism is exploitative. We will
discuss the more common arguments below. However, one example will suffice 
here to see why labour is the source of a surplus, rather than (say) 
"waiting", risk or the productivity of capital (to list some of the more
common explanations for capitalist appropriation of surplus value). This 
is a card game. A good poker-player uses equipment (capital), takes risks, 
delays gratification, engages in strategic behaviour, tries new tricks 
(innovates), not to mention cheats, and can make large winnings. However, 
no surplus product results from such behaviour; the gambler's winnings are 
simply redistributions from others with no new production occurring. For 
one to win, the rest must lose. Thus risk-taking, abstinence, entrepreneurship, 
and so on might be necessary for an individual to receive profits but they
are far from sufficient for them not to be the result a pure redistribution 
from others. 

In short, our discussion of exploitation under capitalism is first and foremost
an economy-wide one. We are concentrating on how value (goods and services) and 
surplus value (profits, rent and interest) are produced rather than how they
are distributed. The distribution of goods between people and the division of
income into wages and surplus value between classes is a secondary concern as
this can only occur under capitalism if workers produce goods and services to 
sell (this is the direct opposite of mainstream economics which assumes a
static economy with almost no discussion of how scarce means are organised
to yield outputs, the whole emphasis is on exchanges of ready made goods). 

Nor is this distribution somehow fixed. As we discuss in section C.3, 
how the amount of value produced by workers is divided between wages 
and surplus value is source of much conflict and struggle, the outcome 
of which depends on the balance of power between and within classes. 
The same can be said of surplus value. This is divided between profits, 
interest and rent -- capitalists, financiers and landlords. This does not 
imply that these sections of the exploiting class see eye to eye or that
there is not competition between them. Struggle goes on within classes 
and well as between classes and this applies at the top of the economic 
hierarchy as at the bottom. The different sections of the ruling elite 
fight over their share of surplus value. This can involve fighting over 
control of the state to ensure that their interests are favoured over 
others. For example, the Keynesian post-war period can be considered a
period when industrial capitalists shaped state policy while the period 
after 1973 represents a shift in power towards finance capital.

We must stress, therefore, that the exploitation of workers is not defined 
as payment less than competitive ("free market") for their labour. Rather,
exploitation occurs even if they are paid the market wage. This is because 
workers are paid for their ability to labour (their "labour-power," to use 
Marx's term) rather the labour itself. This means that for a given hour's 
work (labour), the capitalist expects the worker to produce more than their 
wage (labour power). How much more is dependent on the class struggle and 
the objective circumstances each side faces. Indeed, a rebellious workforce 
willing to take direct action in defence of their interests will not allow 
subjection or its resulting exploitation.

Similarly, it would be wrong to confuse exploitation with low wages. Yes,
exploitation is often associated with paying low wages but it is more than
possible for real wages to go up while the rate of exploitation falls or
rises. While some anarchists in the nineteenth century did argue that 
capitalism was marked by falling real wages, this was more a product of
the time they were living through rather than an universal law. Most 
anarchists today argue that whether wages rise or fall depends on the 
social and economic power of working people and the historic context 
of a given society. This means, in other words, that labour is 
exploited not because workers have a low standard of living (although 
it can) but because labour produces the whole of the value created 
in any process of production or creation of a service but gets only 
part of it back. 

As such, it does not matter *if* real wages do go up or not. Due to 
the accumulation of capital, the social and economic power of the 
capitalists and their ability to extract surplus-value can go up at 
a higher rate than real wages. The key issue is one of freedom rather 
than the possibility of consuming more. Bosses are in a position, due 
to the hierarchical nature of the capitalist workplace, to make workers 
produce more than they pay them in wages. The absolute level of those 
wages is irrelevant to the creation and appropriation of value and 
surplus-value as this happens at all times within capitalism.

As an example, since the 1970s American workers have seen their wages 
stagnate and have placed themselves into more and more debt to maintain an 
expected standard of living. During this time, productivity has increased 
and so they have been increasingly exploited. However, between 1950s and 
1970s wages did increase along with productivity. Strong unions and a 
willingness to strike mitigated exploitation and increased living 
standards but exploitation continued. As Doug Henwood notes, while
"average incomes have risen considerably" since 1945, "the amount of
work necessary to earn those incomes has risen with equal relentlessness
. . . So, despite the fact that productivity overall is up more than 
threefold" over this time "the average worker would have to toil six
months longer to make the average family income." [_After the New
Economy_, pp. 39-40] In other words, rising exploitation *can* go hand
in hand with rising wages. 

Finally, we must stress that we are critiquing economics mostly in its own
terms. On average workers sell their labour-power at a "fair" market price
and still exploitation occurs. As sellers of a commodity (labour-power) they 
do not receive its full worth (i.e. what they actually produce). Even if
they did, almost all anarchists would still be against the system as it is
based on the worker becoming a wage-slave and subject to hierarchy. In other
words, they are not free during production and, consequently, they would still
being robbed, although this time it is as human beings rather than a factor
of production (i.e. they are oppressed rather than exploited). Needless to 
say, the idea that we could be subject to oppression during working hours 
and *not* be exploited is one most anarchists would dismiss as a bad joke and,
as a result, follow Proudhon and demand the abolition of wage labour (most
take it further and advocate the abolition of the wages system as well, i.e.
support libertarian communism).

C.2.2 How does exploitation happen?

In order to make more money, money must be transformed into capital, 
i.e., workplaces, machinery and other "capital goods." By itself, however,
capital (like money) produces nothing. While a few even talk about "making 
money work for you" (as if pieces of paper can actually do any form of work!) 
obviously this is not the case -- human beings have to do the actual work. 
Capital only becomes productive in the labour process when workers use it: 

"Values created by net product are classed as savings and capitalised 
in the most highly exchangeable form, the form which is freest and 
least susceptible of depreciation, -- in a word, the form of specie, 
the only constituted value. Now, if capital leaves this state of 
freedom and *engages itself*, -- that is, takes the form of machines, 
buildings, etc., -- it will still be susceptible of exchange, but much 
more exposed than before to the oscillations of supply and demand. Once 
engaged, it cannot be *disengaged* without difficulty; and the sole 
resource of its owner will be exploitation. Exploitation alone is 
capable of maintaining engaged capital at its nominal value." [_System 
of Economical Contradictions_, p. 291]

Under capitalism, workers not only create sufficient value (i.e. produced 
commodities) to maintain existing capital and their own existence, they 
also produce a surplus. This surplus expresses itself as a surplus of 
goods and services, i.e. an excess of commodities compared to the number 
a workers' wages could buy back. Thus Proudhon: 

"The working man cannot . . . repurchase that which he has produced for his
master. It is thus with all trades whatsoever. . . since, producing for a
master who in one form or another makes a profit, they are obliged to pay
more for their own labour than they get for it." [_What is Property_, 
p. 189]

In other words, the price of all produced goods is greater than the money 
value represented by the workers' wages (plus raw materials and overheads 
such as wear and tear on machinery) when those goods were produced. The 
labour contained in these "surplus-products" is the source of profit, which 
has to be realised on the market (in practice, of course, the value 
represented by these surplus-products is distributed throughout all the 
commodities produced in the form of profit -- the difference between the 
cost price and the market price). In summary, surplus value is unpaid 
labour and hence capitalism is based on exploitation. As Proudhon noted, 
"*Products,* say economists, *are only bought by products*. This maxim 
is property's condemnation. The proprietor producing neither by his own 
labour nor by his implement, and receiving products in exchange for 
nothing, is either a parasite or a thief." [Op. Cit., p. 170]

It is this appropriation of wealth from the worker by the owner which 
differentiates capitalism from the simple commodity production of artisan 
and peasant economies. All anarchists agree with Bakunin when he stated 
that:

"*what is property, what is capital in their present form?* For the
capitalist and the property owner they mean the power and the right,
guaranteed by the State, to live without working . . . [and so] the power
and right to live by exploiting the work of someone else . . . those . . .
[who are] forced to sell their productive power to the lucky owners of
both." [_The Political Philosophy of Bakunin_, p. 180]

It is the nature of capitalism for the monopolisation of the worker's
product by others to exist. This is because of private property in the
means of production and so in "consequence of [which] . . . [the] worker, 
when he is able to work, finds no acre to till, no machine to set in
motion, unless he agrees to sell his labour for a sum inferior to its 
real value." [Peter Kropotkin, _Anarchism_, p. 55]

Therefore workers have to sell their labour on the market. However, as 
this "commodity" "cannot be separated from the person of the worker like
pieces of property. The worker's capacities are developed over time and
they form an integral part of his self and self-identity; capacities are
internally not externally related to the person. Moreover, capacities 
or labour power cannot be used without the worker using his will, his 
understanding and experience, to put them into effect. The use of labour
power requires the presence of its 'owner'. . . To contract for the use
of labour power is a waste of resources unless it can be used in the
way in which the new owner requires . . . The employment contract must,
therefore, create a relationship of command and obedience between
employer and worker."  So, "the contract in which the worker allegedly 
sells his labour power is a contract in which, since he cannot be 
separated from his capacities, he sells command over the use of his 
body and himself. . . The characteristics of this condition are captured 
in the term *wage slave.*" [Carole Pateman, _The Sexual Contract_, 
pp. 150-1] 

Or, to use Bakunin's words, "the worker sells his person and his 
liberty for a given time" and so "concluded for a term only and
reserving to the worker the right to quit his employer, this contract 
constitutes a sort of *voluntary* and *transitory* serfdom." [_The 
Political Philosophy of Bakunin_, p. 187] This domination is the 
source of the surplus, for "wage slavery is not a consequence of 
exploitation -- exploitation is a consequence of the fact that 
the sale of labour power entails the worker's subordination. The 
employment contract creates the capitalist as master; he has the 
political right to determine how the labour of the worker will be 
used, and -- consequently -- can engage in exploitation." [Pateman, 
Op. Cit., p. 149] 

So profits exist because the worker sells themselves to the capitalist, 
who then owns their activity and, therefore, controls them (or, more
accurately, *tries* to control them) like a machine. Benjamin Tucker's 
comments with regard to the claim that capital is entitled to a reward 
are of use here. He notes that some "combat. . . the doctrine that 
surplus value -- oftener called profits -- belong to the labourer 
because he creates it, by arguing that the horse. . . is rightly 
entitled to the surplus value which he creates for his owner. So 
he will be when he has the sense to claim and the power to take 
it. . . Th[is] argument . .  is based upon the assumption that 
certain men are born owned by other men, just as horses are. Thus 
its *reductio ad absurdum* turns upon itself." [_Instead of a Book_, 
pp. 495-6] In other words, to argue that capital should be rewarded 
is to implicitly assume that workers are just like machinery, another
"factor of production" rather than human beings and the creator
of things of value. So profits exists because during the working 
day the capitalist controls the activity and output of the worker 
(i.e. owns them during working hours as activity cannot be
separated from the body and "[t]here is an integral relationship
between the body and self. The body and self are not identical,
but selves are inseparable from bodies." [Carole Pateman, Op. Cit.,
p. 206]). 

Considered purely in terms of output, this results in, as Proudhon 
noted, workers working "for an entrepreneur who pays them and keeps 
their products." [quoted by Martin Buber, _Paths in Utopia_, p. 29]
The ability of capitalists to maintain this kind of monopolisation of 
another's time and output is enshrined in "property rights" enforced by 
either public or private states. In short, therefore, property "is the 
right to enjoy and dispose at will of another's goods - the fruit of 
an other's industry and labour." [P-J Proudhon, _What is Property_, 
p. 171] And because of this "right," a worker's wage will always be 
less than the wealth that he or she produces. 

The surplus value produced by labour is divided between profits, interest 
and rent (or, more correctly, between the owners of the various factors 
of production other than labour). In practice, this surplus is used 
by the owners of capital for: (a) investment (b) to pay themselves dividends 
on their stock, if any; (c) to pay for rent and interest payments; and (d) 
to pay their executives and managers (who are sometimes identical with the 
owners themselves) much higher salaries than workers. As the surplus is
being divided between different groups of capitalists, this means that
there can be clashes of interest between (say) industrial capitalists and
finance capitalists. For example, a rise in interest rates can squeeze
industrial capitalists by directing more of the surplus from them into
the hands of rentiers. Such a rise could cause business failures and so
a slump (indeed, rising interest rates is a key way of regulating working 
class power by generating unemployment to discipline workers by fear of
the sack). The surplus, like the labour used to reproduce existing capital, 
is embodied in the finished commodity and is realised once it is sold. This 
means that workers do not receive the full value of their labour, since the 
surplus appropriated by owners for investment, etc. represents value added 
to commodities by workers -- value for which they are not paid nor control.

The size of this surplus, the amount of unpaid labour, can be changed 
by changing the duration and intensity of work (i.e. by making workers 
labour longer and harder). If the duration of work is increased, the 
amount of surplus value is increased absolutely. If the intensity is 
increased, e.g. by innovation in the production process, then the amount 
of surplus value increases relatively (i.e. workers produce the equivalent 
of their wage sooner during their working day resulting in more unpaid 
labour for their boss). Introducing new machinery, for example, increases 
surplus-value by reducing the amount of work required per unit of output. 
In the words of economist William Lazonick:

"As a general rule, all market prices, including wages, are given to
the particular capitalist. Moreover, in a competitive world a
particular capitalist cannot retain privileged access to process or
product innovations for any appreciable period of time. But the 
capitalist does have privileged access to, and control over, the
workers that he employs. Precisely because the work is not 
perfectly mobile but is dependent on the capitalist to gain a
living, the capitalist is not subject to the dictates of market
forces in dealing with the worker in the production process. The
more dependent the worker is on his or her particular employer, the
more power the capitalist has to demand longer and harder work in
return for a day's pay. The resultant unremunerated increase in
the productivity of the worker per unit of time is the source of
surplus-value.

"The measure of surplus-value is the difference between the value-added
by and the value paid to the worker. As owner of the means of production,
the industrial capitalist has a legal right to keep the surplus-value
for himself." [_Competitive Advantage on the Shop Floor_, p. 54]

Such surplus indicates that labour, like any other commodity, has a use
value and an exchange value. Labour's exchange value is a worker's wages, 
its use value their ability to work, to do what the capitalist who buys
it wants. Thus the existence of "surplus products" indicates that there 
is a difference between the exchange value of labour and its use value,
that labour can *potentially* create *more* value than it receives back 
in wages. We stress potentially, because the extraction of use value from
labour is not a simple operation like the extraction of so many joules
of energy from a ton of coal. Labour power cannot be used without subjecting
the labourer to the will of the capitalist - unlike other commodities, 
labour power remains inseparably embodied in human beings. Both the
extraction of use value and the determination of exchange value for labour
depends upon - and are profoundly modified by - the actions of workers.
Neither the effort provided during an hours work, nor the time spent in
work, nor the wage received in exchange for it, can be determined 
without taking into account the worker's resistance to being turned 
into a commodity, into an order taker. In other words, the amount of
"surplus products" extracted from a worker is dependent upon the
resistance to dehumanisation within the workplace, to the attempts by
workers to resist the destruction of liberty during work hours.

Thus unpaid labour, the consequence of the authority relations explicit 
in private property, is the source of profits. Part of this surplus 
is used to enrich capitalists and another to increase capital, which 
in turn is used to increase profits, in an endless cycle (a cycle, 
however, which is not a steady increase but is subject to periodic 
disruption by recessions or depressions - "The business cycle." The basic 
causes for such crises will be discussed later, in sections C.7 and C.8). 

It should be noted that few economists deny that the "value added" 
by workers in production must exceed the wages paid. It has to, if 
a profit is to be made. As Adam Smith put it:

"As soon as stock has accumulated in the hands of particular persons, 
some of them will naturally employ it in setting to work industrious 
people, whom they will supply with materials and subsistence, in order 
to make a profit by the sale of their work, or by what their labour 
adds to the value of the materials . . . The value which the workmen 
add to the materials, therefore, resolves itself in this case into two 
parts, of which one pays their wages, the other the profits of their 
employer upon the whole stock of materials and wages which he 
advanced. He could have no interest to employ them, unless he expected
from the sale of their work something more than what was sufficient
to replace his stock to him." [_The Wealth of Nations_, p. 42]

That surplus value consists of unpaid labour is a simple fact. The 
difference is that non-socialist economists refuse to explain this 
in terms of exploitation. Like Smith, David Ricardo argued in a 
similar manner and justified surplus value appropriation in spite 
of this analysis. Faced with the obvious interpretation of non-labour
income as exploitation which could easily be derived from classical 
economics, subsequent economists have sought to obscure this fact 
and have produced a series of rationales to justify the appropriation 
of workers labour by capitalists. In other words, to explain and 
justify the fact that capitalism is not based on its own principle 
that labour creates and justifies property. These rationales have 
developed over time, usually in response to socialist and anarchist 
criticism of capitalism and its economics (starting in response to
the so-called Ricardian Socialists who predated Proudhon and Marx
and who first made such an analysis commonplace). These have been 
based on many  factors, such as the abstinence or waiting by the 
capitalist, the productivity of capital, "time-preference," 
entrepreneurialism and so forth. We discuss most rationales and
indicate their weaknesses in subsequent sections.

C.2.3 Is owning capital sufficient reason to justify profits?

No, it does not. To understand why, we must first explain the
logic behind this claim. It is rooted in what is termed "marginal
productivity" theory. In the words of one of its developers:

"If each productive function is paid for according to the amount 
of its product, then each man get what he himself produces. If he 
works, he gets what he creates by working; if he provides capital, 
he gets what his capital produces; and if, further, he renders 
service by co-ordinating labour and capital, he gets the product 
that can be separately traced to that function. Only in one of 
these ways can a man produce anything. If he receives all that 
he brings into existence through any one of these three functions, 
he receives all that he creates at all." [John Bates Clark, _The 
Distribution of Wealth_, p.7]

Needless to say, this analysis was based on the need to justify 
the existing system, for it was "the purpose of this work to show 
that the distribution of income to society is controlled by a 
natural law, and that this law, if it worked without friction, 
would give to every agent of production the amount of wealth which 
that agent creates." In other words, "what a social class gets is, 
under natural law, what it contributes to the general output of 
industry." [Clark, Op. Cit., p. v and p. 313] And only mad people 
can reject a "natural law" like gravity -- or capitalism!

Most schools of capitalist economics, when they bother to try and 
justify non-labour income, hold to this theory of productivity. 
Unsurprisingly, as it proves what right-wing economist Milton 
Friedman called the "capitalist ethic": "To each according to what 
he and the instruments he owns produces." [_Capitalism and Freedom_, 
pp. 161-162] As such, this is one of the key defences of capitalism, 
based as it is on the productive contribution of each factor (labour, 
land and capital). Anarchists as unconvinced.

Unsurprisingly, this theory took some time to develop given the theoretical 
difficulties involved. After all, you need all three factors to produce a 
commodity, say a bushel of wheat. How can we determine that percentage of 
the price is due to the land, what percentage to labour and what percentage 
to capital? You cannot simply say that the "contribution" of each factor 
just happens to be identical to its cost (i.e. the contribution of land 
is what the market rent is) as this is circular reasoning. So how is it 
possible to specify contribution of each factor of production independently 
of the market mechanism in such a way as to show, firstly, that the 
contributions add up to 100 percent and, secondly, that the free 
market will in fact return to each factor its respective contribution?

This is where marginal productivity theory comes in. In neo-classical theory, 
the contribution of a specific factor is defined as the marginal product of 
that factor when the other factors are left constant. Take, as an example,
a hundred bushels of wheat produced by X acres of land being worked by Y 
workers using Z worth of capital. The contribution of land can then be
defined as the increase in wheat that an extra acre of land would produce
(X+1) if the same number of workers employed the same capital worked it.
Similarly, the contribution of a worker would be the increase that would 
result if an addition worker was hired (Y + 1) to work the same land (X)
with the same capital (Z). The contribution of capital, obviously, would
be the increase in wheat produced by the same number of workers (X) working 
the same amount of land (Y) using one more unit of capital (Z+1). Then
mathematics kicks in. If enough assumptions are made in terms of the 
substitutability of factors, diminishing returns, and so forth, then a 
mathematical theorem (Euler's Theorem) can be used to show that the sum 
of these marginal contributions would be a hundred bushels. Applying
yet more assumptions to ensure "perfect competition" it can be mathematically
proven that the rent per acre set by this perfect market will be precisely 
the contribution of the land, that the market wage will be the contribution 
of the worker, and the market interest rate will be the contribution of 
capital. In addition, it can be shown that any monopoly power will enable 
a factor owner to receive more than it contributes, so exploiting the
others.

While this is impressive, the problems are obvious. As we discuss in
section C.2.5, this model does not (indeed, cannot) describe any actual
real economy. However, there is a more fundamental issue than mere 
practicality or realism, namely that it confuses a *moral* principle 
(that factors should receive in accordance with their productive 
contributions) with an ownership issue. This is because even if we 
want to say that land and capital "contribute" to the final product, 
we cannot say the same for the landowner or the capitalist. Using 
our example above, it should be noted that neither the capitalist 
nor the landowner actually engages in anything that might be called 
a productive activity. Their roles are purely passive, they simply 
allow what they own to be used by the people who do the actual work, 
the labourers. 

Marginal productivity theory shows that with declining marginal
productivity, the contribution of labour is less than the total product.
The difference is claimed to be precisely the contribution of capital
and land. But what is this "contribution" of capital and land? Without 
any labourers there would be no output. In addition, in physical terms, 
the marginal product of, say, capital is simply the amount by which 
production would decline is one piece of capital were taken out of 
production. It does not reflect any productive activity whatsoever 
on the part of the owner of said capital. *It does not, therefore, 
measure his or her productive contribution.* In other words, capitalist 
economics tries to confuse the owners of capital with the machinery they 
own. Unlike labour, whose "ownership" cannot be separated from the 
productive activities being done, capital and land can be rewarded
without their owners actually doing anything productive at all.

For all its amazing mathematics, the neo-classical solution fails simply
because it is not only irrelevant to reality, it is not relevant ethically.

To see why, let us consider the case of land and labour (capital is more
complex and will be discussed in the next two sections). Marginal productivity
theory can show, given enough assumptions, that five acres of land can
produce 100 bushels of wheat with the labour of ten men and that the 
contribution of land and labour are, respectively, 40 and 60 bushels each. 
In other words, that each worker receives a wage representing 6 bushels of
wheat while the landlord receives an income of 40 bushels. As socialist 
David Schweickart notes, "we have derived both the contribution of labour 
and the contribution of land from purely technical considerations. We have 
made no assumptions about ownership, competition, or any other social or 
political relationship. No covert assumptions about capitalism have been 
smuggled into the analysis." [_After Capitalism_, p. 29] 

Surely this means that economics has produced a defence of non-labour 
income? Not so, as it ignores the key issue of what represents a valid 
contribution. The conclusion that the landlord (or capitalist) is 
entitled to their income "in no way follows from the technical premises
of the argument. Suppose our ten workers had cultivated the five acres
*as a worker collective.* In this, they would receive the entire product,
all one hundred bushels, instead of sixty. Is this unfair? To whom should
the other forty bushels go? To the land, for its 'contribution'? Should
the collective perhaps burn forty bushels as an offering to the Land-God?
(Is the Land-Lord the representative on Earth of this Land-God?)."
[Op. Cit., p. 30] It should be noted that Schweickart is echoing the 
words of Proudhon:

"How much does the proprietor increase the utility of his tenant's
products? Has he ploughed, sowed, reaped, mowed, winnowed, weeded?
. . . I admit that the land is an implement; but who made it? Did
the proprietor? Did he -- by the efficacious virtue of the right
of property, by this *moral quality* infused into the soil -- endow 
it with vigour and fertility? Exactly there lies the monopoly of the
proprietor, though he did not make the implement, he asks pay for
its use. When the Creator shall present himself and claim farm-rent,
we will consider the matter with him; or even when the proprietor
-- his pretended representative -- shall exhibit his power of 
attorney." [_What is Property?_, pp. 166-7]

In other words, granting permission cannot be considered as a 
"contribution" or a "productive" act:

"We can see that a moral sleight-of-hand has been performed. A technical
demonstration has passed itself off as a moral argument by its choice of
terminology, namely, by calling a marginal product a 'contribution.' The
'contribution = ethical entitlement' of the landowner has been identified
with the 'contribution = marginal product' of the land . . . What is the
nature of the landowner's 'contribution' here? We can say that the landlord
*contributed the land* to the workers, but notice the qualitative 
difference between his 'contribution' and the contribution of his 
workforce. He 'contributes' his land -- but the land remains intact and
remains his at the end of the harvest, whereas the labour contributed by
each labourer is gone. If the labourers do not expend *more* labour next
harvest, they will get nothing more, whereas the landowner can continue
to 'contribute' year after year (lifting not a finger), and be rewarded
year after year for doing so." [Schweickart, Op. Cit., p. 30]

As the examples of the capitalist and co-operative farms shows, the 
"contribution" of land and capital can be rewarded without their
owners doing anything at all. So what does it mean, "capital's share"? 
After all, no one has ever given money to a machine or land. That money 
goes to the owner, not the technology or resource used. When "land" gets 
its "reward" it involves money going to the landowner *not* fertiliser 
being spread on the land. Equally, if the land and the capital were owned 
by the labourers then "capital" and "land" would receive nothing despite 
both being used in the productive process and, consequently, having 
"aided" production. Which shows the fallacy of the idea that profits, 
interest and rent represent a form of "contribution" to the productive 
process by land and capital which needs rewarded. They only get a 
"reward" when they hire labour to work them, i.e. they give permission 
for others to use the property in question in return for telling them 
what to do and keeping the product of their labour.

As Proudhon put it, "[w]ho is entitled to the rent of the land? The 
producer of the land, without doubt. Who made the land? God. Then, 
proprietor, retire!" [Op. Cit., p. 104] Much the same can be said 
of "capital" (workplaces, machinery, etc.) as well. The capitalist, 
argued Berkman, "gives you a job; that is permission to work in the 
factory or mill which was not built by him but by other workers like 
yourself. And for that permission you help to support him for the 
rest of your life or as long as you work for him." [_What is 
Anarchism?_, p. 14] 

So non-labour income exists *not* because of the owners of capital and 
land "contribute" to production but because they, as a class, *own* 
the means of life and workers have to sell their labour and liberty
to them to gain access:

"We cry shame on the feudal baron who forbade the peasant to turn a
clod of earth unless he surrendered to his lord a fourth of his crop.
We called those the barbarous times, But if the forms have changed,
the relations have remained the same, and the worker is forced, under
the name of free contract, to accept feudal obligations." [Kropotkin,
_The Conquest of Bread_, pp. 31-2]

It is capitalist property relations that allow this monopolisation of 
wealth by those who own (or boss) but do not produce. The workers do 
not get the full value of what they produce, nor do they have a say 
in how the surplus value produced by their labour gets used (e.g. 
investment decisions). Others have monopolised both the wealth 
produced by workers and the decision-making power within the company. 
This is a private form of taxation without representation, just as 
the company is a private form of statism. 

Therefore, providing capital is *not* a productive act, and keeping the
profits that are produced by those who actually do use capital is an act of
theft. This does not mean, of course, that creating capital goods is not
creative nor that it does not aid production. Far from it!  But owning the
outcome of such activity and renting it does not justify capitalism or 
profits. In other words, while we need machinery, workplaces, houses and
raw materials to produce goods we do *not* need landlords and capitalists.

The problem with the capitalists' "contribution to production" argument is 
that one must either assume (a) a strict definition of who is the producer 
of something, in which case one must credit only the worker(s), or (b) a 
looser definition based on which individuals have contributed to the 
circumstances that made the productive work possible. Since the worker's 
productivity was made possible in part by the use of property supplied by 
the capitalist, one can thus credit the capitalist with "contributing to 
production" and so claim that he or she is entitled to a reward, i.e. 
profit. 

However, if one assumes (b), one must then explain why the chain of credit 
should stop with the capitalist. Since all human activity takes place within 
a complex social network, many factors might be cited as contributing to the 
circumstances that allowed workers to produce -- e.g. their upbringing and 
education, the contribution of other workers in providing essential products,
services and infrastructure that permits their place of employment to operate, 
and so on (even the government, which funds infrastructure and education). 
Certainly the property of the capitalist contributed in this sense. But his 
contribution was less important than the work of, say, the worker's mother. 
Yet no capitalist, so far as we know, has proposed compensating workers' 
mothers with any share of the firm's revenues, and particularly not with 
a *greater* share than that received by capitalists! Plainly, however, if 
they followed their own logic consistently, capitalists would have to agree 
that such compensation would be fair.

In summary, while some may consider that profit is the capitalist's 
"contribution" to the value of a commodity, the reality is that it is
nothing more than the reward for owning capital and giving permission
for *others* to produce using it. As David Schweickart puts it, 
"'providing capital' means nothing more than 'allowing it to be 
used.' But an act of granting permission, in and of itself, is not a 
productive activity. If labourers cease to labour, production ceases 
in any society. But if owners cease to grant permission, production 
is affected only if their *authority* over the means of production 
is respected." [_Against Capitalism_, p. 11] 

This authority, as discussed earlier, derives from the coercive mechanisms 
of the state, whose primary purpose is to ensure that capitalists have 
this ability to grant or deny workers access to the means of production. 
Therefore, not only is "providing capital" not a productive activity, it 
depends on a system of organised coercion which requires the appropriation 
of a considerable portion of the value produced by labour, through taxes, 
and hence is actually parasitic. Needless to say, rent can also be considered 
as "profit", being based purely on "granting permission" and so not a 
productive activity. The same can be said of interest, although the 
arguments are somewhat different (see section C.2.6).

So, even if we assume that capital and land *are* productive, it 
does not follow that owning those resources entitles the owner to 
an income. However, this analysis is giving too much credit to
capitalist ideology. The simple fact is that capital is *not*
productive at all. Rather, "capital" only contributes to production 
when used by labour (land does produce use values, of course, but
these only become available once labour is used to pick the fruit,
reap the corn or dig the coal). As such, profit is not the reward
for the productivity of capital. Rather *labour* produces the 
marginal productivity of capital. This is discussed in the next 
section.

C.2.4 Is profit the reward for the productivity of capital?

In a word, no. As Proudhon pointed out, "Capital, tools, and machinery 
are likewise unproductive. . . The proprietor who asks to be rewarded 
for the use of a tool or for the productive power of his land, takes 
for granted, then, that which is radically false; namely, that capital 
produces by its own effort -- and, in taking pay for this imaginary 
product, he literally receives something for nothing." [_What is 
Property?_, p. 169] In other words, only labour is productive and
profit is not the reward for the productivity of capital.

Needless to say, capitalist economists disagree. "Here again the philosophy 
of the economists is wanting. To defend usury they have pretended that 
capital was productive, and they have changed a metaphor into a reality," 
argued Proudhon. The socialists had "no difficulty in overturning their 
sophistry; and through this controversy the theory of capital has fallen 
into such disfavour that today, in the minds of the people, *capitalist* 
and *idler* are synonymous terms." [_System of Economical Contradictions_,
p. 290] 

Sadly, since Proudhon's time, the metaphor has become regained its hold, 
thanks in part to neo-classical economics and the "marginal productivity" 
theory. We explained this theory in the last section as part of our 
discussion on why, even if we assume that land and capital *are* productive
this does not, in itself, justify capitalist profit. Rather, profits accrue 
to the capitalist simply because he or she gave their permission for others 
to use their property. However, the notion that profits represent that 
"productivity" of capital is deeply flawed for other reasons. The key one
is that, by themselves, capital and land produce nothing. As Bakunun put
it, "neither property nor capital produces anything when not fertilised 
by labour." [_The Political Philosophy of Bakunin_, p. 183] 

In other words, capital is "productive" simply because people use it.
This is hardly a surprising conclusion. Mainstream economics recognises
it in its own way (the standard economic terminology for this is that 
"factors usually do not work alone"). Needless to say, the conclusions
anarchists and defenders of capitalism draw from this obvious fact are 
radically different.

The standard defence of class inequalities under capitalism is that 
people get rich by producing what other people want. That, however, 
is hardly ever true. Under capitalism, people get rich by hiring other 
people to produce what other people want or by providing land, money or 
machinery to those who do the hiring. The number of people who have 
became rich purely by their own labour, without employing others, is 
tiny. When pressed, defenders of capitalism will admit the basic point 
and argue that, in a free market, everyone gets in income what 
their contribution in producing these goods indicates. Each factor 
of production (land, capital and labour) is treated in the same 
way and their marginal productivity indicates what their contribution 
to a finished product is and so their income. Thus wages represent the
marginal productivity of labour, profit the marginal productivity of
capital and rent the marginal productivity of land. As we have used 
land and labour in the previous section, we will concentrate on land 
and "capital" here. We must note, however, that marginal productivity 
theory has immense difficulties with capital and has been proven to 
be internally incoherent on this matter (see next section). However,
as mainstream economics ignores this, so will we for the time being.

So what of the argument that profits represent the contribution of
capital? The reason why anarchists are not impressed becomes clear 
when we consider ten men digging a hole with spades. Holding labour 
constant means that we add spades to the mix. Each new spade 
increases productivity by the same amount (because we assume that 
labour is homogenous) until we reach the eleventh spade. At that 
point, the extra spade lies unused and so the marginal contribution 
of the spade ("capital") is zero. This suggests that the socialists 
are correct, capital *is* unproductive and, consequently, does not 
deserve any reward for its use. 

Of course, it will be pointed out that the eleventh spade cost money
and, as a result, the capitalist would have stopped at ten spades 
and the marginal contribution of capital equals the amount the tenth
spade added. Yet the only reason that spade added anything to 
production was because there was a worker to use it. In other words,
as economist David Ellerman stresses, the "point is that capital 
itself does not 'produce' at all; capital is used by Labour to 
produce the outputs . . . Labour produces the marginal product 
*of capital.*" [_Property and Contract in Economics_, p. 204] As 
such, to talk of the "marginal product" of capital is meaningless
as holding labour constant is meaningless:

"Consider, for example, the 'marginal product of a shovel' in a 
simple production process wherein three workers use two shovels 
and a wheelbarrow to dig out a cellar. Two of the workers use two 
shovels to fill the wheelbarrow which the third worker pushes a 
certain distance to dump the dirt. The marginal productivity of 
a shovel is defined as the extra product produced when an extra 
shovel is added and the other factors, such as labour, are held 
constant. The labour is the human activity of carrying out this 
production process. If labour was held 'constant' is the sense 
of carrying out the same human activity, then any third shovel 
would just lie unused and the extra product would be identically 
zero.

"'Holding labour constant' really means reorganising the human 
activity in a more capital intensive way so that the extra shovel 
will be optimally utilised. For instance, all three workers could 
use the three shovels to fill the wheelbarrow and then they could 
take turns emptying the wheelbarrow. In this manner, the workers 
would use the extra shovel and by so doing they would produce 
some extra product (additional earth moved during the same time 
period). This extra product would be called the 'marginal product 
of the shovel, but in fact it is produced by the workers who are 
also using the additional shovel . . . [Capital] does not 'produce' 
its marginal product. Capital does not 'produce' at all. Capital 
is used by Labour to produce the output. When capital is increased, 
Labour produces extra output by using up the extra capital . . . In 
short, *Labour produced the marginal product of capital* (and used 
up the extra capital services)." [Op. Cit., pp. 207-9]

Therefore, the idea that profits equals the marginal productivity of 
capital is hard to believe. Capital, in this perspective, is not only 
a tree which bears fruit even if its owner leaves it uncultivated, it 
is a tree which also picks its own fruit, prepares it and serves it 
for dinner! Little wonder the classical economists (Smith, Ricardo, 
John Stuart Mill) considered capital to be unproductive and
explained profits and interest in other, less obviously false, means.

Perhaps the "marginal productivity" of capital is simply what is 
left over once workers have been paid their "share" of production,
i.e. once the marginal productivity of labour has been rewarded.
Obviously the marginal product of labour and capital are related. 
In a production process, the contribution of capital will (by 
definition) be equal to total price minus the contribution
of labour. You define the marginal product of labour, it is necessary 
to keep something else constant. This means either the physical 
inputs other than labour are kept constant, or the rate of profit 
on capital is kept constant. As economist Joan Robinson noted:

"I found this satisfactory, for it destroys the doctrine that
wages are regulated by marginal productivity. In a short-period
case, where equipment is given, at full-capacity operation the
marginal physical product of labour is indeterminate. When
nine men with nine spades are digging a hole, to add a tenth
man could increase output only to the extent that nine dig
better if they have a rest from time to time. On the other
hand, to subtract the ninth man would reduce output by more 
or less the average amount. The wage must lie somewhere between
the average value of output per head and zero, so that marginal
product is greater or much less than the wage according as 
equipment is being worked below or above its designed capacity."
[_Contributions to Modern Economics_, p. 104]

If wages are not regulated by marginal productivity theory, then
neither is capital (or land). Subtracting labour while keeping
capital constant simply results in unused equipment and unused
equipment, by definition, produces nothing. What the "contribution"
of capital is dependent, therefore, on the economic power the
owning class has in a given market situation (as we discuss in
section C.3). As David Lazonick notes, the neo-classical theory
of marginal productivity has two key problems which flow from its
flawed metaphor that capital is "productive":

"The first flaw is the assumption that, at any point in time, the
productivity of a technology is given to the firm, irrespective of
the social context in which the firm attempts to utilise the
technology . . . this assumption, typically implicit in mainstream
economic analysis and [is] derived from an ignorance of the nature
of the production process as much as everything else . . ." 

"The second flaw in the neo-classical theoretical structure is the
assumption that factor prices are independent of factor productivities.
On the basis of this assumption, factor productivities arising from
different combinations of capital and labour can be taken as given
to the firm; hence the choice of technique depends only on variations
in relative factor prices. It is, however, increasingly recognised
by economists who speak of 'efficiency wages' that factor prices and
factor productivities may be linked, particularly for labour inputs
. . . the productivity of a technology depends on the amount of
effort that workers choose to supply." [William Lazonick, _Competitive 
Advantage on the Shop Floor_, p. 130 and pp. 133-4]

In other words, neo-classical economics forgets that technology has
to be used by workers and so its "productivity" depends on how it is
applied. If profit did flow as a result of some property of machinery 
then bosses could do without autocratic workplace management to ensure 
profits. They would have no need to supervise workers to ensure that 
adequate amounts of work are done in excess of what they pay in wages.
This means the idea (so beloved by pro-capitalist economics) that a 
worker's wage *is* the equivalent of what she produces is one violated 
everyday within reality:

"Managers of a capitalist enterprise are not content simply to respond 
to the dictates of the market by equating the wage to the value of
the marginal product of labour. Once the worker has entered the 
production process, the forces of the market have, for a time at least,
been superseded. The effort-pay relation will depend not only on 
market relations of exchange but also. . . on the hierarchical relations
of production - on the relative power of managers and workers within
the enterprise." [William Lazonick, _Business Organisation and the
Myth of the Market Economy_, pp. 184-5]

But, then again, capitalist economics is more concerned with justifying 
the status quo than being in touch with the real world. To claim that
a workers wage represents her contribution and profit capital's is 
simply false. Capital cannot produce anything (never mind a surplus) 
unless used by labour and so profits do not represent the productivity
of capital. In and of themselves, fixed costs do not create value. 
Whether value is created depends on how investments are developed and 
used once in place. Which brings us back to labour (and the social 
relationships which exist within an economy) as the fundamental source 
of surplus value. 

Then there is the concept of profit sharing, whereby workers are get 
a share of the profits made by the company. Yet profits are the return 
to capital. This shatters the notion that profits represent the 
contribution of capital. *If* profits were the contribution of the 
productivity of equipment, then sharing profits would mean that 
capital was not receiving its full "contribution" to production 
(and so was being exploited by labour!). It is unlikely that bosses
would implement such a scheme unless they knew they would get more
profits out of it. As such, profit sharing is usually used as a technique 
to *increase* productivity and profits. Yet in neo-classical economics,
it seems strange that such a technique would be required if profits, in 
fact, *did* represent capital's "contribution." After all, the machinery 
which the workers are using is the same as before profit sharing was 
introduced -- how could this unchanged capital stock produce an increased 
"contribution"? It could only do so if, in fact, capital was unproductive 
and it was the unpaid efforts, skills and energy of workers' that actually
was the source of profits. Thus the claim that profit equals capital's 
"contribution" has little basis in fact. 

As capital is not autonomously productive and goods are the product of human 
(mental and physical) labour, Proudhon was right to argue that "Capital, tools, 
and machinery are likewise unproductive . . . The proprietor who asks to be 
rewarded for the use of a tool or for the productive power of his land, 
takes for granted, then, that which is radically false; namely, that capital 
produces by its own effort - and, in taking pay for this imaginary product, 
he literally receives something for nothing." [_What is Property?_, p. 169]

It will be objected that while capital is not productive in itself, its 
use does make labour more productive. As such, surely its owner is 
entitled to some share of the larger output produced by its aid. Surely
this means that the owners of capital deserve a reward? Is this 
difference not the "contribution" of capital? Anarchists are not convinced. 
Ultimately, this argument boils down to the notion that giving permission 
to use something is a productive act, a perspective we rejected in the 
last section. In addition, providing capital is unlike normal commodity 
production. This is because capitalists, unlike workers, get paid 
multiple times for one piece of work (which, in all likelihood, 
they paid others to do) and *keep* the result of that labour. As 
Proudhon argued:

"He [the worker] who manufactures or repairs the farmer's tools receives 
the price *once*, either at the time of delivery, or in several payments; 
and when this price is once paid to the manufacturer, the tools which he has 
delivered belong to him no more. Never can he claim double payment for the 
same tool, or the same job of repairs. If he annually shares in the products 
of the farmer, it is owing to the fact that he annually does something for 
the farmer.

"The proprietor, on the contrary, does not yield his implement; eternally he 
is paid for it, eternally he keeps it." [Op. Cit., pp. 169-170]

While the capitalist, in general, gets their investment back plus something 
extra, the workers can never get their time back. That time has gone, forever, 
in return for a wage which allows them to survive in order to sell their time 
and labour (i.e. liberty) again. Meanwhile, the masters have accumulated more 
capital and their the social and economic power and, consequently, their 
ability to extract surplus value goes up at a higher rate than the wages 
they have to pay (as we discuss in section C.7, this process is not without
problems and regularly causes economic crisis to break out). 

Without labour nothing would have been produced and so, in terms of justice, 
*at best* it could be claimed that the owners of capital deserve to be paid 
only for what has been used of their capital (i.e. wear and tear and damages).
While it is true that the value invested in fixed capital is in the course 
of time transferred to the commodities produced by it and through their sale 
transformed into money, this does not represent any actual labour by the 
owners of capital. Anarchists reject the ideological sleight-of-hand that
suggests otherwise and recognise that (mental and physical) labour is the 
*only* form of contribution that can be made by humans to a productive 
process. Without labour, nothing can be produced nor the value contained 
in fixed capital transferred to goods. As Charles A. Dana pointed out in 
his popular introduction to Proudhon's ideas, "[t]he labourer without capital 
would soon supply his wants by its production . . . but capital with no 
labourers to consume it can only lie useless and rot." [_Proudhon and his 
"Bank of the People"_, p. 31] If workers do not control the full value of 
their contributions to the output they produce then they are exploited and 
so, as indicated, capitalism is based upon exploitation. 

Of course, as long as "capital" *is* owned by a different class than as those 
who use it, this is extremely unlikely that the owners of capital will simply
accept a "reward" of damages. This is due to the hierarchical organisation 
of production of capitalism. In the words of the early English socialist 
Thomas Hodgskin "capital does not derive its utility from previous, but 
present labour; and does not bring its owner a profit because it has been 
stored up, but because it is a means of obtaining a command over labour." 
[_Labour Defended against the Claims of Capital_] It is more than a 
strange coincidence that the people with power in a company, when working 
out who contributes most to a product, decide it is themselves! 

This means that the notion that labour gets its "share" of the products 
created is radically false for, as "a description of *property rights*, 
the distributive shares picture is quite misleading and false. The 
simple fact is that one legal party owns all the product. For example, 
General Motors doesn't just own 'Capital's share' of the GM cars produced; 
it owns all of them." [Ellerman, Op. Cit., p. 27] Or as Proudhon put it,
"Property is the right to enjoy and dispose of another's goods, -- the 
fruit of another's industry and labour." The only way to finally abolish 
exploitation is for workers to manage their own work and the machinery 
and tools they use. This is implied, of course, in the argument that 
labour is the source of property for "if labour is the sole basis of 
property, I cease to be a proprietor of my field as soon as I receive 
rent for it from another . . . It is the same with all capital." Thus,
"all production being necessarily collective" and "all accumulated capital 
being social property, no one can be its exclusive proprietor." [_What is 
Property?_, p. 171, p. 133 and p. 130]

The reason why capital gets a "reward" is simply due to the current system 
which gives capitalist class an advantage which allows them to refuse access 
to their property except under the condition that they command the workers 
to make more than they have to pay in wages and keep their capital at the 
end of the production process to be used afresh the next. So while capital 
is not productive and owning capital is not a productive act, under 
capitalism it is an enriching one and will continue to be so until such 
time as that system is abolished. In other words, profits, interest and 
rent are not founded upon any permanent principle of economic or social 
life but arise from a specific social system which produce specific social 
relationships. Abolish wage labour by co-operatives, for example, and the
issue of the "productivity" of "capital" disappears as "capital" no longer
exists (a machine is a machine, it only becomes capital when it is used
by wage labour).

So rather that the demand for labour being determined by the technical 
considerations of production, it is determined by the need of the 
capitalist to make a profit. This is something the neo-classical theory 
implicitly admits, as the marginal productivity of labour is just a 
roundabout way of saying that labour-power will be bought as long as 
the wage is not higher than the profits that the workers produce. In
other words, wages do not rise above the level at which the capitalist 
will be able to produce and realise surplus-value. To state that workers 
will be hired as long as the marginal productivity of their labour 
exceeds the wage is another way of saying that workers are exploited 
by their boss. So even if we do ignore reality for the moment, this
defence of profits does *not* prove what it seeks to -- it shows that 
labour *is* exploited under capitalism.

However, as we discuss in the next section, this whole discussion is 
somewhat beside the point. This is because marginal productivity theory 
has been conclusively proven to be flawed by dissident economics and has 
been acknowledged as such by leading neo-classical economists. 

C.2.5 Do profits represent the contribution of capital to production?

In a word, no. While we have assumed the validity of "marginal productivity"
theory in relation to capital in the previous two sections, the fact is that
the theory is deeply flawed. This is on two levels. Firstly, it does not 
reflect reality in any way. Secondly, it is logically flawed and, even 
worse, this has been known to economists for decades. While the first 
objection will hardly bother most neo-classical economists (what part of
that dogma *does* reflect reality?), the second should as intellectual
coherence is what replaces reality in economics. However, in spite of
"marginal productivity" theory being proven to be nonsense and admitted
as such by leading neo-classical economists, it is still taught in 
economic classes and discussed in text books as if it were valid.

We will discuss each issue in turn.

The theory is based on a high level of abstraction and the assumptions used 
to allow the mathematics to work are so extreme that no real world example 
could possibly meet them. The first problem is determining the level at 
which the theory should be applied. Does it apply to individuals, groups,
industries or the whole economy? For depending on the level at which it
is applied, there are different problems associated with it and different
conclusions to be drawn from it. Similarly, the time period over which it
is to be applied has an impact. As such, the theory is so vague that it
would be impossible to test as its supporters would simply deny the results
as being inapplicable to *their* particular version of the model. 

Then there are problems with the model itself. While it has to assume that 
factors are identical in order to invoke the necessary mathematical theory, 
none of the factors used are homogenous in the real world. Similarly, for 
Euler's theory to be applied, there must be constant returns to scale and
this does not apply either (it would be fair to say that the assumption of
constant returns to scale was postulated to allow the theorem to be invoked
in the first place rather than as a result of a scientific analysis of real 
industrial conditions). Also, the model assumes an ideal market which 
cannot be realised and any real world imperfections make it redundant. In 
the model, such features of the real world as oligopolistic markets (i.e. 
markets dominated by a few firms), disequilibrium states, market power, 
informational imperfections of markets, and so forth do not exist. Including 
any of these real features invalidates the model and no "factor" gets its 
just rewards.

Moreover, like neo-classical economics in general, this theory just assumes 
the original distribution of ownership. As such, it is a boon for those who 
have benefited from previous acts of coercion -- their ill-gotten gains 
can now be used to generate income for them!

Finally, "marginal productivity" theory ignores the fact that most production 
is collective in nature and, as a consequence, the idea of subtracting a 
single worker makes little or no sense. As soon as there is "a division 
of labour and an interdependence of different jobs, as is the case 
generally in modern industry," its "absurdity can immediately be 
shown." For example, "[i]f, in a coal-fired locomotive, the train's 
engineer is eliminated, one does not 'reduce a little' of the product
(transportation), one eliminates it completely; and the same is true if
one eliminates the fireman. The 'product' of this indivisible team of
engineer and fireman obeys a law of all or nothing, and there is no
'marginal product' of the one that can be separated from the other. The
same thing goes on the shop floor, and ultimately for the modern factory
as a whole, where jobs are closely interdependent." [Cornelius Castoriadis,
_Political and Social Writings_, vol. 3, p. 213] Kropotkin made the same
point, arguing it "is utterly impossible to draw a distinction between
the work" of the individuals collectively producing a product as all
"contribute . . . in proportion to their strength, their energy, their
knowledge, their intelligence, and their skill." [_The Conquest of Bread_,
p. 170 and p. 169]

This suggests another explanation for the existence of profits than the
"marginal productivity" of capital. Let us assume, as argued in marginal
productivity theory, that a worker receives exactly what she has produced 
because if she ceases to work, the total product will decline by precisely 
the value of her wage. However, this argument has a flaw in it. This is 
because the total product will decline by more than that value if two or 
more workers leave. This is because the wage each worker receives under 
conditions of perfect competition is assumed to be the product of the 
*last* labourer in neo-classical theory. The neo-classical argument 
presumes a "declining marginal productivity," i.e. the marginal product 
of the last worker is assumed to be less than the second last and so on.
In other words, in neo-classical economics, all workers bar the mythical
"last worker" do not receive the full product of their labour. They only
receive what the *last* worker is claimed to produce and so everyone
*bar* the last worker does not receive exactly what he or she produces.
In other words, all the workers are exploited bar the last one.

However, this argument forgets that co-operation leads to increased 
productivity which the capitalists appropriate for themselves. This is 
because, as Proudhon argued, "the capitalist has paid as many times one 
day's wages"rather than the workers collectively and, as such, "he has 
paid nothing for that immense power which results from the union and 
harmony of labourers, and the convergence and simultaneousness of their 
efforts. Two hundred grenadiers stood the obelisk of Luxor upon its base 
in a few hours; do you suppose that one man could have accomplished the 
same task in two hundred days? Nevertheless, on the books of the 
capitalist, the amount of wages would have been the same." Therefore,
the capitalist has "paid all the individual forces" but "the collective
force still remains to be paid. Consequently, there remains a right
of collective property" which the capitalist "enjoy[s] unjustly."
[_What is Property?_, p. 127 and p. 130] 

As usual, therefore, we must distinguish between the ideology and reality 
of capitalism. As we indicated in section C.1, the model of perfect 
competition has no relationship with the real world. Unsurprisingly, 
marginal productivity theory is likewise unrelated to reality. This means
that the assumptions required to make "marginal productivity" theory work are
so unreal that these, in themselves, should have made any genuine scientist
reject the idea out of hand. Note, we are *not* opposing abstract theory, 
*every* theory abstracts from reality is some way. We are arguing that, to 
be valid, a theory has to reflect the real situation it is seeking to explain 
in some meaningful way. Any abstractions or assumptions used must be relatively 
trivial and, when relaxed, not result in the theory collapsing. This is not
the case with marginal productivity theory. It is important to recognise 
that there are degrees of abstraction. There are "negligibility assumptions" 
which state that some aspect of reality has little or no effect on what is 
being analysed. Sadly for marginal productivity theory, its assumptions are 
not of this kind. Rather, they are "domain assumptions" which specify "the 
conditions under which a particular theory will apply. If those conditions 
do not apply, then neither does the theory." [Steve Keen, _Debunking Economics_, 
p. 151] This is the case here.

However, most economists will happily ignore this critique for, 
as noted repeatedly, basing economic theory on reality or realistic 
models is not considered a major concern by neoclassical economists.
However, "marginal productivity" theory applied to capital is riddled 
with logical inconsistencies which show that it is simply wrong. In 
the words of the noted left-wing economist Joan Robinson:

"The neo-classicals evidently had not been told that the neo-classical
theory did not contain a solution of the problems of profits or of
the value of capital. They have erected a towering structure of 
mathematical theorems on a foundation that does not exist. Recently
[in the 1960s, leading neo-classical economist] Paul Samuelson was 
sufficiently candid to admit that the basis of his system does not 
hold, but the theorems go on pouring out just the same." 
[_Contributions to Modern Economics_, p. 186]

If profits *are* the result of private property and the inequality it
produces, then it is unsurprising that neoclassical theory would be
as foundationless as Robinson argues. After all, this is a *political* 
question and neo-classical economics was developed to ignore such questions. 
Marginal productivity theory has been subject to intense controversy, 
precisely because it claims to show that labour is not exploited under 
capitalism (i.e. that each factor gets what it contributes to production). 
We will now summarise this successful criticism.

The first major theoretical problem is obvious, how do you measure capital?
In neoclassical economics, capital is referred to as machinery of all sorts
as well as the workplaces that house them. Each of these items are, in 
turn, made up of a multitude of other commodities and many of these are
assemblies of other commodities. So what does it mean to say, as in marginal
productivity theory, that "capital" is varied by one unit? The only thing 
these products have in common is a price and that is precisely what 
economists *do* use to aggregate capital. Sadly, though, shows "that 
there is no meaning to be given to a 'quantity of capital' apart from 
the rate of profit, so that the contention that the 'marginal product of 
capital' determines the rate of profit is meaningless." [Robinson, Op. Cit., 
p. 103] This is because argument is based on circular reasoning:

"For long-period problems we have to consider the meaning of the rate of 
profit on capital . . . the value of capital equipment, reckoned as its 
future earnings discounted at a rate of interest equal to the rate of 
profit, is equal to its initial cost, which involves prices including 
profit at the same rate on the value of the capital involved in producing
it, allowing for depreciation at the appropriate rate over its life up to 
date.

"The value of a stock of capital equipment, therefore, involves the rate of 
profit. There is no meaning in a 'quantity of capital' apart from the rate 
of profit." [_Collected Economic Papers_, vol. 4, p. 125]

In other words, according to neoclassical theory, the rate of profit and 
interest depends on the amount of capital, and the amount of capital depends 
on the rate of profit and interest. One has to assume a rate of profit in
order to demonstrate the equilibrium rate of return is determined. This 
issue is avoided in neo-classical economics simply by ignoring it (it 
must be noted that the same can be said of the "Austrian" concept of
"roundaboutness" as "it is impossible to define one way of producing
a commodity as 'more roundabout' than another independently of the rate
of profit . . . Therefore the Austrian notion of roundaboutness is as
internally inconsistent as the neoclassical concept of the marginal
productivity of capital." [Steve Keen, _Debunking Economics_, p. 302]).

The next problem with the theory is that "capital" is treated as something
utterly unreal. Take, for example, leading neoclassical Dennis Robertson's 
1931 attempt to explain the marginal productivity of labour when holding 
"capital" constant:

"If ten men are to be set out to dig a hole instead of nine, they will be
furnished with ten cheaper spades instead of nine more expensive ones; or
perhaps if there is no room for him to dig comfortably, the tenth man will
be furnished with a bucket and sent to fetch beer for the other nine."
["Wage-grumbles", _Economic Fragments_, p. 226]

So to work out the marginal productivity of the factors involved, "ten 
cheaper spades" somehow equal nine more expensive spades? How is this 
keeping capital constant? And how does this reflect reality? Surely, 
any real world example would involve sending the tenth digger to get 
another spade? And how do nine expensive spades become nine cheaper 
ones? In the real world, this is impossible but in neoclassical economics 
this is not only possible but required for the theory to work. As Robinson 
argued, in neo-classical theory the "concept of capital all the man-made
factors are boiled into one, which we may call *leets* . . . [which], 
though all made up of one physical substance, is endowed with the 
capacity to embody various techniques of production . . . and a change 
of technique can be made simply by squeezing up or spreading out leets, 
instantaneously and without cost." [_Contributions to Modern Economics_, 
p. 106] 

This allows economics to avoid the obvious aggregation problems
with "capital", make sense of the concept of adding an extra unit of
capital to discover its "marginal productivity" and allows capital to
be held "constant" so that the "marginal productivity" of labour can
be found. For when "the stock of means of production in existence can 
be represented as a quantity of ectoplasm, we can say, appealing to 
Euler's theorem, that the rent per unit of ectoplasm is equal to the 
marginal product of the given quantity of  ectoplasm when it is fully 
utilised. This does seem to add anything of interest to the argument." 
[Op. Cit., p. 99] This ensures reality has to be ignored and so 
economic theory need not discuss any practical questions:

"When equipment is made of leets, there is no distinction between
long and short-period problems . . . Nine spades are lumps of
leets; when the tenth man turns up it is squeezed out to provide 
him with a share of equipment nine-tenths of what each man had
before . . . There is no room for imperfect competition. There is
no possibility of disappointed expectations . . . There is no 
problem of unemployment . . . Unemployed workers would bid down
wages and the pre-existing quantity of leets would be spread out
to accommodate them." [Op. Cit., p. 107]

The concept that capital goods are made of ectoplasm and can be remoulded 
into the profit maximising form from day to day was invented in order to
prove that labour and capital both receive their contribution to society,
to show that labour is not exploited. It is not meant to be taken literally,
it is only a parable, but without it the whole argument (and defence of
capitalism) collapses. Once capital equipment is admitted to being actual,
specific objects that cannot be squeezed, without cost, into new objects
to accommodate more or less workers, such comforting notions that profits 
equal the (marginal) contribution of "capital" or that unemployment is 
caused by wages being too high have to be discarded for the wishful 
thinking they most surely are.

The last problem arises when ignore these issues and assume that marginal
productivity theory is correct. Consider the notion of the short run,
where at least one factor of production cannot be varied. To determine
its marginal productivity then capital has to be the factor which is
varied. However, common sense suggests that capital is the least flexible
factor and if that can be varied then every other one can be as well? As
dissident economist Piero Sraffa argued, when a market is defined broadly
enough, then the key neoclassical assumption that the demand and supply
of a commodity are independent breaks down. This was applied by another
economist, Amit Bhaduri, to the "capital market" (which is, by nature, a
broadly defined industry). Steve Keen usually summarises these arguments,
noting that "at the aggregate level [of the economy as a whole], the 
desired relationship -- the rate of profit equals the marginal productivity
of capital -- will not hold true" as it only applies "when the capital to
labour ratio is the same in all industries -- which is effectively the
same as saying there is only one industry." This "proves Sraffa's assertion 
that, when a broadly defined industry is considered, changes in its 
conditions of supply and demand will affect the distribution of income." 
This means that a "change in the capital input will change output, but it
also changes the wage, and the rate of profit . . . As a result, the
distribution of income is neither meritocratic nor determined by the
market. The distribution of income is to some significant degree 
determined independently of marginal productivity and the impartial
blades of supply and demand . . . To be able to work out prices, it
is first necessary to know the distribution of income . . . There is
therefore nothing sacrosanct about the prices that apply in the 
economy, and equally nothing sacrosanct about the distribution of
income. It reflects the relative power of different groups in society."  
[Op. Cit., p. 135] 

It should be noted that this critique bases itself on the neoclassical
assumption that it is possible to define a factor of production called
capital. In other words, even if we assume that neo-classical economics
theory of capital is not circular reasoning, it's theory of distribution 
is still logically wrong.

So mainstream economics is based on a theory of distribution which is 
utterly irrelevant to the real world and is incoherent when applied to
capital. This would not be important except that it is used to justify
the distribution of income in the real world. For example, the widening 
gap between rich and poor (it is argued) simply reflects a market 
efficiently rewarding more productive people. Thus the compensation for 
corporate chief executives climbs so sharply because it reflects their 
marginal productivity. Except, of course, the theory supports no such
thing -- except in a make believe world which cannot exist (lassiez
fairy land, anyone?). 

It must be noted that this successful critique of neoclassical economics 
by dissident economists was first raised by Joan Robinson in the 1950s (it 
usually called the Cambridge Capital Controversy). It is rarely mentioned 
these days. While most economic textbooks simply repeat the standard theory, 
the fact is that this theory has been successfully debunked by dissident 
economists over four decades go. As Steve Keen notes, while leading 
neoclassical economists admitted that the critique was correct in the
1960s, today "economic theory continues to use exactly the same 
concepts which Sraffa's critique showed to be completely invalid" in 
spite the "definitive capitulation by as significant an economist as Paul 
Samuelson." As he concludes: "There is no better sign of the intellectual 
bankruptcy of economics than this." [Op. Cit., p. 146, p. 129 and p. 147]

Why? Simply because the Cambridge Capital Controversy would expose the
student of economics to some serious problems with neo-classical economics
and they may start questioning the internal consistency of its claims. 
They would also be exposed to alternative economic theories and start to
question whether profits *are* the result of exploitation. As this would
put into jeopardy the role of economists as, to quote Marx, the "hired
prize-fighters" for capital who replace "genuine scientific research"
with "the bad conscience and evil intent of apologetics." Unsurprisingly,
he characterised this as "vulgar economics." [_Capital_, vol. 1, p. 97]

C.2.6 Does interest represent the "time value" of money?

One defence of interest is the notion of the "time value" of money,
that individuals have different "time preferences." Most individuals 
prefer, it is claimed, to consume now rather than later while a few 
prefer to save now on the condition that they can consume more later. 
Interest, therefore, is the payment that encourages people to defer 
consumption and so is dependent upon the subjective evaluations of 
individuals. It is, in effect, an exchange over time and so surplus 
value is generated by the exchange of present goods for future goods.

Based on this argument, many supporters of capitalism claim that it is 
legitimate for the person who provided the capital to get back *more* 
than they put in, because of the "time value of money." This is because 
investment requires savings and the person who provides those had to 
postpone a certain amount of current consumption and only agree to 
do this only if they get an increased amount later (i.e. a portion, 
over time, of the increased output that their saving makes possible). 
This plays a key role in the economy as it provide the funds from 
which investment can take place and the economy grow.

In this theory, interest rates are based upon this "time value" of money
and the argument is rooted in the idea that individuals have different 
"time preferences." Some economic schools, like the Austrian school, 
argue that the actions by banks and states to artificially lower 
interest rates (by, for example, creating credit or printing money) 
create the business cycle as this distorts the information about people's 
willingness to consume now rather than later leading to over 
investment and so to a slump.

That the idea of doing nothing (i.e. not consuming) can be considered 
as productive says a lot about capitalist theory. However, this is 
beside the point as the argument is riddled with assumptions and,
moreover, ignores key problems with the notion that savings always
lead to investment.

The fundamental weakness of the theory of time preference must be 
that it is simply an unrealistic theory and does not reflect where
the supply of capital does come from. It *may* be appropriate to the
decisions of households between saving and consumption, but the 
main source of new capital is previous profit under capitalism. The 
motivation of making profits is not the provision of future means of 
consumption, it is profits for their own sake. The nature of capitalism 
requires profits to be accumulated into capital for if capitalists *did* 
only consume the system would break down. While from the point of 
view of the mainstream economics such profit-making for its own sake 
is irrational in reality it is imposed on the capitalist by capitalist 
competition. It is only by constantly investing, by introducing new 
technology, work practices and products, can the capitalists keep their 
capital (and income) intact. Thus the motivation of capitalists to 
invest is imposed on them by the capitalist system, not by subjective
evaluations between consuming more later rather than now.

Ignoring this issue and looking at the household savings, the theory
still raises questions. The most obvious problem is that an individual's 
psychology is conditioned by the social situation they find themselves 
in. Ones "time preference" is determined by ones social position. If 
one has more than enough money for current needs, one can more easily 
"discount" the future (for example, workers will value the future 
product of their labour less than their current wages simply because 
without those wages there will be no future). We will discuss this 
issue in more detail later and will not do so here (see section C.2.7).

The second thing to ask is why should the supply price of waiting 
be assumed to be positive? If the interest rate simply reflects 
the subjective evaluations of individuals then, surely, it could 
be negative or zero. Deferred gratification is as plausible a 
psychological phenomenon as the overvaluation of present satisfactions, 
while uncertainty is as likely to produce immediate consumption 
as it is to produce provision for the future (saving). Thus Joan 
Robinson:

"The rate of interest (excess of repayment over original loan) 
would settle at the level which equated supply and demand for
loans. Whether it was positive or negative would depend upon
whether spendthrifts or prudent family men happened to predominate 
in the community. There is no *a priori* presumption in favour of 
a positive rate. Thus, the rate of interest cannot be account for 
as the 'cost of waiting.'

"The reason why there is always a demand for loans at a positive 
rate of interest, in an economy where there is property in the 
means of production and means of production are scarce, is that 
finance expended now can be used to employ labour in productive 
processes which will yield a surplus in the future over costs of 
production. Interest is positive because profits are positive 
(though at the same time the cost and difficulty of obtaining 	
finance play a part in keeping productive equipment scarce, and so 
contribute to maintaining the level of profits)." [_Contributions 
to Modern Economics_, p. 83]

It is only because money provides the authority to allocate resources 
and exploit wage labour that money now is more valuable ("we know
that mere saving itself brings in nothing, so long as the pence
saved are not used to exploit." [Kropotkin, _The Conquest of Bread_,
p. 59]). The capitalist does not supply "time" (as the "time value" 
theory argues), the loan provides authority/power and so the
interest rate does not reflect "time preference" but rather the 
utility of the loan to capitalists, i.e. whether it can be used
to successfully exploit labour. If the expectations of profits by 
capitalists are low (as in, say, during a depression), loans would 
not be desired no matter how low the interest rate became. As 
such, the interest rate is shaped by the general profit level 
and so be independent of the "time preference" of individuals. 

Then there is the problem of circularity. In any real economy, interest 
rates obviously shape people's saving decisions. This means that an 
individual's "time preference" is shaped by the thing it is meant 
to explain:

"But there may be some savers who have the psychology required
by the text books and weigh a preference for present spending
against an increment of income (interest, dividends and capital
gains) to be had from an increment of wealth. But what then?
Each individual goes on saving or dis-saving till the point 
where his individual subjective rate of discount is equal to
the market rate of interest. There has to be a market rate of
interest for him to compare his rate of discount to." 
[Joan Robinson, Op. Cit., pp. 11-12]

Looking at the individuals whose subjective evaluations allegedly 
determine the interest rate, there is the critical question of 
motivation. Looking at lenders, do they *really* charge interest 
because they would rather spend more money later than now? 
Hardly, their motivation is far more complicated than that. It 
is doubtful that many people actually sit down and work out how 
much their money is going to be "worth" to them a year or 
more from now. Even if they did, the fact is that they really 
have no idea how much it will be worth. The future is unknown and 
uncertain and, consequently, it is implausible that "time preference" 
plays the determining role in the decision making process. 

In most economies, particularly capitalism, the saver and lender 
are rarely the same person. People save and the banks use it 
to loan it to others. The banks do not do this because they have a 
low "time preference" but because they want to make profits. They 
are a business and make their money by charging more interest on 
loans than they give on savings. Time preference does not enter 
into it, particularly as, to maximise profits, banks loan out more 
(on credit) than they have in savings and, consequently, make the 
actual interest rate totally independent of the rate "time preference" 
would (in theory) produce. 

Given that it would be extremely difficult, indeed impossible, to 
stop banks acting in this way, we can conclude that even if "time
preference" were true, it would be of little use in the real world. This, 
ironically, is recognised by the same free market capitalist economists 
who advocate a "time preference" perspective on interest. Usually 
associated with the "Austrian" school, they argue that banks should 
have 100% reserves (i.e. they loan out only what they have in savings, 
backed by gold). This implicitly admits that the interest rate does 
not reflect "time preference" but rather the activities (such as credit 
creation) of banks (not to mention other companies who extend business
credit to consumers). As we discuss in section C.8, this is not due to 
state meddling with the money supply or the rate of interest but rather 
the way capitalism works.

Moreover, as the banking industry is marked, like any industry, by 
oligopolistic competition, the big banks will be able to add a mark 
up on  services, so distorting any interest rates set even further 
from any abstract "time preference" that exists. Therefore, the 
structure of that market will have a significant effect on the 
interest rate. Someone in the same circumstances with the same 
"time preference" will get radically different interest rates depending 
on the "degree of monopoly" of the banking sector (see section C.5 for
"degree of monopoly"). An economy with a multitude of small banks,
implying low barriers of entry, will have different interest rates than 
one with a few big firms implying high barriers (if banks are forced 
to have 100% gold reserves, as desired by many "free market" 
capitalists, then these barriers may be even higher). As such, 
it is highly unlikely that "time preference" rather than market power 
is a more significant factor in determining interest rates in any 
*real* economy. Unless, of course, the rather implausible claim is 
made that the interest rate would be the same no matter how competitive 
the banking market was -- which, of course, is what the "time preference" 
argument does imply.

Nor is "time preference" that useful when we look at the saver. 
People save money for a variety of motives, few (if any) of which 
have anything to do with "time preference." A common motive is, 
unsurprisingly, uncertainty about the future. Thus people put 
money into savings accounts to cover possible mishaps and
unexpected developments (as in "saving for a rainy day"). Indeed, 
in an uncertain world future money may be its own reward for 
immediate consumption is often a risky thing to do as it reduces 
the ability to consumer in the future (for example, workers facing 
unemployment in the future could value the same amount of money 
more then than now). Given that the future is uncertain, many save 
precisely for precautionary reasons and increasing current consumption 
is viewed as a disutility as it is risky behaviour. Another common 
reason would be to save because they do not have enough money to buy 
what they want now. This is particularly the case with working class 
families who face stagnating or falling income or face financial 
difficulties.[Henwood, _Wall Street_, p. 65] Again, "time preference" 
does not come into it as economic necessity forces the borrowers to 
consume more now in order to be around in the future. 

Therefore, money lending is, for the poor person, not a choice between
more consumption now/less later and less consumption now/more later. 
If there is no consumption now, there will not be any later. So 
not everybody saves money because they want to be able to spend 
more at a future date. As for borrowing, the real reason for it is 
necessity produced by the circumstances people find themselves in. 
As for the lender, their role is based on generating a current 
and future income stream, like any business. So if "time preference" 
seems unlikely for the lender, it seems even more unlikely for the 
borrower or saver. Thus, while there is an element of time involved 
in decisions to save, lend and borrow, it would be wrong to see 
interest as the consequence of "time preference." Most people do 
not think in terms of it and, therefore, predicting their behaviour 
using it would be silly.

At the root of the matter is that for the vast majority of cases 
in a capitalist economy, an individual's "time preference" is 
determined by their social circumstances, the institutions which 
exist, uncertainty and a host of other factors. As inequality 
drives "time preference," there is no reason to explain interest 
rates by the latter rather than the former. Unless, of course, 
you are seeking to rationalise and justify the rich getting richer.
Ultimately, interest is an expression of inequality, *not* exchange:

"If there is chicanery afoot in calling 'money now' a different good 
than 'money later,' it is by no means harmless, for the intended 
effect is to subsume money lending under the normative rubric of 
exchange . . . [but] there are obvious differences . . . [for in 
normal commodity exchange] both parties have something [while in 
loaning] he has something you don't . . . [so] inequality dominates 
the relationship. He has more than you have now, and he will get 
back more than he gives." [Schweickart, _Against Capitalism_, p. 23]

While the theory is less than ideal, the practice is little better.
Interest rates have numerous perverse influences in any real economy. 
In neo-classical and related economics, saving does not have a negative
impact on the economy as it is argued that non-consumed income must 
be invested. While this could be the case when capitalism was young, 
when the owners of firms ploughed their profits back into them, as
financial institutions grew this became less so. Saving and investment
became different activities, governed by the rate of interest. If 
the supply of savings increased, the interest rate would drop and
capitalists would invest more. If the demand for loans increased,
then the interest rate would rise, causing more savings to occur.

While the model is simple and elegant, it does have its flaws. These
are first analysed by Keynes during the Great Depression of the 1930s,
a depression which the neo-classical model said was impossible.

For example, rather than bring investment into line with savings, a 
higher interest can cause savings to fall as "[h]ousehold saving, of 
course, is mainly saving up to spend later, and . . .  it is likely 
to respond the wrong way. A higher rate of return means that 'less' 
saving is necessary to get a given pension or whatever." [Robinson, 
Op. Cit., p. 11] Similarly, higher interest rates need not lead to 
higher investment as higher interest payments can dampen profits as 
both consumers and industrial capitalists have to divert more of 
their finances away from real spending and towards debt services. 
The former causes a drop in demand for products while the latter 
leaves less for investing. 

As argued by Keynes, the impact of saving is not as positive as some 
like to claim. Any economy is a network, where decisions affect everyone. 
In a nutshell, the standard model fails to take into account changes of 
income that result from decisions to invest and save (see Michael
Stewart's _Keynes and After_ for a good, if basic, introduction).
This meant that if some people do not consume now, demand falls for 
certain goods, production is turned away from consumption goods, and 
this has an effect on all. Some firms will find their sales failing 
and may go under, causing rising unemployment. Or, to put it slightly 
differently, aggregate demand -- and so aggregate supply -- is changed 
when some people postpone consumption, and this affects others. The 
decrease in the demand for consumer goods affects the producers of 
these goods. With less income, the producers would reduce their 
expenditure and this would have repercussions on other people's 
incomes. In such circumstances, it is unlikely that capitalists 
would be seeking to invest and so rising savings would result in 
falling investment in spite of falling interest rates. In an
uncertain world, investment will only be done if capitalists think
that they will end up with more money than they started with and
this is unlikely to happen when faced with falling demand.

Whether rising interest rates do cause a crisis is dependent on the
the strength of the economy. During a strong expansion, a modest 
rise in interest rates may be outweighed by rising wages and profits.
During a crisis, falling rates will not counteract the general 
economic despair. Keynes aimed to save capitalism from itself and
urged state intervention to counteract the problems associated with
free market capitalism. As we discuss in section C.8.1, this ultimately
failed partly due to the mainstream economics gutting Keynes' work
of key concepts which were incompatible with it, partly due to Keynes' 
own incomplete escape from neoclassical economics, partly due the 
unwillingness of rentiers to agree to their own euthanasia but
mostly because capitalism is inherently unstable due to the 
hierarchical (and so oppressive and exploitative) organisation of 
production.

Which raises the question of whether someone who saves deserve a reward 
for so doing? Simply put, no. Why? Because the act of saving is no more 
an act of production than is purchasing a commodity (most investment 
comes from retained profits and so the analogy is valid). Clearly the 
reward for purchasing a commodity is that commodity. By analogy, the 
reward for saving should be not interest but one's savings -- the 
ability to consume at a later stage. Particularly as the effects of
interest rates and savings can have such negative impacts on the rest
of the economy. It seems strange, to say the least, to reward people 
for helping do so. Why should someone be rewarded for a decision which 
may cause companies to go bust, so *reducing* the available means of 
production as reduced demand results in job loses and idle factories?
Moreover, this problem "becomes ever more acute the richer or more
inegalitarian the society becomes, since wealthy people tend to save
more than poor people." [Schweickart, _After Capitalism_, p. 43]

Supporters of capitalists assume that people will not save unless promised 
the ability to consume *more* at a later stage, yet close examination of 
this argument reveals its absurdity. People in many different economic 
systems save in order to consume later, but only in capitalism is it 
assumed that they need a reward for it beyond the reward of having those 
savings available for consumption later. The peasant farmer "defers 
consumption" in order to have grain to plant next year, even the squirrel 
"defers consumption" of nuts in order to have a stock through winter. 
Neither expects to see their stores increase in size over time. Therefore, 
saving is rewarded by saving, as consuming is rewarded by consuming. 
In fact, the capitalist "explanation" for interest has all the hallmarks 
of apologetics.  It is merely an attempt to justify an activity without 
careful analysing it. 

To be sure, there is an economic truth underlying this argument for 
justifying interest, but the formulation by supporters of capitalism 
is inaccurate and unfortunate. There is a sense in which 'waiting' 
is a condition for capital *increase*, though not for capital per 
se. Any society which wishes to increase its stock of capital goods 
may have to postpone some gratification. Workplaces and resources 
turned over to producing capital goods cannot be used to produce 
consumer items, after all. How that is organised differs from society
to society. So, like most capitalist economics there is a grain of 
truth in it but this grain of truth is used to grow a forest of 
half-truths and confusion.

As such, this notion of "waiting" only makes sense in a 'Robinson Crusoe"
style situation, *not* in any form of real economy. In a real economy, we
do not need to "wait" for our consumption goods until investment is complete
since the division of labour/work has replaced the succession in time by a
succession in place. We are dealing with an already well developed system 
of *social* production and an economy based on a social distribution 
of labour in which there are available all the various stages of the 
production process. As such, the notion that "waiting" is required makes
little sense. This can be seen from the fact that it is not the capitalist 
who grants an advance to the worker. In almost all cases the worker is paid 
by their boss *after* they have completed their work. That is, it is the 
worker who makes an advance of their labour power to the capitalist. This
waiting is only possible because "no species of labourer depends on any 
previously prepared stock, for in fact no such stock exists; but every 
species of labourer does constantly, and at all times, depend for his 
supplies on the co-existing labour of some other labourers." [Thomas 
Hodgskin, _Labour Defended Against the Claims of Capital_] This means
that the workers, as a class, creates the fund of goods out of which
the capitalists pay them.

Ultimately, selling the use of money (paid for by interest) is not the same 
as selling a commodity. The seller of the commodity does not receive the 
commodity back as well as its price, unlike the typical lender of money. 
In effect, as with rent and profits, interest is payment for permission 
to use something and, therefore, not a productive act which should be 
rewarded. It is *not* the same as other forms of exchange. Proudhon 
pointed out the difference:

"Comparing a loan to a *sale*, you say: Your argument is as valid against 
the latter as against the former, for the hatter who sells hats does not
*deprive* himself.

"No, for he receives for his hats -- at least he is reputed to receive for 
them -- their exact value immediately, neither *more* nor *less*. But the 
capitalist lender not only is not deprived, since he recovers his capital 
intact, but he receives more than his capital, more than he contributes 
to the exchange; he receives in addition to his capital an interest which 
represents no positive product on his part. Now, a service which costs no
labour to him who renders it is a service which may become gratuitous."
[_Interest and Principal: The Circulation of Capital, Not Capital Itself, 
Gives Birth to Progress_]

The reason why interest rates do not fall to zero is due to the class nature
of capitalism, *not* "time preference." That it is ultimately rooted in social
institutions can be seen from Bhm-Bawerk's acknowledgement that monopoly can
result in exploitation by increasing the rate of interest above the rate 
specified by "time preference" (i.e. the market):

"Now, of course, the circumstances unfavourable to buyers may be corrected by 
active competition among sellers . . . But, every now and then, something will 
suspend the capitalists' competition, and then those unfortunates, whom fate 
has thrown on a local market ruled by monopoly, are delivered over to the 
discretion of the adversary. Hence direct usury, of which the poor borrower 
is only too often the victim; and hence the low wages forcibly exploited 
from the workers. . .

"It is not my business to put excesses like these, where there actually is 
exploitation, under the aegis of that favourable opinion I pronounced above 
as to the essence of interest. But, on the other hand, I must say with all 
emphasis, that what we might stigmatise as 'usury' does not consist in the 
obtaining of a gain out of a loan, or out of the buying of labour, but in 
the immoderate extent of that gain . . . Some gain or profit on capital there 
would be if there were no compulsion on the poor, and no monopolising of 
property; and some gain there must be. It is only the height of this gain 
where, in particular cases, it reaches an excess, that is open to criticism, 
and, of course, the very unequal conditions of wealth in our modern communities 
bring us unpleasantly near the danger of exploitation and of usurious rates 
of interest." [_The Positive Theory of Capital_, p. 361]

Little wonder, then, that Proudhon continually stressed the need for
working people to organise themselves and credit (which, of course, 
they would have done naturally, if it were not for the state intervening
to protect the interests, income and power of the ruling class, i.e.
of itself and the economically dominant class). If, as Bhm-Bawerk
admitted, interest rates could be high due to institutional factors
then, surely, they do not reflect the "time preferences" of individuals.
This means that they could be lower (effectively zero) if society 
organised itself in the appropriate manner. The need for savings could
be replaced by, for example, co-operation and credit (as already exists,
in part, in any developed economy). Organising these could ensure a
positive cycle of investment, growth and savings (Keynes, it should
be noted, praised Proudhon's follower Silvio Gesell in _The General
Theory_. For a useful discussion see Dudley Dillard's essay "Keynes 
and Proudhon" [_The Journal of Economic History_, vol. 2, No. 1,
pp. 63-76]).

Thus the key flaw in the theory is that of capitalist economics in
general. By concentrating on the decisions of individuals, it 
ignores the social conditions in which these decisions are made. 
By taking the social inequalities and insecurities of capitalism
as a given, the theory ignores the obvious fact that an individual's
"time preference" will be highly shaped by their circumstances.
Change those circumstances and their "time preference" will also
change. In other words, working people have a different "time
preference" to the rich because they are poorer. Similarly, by 
focusing on individuals, the "time preference" theory fails to 
take into account the institutions of a given society. If working 
class people have access to credit in other forms than those
supplied by capitalists then their "time preference" will differ
radically. As an example, we need only look at credit unions. In
communities with credit unions the poor are less likely to agree
to get into an agreement from a loan shark. It seems unlikely, to
say the least, that the "time preference" of those involved have
changed. They are subject to the same income inequalities and 
pressures as before, but by uniting with their fellows they give
themselves better alternatives. 

As such, "time preference" is clearly not an independent factor.
This means that it cannot be used to justify capitalism or the 
charging of interest. It simply says, in effect, that in a society 
marked by inequality the rich will charge the poor as much interest 
as they can get away with. This is hardly a sound basis to argue
that charging interest is a just or a universal fact. It reflects 
social inequality, the way a given society is organised and the 
institutions it creates. Put another way, there is no "natural" 
rate of interest which reflects the subjective "time preferences" of 
abstract individuals whose decisions are made without any social 
influence. Rather, the interest rate depends on the conditions and 
institutions within the economy as a whole. The rate of interest is 
positive under capitalism because it is a class society, marked by 
inequality and power, *not* because of the "time preference" of 
abstract individuals.

In summary, providing capital and charging interest are not productive 
acts. As Proudhon argued, "all rent received (nominally as damages, but 
really as payment for a loan) is an act of property -- of robbery." 
[_What is Property_, p. 171] 

C.2.7 Are interest and profit not the reward for waiting?

Another defence of surplus value by capitalist economics is also based 
on time. This argument is related to the "time preference" one we have
discussed in the last section and is, likewise, rooted in the idea that 
money now is different than money later and, as a consequence, surplus 
value represents (in effect) an exchange of present goods for future 
ones. This argument has two main forms, depending on whether it is 
interest or profits which are being defended, but both are based on
this perspective. We will discuss each in turn.

One of the oldest defences of interest is the "abstinence" theory first 
postulated by Nassau Senior in 1836. For Senior, abstinence is a sacrifice
of present enjoyment for the purpose achieving some distant result.
This demands the same heavy sacrifice as does labour, for to "abstain
from the enjoyment which is in our power, or to seek distant rather
than immediate results, are among the most painful exertions of the
human will." Thus wages and interest/profit "are to be considered as
the rewards of peculiar sacrifices, the former the remuneration for
labour, and the latter for abstinence from immediate enjoyment." [_An 
Outline of the Science of Political Economy_, p. 60 and p. 91]

Today, the idea that interest is the reward for "abstinence" on the part 
of savers is still a common one in capitalist economics. However, by the 
end of the nineteenth century, Senior's argument had become known as the 
"waiting" theory while still playing the same role in justifying non-labour 
income. One of the leading neo-classical economists of his day, Alfred 
Marshall, argued that "[i]f we admit [a commodity] is the product of 
labour alone, and not of labour and waiting, we can no doubt be compelled 
by an inexorable logic to admit that there is no justification of interest, 
the reward for waiting." [_Principles of Economics_, p. 587] While 
implicitly recognising that labour is the source of all value in 
capitalism (and that abstinence is not the *source* of profits), it 
is claimed that interest is a justifiable claim on the surplus value 
produced by a worker. 

Why is this the case? Capitalist economics claims that by "deferring
consumption," the capitalist allows new means of production to be
developed and so should be rewarded for this sacrifice. In other words, in
order to have capital available as an input -- i.e.  to bear costs now for
returns in the future -- someone has to be willing to postpone his or her
consumption. That is a real cost, and one that people will pay only if
rewarded for it:

"human nature being what it is, we are justified in speaking of the
interest on capital as the reward of the sacrifice involved in waiting
for the enjoyment of material resources, because few people would save
much without reward; just as we speak of wages as the reward of labour,
because few people would work hard without reward." [Op. Cit., p. 232]

The interest rate is, in neo-classical economic theory, set when
the demand for loans meets the supply of savings. The interest 
rate stems from the fact that people prefer present spending over 
future spending. If someone borrows 200 for one year at 5%, this 
is basically the same as saying that there would rather have 
200 now than 210 a year from now. Thus interest is the cost of
providing a service, namely time. People are able to acquire today 
what they would otherwise not have until sometime in the future. 
With a loan, interest is the price of the advantage obtained from 
having money immediately rather than having to wait for.

This, on first appears, seems plausible. If you accept the logic 
of capitalist economics and look purely at individuals and their 
preferences independently of their social circumstances then it 
can make sense. However, once you look wider you start to see 
this argument start to fall apart. Why is it that the wealthy 
are willing to save and provide funds while it is the working 
class who do not save and get into debt? Surely a person's 
"time preference" is dependent on their socio-economic position? 
As we argued in the last section, this means that any subjective 
evaluation of the present and future is dependent on, not independent 
of, the structure of market prices and income distribution. It varies 
with the income of individual and their class position, since the 
latter will condition the degree or urgency of present wants and 
needs. 

So this theory appears ludicrous to a critic of capitalism -- 
simply put, does the mine owner really sacrifice more than a miner, a
rich stockholder more than an autoworker working in their car plant, a 
millionaire investor more than a call centre worker? As such, the notion
that "waiting" explains interest is question begging in the extreme as
it utterly ignores inequality within a society. After all, it is far
easier for a rich person to "defer consumption" than for someone on an
average income. This is borne out by statistics, for as Simon Kuznets has
noted, "only the upper income groups save; the total savings of groups
below the top decile are fairly close to zero." [_Economic Growth and
Structure_, p. 263] Obviously, therefore, in modern society it is the 
capitalist class, the rich, who refrain from expending their income on 
immediate consumption and "abstain." Astonishingly, working class people
show no such desire to abstain from spending their wages on immediate 
consumption. It does not take a genius to work out why, although many 
economists have followed Senior in placing the blame on working class 
lack of abstinence on poor education rather than, say, the class system 
they live in (for Senior, "the worse educated" classes "are always the
most improvident, and consequently the least abstinent." [Op. Cit., 
p. 60]).

Therefore, the plausibility of interest as payment for the pain of 
deferring consumption rests on the premise that the typical saving 
unit is a small or medium-income household.  But in contemporary 
capitalist societies, this is not the case. Such households are not 
the source of most savings; the bulk of interest payments do not 
go to them. As such, interest is the dependent factor and so "waiting"
cannot explain interest. Rather, interest is product of social 
inequality and the social relationships produced by an economy. 
Lenders lend because they have the funds to do so while borrowers 
borrow because without money now they may not be around later. As 
those with funds are hardly going without by lending, it does not 
make much sense to argue that they would spend even more today 
without the temptation of more income later.

To put this point differently, the capitalist proponents of interest only
consider "postponing consumption" as an abstraction, without making it
concrete. For example, a capitalist may "postpone consumption" of his 10th
Rolls Royce because he needs the money to upgrade some machinery in his
factory; whereas a single mother may have to "postpone consumption" of
food or adequate  housing in order to attempt to better take care of her
children.  The two situations are vastly different, yet the capitalist
equates them.  This equation implies that "not being able to buy anything
you want" is the same as "not being able to buy things you need", and is
thus skewing the obvious difference in costs of such postponement of
consumption! 

Thus Proudhon's comments that the loaning of capital "does not involve an 
actual sacrifice on the part of the capitalist" and so "does not deprive 
himself. . . of the capital which be lends. He lends it, on the contrary, 
precisely because the loan is not a deprivation to him; he lends it because 
he has no use for it himself, being sufficiently provided with capital 
without it; be lends it, finally, because he neither intends nor is able 
to make it valuable to him personally, -- because, if he should keep it 
in his own hands, this capital, sterile by nature, would remain sterile, 
whereas, by its loan and the resulting interest, it yields a profit which 
enables the capitalist to live without working. Now, to live without working 
is, in political as well as moral economy, a contradictory proposition, 
an impossible thing." [_Interest and Principal: A Loan is a Service_]

In other words, contra Marshall, saving is *not* a sacrifice for the
wealthy and, as such, not deserving a reward. Proudhon goes on:

"The proprietor who possesses two estates, one at Tours, and the other 
at Orleans, and who is obliged to fix his residence on the one which he
uses, and consequently to abandon his residence on the other, can this 
proprietor claim that he deprives himself of anything, because he is not,
like God, ubiquitous in action and presence? As well say that we who live 
in Paris are deprived of a residence in New York! Confess, then, that
the privation of the capitalist is akin to that of the master who has 
lost his slave, to that of the prince expelled by his subjects, to that 
of the robber who, wishing to break into a house, finds the dogs on the 
watch and the inmates at the windows."

Given how much income this "abstinence" or "waiting" results in, we can 
only conclude that it is the most painful of decisions possible for a
multi-millionaire to decide *not* to buy that fifth house and instead 
save the money. The effort to restrain themselves from squandering their 
entire fortunes all at once must be staggering. In the capitalist's world, 
an industrialist who decides not to consume a part of their riches "suffers" 
a cost equivalent to that of someone who postpones consumption of their
meagre income to save enough to get something they need. Similarly, if the 
industrialist "earns" hundred times more in interest than the wage of the 
worker who toils in their workplace, the industrialist "suffers" hundred 
times more discomfort living in his palace than, say, the coal miner does 
working at the coal face in dangerous conditions or the worker stuck in 
a boring McJob they hate. The "disutility" of postponing consumption while 
living in luxury is obviously 100 times greater than the "disutility" of, 
say, working for a living and so should be rewarded appropriately. 

As there is no direct relationship between interest received and the 
"sacrifice" involved (if anything, it is an *inverse* relationship), 
the idea that interest is the reward for waiting is simply nonsense.
You need be no anarchist to come to this obvious conclusion. It was 
admitted as much by a leading capitalist economist and his argument
simply echoes Proudhon's earlier critique:

"the existence and height of interest by no means invariably correspond 
with the existence and the height of a 'sacrifice of abstinence.' Interest, 
in exceptional cases, is received where there has been no individual 
sacrifice of abstinence. High interest is often got where the sacrifice 
of the abstinence is very trifling -- as in the case of [a] millionaire 
-- and 'low interest' is often got where the sacrifice entailed by the 
abstinence is very great. The hardly saved sovereign which the domestic 
servant puts in the savings bank bears, absolutely and relatively, less 
interest than the lightly spared thousands which the millionaire puts to 
fructify in debenture and mortgage funds. These phenomena fit badly into 
a theory which explains interest quite universally as a 'wage of 
abstinence.'" [Eugen von Bhm-Bawerk, _Capital and Interest_, p. 277]

All in all, as  Joan Robinson pointed out, "that the rate of interest is 
the 'reward for waiting' but 'waiting' only means owning wealth . . . In 
short, a man who refrains from blowing his capital in orgies and feasts 
can continue to get interest on it. This seems perfectly correct, but 
as a theory of distribution it is only a circular argument." [_Contributions 
to Modern Economics_, p. 11] Interest is not the reward for "waiting," 
rather it is one of the (many) rewards for being rich. This was admitted 
as much by Marshall himself, who noted that the "power to save depends 
on an excess of income over necessary expenditure; and this is greatest 
among the wealthy." [Op. Cit., p. 229]

Little wonder, then, that neo-classical economists introduced the term 
*waiting* as an "explanation" for returns to capital (such as interest). 
Before this change in the jargon of economics, mainstream economists used 
the notion of "abstinence" (the term used by Nassau Senior) to account 
for (and so justify) interest. Just as Senior's "theory" was seized upon
to defend returns to capital, so was the term "waiting" after it was 
introduced in the 1880s. Interestingly, while describing *exactly* the 
same thing, "waiting" became the preferred term simply because it had a 
less apologetic ring to it. Both describe the "sacrifice of present pleasure
for the sake of future" yet, according to Marshall, the term "abstinence" 
was "liable to be misunderstood" because there were just too many wealthy 
people around who received interest and dividends without ever having 
abstained from anything. As he admitted, the "greatest accumulators of 
wealth are very rich persons, some [!] of whom live in luxury, and 
certainly do not practise abstinence in that sense of the term in which
it is convertible with abstemiousness." So he opted for the term "waiting" 
because there was "advantage" in its use to describe "the accumulation
of wealth" as the "result of a postponement of enjoyment." [Op. Cit., 
pp. 232-3] This is particularly the case as socialists had long been 
pointing out the obvious fact that capitalists do not "abstain" from 
anything. 

The lesson is obvious, in mainstream economics if reality conflicts with 
your theory, do not reconsider the theory, change its name!

The problems of "waiting" and "abstinence" as the source of interest 
becomes even clearer when we look at inherited wealth. Talking about 
"abstinence" or "waiting" when discussing a capitalist inheriting a 
company worth millions is silly. Senior recognised this, arguing that 
income in this case is not profit, but rather "has all the attributes of
rent." [Op. Cit., p. 129] That such a huge portion of capitalist revenue 
would not be considered profit shows the bankruptcy of any theory which 
see profit as the reward for "waiting." However, Senior's argument does 
show that interest payments need not reflect any positive contribution 
to production by those who receive it. Like the landlord receiving 
payment for owning a gift of nature, the capitalist receives income 
for simply monopolising the work of previous generations and, as 
Smith put it, the "rent of land, considered as the price paid for 
the use of land, is naturally a monopoly price." [_The Wealth of 
Nations_, p. 131]

Even capitalist economists, while seeking to justify interest, admit 
that it "arises independently of any personal act of the capitalist. It 
accrues to him even though he has not moved any finger in creating it
. . . And it flows without ever exhausting that capital from which it 
arises, and therefore without any necessary limit to its continuance. 
It is, if one may use such an expression in mundane matters, capable 
of everlasting life." [Bhm-Bawerk, Op. Cit., p. 1] Little wonder we 
argued in section C.2.3 that simply owning property does not justify 
non-labour income. 

In other words, due to *one* decision not to do anything (i.e. *not* 
to consume), a person (and his or her heirs) may receive *forever* 
a reward that is not tied to any productive activity. Unlike the people
actually doing the work (who only get a reward every time they "contribute" 
to creating a commodity), the capitalist will get rewarded for just 
*one* act of abstention.  This is hardly a just arrangement. As David 
Schweickart has pointed out, "Capitalism does reward some individuals 
perpetually. This, if it is to be justified by the canon of contribution, 
one must defend the claim that some contributions are indeed eternal." 
[_Against Capitalism_, p. 17] As we noted in section C.1.1, current
and future generations should not be dominated by the actions of the
long dead.

The "waiting" theory, of course, simply seeks to justify interest rather 
than explain its origin. If the capitalist really *did* deserve an income
as a reward for their abstinence, where does it come from? It cannot
be created passively, merely by the decision to save, so interest 
exists because the exploitation of labour exists. As Joan Robinson
summarised:

"Obviously, the reward of saving is owning some more wealth. One of the 
advantages, though by no means the only one, of owning wealth is the 
possibility of getting interest on it.

"But why is it possible to get interest? Because businesses make profits 
and are willing to borrow." [_Collected Economic Papers_, vol. 5, p. 36]

This is the key. If ones ability and willingness to "wait" is dependent on 
social facts (such as available resources, ones class, etc.), then interest 
cannot be based upon subjective evaluations, as these are not the independent 
factor. In other words, saving does not express "waiting", it simply expresses 
the extent of inequality and interest expresses the fact that workers have to
sell their labour to others in order to survive:

"The notion that human beings discount the future certainly seems to
correspond to everyone's subjective experience, but the conclusion
drawn from it is a *non sequitor*, for most people have enough sense to
want to be able to exercise consuming power as long as fate permits, and
many people are in the situation of having a higher income in the present
than they expect in the future (salary earners will have to retire, 
business may be better now than it seems likely to be later, etc.) and
many look beyond their own lifetime and wish to leave consuming power
to their heirs. Thus a great many . . . are eagerly looking for a
reliable vehicle to carry purchasing power into the future . . . It is
impossible to say what price would rule if there were a market for
present *versus* future purchasing power, unaffected by any other
influence except the desires of individuals about the time-pattern
of their consumption. It might will be such a market would normally
yield a negative rate of discount . . . 

"The rate of interest is normally positive for a quite different reason.
Present purchasing power is valuable partly because, under the capitalist
rules of the game, it permits its owner . . . to employ labour and 
undertake production which will yield a surplus of receipts over costs.
In an economy in which the rate of profit is expected to be positive,
the rate of interest is positive . . . [and so] the present value of
purchasing power exceeds its future value to the corresponding extent. . .
This is nothing whatever to do with the subjective *rate of discount
of the future* of the individual concerned. . . " [_The Accumulation
of Capital_, p. 395]

So, interest has little to do with "waiting" and a lot more to do 
with the inequalities associated with the capitalist system. In effect,
the "waiting" theory assumes what it is trying to prove. Interest is 
positive simply because capitalists can appropriate surplus value from
workers and so current money is more valuable than future money because
of this fact. Ironically, therefore, the pro-capitalist theories of who 
abstains are wrong, "since saving is mainly out of profits, and real 
wages tend to be lower the higher the rate of profit, the abstinence 
associated with saving is mainly done by the workers, who do not 
receive any share in the 'reward.'" [Robinson, Op. Cit., p. 393]

In other words, "waiting" does not produce a surplus, labour does. As 
such, to "say that those who hold financial instruments can lay claim 
to a portion of the social product by abstaining or waiting provides no 
explanation of what makes the production process profitable, and hence 
to what extent interest claims or dividends can be paid. Reliance on a 
waiting theory of the return to capital represented nothing less than a 
reluctance of economists to confront the sources of value creation and 
analyse the process of economic development." [William Lazonick, 
_Competitive Advantage on the Shop Floor_, p. 267] This would involve
having to analyse the social relations between workers and managers/bosses 
on the shop floor, which would be to bring into question the whole nature 
of capitalism and any claims it was based upon freedom.

To summarise, the idea that interest is the "reward" for waiting simply 
ignores the reality of class society and, in effect, rewards the wealthy 
for being wealthy. Neo-classical economics implies that being rich is the 
ultimate disutility. The hardships ("sacrifices") of having to decide to 
consume or invest their riches weighs as heavily on the elite as they do 
on the scales of utility. Compared to, say, working in a sweatshop, 
fearing unemployment (sorry, maximising "leisure") or not having to 
worry about saving (as your income just covers your out-goings) it 
is clear which are the greatest sacrifices and which are rewarded 
accordingly under capitalism.

Much the same argument can be applied to "time-preference" theories of 
profit. These argue that profits are the result of individuals preferring 
present goods to future ones. Capitalists pay workers wages, allowing them
to consumer now rather than later. This is the providing of time and this 
is rewarded by profits. This principle was first stated clearly by Eugen 
von Bhm-Bawerk and has been taken as the basis of the "Austrian" school 
of capitalist economics (see section C.1.6). After rejecting past theories 
of interest (including, as noted above, "abstinence" theories, which he 
concluded the socialists were right to mock), Bhm-Bawerk argued that 
profits could only by explained by means of time preference:

"*The loan is a real exchange of present goods against future goods* 
. . . present goods invariably possess a greater value than future 
goods of the same number and kind, and therefore a definite sum of 
present goods can, as a rule, only be purchased by a larger sum of 
future goods. Present goods possess an agio in future goods. *This 
agio is interest.* It is not a separate equivalent for a separate 
and durable use of the loaned goods, for that is inconceivable; it 
is a part equivalent of the loaned sum, kept separate for practical 
reasons. The replacement of the capital + the interest constitutes 
the full equivalent." [_Capital and Interest_, p. 259] 

For him, time preference alone is the reason for profit/interest due 
to the relative low value of future goods, compared to present goods. 
Capital goods, although already present in their physical state, are 
really *future* goods in their "economic nature" as is labour. This
means that workers are paid the amount their labour creates in terms
of *future* goods, not *current* goods. This difference between the
high value of current goods and low value of future goods is the
source of surplus value:

"This, and nothing else, is the foundation of the so-called 'cheap' 
buying of production instruments, and especially of labour, which the 
Socialists rightly explain as the source of profit on capital, but 
wrongly interpret . . . as the result of a robbery or exploitation of 
the working classes by the propertied classes." [_The Positive Theory 
of Capital_, p. 301]

The capitalists are justified in keeping this surplus value because
they provided the time required for the production process to occur.
Thus surplus value is the product of an exchange, the exchange of
present goods for future ones. The capitalist bought labour at its
full present value (i.e. the value of its future product) and so 
there is no exploitation as the future goods are slowly maturing
during the process of production and can then be sold at its full 
value as a present commodity. Profit, like interest, is seen as 
resulting from varying estimates of the present and future needs.

As should be obvious, our criticisms of the "waiting" theory of interest
apply to this justification of profits. Money in itself does not produce 
profit any more than interest. It can only do that when invested in 
*actual* means of production which are put to work by actual people. As 
such, "time preference" only makes sense in an economy where there is 
a class of property-less people who are unable to "wait" for future 
goods as they would have died of starvation long before they arrived. 

So it is the *class* position of workers which explains their time 
preferences, as Bhm-Bawerk *himself* acknowledged. Thus capitalism 
was marked by an "enormous number of wage-earners who cannot employ 
their labour remuneratively by working on their own account, and 
are accordingly, as a body, inclined and ready to sell the future 
product of their labour for a considerably less amount of present 
goods." So, being poor, meant that they lacked the resources to 
"wait" for "future" goods and so became dependent (as a class) on 
those who do. This was, in his opinion the "sole ground of that 
much-talked-of and much-deplored dependence of labourer on capitalist." 
It is "only because the labourers cannot wait till the roundabout 
process . . .  delivers up its products ready for consumption, that 
they become economically dependent on the capitalists who already 
hold in their possession what we have called 'intermediate products.'" 
[Op. Cit., p. 330 and p. 83]

Bhm-Bawerk, ironically, simply repeats (although in different words) 
*and agrees* with the socialist critique of capitalism which, as we
discussed in section C.2.2, is also rooted in the class dependence
of workers to capitalists. The difference is that Bhm-Bawerk thinks 
that the capitalists deserve their income from wealth while socialists 
and anarchists argue they do not as they simply are being rewarded for 
being wealthy. Bhm-Bawerk simply cannot bring himself to acknowledge 
that an individual's psychology, their subjective evaluations, are 
conditioned by their social circumstances and so cannot comprehend 
the *class* character of capitalism and profit. After all, a landless 
worker will, of course, estimate the "sacrifice" or "disutility" of 
selling their labour to a master as much less than the peasant farmer 
or artisan who possesses their own land or tools. The same can be said 
of workers organised into a union.

As such, Bhm-Bawerk ignores the obvious, that the source of non-labour 
income is not in individual subjective evaluations but rather the 
*social* system within which people live. The worker does not sell 
her labour power because she "underestimates" the value of future 
goods but because she lacks the means of obtaining any sort of 
goods at all except by the selling of her labour power. There is no 
real choice between producing for herself or working for a boss -- she 
has no real opportunity of doing the former at all and so *has* to do 
the latter. This means that workers sells their labour (future goods) 
"voluntarily" for an amount less than its value (present goods) because
their class position ensures that they cannot "wait." So, if profit is 
the price of time, then it is a monopoly price produced by the class 
monopoly of wealth ownership under capitalism. Needless to say, as 
capital is accumulated from surplus value, the dependence of the 
working class on the capitalists will tend to grow over time as the 
"waiting" required to go into business will tend to increase also.

An additional irony of Bhm-Bawerk's argument is that is very similar to
the "abstinence" theory he so rightly mocked and which he admitted the
socialists were right to reject. This can be seen from one of his 
followers, right-"libertarian" Murray Rothbard:
 
"What has been the contribution of these product-owners, or 'capitalists', 
to the production process? It is this: the saving and restriction of 
consumption, instead of being done by the owners of land and labour, has 
been done by the *capitalists.* The capitalists originally saved, say, 
95 ounces of gold which they could have then spent on consumers' goods. 
They refrained from doing so, however, and, instead, *advanced* the money 
to the original owners of the factors. They *paid* the latter for their 
services while they were working, thus advancing them money before the 
product was actually produced and sold to the consumers. The capitalists, 
therefore, made an essential contribution to production. They relieved 
the owners of the original factors from the necessity of sacrificing 
present goods and waiting for future goods." [_Man, Economy, and State_, 
pp. 294-95]

This meant that without risk, "[e]ven if financial returns and consumer 
demand are certain, *the capitalists are still providing present goods 
to the owners of labour and land* and thus relieving them of the burden 
of waiting until the future goods are produced and finally transformed 
into consumers' goods." [Op. Cit., p. 298] Capitalists pay out, say, 
100,000 this year in wages and reap 200,000 next year not because of 
exploitation but because both parties prefer this amount of money this 
year rather than next year. Capitalists, in other words, pay out wages 
in advance and then wait for a sale. They will only do so if compensated 
by profit.

Rothbard's argument simply assumes a *class* system in which there is a 
minority of rich and a majority of property-less workers. The reason why 
workers cannot "wait" is because if they did they would starve to death. 
Unsurprisingly, then, they prefer their wages now rather than next year. 
Similarly, the reason why they do not save and form their own co-operatives 
is that they simply cannot "wait" until their workplace is ready and their 
products are sold before eating and paying rent. In other words, their 
decisions are rooted in their class position while the capitalists (the 
rich) have shouldered the "burden" of abstinence so that they can be 
rewarded with even more money in the future. Clearly, the time preference 
position and the "waiting" or "abstinence" perspective are basically the 
same and subject to the same critique (as can be found in, say, the works
of a certain Eugen von Bhm-Bawerk).

In other words, profit has a *social* basis, rooted in the different
economic situation of classes within capitalism. It is not the fact
of "waiting" which causes profits but rather the monopoly of the 
means of life by the capitalist class which is the basis of "economic
dependence." Any economic theory which fails to acknowledge and 
analyse this social inequality is doomed to failure from the start.

To conclude, the arguments that "waiting" or "time preference" explain or
justify surplus value are deeply flawed simply because they ignore the
reality of class society. By focusing on individual subjective evaluations,
they ignore the social context in which these decisions are made and, as
a result, fail to take into account the class character of interest and
profit. In effect, they argue that the wealthy deserve a reward for being
wealthy. Whether it is to justify profits or interest, the arguments used
simply show that we have an economic system that works only by bribing
the rich!

C.2.8 Are profits the result of entrepreneurial activity and innovation?

One of the more common arguments in favour of profits is the notion that
they are the result of innovation or entrepreneurial activity, that the 
creative spirit of the capitalist innovates profits into existence. This
perspective is usually associated with the so-called "Austrian" school
of capitalist economics but has become more common in the mainstream of
economics, particularly since the 1970s. 

There are two related themes in this defence of profits -- innovation
and entrepreneurial activity. While related, they differ in one key way. 
The former (associated with Joseph Schumpeter) is rooted in production 
while the former seeks to be of more general application. Both are based 
on the idea of "discovery", the subjective process by which people use 
their knowledge to identify gaps in the market, new products or services 
or new means of producing existing goods. When entrepreneurs discover, 
for example, a use of resources, they bring these resources into a new 
(economic) existence. Accordingly, they have created something *ex nihilo* 
(out of nothing) and therefore are entitled to the associated profit on 
generally accepted moral principle of "finders keepers." 

Anarchists, needless to say, have some issues with such an analysis. The
most obvious objection is that while "finders keepers" may be an acceptable 
ethical position on the playground, it is hardly a firm basis to justify an 
economic system marked by inequalities of liberty and wealth. Moreover, 
discovering something does *not* entitle you to an income from it. Take, 
for example, someone who discovers a flower in a wood. That, in itself, 
will generate no income of any kind. Unless the flower is picked and taken 
to a market, the discoverer cannot "profit" from discovering it. If the 
flower is left untouched then it is available for others to appropriate 
unless some means are used to stop them (such as guarding the flower). 
This means, of course, limiting the discovery potential of others, like 
the state enforcing copyright stops the independent discovery of the 
same idea, process or product.

As such, "discovery" is not sufficient to justify non-labour income as an
idea remains an idea unless someone applies it. To generate an income 
(profit) from a discovery you need to somehow take it to the market and, 
under capitalism, this means getting funds to invest in machinery and 
workplaces. However, these in themselves do nothing and, consequently, workers 
need to be employed to produce the goods in question. If the costs of producing 
these goods is less than the market price, then a profit is made. Does this 
profit represent the initial "discovery"? Hardly for without funds the idea 
would have remained just that. Does the profit represent the contribution 
of "capital"? Hardly, for without the labour of the workers the workplace 
would have remained still and the product would have remained an idea.

Which brings us to the next obvious problem, namely that "entrepreneurial"
activity becomes meaningless when divorced from owning capital. This is
because any action which is taken to benefit an individual and involves 
"discovery" is considered entrepreneurial. Successfully looking for a 
better job? Your new wages are entrepreneurial profit. Indeed, 
successfully finding *any* job makes the wages entrepreneurial profit. 
Workers successfully organising and striking to improve their pay and 
conditions? An entrepreneurial act whose higher wages are, in fact, 
entrepreneurial profit. Selling your shares in one company and buying
others? Any higher dividends are entrepreneurial profit. Not selling 
your shares? Likewise. What income flow could *not* be explained by 
"entrepreneurial" activity if we try hard enough?

In other words, the term becomes meaningless unless it is linked to owning 
capital and so any non-trivial notion of entrepreneurial activity requires 
private property, i.e. property which functions as capital. This can be seen 
from an analysis of whether entrepreneurship which is *not* linked to 
owning capital or land creates surplus value (profits) or not. It is 
possible, for example, that an entrepreneur can make a profit by buying 
cheap in one market and selling dear in another. However, this simply 
redistributes existing products and surplus value, it does not *create* 
them. This means that the entrepreneur does not create something from 
nothing, he takes something created by others and sells it at a higher 
price and so gains a slice of the surplus value created by others. If 
buying high and selling low *was* the cause of surplus value, then 
profits overall would be null as any gainer would be matched by a loser. 
Ironically, for all its talk of being concerned about process, this 
defence of entrepreneurial profits rests on the same a *static* 
vision of capitalism as does neo-classical economics.

Thus entrepreneurship is inherently related to inequalities in economic 
power, with those at the top of the market hierarchy having more ability 
to gain benefits of it than those at the bottom. Entrepreneurship, in 
other words, rather than an independent factor is rooted in social 
inequality. The larger one's property, the more able they are to gather 
and act on information advantages, i.e. act in as an entrepreneur.
Moreover the ability to exercise the entrepreneurial spirit or innovate
is restricted by the class system of capitalism. To implement a new idea, 
you need money. As it is extremely difficult for entrepreneurs to act on 
the opportunities they have observed without the ownership of property, 
so profits due to innovation simply becomes yet another reward for already 
being wealthy or, at best, being able to convince the wealthy to loan you 
money in the expectation of a return. Given that credit is unlikely to
be forthcoming to those without collateral (and most working class people
are asset-poor), entrepreneurs are almost always capitalists because of 
social inequality. Entrepreneurial opportunities are, therefore, not 
available to everyone and so it is inherently linked to private property 
(i.e. capital).

So while entrepreneurship in the abstract may help explain the distribution 
of income, it neither explains why surplus value exists in the first place 
nor does it justify the entrepreneur's appropriation of part of that surplus. 
To explain why surplus value exists and why capitalists may be justified 
in keeping it, we need to look at the other aspect of entrepreneurship, 
innovation as this is rooted in the actual production process. 

Innovation occurs in order to expand profits and so survive competition
from other companies. While profits can be redistributed in circulation (for 
example by oligopolistic competition or inflation) this can only occur at the 
expense of other people or capitals (see sections C.5 and C.7). Innovation, 
however, allows the generation of profits directly from the new or increased 
productivity (i.e. exploitation) of labour it allows. This is because it is 
in production that commodities, and so profits, are created and innovation 
results in new products and/or new production methods. New products mean 
that the company can reap excess profits until competitors enter the new 
market and force the market price down by competition. New production 
methods allow the intensity of labour to be increased, meaning that 
workers do more work relative to their wages (in other words, the
cost of production falls relative to the market price, meaning extra 
profits).

So while competition ensures that capitalist firms innovate, innovation is
the means by which companies can get an edge in the market. This is because
innovation means that "capitalist excess profits come from the production 
process. . . when there is an above-average rise in labour productivity; 
the reduced costs then enable firms to earn higher than average profits in 
their products. But this form of excess profits is only temporary and 
disappears again when improved production methods become more general." 
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 38]
Capitalists, of course, use a number of techniques to stop the spread
of new products or production methods in order to maintain their position,
such as state enforced intellectual property rights. 

Innovation as the source of profits is usually associated with economist
Joseph Schumpeter who described and praised capitalism's genius for 
"creative destruction" caused by capitalists who innovate, i.e. introduce 
new goods and means of production. Schumpeter's analysis of capitalism 
is more realistic than the standard neo-classical perspective. He 
recognised that capitalism was marked by a business cycle which he 
argued flowed from cycles of innovation conducted by capitalists. 
He also rejected the neo-classical assumption of perfect competition, 
arguing that the "introduction of new methods of production and new 
commodities is hardly compatible with perfect and perfectly prompt 
competition from the start . . . As a matter of fact, perfect 
competition has always been temporarily stemmed whenever anything 
new is being introduced." [_Capitalism, Socialism and Democracy_, 
p. 104] 

This analysis presents a picture of capitalism more like it actually
is rather than what economics would like it to be. However, this does
not mean that its justification for profits is correct, far from it.
Anarchists do agree that it is true that individuals do see new potential 
and act in innovative ways to create new products or processes. However, 
this is not the source of surplus value. This is because an innovation 
only becomes a source of profits once it actually produced, i.e. once 
workers have toiled to create it (in the case of new goods) or used it 
(in the case of new production techniques). An idea in and of itself 
produces nothing unless it is applied. The reason why profits result 
from innovation is due to the way the capitalist firm is organised 
rather than any inherent aspect of innovation. 

Ultimately, entrepreneurialism is just a fancy name for decision making
and, as such, it is a *labour* income (labour refers to physical *and* 
mental activities). However, as noted above, there are two types of 
labour under capitalism, the labour of production and the labour of 
exploitation. Looking at entrepreneurialism in a workplace situation, 
it is obvious that it is *not* independent of owning or managing capital 
and so it is impossible to distinguish profits produced by "entrepreneurial" 
activity and profits resulting from a return on property (and so the 
labour of others). In other words, it is the labour of exploitation 
and any income from it is simply monopoly profit. This is because 
the capitalist or manager has a monopoly of power within the workplace 
and, consequently, can reap the benefits this privileged position 
ensures. The workers have their opportunities for entrepreneurialism 
restricted and monopolised by the few in power who, when deciding who 
contributes most to production, strangely enough decide it is themselves. 

This can be seen from the fact that innovation in terms of new technology 
is used to help win the class war at the point of production for the 
capitalists. As the aim of capitalist production is to maximise the 
profits available for capitalists and management to control, it follows that
capitalism will introduce technology that will allow more surplus value 
to be extracted from workers. As Cornelius Castoriadis argues, capitalism 
"does not utilise a socially neutral technology for capitalist ends. 
Capitalism has created capitalist technology, which is by no means neutral. 
The real essence of capitalist technology is not to develop production for 
production's sake: It is to subordinate and dominate the producers." 
[_Political and Social Writings_, vol. 2, p. 104] Therefore, "innovation"
(technological improvement) can  be used to increase the power of 
capital over the workforce, to ensure that workers will do as they are 
told. In this way innovation can maximise surplus value production by 
trying to increase domination during working hours as well as by increasing 
productivity by new processes.

These attempts to increase profits by using innovation is the key to 
capitalist expansion and accumulation. As such innovation plays a key 
role within the capitalist system. However, the source of profits does 
not change and remains in the labour, skills and creativity of workers 
in the workplace. As such, innovation results in profits because labour 
is exploited in the production process, *not* due to some magical 
property of innovation.

The question now arises whether profits are justified as a reward for
those who made the decision to innovate in the first place. This,
however, fails for the obvious reason that capitalism is marked by
a hierarchical organisation of production. It is designed so that a
few make all the decisions while the majority are excluded from power.
As such, to say that capitalists or managers deserve their profits due
to innovation is begging the question. Profits which are claimed to
flow from innovation are, in fact, the reward for having a monopoly, 
namely the monopoly of decision making within the workplace, rather 
than some actual contribution to production. The only thing management 
does is decide which innovations to pursue and to reap the benefits 
they create. In other words, they gain a reward simply due to their 
monopoly of decision making power within a firm. Yet this hierarchy only 
exists because of capitalism and so can hardly be used to defend that 
system and the appropriation of surplus value by capitalists. 

Thus, if entrepreneurial spirit is the source of profit then we can reply 
that under capitalism the means of exercising that spirit is monopolised 
by certain classes and structures. The monopoly of decision making power 
in the hands of managers and bosses in a capitalist firm ensure that 
they also monopolise the rewards of the entrepreneurialism their workforce 
produce. This, in turn, reduces the scope for innovation as this division 
of society into people who do mental and physical labour "destroy[s] the 
love of work and the capacity for invention" and under such a system, 
the worker "lose[s] his intelligence and his spirit of invention." 
[Kropotkin, _The Conquest of Bread_, p. 183 and p. 181] 

These issues should be a key concern *if* entrepreneurialism *really* 
were considered as the unique source of profit. However, such issues as 
management power is rarely, if ever, discussed by the Austrian school. 
While they thunder against state restrictions on entrepreneurial activity, 
boss and management restrictions are always defended (if mentioned at 
all). Similarly, they argue that state intervention (say, anti-monopoly 
laws) can only harm consumers as it tends to discourage entrepreneurial 
activity yet ignore the restrictions to entrepreneurship imposed by 
inequality, the hierarchical structure of the capitalist workplace and 
negative effects both have on individuals and their development (as 
discussed in section B.1.1). 

This, we must stress, is the key problem with the idea that innovation 
is the root of surplus value. It focuses attention to the top of the 
capitalist hierarchy, to business leaders. This implies that they, the 
bosses, create "wealth" and without them nothing would be done. For 
example, leading "Austrian" economist Israel Kirzner talks of "the 
necessarily indivisible entrepreneur" who "is responsible for the 
entire product, The contributions of the factor inputs, being without 
an entrepreneurial component, are irrelevant for the ethical position 
being taken." ["Producer, Entrepreneur, and the Right to Property," 
pp. 185-199, _Perception, Opportunity, and Profit_, p. 195] The
workforce is part of the "factor inputs" who are considered "irrelevant."
He quotes economist Frank Knight to bolster this analysis that the
entrepreneur solely creates wealth and, consequently, deserves his
profits:

"Under the enterprise system, a special social class, the businessman,
direct economic activity: *they are in the strict sense the producers,
while the great mass of the population merely furnishes them with 
productive services, placing their persons and their property at the
disposal of this class.*" [quoted by Kirzner, Op. Cit., p. 189]

If, as Chomsky stresses, the capitalist firm is organised in a fascist 
way, the "entrepreneurial" defence of profits is its ideology, its
"Fhrerprinzip" (the German for "leader principle"). This ideology sees 
each organisation as a hierarchy of leaders, where every leader (Fhrer, 
in German) has absolute responsibility in his own area, demands absolute 
obedience from those below him and answers only to his superiors. This 
ideology was most infamously applied by fascism but its roots lie in 
military organisations which continue to use a similar authority 
structure today. 

Usually defenders of capitalism contrast the joys of "individualism" with
the evils of "collectivism" in which the individual is sub-merged into
the group or collective and is made to work for the benefit of the 
group. Yet when it comes to capitalist industry, they stress the abilities 
of the people at the top of the company, the owner, the entrepreneur, and 
treat as unpeople those who do the actual work (and ignore the very real 
subordination of those lower down the hierarchy). The entrepreneur is 
considered the driving force of the market process and the organisations 
and people they govern are ignored, leading to the impression that the 
accomplishments of a firm are the personal triumphs of the capitalists, 
as though their subordinates are merely tools not unlike the machines on 
which they labour.

The ironic thing about this argument is that if it were true, then the 
economy would grind to a halt (we discuss this more fully in our critique 
of Engels's diatribe against anarchism "On Authority" in section H.4.4). 
It exposes a distinct contradiction within capitalism. While the advocates 
of entrepreneurialism assert that the entrepreneur is the only real producer 
of wealth in society, the fact is that the entrepreneurialism of the workforce 
industry is required to implement the decisions made by the bosses. Without
this unacknowledged input, the entrepreneur would be impotent. Kropotkin 
recognised this fact when he talked of the workers "who have added to the 
original invention" little additions and contributions "without which
the most fertile idea would remain fruitless." Nor does the idea itself 
develop out of nothing as "every invention is a synthesis, the resultant 
of innumerable inventions which have preceded it." [Op. Cit., p. 30] Thus 
Cornelius Castoriadis:

"The capitalist organisation of production is profoundly contradictory . . . 
It claims to reduce the worker to a limited and determined set of tasks, 
but it is obliged at the same time to rely upon the universal capacities 
he develops both as a function of and in opposition to the situation in 
which he is placed . . . Production can be carried out only insofar as 
the worker himself organises his work and goes beyond his theoretical 
role of pure and simply executant," [_Political and Social Writings_, 
vol. 2, p. 181]

Moreover, such a hierarchical organisation cannot help but generate
wasted potential. Most innovation is the cumulative effect of lots of 
incremental process improvements and the people most qualified to identify 
opportunities for such improvements are, obviously, those involved in the 
process. In the hierarchical capitalist firm, those most aware of what would 
improve efficiency have the least power to do anything about it. They also 
have the least incentive as well as any productivity increases resulting from 
their improvements will almost always enrich their bosses and investors,
not them. Indeed, any gains may be translated into layoffs, soaring stock 
prices, and senior management awarding itself a huge bonus for "cutting 
costs." What worker in his right mind would do something to help their
worst enemy? As such, capitalism hinders innovation:

"It is nonsensical to seek to organise people . . . as if they were mere 
objects . . . In real life, capitalism is obliged to base itself on people's 
capacity for self-organisation, on the individual and collective creativity 
of the producers. Without making use of these abilities the system would 
not survive a day. But the whole 'official' organisation of modern society 
both ignores and seeks to suppress these abilities to the utmost. The 
result is not only an enormous waste due to untapped capacity. The system 
does more: It *necessarily* engenders opposition, a struggle against it by 
those upon whom it seeks to impose itself . . . The net result is not only 
waste but perpetual conflict." [Castoriadis, Op. Cit., p. 93]

While workers make the product and make entrepreneurial decisions every 
day, in the face of opposition of the company hierarchy, the benefits of
those decisions are monopolised by the few who take all the glory for 
themselves. The question now becomes, why should capitalists and managers 
have a monopoly of power and profits when, in practice, they do not and 
cannot have a monopoly of entrepreneurialism within a workplace? If the 
output of a workplace is the result of the combined mental and physical 
activity (entrepreneurialism) of all workers, there is no justification 
either for the product or "innovation" (i.e. decision making power) to 
be monopolised by the few.

We must also stress that innovation itself is a form of labour -- mental 
labour. Indeed, many companies have Research and Development groups in 
which workers are paid to generate new and innovative ideas for their 
employers. This means that innovation is not related to property ownership
at all. In most modern industries, as Schumpeter himself acknowledged, 
innovation and technical progress is conducted by "teams of trained 
specialists, who turn out what is required and make it work in predictable 
ways" and so "[b]ureau and committee work tends to replace individual 
action." This meant that "the leading man . . . is becoming just another 
office worker -- and one who is not always difficult to replace." 
[Op. Cit., p. 133] And we must also point out that many new innovations 
come from individuals who combine mental and physical labour outside of 
capitalist companies. Given this, it is difficult to argue that profits 
are the result of innovation of a few exceptional people rather than by 
workers when the innovations, as well as being worked or produced by 
workers are themselves are created by teams of workers. 

As such, "innovation" and "entrepreneurialism" is not limited to a few 
great people but rather exists in all of us. While the few may currently
monopolise "entrepreneurialism" for their own benefit, an economy does not
need to work this way. Decision making need *not* be centralised in a few
hands. Ordinary workers can manage their own productive activity, innovate
and make decisions to meet social and individual needs (i.e. practice 
"entrepreneurialism"). This can be seen from various experiments in 
workers' control where increased equality within the workplace actually 
increases productivity and innovation. As these experiments show workers, 
when given the chance, can develop numerous "good ideas" *and*, equally 
as important, produce them. A capitalist with a "good idea," on the other 
hand, would be powerless to produce it without workers and it is this fact 
that shows that innovation, in and of itself, is not the source of surplus 
value. 

So, contrary to much capitalist apologetics, innovation is not the monopoly
of an elite class of humans. It is part of all of us, although the
necessary social environment needed to nurture and develop it in all
is crushed by the authoritarian workplaces of capitalism and the effects
of inequalities of wealth and power within society as a whole. If
workers were truly incapable of innovation, any shift toward greater
control of production by workers should result in decreased productivity.
What one actually finds, however, is just the opposite: productivity
increased dramatically as ordinary people were given the chance, 
usually denied them, to apply their skills and talents. They show
the kind of ingenuity and creativity people naturally bring to a 
challenging situation -- if they are allowed to, if they are 
participants rather than servants or subordinates.

In fact, there is "a growing body of empirical literature that is 
generally supportive of claims for the economic efficiency of the 
labour-managed firm. Much of this literature focuses on productivity, 
frequently finding it to be positively correlated with increasing 
levels of participation . . . Studies that encompass a range of 
issues broader than the purely economic also tend to support
claims for the efficiency of labour managed and worker-controlled
firms . . . In addition, studies that compare the economic preference
of groups of traditionally and worker-controlled forms point to
the stronger performance of the latter." [Christopher Eaton Gunn, 
_Workers' Self-Management in the United States_, pp. 42-3] This is
confirmed by David Noble, who points out that "the self-serving claim" 
that "centralised management authority is the key to productivity" is 
"belied by nearly every sociological study of work." [_Progress without 
People_, p. 65] 

During the Spanish Revolution of 1936-39, workers self-managed many
factories following the principles of participatory democracy.
Productivity and innovation in the Spanish collectives was exceptionally 
high. The metal-working industry is a good example. As Augustine 
Souchy observes, at the outbreak of the Civil War, the metal industry 
in Catalonia was "very poorly developed." Yet within months, the 
Catalonian metal workers had rebuilt the industry from scratch, 
converting factories to the production of war materials for the
anti-fascist troops. A few days after the July 19th revolution, the
Hispano-Suiza Automobile Company was already converted to the manufacture
of armoured cars, ambulances, weapons, and munitions for the fighting
front. "Experts were truly astounded," Souchy writes, "at the expertise
of the workers in building new machinery for the manufacture of arms and
munitions. Very few machines were imported. In a short time, two hundred
different hydraulic presses of up to 250 tons pressure, one hundred
seventy-eight revolving lathes, and hundreds of milling machines and
boring machines were built." [_The Anarchist Collectives: Workers'
Self-management in the Spanish Revolution, 1936-1939_, Sam Dolgoff (ed.),
p. 96]

Similarly, there was virtually no optical industry in Spain before the
July revolution, only some scattered workshops. After the revolution, the
small workshops were voluntarily converted into a production collective. 
"The greatest innovation," according to Souchy, "was the construction of a
new factory for optical apparatuses and instruments. The whole operation
was financed by the voluntary contributions of the workers. In a short
time the factory turned out opera glasses, telemeters, binoculars,
surveying instruments, industrial glassware in different colours, and
certain scientific instruments. It also manufactured and repaired optical
equipment for the fighting fronts . . . What private capitalists failed to
do was accomplished by the creative capacity of the members of the Optical
Workers' Union of the CNT." [Op. Cit., pp. 98-99]

More recently, the positive impact of workers' control has been 
strikingly confirmed in studies of the Mondragon co-operatives in Spain, 
where workers are democratically involved in production decisions and 
encouraged to innovate. As George Bennello notes, "Mondragon productivity 
is very high -- higher than in its capitalist counterparts. Efficiency, 
measured as the ratio of utilised resources -- capital and labour -- 
to output, is far higher than in comparable capitalist factories." 
["The Challenge of Mondragon", _Reinventing Anarchy, Again_, p. 216] 

The example of Lucas Aerospace, during the 1970s indicates well the 
creative potential waiting to be utilised and wasted due to capitalism. 
Faced with massive job cuts and restructuring, the workers and their
Shop Stewards SSCC in 1976 proposed an alternative Corporate Plan to 
Lucas's management. This was the product of two years planning and 
debate among Lucas workers. Everyone from unionised engineers, to 
technicians to production workers and secretaries was involved in 
drawing it up. It was based on detailed information on the machinery 
and equipment that all Lucas sites had, as well as the type of skills 
that were in the company. The workers designed the products themselves, 
using their own experiences of work and life. While its central aim 
was to head off Lucas's planned job cuts, it presented a vision of
a better world by arguing that the concentration on military goods 
and markets was neither the best use of resources nor in itself 
desirable. It argued that if Lucas was to look away from military 
production it could expand into markets for socially useful goods 
(such as medical equipment) where it already had some expertise 
and sales. The management were not interested, it was their to 
"manage" Lucas and to decide where its resources would be used,
including the 18,000 people working there. Management were more 
than happy to exclude the workforce from any say in such fundamental 
matter as implementing the workers' ideas would have shown how 
unnecessary they, the bosses, actually were.

Another example of wasted worker innovation is provided by the
US car industry. In the 1960s, Walter Reuther, president of the 
United Auto Workers (UAW) had proposed to the Johnson Whitehouse 
that the government help the US car companies to produce small 
cars, competing with Volkswagen which had enjoyed phenomenal 
success in the U.S. market. The project, unsurprisingly, fell 
through as the executives of the car companies were uninterested.
In the 1970s, higher petrol prices saw US buyers opt for smaller 
cars and the big US manufacturers were caught unprepared. This 
allowed Toyota, Honda and other Asian car companies to gain a 
crucial foothold in the American market. Unsurprisingly, 
resistance by the union and workforce were blamed for the 
industry's problems when, in fact, it was the bosses, not the 
unions, who were blind to a potential market niche and the 
industry's competitive challenges. 

Therefore, far from being a threat to innovation, workers' self-management
would increase it and, more importantly, direct it towards improving the
quality of life for all as opposed to increasing the profits of the few 
(this aspect an anarchist society will be discussed in more detail in
section I). This should be unsurprising, as vesting a minority with 
managerial authority and deciding that the others should be cogs results 
in a massive loss of social initiative and drive. In addition, see sections 
J.5.10, J.5.11 and J.5.12 for more on why anarchists support self-management 
and why, in spite of its higher efficiency and productivity, the capitalist 
market will select against it.

To conclude, capitalist workplace hierarchy actually hinders innovation 
and efficiency rather than fosters it. To defend profits by appealing to 
innovation is, in such circumstances, deeply ironic. Not only does
it end up simply justifying profits in terms of monopoly power (i.e.
hierarchical decision making rewarding itself), that power also 
wastes a huge amount of potential innovation in society -- namely 
the ideas and experience of the workforce excluded from the decision
making process. Given that power produces resistance, capitalism ensures
that the "creative faculties [the workers] are not allowed to exercise 
*on behalf* of a social order that rejects them (and which they reject) 
are now utilised *against* that social order" and so "work under 
capitalism" is "a perpetual waste of creative capacity, and a constant 
struggle between the worker and his own activity." [Castoriadis, 
Op. Cit., p. 93 and p. 94]

Therefore, rather than being a defence of capitalist profit taking (and 
the inequality it generates) innovation backfires against capitalism. 
Innovation flourishes best under freedom and this points towards 
libertarian socialism and workers' self-management. Given the chance,
workers can manage their own work and this results in increased
innovation and productivity, so showing that capitalist monopoly of
decision making power hinders both. This is unsurprising, for only 
equality can maximise liberty and so workers' control (rather than 
capitalist power) is the key to innovation. Only those who confuse 
freedom with the oppression of wage labour would be surprised by this.

C.2.9 Do profits reflect a reward for risk?

Another common justification of surplus value is that of "risk taking", 
namely the notion that non-labour income is justified because its owners 
took a risk in providing money and deserve a reward for so doing. 

Before discussing why anarchists reject this argument, it must be noted 
that in the mainstream neo-classical model, risk and uncertainty plays 
no role in generating profits. According to general equilibrium theory, 
there is no uncertainty (the present and future are known) and so there 
is no role for risk. As such, the concept of profits being related to 
risk is more realistic than the standard model. However, as we will 
argue, such an argument is unrealistic in many other ways, particularly 
in relation to modern-day corporate capitalism.

It is fair to say that the appeal of risk to explain and justify profits 
lies almost entirely in the example of the small investor who gambles
their savings (for example, by opening a bar) and face a major risk if 
the investment does not succeed. However, in spite of the emotional 
appeal of such examples, anarchists argue that they are hardly typical 
of investment decisions and rewards within capitalism. In fact, such 
examples are used precisely to draw attention away from the way the 
system works rather than provide an insight into it. That is, the 
higher apparent realism of the argument hides an equally unreal model 
of capitalism as the more obviously unrealistic theories which seek 
to rationalise non-labour income.

So does "risk" explain or justify non-labour income? No, anarchists
argue. This is for five reasons. Firstly, the returns on property 
income are utterly independent on the amount of risk involved. 
Secondly, all human acts involve risk of some kind and so why should 
property owners gain exclusively from it? Thirdly, risk as such 
it not rewarded, only *successful* risks are and what constitutes 
success is dependent on production, i.e. exploiting labour. Fourthly, 
most "risk" related non-labour income today plays *no* part in aiding 
production and, indeed, is simply not that risky due to state intervention. 
Fifthly, risk in this context is not independent of owning capital 
and, consequently, the arguments against "waiting" and innovation 
apply equally to this rationale. In other words, "risk" is simply 
yet another excuse to reward the rich for being wealthy.

The first objection is the most obvious. It is a joke to suggest that 
capitalism rewards in proportion to risk. There is little or no relationship
between income and the risk that person faces. Indeed, it would be fairer 
to say that return is *inversely* proportional to the amount of risk a
person faces. The most obvious example is that of a worker who wants to 
be their own boss and sets up their own business. That is a genuine risk, 
as they are risking their savings and are willing to go into debt. Compare 
this to a billionaire investor with millions of shares in hundreds of 
companies. While the former struggles to make a living, the latter gets 
a large regular flow of income without raising a finger. In terms of 
risk, the investor is wealthy enough to have spread their money so 
far that, in practical terms, there is none. Who has the larger income?

As such, the risk people face is dependent on their existing wealth and
so it is impossible to determine any relationship between it and the
income it is claimed to generate. Given that risk is inherently subjective, 
there is no way of discovering its laws of operation except by begging the 
question and using the actual rate of profits to measure the cost of 
risk-bearing. 

The second objection is equally as obvious. The suggestion that risk 
taking is the source and justification for profits ignores the fact that 
virtually all human activity involves risk. To claim that capitalists 
should be paid for the risks associated with investment is to implicitly 
state that money is more valuable that human life. After all, workers 
risk their health and often their lives in work and often the most 
dangerous workplaces are those associated with the lowest pay. Moreover, 
providing safe working conditions can eat into profits and by cutting 
health and safety costs, profits can rise. This means that to reward 
capitalist "risk", the risk workers face may actually increase. In 
the inverted world of capitalist ethics, it is usually cheaper (or 
more "efficient") to replace an individual worker than a capital 
investment. Unlike investors, bosses and the corporate elite, workers 
*do* face risk to life or limb daily as part of their work. Life is
risky and no life is more risky that that of a worker who may be 
ruined by the "risky" decisions of management, capitalists and 
investors seeking to make their next million. While it is possible 
to diversify the risk in holding a stock portfolio that is not possible 
with a job. A job cannot be spread across a wide array of companies 
diversifying risk. 

In other words, workers face much greater risks than their employers 
and, moreover, they have no say in what risks will be taken with their 
lives and livelihoods. It is workers who pay the lion's share of the 
costs of failure, not management and stockholders. When firms are in 
difficulty, it is the workers who are asked to pay for the failures 
of management though pay cuts and the elimination of health and other 
benefits. Management rarely get pay cuts, indeed they often get bonuses 
and "incentive" schemes to get them to do the work they were (over) 
paid to do in the first. When a corporate manager makes a mistake
and their business actually fails, his workers will suffer far 
more serious consequences than him. In most cases, the manager will
still live comfortably (indeed, many will receive extremely generous
severance packages) while workers will face the fear, insecurity and
hardship of having to find a new job. Indeed, as we argued in section
C.2.1, it is the risk of unemployment that is a key factor in ensuring
the exploitation of labour in the first place. 

As production is inherently collective under capitalism, so must be the
risk. As Proudhon put it, it may be argued that the capitalist "alone
runs the risk of the enterprise" but this ignores the fact that 
capitalist cannot "alone work a mine or run a railroad" nor "alone
carry on a factory, sail a ship, play a tragedy, build the Pantheon."
He asked: "Can anybody do such things as these, even if he has all
the capital necessary?" And so "association" becomes "absolutely 
necessary and right" as the "work to be accomplished" is "the common
and undivided property of all those who take part therein." If not,
shareholders would "plunder the bodies and souls of the wage-workers"
and it would be "an outrage upon human dignity and personality."
[_The General Idea of the Revolution_, p. 219] In other words, as
production is collective, so is the risk faced and, consequently,
risk cannot be used to justify excluding people from controlling 
their own working lives or the fruit of their labour.

This brings us to the third reason, namely how "risk" contributes
to production. The idea that "risk" is a contribution to production 
is equally flawed. Obviously, no one argues that *failed* investments 
should result in investors being rewarded for the risks they took. 
This means that *successful* risks are what counts and this means 
that the company has produced a desired good or service. In other 
words, the argument for risk is dependent on the investor providing 
capital which the workers of the company used productivity to create 
a commodity. However, as we discussed in section C.2.4 capital is 
*not* productive and, as a result, an investor may expect the return 
of their initial investment but no more. At best, the investor has 
allowed others to use their money but, as section C.2.3 indicated, 
giving permission to use something is not a productive act.

However, there is another sense in which risk does not, in general,
contribute to production within capitalism, namely finance markets.
This bring us to our fourth objection, namely that most kinds of 
"risks" within capitalism do *not* contribute to production and,
thanks to state aid, not that risky.

Looking at the typical "risk" associated with capitalism, namely 
putting money into the stock market and buying shares, the idea that
"risk" contributes to production is seriously flawed. As David
Schweickart points out, "[i]n the vast majority of cases, when you
buy stock, you give your money not to the company but to another
private individual. You buy your share of stock from someone who is
cashing in his share. Not a nickel of your money goes to the company
itself. The company's profits would have been exactly the same, with
or without your stock purchase." [_After Capitalism_, p. 37] In fact
between 1952 and 1997, about 92% of investment was paid for by firms' 
own internal funds and so "the stock market contributes virtually 
nothing to the financing of outside investment." Even new stock 
offerings only accounted for 4% of non-financial corporations 
capital expenditures. [Doug Henwood, _Wall Street_, p. 72] "In 
spite of the stock market's large symbolic value, it is notorious 
that it has relatively little to do with the production of goods 
and services," notes David Ellerman, "The overwhelming bulk of stock 
transactions are in second-hand shares so the capital paid for shares 
usually goes to other stock traders, not to productive enterprises 
issuing new shares." [_The Democratic worker-owned firm_, p. 199]

In other words, most investment is simply the "risk" associated
with buying a potential income stream in an uncertain world. The
buyer's action has not contributed to producing that income stream
in any way whatsoever yet it results in a claim on the labour of
others. At best, it could be said that a previous owner of the 
shares at some time in the past has "contributed" to production 
by providing money but this does not justify non-labour income. 
As such, investing in shares may rearrange existing wealth (often 
to the great advantage of the rearrangers) but it does produce 
anything. New wealth flows from production, the use of labour on 
existing wealth to create new wealth. 

Ironically, the stock market (and the risk it is based on) harms 
this process. The notion that dividends represent the return for 
"risk" may be faulted by looking at how the markets operate in reality,
rather than in theory. Stock markets react to recent movements in the
price of stock markets, causing price movements to build upon price
movements. According to academic finance economist Bob Haugen, this
results in finance markets having endogenous instability, with 
such price-driven volatility accounting for over three-quarters of
all volatility in finance markets. This leads to the market directing
investments very badly as some investment is wasted in over-valued
companies and under-valued firms cannot get finance to produce 
useful goods. The market's endogenous volatility reduces the overall
level of investment as investors will only fund projects which return
a sufficiently high level of return. This results in a serious drag
on economic growth. As such, "risk" has a large and negative impact 
on the real economy and it seems ironic to reward such behaviour. 
Particularly as the high rate of return is meant to compensate for 
the risk of investing in the stock market, but in fact most of this 
risk results from the endogenous stability of the market itself. 
[Steve Keen, _Debunking Economics_, pp. 249-50]

Appeals to "risk" to justify capitalism are somewhat ironic, given
the dominant organisational form within capitalism -- the corporation.
These firms are based on "limited liability" which was designed explicitly
to reduce the risk faced by investors. As Joel Bakan notes, before this
"no matter how much, or how little, a person had invested in a company,
he or she was *personally* liable, without limit, for the company's debts.
Investors' homes, savings, and other personal assess would be exposed to
claims by creditors if a company failed, meaning that a person risked
finance ruin simply by owning shares in a company. Stockholding could 
not becomes a truly attractive option . . . until that risk was removed,
which it soon was. By the middle of the nineteenth century, business
leaders and politicians broadly advocated changing the law to limit
the liability of shareholders to the amounts they had invested in a
company. If a person bought $100 worth of shares, they reasoned, he or
she should be immune to liability for anything beyond that, regardless
of what happened to the company." Limited liability's "sole purpose
. . . is to shield them from legal responsibility for corporations'
actions" as well as reducing the risks of investing (unlike for small
businesses). [_The Corporation_, p. 11 and p. 79] 

This means that stock holders (investors) in a corporation hold 
no liability for the corporation's debts and obligations. As a 
result of this state granted privilege, potential losses cannot 
exceed the amount which they paid for their shares. The rationale 
used to justify this is the argument that without limited liability, 
a creditor would not likely allow any share to be sold to a buyer 
of at least equivalent creditworthiness as the seller. This means 
that limited liability allows corporations to raise funds for 
riskier enterprises by reducing risks and costs from the owners and 
shifting them onto other members of society (i.e. an externality). 
It is, in effect, a state granted privilege to trade with a limited
chance of loss but with an unlimited chance of gain.

This is an interesting double-standard. It suggests that corporations 
are not, in fact, owned by shareholders at all since they take on none 
of the responsibility of ownership, especially the responsibility to 
pay back debts. Why should they have the privilege of getting profit 
during good times when they take none of the responsibility during 
bad times? Corporations are creatures of government, created with the 
social privileges of limited financial liability of shareholders. 
Since their debts are ultimately public, why should their profits
be private?

Needless to say, this reducing of risk is not limited to within a
state, it is applied internationally as well. Big banks and corporations
lend money to developing nations but "the people who borrowed the 
money [i.e. the local elite] aren't held responsible for it. It's 
the people . . . who have to pay [the debts] off . . . The lenders
are protected from risk. That's one of the main functions of the
IMF, to provide risk free insurance to people who lend and invest
in risky loans. They earn high yields because there's a lot of risk,
but they don't have to take the risk, because it's socialised. It's
transferred in various ways to Northern taxpayers through the IMP and
other devices . . . The whole system is one in which the borrowers are
released from the responsibility. That's transferred to the impoverished
mass of the population in their own countries. And the lenders are
protected from risk." [Noam Chomsky, _Propaganda and the Public Mind_,
p. 125]

Capitalism, ironically enough, has developed precisely by externalising 
risk and placing the burden onto other parties -- suppliers, creditors, 
workers and, ultimately, society as a whole. "Costs and risks are
socialised," in other words, "and the profit is privatised." [Noam 
Chomsky, Op. Cit., p. 185] To then turn round and justify corporate 
profits in terms of risk seems to be hypocritical in the extreme, 
particularly by appealing to examples of small business people 
whom usually face the burdens caused by corporate externalising of 
risk! Doug Henwood states the obvious when he writes shareholder 
"liabilities are limited by definition to what they paid for the 
shares" and "they can always sell their shares in a troubled firm, 
and if they have diversified portfolios, they can handle an occasional 
wipe-out with hardly a stumble. Employees, and often customers and 
suppliers, are rarely so well-insulated." Given that the "signals 
emitted by the stock market are either irrelevant or harmful to real 
economic activity, and that the stock market itself counts for little 
or nothing as a source of finance" and the argument for risk as a 
defence of profits is extremely weak. [Op. Cit., p. 293 and p. 292]

Lastly, the risk theory of profit fails to take into account the 
different risk-taking abilities of that derive from the unequal 
distribution of society's wealth. As James Meade puts it, while 
"property owners can spread their risks by putting small bits of 
their property into a large number of concerns, a worker cannot 
easily put small bits of his effort into a large number of 
different jobs. This presumably is the main reason we find 
risk-bearing capital hiring labour" and not vice versa. [quoted 
by David Schweickart, _Against Capitalism_, pp. 129-130] 

It should be noted that until the early nineteenth century, 
self-employment was the normal state of affairs and it has declined
steadily to reach, at best, around 10% of the working population
in Western countries today. It would be inaccurate, to say the
least, to explain this decline in terms of increased unwillingness
to face potential risks on the part of working people. Rather, it
is a product of increased costs to set up and run businesses which
acts as a very effect *natural* barrier to competition (see 
section C.4). With limited resources available, most working people
simply *cannot* face the risk as they do not have sufficient funds
in the first place and, moreover, if such funds are found the 
market is hardly a level playing field.

This means that going into business for yourself is always a 
possibility, but that option is very difficult without sufficient 
assets. Moreover, even if sufficient funds are found (either by 
savings or a loan), the risk is extremely high due to the inability 
to diversify investments and the constant possibility that larger
firms will set-up shop in your area (for example, Wal-Mart driving
out small businesses or chain pubs, cafes and bars destroying local
family businesses).  So it is true that there is a small flow of 
workers into self-employment (sometimes called the petit bourgeoisie)
and that, of these, a small amount become full-scale capitalists.
However, these are the exceptions that prove the rule -- there is
a greater return into wage slavery as enterprises fail. 

Simply put, the distribution of wealth (and so ability to take risks)
is so skewed that such possibilities are small and, in spite being 
highly risky, do not provide sufficient returns to make most of them 
a success. That many people *do* risk their savings and put themselves 
through stress, insecurity and hardship in this way is, ironically, 
hardly a defence of capitalism as it suggests that wage labour is so 
bad that many people will chance everything to escape it. Sadly, this 
natural desire to be your own boss generally becomes, if successful, 
being someone else's boss! Which means, in almost all cases, it shows 
that to become rich you need to exploit other people's labour.

So, as with "waiting" (see section C.2.7), taking a risk is much 
easier if you are wealthy and so risk is simply another means for
rewarding the wealthy for being wealthy. In other words, risk
aversion is the dependent, not the independent, factor. The 
distribution of wealth determines the risks people willing to
face and so cannot explain or justify that wealth. Rather than 
individual evaluations determining "risk", these evaluations will 
be dependent on the class position of the individuals involved. 
As Schweickart notes, "large numbers of people simply do not have
any discretionary funds to invest. They can't play at all . . . 
among those who can play, some are better situated than others.
Wealth gives access to information, expert advice, and opportunities
for diversification that the small investor often lacks." [_After
Capitalism_, p. 34] As such, profits do not reflect the real 
cost of risk but rather the scarcity of people with anything to
risk (i.e. inequality of wealth).

Similarly, given that the capitalists (or their hired managers)
have a monopoly of decision making power within a firm, any 
risks made by a company reflects that hierarchy. As such, risk
and the ability to take risks are monopolised in a few hands.
If profit *is* the product of risk then, ultimately, it is the
product of a hierarchical company structure and, consequently,
capitalists are simply rewarding themselves because they have
power within the workplace. As with "innovation" and 
"entrepreneurialism" (see section C.2.8), this rationale for 
surplus value depends on ignoring how the workplace is structured. 
In other words, because managers monopolise decision making 
("risk") they also monopolise the surplus value produced by 
workers. However, the former in no way justifies this 
appropriation nor does it create it.

As risk is not an independent factor and so cannot be the source of 
profit. Indeed other activities can involve far more risk and be 
rewarded less. Needless to say, the most serious consequences of 
"risk" are usually suffered by working people who can lose their 
jobs, health and even lives all depending on how the risks of the 
wealthy turn out in an uncertain world. As such, it is one thing 
to gamble your own income on a risky decision but quite another 
when that decision can ruin the lives of others. If quoting Keynes 
is not too out of place: "Speculators may do no harm as bubbles on a
steady stream of enterprise. But the position is serious when
enterprise becomes the bubble on a whirlpool of speculation. When
the capital development of a country becomes a by-product of the
activities of a casino, the job is likely to be ill-done." 
[_The General Theory of Employment, Interest and Money_, p. 159]

Appeals of risk to justify capitalism simply exposes that system 
as little more than a massive casino. In order for such a system 
to be fair, the participants must have approximately equal chances of 
winning. However, with massive inequality the wealthy face little chance 
of loosing. For example, if a millionaire and a pauper both repeatedly 
bet a pound on the outcome of a coin toss, the millionaire will always 
win as the pauper has so little reserve money that even a minor run of 
bad luck will bankrupt him. 

Ultimately, "the capitalist investment game (as a whole and usually 
in its various parts) is positive sum. In most years more money is 
made in the financial markets than is lost. How is this possible? 
It is possible only because those who engage in real productive 
activity receive less than that to which they would be entitled 
were they fully compensated for what they produce. The reward, 
allegedly for risk, derives from this discrepancy." [David
Schweickart, Op. Cit., p. 38] In other words, people would not 
risk their money unless they could make a profit and the willingness
to risk is dependent on current and expected profit levels and so
cannot explain them. To focus on risk simply obscures the influence 
that property has upon the ability to enter a given industry (i.e. 
to take a risk in the first place) and so distracts attention away 
from the essential aspects of how profits are actually generated 
(i.e. away from production and its hierarchical organisation under 
capitalism). 

So risk does not explain how surplus value is generated nor is its origin. 
Moreover, as the risk people face and the return they get is dependent on 
the wealth they have, it cannot be used to justify this distribution. Quite 
the opposite, as return and risk are usually inversely related. If risk 
was the source of surplus value or justified it, the riskiest investment 
and poorest investor would receive the highest returns and this is not 
the case. In summary, the "risk" defence of capitalism does not convince. 

C.3 What determines the distribution of income between labour and 
  capital?

At any time, there is a given amount of unpaid labour in circulation
in the form of goods or services representing more added value than
workers were paid for. This given sum of unpaid labour represents total
available profits. Each company tries to maximise its share of that
total, and if a company does realise an above-average share, it means that
some other companies receive less than average. The larger the company,
the more likely it is to obtain a larger share of the available surplus,
for reasons discussed later (see section C.5). The important thing to note 
here is that companies compete on the market to realise their share of the
total surplus of profits (unpaid labour). However, the *source* of these
profits does not lie in the market, but in production. One cannot buy
what does not exist and if one gains, another loses. 

As indicated above, production prices determine market prices. In any
company, wages determine a large percentage of the production costs.
Looking at other costs (such as raw materials), again wages play a large
role in determining their price. Obviously the division of a commodity's
price into costs and profits is not a fixed ratio, which mean that prices
are the result of complex interactions of wage levels and productivity. 

Within the limits of a given situation, the class struggle between
employers and employees over wages, working conditions and benefits 
determines the degree of exploitation within a workplace and industry, 
and so determines the relative amount of money which goes to labour 
(i.e. wages) and the company (profits). As Proudhon argued, the 
expression "the relations of profits to wages" meant "the war between
labour and capital." [_System of Economical Contradictions_, p. 130] 
This also means that an increase in wages may not drive up prices, as it 
may reduce profits or be tied to productivity; but this will have more 
widespread effects, as capital will move to other industries and 
countries in order to improve profit rates, if this is required. 

The essential point is that the extraction of surplus value from
workers is not a simple technical operation like the extraction of so
many joules from a ton of coal. It is a bitter struggle, in which the
capitalists lose half the time. Labour power is unlike all other 
commodities - it is and remains inseparably embodied in human beings. 
This means that the division of profits and wages in a company and 
in the economy as a whole is dependent upon and modified by the 
actions of workers, both as individuals and as a class.

We are not saying that economic and objective factors play no role in 
the determination of the wage level. On the contrary, at any moment the 
class struggle can only act within a given economic framework. However, 
these objective conditions are constantly modified by the class struggle
and it is this conflict between the human and commodity aspects of 
labour power that ultimately brings capitalism into crisis (see section 
C.7).

From this perspective, the neo-classical argument that a factor in production
(labour, capital or land) receives an income share that indicates its productive
power "at the margin" is false. Rather, it is a question of power -- and the
willingness to use it. As Christopher Eaton Gunn points out, this argument
"take[s] no account of power -- of politics, conflict, and bargaining -- as
more likely indicators of relative shares of income in the real world." 
[_Workers' Self-Management in the United States_, p. 185] If the power
of labour is increasing, it's share in income will tend to increase and,
obviously, if the power of labour decreased it would fall. And the history
of the post-war economy supports such an analysis, with labour in the 
advanced countries share of income falling from 68% in the 1970s to 
65.1% in 1995 (in the EU, it fell from 69.2% to 62%). In the USA,
labour's share of income in the manufacturing sector fell from 74.8%
to 70.6% over the 1979-89 period, reversing the rise in labour's share
that occurred over the 1950s, 1960s and 1970s. The reversal in labour's
share occurred at the same time as labour's power was undercut by
right-wing governments and high unemployment.

Thus, for many anarchists, the relative power between labour and capital 
determines the distribution of income between them. In periods of
full employment or growing workplace organisation and solidarity,
workers wages will tend to rise faster. In periods where there is high
unemployment and weaker unions and less direct action, labour's share
will fall. From this analysis anarchists support collective organisation
and action in order to increase the power of labour and ensure we 
receive more of the value we produce.

The neo-classical notion that rising productivity allows for increasing 
wages is one that has suffered numerous shocks since the early 1970s.
Usually wage increases lag behind productivity. For example, during
Thatcher's reign of freer markets, productivity rose by 4.2%, 1.4% higher
than the increase in real earnings between 1980-88. Under Reagan,
productivity increased by 3.3%, accompanied by a fall of 0.8% in real
earnings. Remember, though, these are averages and hide the actual 
increases in pay differentials between workers and managers. To take 
one example, the real wages for employed single men between 1978 and 
1984 in the UK rose by 1.8% for the bottom 10% of that group, for the 
highest 10%, it was a massive 18.4%. The average rise (10.1%) hides 
the vast differences between top and bottom. In addition, these figures 
ignore the starting point of these rises -- the often massive differences 
in wages between employees (compare the earnings of the CEO of McDonalds 
and one of its cleaners). In other words, 2.8% of nearly nothing is 
still nearly nothing!

Looking at the USA again, we find that workers who are paid by the
hour (the majority of employees) saw their average pay peak in 1973.
Since then, it had declined substantially and stood at its mid-1960s
level in 1992. For over 80 per cent of the US workforce (production
and non-supervisory workers), real wages have fallen by 19.2 per cent
for weekly earnings and 13.4 per cent for hourly earnings between 1973 
and 1994. Productivity had risen by 23.2 per cent. Combined with this 
drop in real wages in the USA, we have seen an increase in hours 
worked. In order to maintain their current standard of living, working 
class people have turned to both debt and longer working hours. 
Since 1979, the annual hours worked by middle-income families rose 
from 3 020 to 3 206 in 1989, 3 287 in 1996 and 3 335 in 1997. In 
Mexico we find a similar process. Between 1980 and 1992, 
productivity rose by 48 per cent while salaries (adjusted for 
inflation) fell by 21 per cent.

Between 1989 to 1997, productivity increased by 9.7% in the USA while 
medium compensation decreased by 4.2%. In addition, median family 
working hours grew by 4% (or three weeks of full-time work) while its 
income increased by only 0.6 % (in other words, increases in working
hours helped to create this slight growth). If the wages of workers 
were related to their productivity, as argued by neo-classical economics, 
you would expect wages to increase as productivity rose, rather than 
fall. However, if wages are related to economic power, then this fall 
is to be expected. This explains the desire for "flexible" labour 
markets, where workers' bargaining power is eroded and so more 
income can go to profits rather than wages. Of course, it will be 
argued that only in a perfectly competitive market (or, more 
realistically, a truly "free" one) will wages increase in-line with
productivity. However, you would expect that a regime of *freer* 
markets would make things better, not worse. Moreover, the 
neo-classical argument that unions, struggling over wages and 
working conditions will harm workers in the "long run" has been 
dramatically refuted over the last 30 years -- the decline of the 
labour movement in the USA has been marked by falling wages, not 
rising ones, for example.

Unsurprisingly, in a hierarchical system those at the top do better than 
those at the bottom. The system is set up so that the majority enrich the 
minority. That is way anarchists argue that workplace organisation and
resistance is essential to maintain -- and even increase -- labour's income.
For if the share of income between labour and capital depends on their
relative power -- and it does -- then only the actions of workers themselves
can improve their situation and determine the distribution of the value they
create.

C.4 Why does the market become dominated by Big Business?

"The facts show. . .that capitalist economies tend over time and with
some interruptions to become more and more heavily concentrated." [M.A.
Utton, _The Political Economy of Big Business_, p. 186] The dynamic
of the "free" market is that it tends to becomes dominated by a few
firms (on a national, and increasingly, international, level), resulting 
in oligopolistic competition and higher profits for the companies in 
question (see next section for details and evidence). This occurs because 
only established firms can afford the large capital investments needed to
compete, thus reducing the number of competitors who can enter or survive
in a given the market. Thus, in Proudhon's words, "competition kills
competition." [_System of Economical Contradictions_, p. 242]

This "does not mean that new, powerful brands have not emerged [after 
the rise of Big Business in the USA after the 1880s]; they have, but 
in such markets. . . which were either small or non-existent in the
early years of this century." The dynamic of capitalism is such that 
the "competitive advantage [associated with the size and market power 
of Big Business], once created, prove[s] to be enduring." [Paul 
Ormerod, _The Death of Economics_, p. 55]

For people with little or no capital, entering competition is limited to
new markets with low start-up costs ("In general, the industries which 
are generally associated with small scale production. . . have low levels
of concentration" [Malcolm C. Sawyer, _The Economics of Industries and
Firms_, p. 35]). Sadly, however, due to the dynamics of competition,
these markets usually in turn become dominated by a few big firms, as
weaker firms fail, successful ones grow and capital costs increase --
"Each time capital completes its cycle, the individual grows smaller in
proportion to it." [Josephine Guerts, _Anarchy: A Journal of Desire Armed_
no. 41, p. 48]

For example, between 1869 and 1955 "there was a marked growth in capital
per person and per number of the labour force. Net capital per head rose.
. . to about four times its initial level. . . at a rate of about 17% per
decade." The annual rate of gross capital formation rose "from $3.5
billion in 1869-1888 to $19 billion in 1929-1955, and to $30 billion in
1946-1955. This long term rise over some three quarters of a century was
thus about nine times the original level." [Simon Kuznets, _Capital in the
American Economy_, p. 33 and p. 394, constant (1929) dollars] To take the
steel industry as an illustration: in 1869 the average cost of steel
works in the USA was $156,000, but by 1899 it was $967,000 -- a 520%
increase. From 1901 to 1950, gross fixed assets increased from $740,201
to $2,829,186 in the steel industry as a whole, with the assets of
Bethlehem Steel increasing by 4,386.5% from 1905 ($29,294) to 1950
($1,314,267). These increasing assets are reflected both in the size of
workplaces and in the administration levels in the company as a whole
(i.e. *between* individual workplaces).

With the increasing ratio of capital to worker, the cost of starting a
rival firm in a given, well-developed, market prohibits all but other
large firms from doing so (and here we ignore advertising and other
distribution expenses, which increase start-up costs even more - 
"advertising raises the capital requirements for entry into the industry" 
-- Sawyer, Op. Cit., p. 108). J.S Bain (in _Barriers in New Competition_) 
identified three main sources of entry barrier: economies of scale 
(i.e. increased capital costs and their more productive nature); product 
differentiation (i.e. advertising); and a more general category he called 
"absolute cost advantage."

This last barrier means that larger companies are able to outbid smaller
companies for resources, ideas, etc. and put more money into Research and
Development and buying patents. Therefore they can have a technological
and material advantage over the small company. They can charge 
"uneconomic" prices for a time (and still survive due to their resources) -- 
an activity called "predatory pricing" -- and/or mount lavish promotional 
campaigns to gain larger market share or drive competitors out of the 
market. In addition, it is easier for large companies to raise external 
capital, and risk is generally less.

In addition, large firms can have a major impact on innovation and the
development of technology -- they can simply absorb newer, smaller, 
enterprises by way of their economic power, buying out (and thus 
controlling) new ideas, much the way oil companies hold patents on 
a variety of alternative energy source technologies, which they then 
fail to develop in order to reduce competition for their product (of 
course, at some future date they may develop them when it becomes 
profitable for them to do so). Also, when control of a market is 
secure, oligopolies will usually delay innovation to maximise their
use of existing plant and equipment or introduce spurious innovations 
to maximise product differentiation. If their control of a market is 
challenged (usually by other big firms, such as the increased competition
Western oligopolies faced from Japanese ones in the 1970s and 1980s), 
they can speed up the introduction of more advanced technology and 
usually remain competitive (due, mainly, to the size of the resources 
they have available). 

These barriers work on two levels - *absolute* (entry) barriers and
*relative* (movement) barriers. As business grows in size, the amount 
of capital required to invest in order to start a business also increases. 
This restricts entry of new capital into the market (and limits it to firms 
with substantial financial and/or political backing behind them):

"Once dominant organisations have come to characterise the structure of
an industry, immense barriers to entry face potential competitors. Huge
investments in plant, equipment, and personnel are needed. . . [T]he
development and utilisation of productive resources *within* the organisation 
takes considerable time, particularly in the face of formidable incumbents
. . . It is therefore one thing for a few business organisations to emerge 
in an industry that has been characterised by . . . highly competitive
conditions. It is quite another to break into an industry. . . [marked by]
oligopolistic market power." [William Lazonick, _Business Organisation
and the Myth of the Market Economy_, pp. 86-87]

Moreover, *within* the oligopolistic industry, the large size and market power
of the dominant firms mean that smaller firms face expansion disadvantages
which reduce competition. The dominant firms have many advantages over 
their smaller rivals -- significant purchasing power (which gains better service
and lower prices from suppliers as well as better access to resources),
privileged access to financial resources, larger amounts of retained earnings 
to fund investment, economies of scale both within and *between* workplaces, 
the undercutting of prices to "uneconomical" levels and so on (and, of course,
they can *buy* the smaller company -- IBM paid $3.5 billion for Lotus in
1995. That is about equal to the entire annual output of Nepal, which has
a population of 20 million). The large firm or firms can also rely on
its established relationships with customers or suppliers to limit the
activities of smaller firms which are trying to expand (for example, using
their clout to stop their contacts purchasing the smaller firms products).

Little wonder Proudhon argued that "[i]n competition. . . victory is assured
to the heaviest battalions." [Op. Cit., p. 260]

As a result of these entry/movement barriers, we see the market being divided
into two main sectors -- an oligopolistic sector and a more competitive one.
These sectors work on two levels -- within markets (with a few firms in a 
given market having very large market shares, power and excess profits) and 
within the economy itself (some markets being highly concentrated and 
dominated by a few firms, other markets being more competitive). This results 
in smaller firms in oligopolistic markets being squeezed by big business
along side firms in more competitive markets. Being protected from competitive
forces means that the market price of oligopolistic markets is *not* forced
down to the average production price by the market, but instead it tends to
stabilise around the production price of the smaller firms in the industry
(which do not have access to the benefits associated with dominant position
in a market). This means that the dominant firms get super-profits while
new capital is not tempted into the market as returns would not make the move
worthwhile for any but the biggest companies, who usually get comparable
returns in their own oligopolised markets (and due to the existence of market
power in a few hands, entry can potentially be disastrous for small firms
if the dominant firms perceive expansion as a threat).

Thus whatever super-profits Big Business reap are maintained due to the
advantages it has in terms of concentration, market power and size which
reduce competition (see section C.5 for details).

And, we must note, that the processes that saw the rise of national 
Big Business is also at work on the global market. Just as Big Business 
arose from a desire to maximise profits and survive on the market, so
"[t]ransnationals arise because they are a means of consolidating or
increasing profits in an oligopoly world." [Keith Cowling and Roger Sugden,
_Transnational Monopoly Capitalism_, p. 20] So while a strictly national
picture will show a market dominated by, say, four firms, a global view shows
us twelve firms instead and market power looks much less worrisome. But just
as the national market saw a increased concentration of firms over time,
so will global markets. Over time a well-evolved structure of global
oligopoly will appear, with a handful of firms dominating most global
markets (with turnovers larger than most countries GDP -- which is the
case even now. For example, in 1993 Shell had assets of US$ 100.8 billion, 
which is more than double the GDP of New Zealand and three times that of 
Nigeria, and total sales of US$ 95.2 billion). 

Thus the very dynamic of capitalism, the requirements for survival on
the market, results in the market becoming dominated by Big Business
("the more competition develops, the more it tends to reduce the
number of competitors." [P-J Proudhon, Op. Cit., p. 243]). The irony
that competition results in its destruction and the replacement of
market co-ordination with planned allocation of resources is one usually
lost on supporters of capitalism.

C.4.1 How extensive is Big Business?

The effects of Big Business on assets, sales and profit distribution are
clear. In the USA, in 1985, there were 14,600 commercial banks. The 50
largest owned 45.7 of all assets, the 100 largest held 57.4%. In 1984
there were 272,037 active corporations in the manufacturing sector, 710
of them (one-fourth of 1 percent) held 80.2 percent of total assets. In
the service sector (usually held to be the home of small business), 95 
firms of the total of 899,369 owned 28 percent of the sector's assets. 
In 1986 in agriculture, 29,000 large farms (only 1.3% of all farms) 
accounted for one-third of total farm sales and 46% of farm profits. 
In 1987, the top 50 firms accounted for 54.4% of the total sales of 
the _Fortune_ 500 largest industrial companies. [Richard B. Du Boff, 
_Accumulation and Power_, p. 171]

The process of market domination is reflected by the increasing market share
of the big companies. In Britain, the top 100 manufacturing companies saw
their market share rise from 16% in 1909, to 27% in 1949, to 32% in 1958
and to 42% by 1975. In terms of net assets, the top 100 industrial and
commercial companies saw their share of net assets rise from 47% in 1948
to 64% in 1968 to 80% in 1976 [R.C.O. Matthews (ed.), _Economy and
Democracy_, p. 239]. Looking wider afield, we find that in 1995 about
50 firms produce about 15 percent of the manufactured goods in the
industrialised world. There are about 150 firms in the world-wide motor
vehicle industry. But the two largest firms, General Motors and Ford,
together produce almost one-third of all vehicles. The five largest firms
produce half of all output and the ten largest firms produce three-quarters.
Four appliance firms manufacture 98 percent of the washing machines made in
the United States. In the U. S. meatpacking industry, four firms account for
over 85 percent of the output of beef, while the other 1,245 firms have less
than 15 percent of the market.

While the concentration of economic power is most apparent in the
manufacturing sector, it is not limited to manufacturing. We are seeing
increasing concentration in the service sector - airlines, fast-food
chains and the entertainment industry are just a few examples.

The other effect of Big Business is that large companies tend to become
more diversified as the concentration levels in individual industries
increase. This is because as a given market becomes dominated by larger
companies, these companies expand into other markets (using their larger
resources to do so) in order to strengthen their position in the economy
and reduce risks. This can be seen in the rise of "subsidiaries" of parent
companies in many different markets, with some products apparently
competing against each other actually owned by the same company!

Tobacco companies are masters of this diversification strategy; most people
support their toxic industry without even knowing it! Don't believe it?
Well, if you ate any Jell-O products, drank Kool-Aid, used Log Cabin syrup,
munched Minute Rice, quaffed Miller beer, gobbled Oreos, smeared Velveeta 
on Ritz crackers, and washed it all down with Maxwell House coffee, you
supported the tobacco industry, all without taking a puff on a cigarette!

Ironically, the reason why the economy becomes dominated by Big Business
has to do with the nature of competition itself. In order to survive (by
maximising profits) in a competitive market, firms have to invest in capital,
advertising, and so on. This survival process results in barriers to
potential competitors being created, which results in more and more markets
being dominated by a few big firms. This oligopolisation process becomes
self-supporting as oligopolies (due to their size) have access to more
resources than smaller firms. Thus the dynamic of competitive capitalism
is to negate itself in the form of oligopoly.

C.4.2 What are the effects of Big Business on society?

Unsurprisingly many pro-capitalist economists and supporters of capitalism 
try to downplay the extensive evidence on the size and dominance of Big 
Business in capitalism.

Some deny that Big Business is a problem - if the market results in a
few companies dominating it, then so be it (the right-libertarian "Austrian"
school is at the forefront of this kind of position - although it does
seem somewhat ironic that "Austrian" economists and other "market advocates"
should celebrate the suppression of market co-ordination by *planned*
co-ordination within the economy that the increased size of Big Business
marks). According to this perspective, oligopolies and cartels usually do
not survive very long, unless they are doing a good job of serving the
customer.

We agree -- it is oligopolistic *competition* we are discussing here. Big
Business has to be responsive to demand (when not manipulating/creating it 
by advertising, of course), otherwise they lose market share to their rivals 
(usually other dominant firms in the same market, or big firms from other 
countries). However, the "free market" response to the reality of oligopoly 
ignores the fact that we are more than just consumers and that economic 
activity and the results of market events impact on many different aspects 
of life. Thus our argument is not focused on the fact we pay more for some 
products than we would in a more competitive market -- it is the *wider* 
results of oligopoly we are concerned with here. If a few companies receive 
excess profits just because their size limits competition the effects of 
this will be felt *everywhere.*

For a start, these "excessive" profits will tend to end up in few hands, so
skewing the income distribution (and so power and influence) within society.
The available evidence suggests that "more concentrated industries generate
a lower wage share for workers" in a firm's value-added. [Keith Cowling, 
_Monopoly Capitalism_, p. 106] The largest firms retain only 52% of their 
profits, the rest is paid out as dividends, compared to 79% for the smallest 
ones and "what might be called rentiers share of the corporate surplus - 
dividends plus interest as a percentage of pretax profits and interest - 
has risen sharply, from 20-30% in the 1950s to 60-70% in the early 1990s." 
[Doug Henwood, _Wall Street_, p. 75, p. 73] The top 10% of the US population 
own well over 80% of stock and bonds owned by individuals while the top 5% of 
stockowners own 94.5% of all stock held by individuals. Little wonder wealth 
has become so concentrated since the 1970s [Ibid., pp. 66-67]. At its most 
basic, this skewing of income provides the capitalist class with more 
resources to fight the class war but its impact goes much wider than this.

Moreover, the "level of aggregate concentration helps to indicate the degree
of centralisation of decision-making in the economy and the economic power
of large firms." [Malcolm C. Sawyer, Op. Cit., p. 261] Thus oligopoly
increases and centralises economic power over investment decisions and
location decisions which can be used to play one region/country and/or 
workforce against another to lower wages and conditions for all (or, equally 
likely, investment will be moved away from countries with rebellious work 
forces or radical governments, the resulting slump teaching them a lesson on 
whose interests count). As the size of business increases, the power of capital
over labour and society also increases with the threat of relocation being
enough to make workforces accept pay cuts, worsening conditions, "down-sizing" 
and so on and communities increased pollution, the passing of pro-capital
laws with respect to strikes, union rights, etc. (and increased corporate 
control over politics due to the mobility of capital). 

Also, of course, oligopoly results in political power as their economic
importance and resources gives them the ability to influence government
to introduce favourable policies -- either directly, by funding political
parties, or indirectly by investment decisions or influencing the media and
funding political think-tanks. Economic power also extends into the labour
market, where restricted labour opportunities as well as negative effects
on the work process itself may result. All of which shapes the society we
live in; the laws we are subject to; the "evenness" and "levelness" of the
"playing field" we face in the market and the ideas dominant in society
(see sections D.2 and D.3). 

So, with increasing size, comes the increasing power, the power of
oligopolies to "influence the terms under which they choose to operate. 
Not only do they *react* to the level of wages and the pace of work,
they also *act* to determine them. . . The credible threat of the shift of
production and investment will serve to hold down wages and raise the
level of effort [required from workers] . . . [and] may also be able to
gain the co-operation of the state in securing the appropriate environment
. . . [for] a redistribution towards profits" in value/added and national
income. [Keith Cowling and Roger Sugden, _Transnational Monopoly 
Capitalism_, p. 99]

Since the market price of commodities produced by oligopolies is determined
by a mark-up over costs, this means that they contribute to inflation as
they adapt to increasing costs or falls in their rate of profit by increasing
prices. However, this does not mean that oligopolistic capitalism is
not subject to slumps. Far from it. Class struggle will influence the
share of wages (and so profit share) as wage increases will not be
fully offset by price increases -- higher prices mean lower demand and
there is always the threat of competition from other oligopolies. In
addition, class struggle will also have an impact on productivity and the
amount of surplus value in the economy as a whole, which places major
limitations on the stability of the system. Thus oligopolistic capitalism
still has to contend with the effects of social resistance to hierarchy,
exploitation and oppression that afflicted the more competitive capitalism
of the past.

The distributive effects of oligopoly skews income, thus the degree of
monopoly has a major impact on the degree of inequality in household
distribution. The flow of wealth to the top helps to skew production away
from working class needs (by outbidding others for resources and having
firms produce goods for elite markets while others go without). The
empirical evidence presented by Keith Cowling "points to the conclusion
that a redistribution from wages to profits will have a depressive 
impact on consumption" [Op. Cit, p. 51] which may cause depression.
High profits also means that more can be retaining by the firm to fund
investment (or pay high level managers more salaries or increase dividends,
of course). When capital expands faster than labour income over-investment
is an increasing problem and aggregate demand cannot keep up to counteract
falling profit shares (see section C.7 on more about the business cycle).
Moreover, as the capital stock is larger, oligopoly will also have a
tendency to deepen the eventual slump, making it last long and harder
to recover from.

Looking at oligopoly from an efficiency angle, the existence of super
profits from oligopolies means that the higher price within a market
allows inefficient firms to continue production. Smaller firms can
make average (non-oligopolistic) profits *in spite* of having higher 
costs, sub-optimal plant and so on. This results in inefficient use of 
resources as market forces cannot work to eliminate firms which have 
higher costs than average (one of the key features of capitalism according 
to its supporters). And, of course, oligopolistic profits skew allocative
efficiency as a handful of firms can out-bid all the rest, meaning that
resources do not go where they are most needed but where the largest
effective demand lies.

Such large resources available to oligopolistic companies also allows
inefficient firms to survive on the market even in the face of competition
from other oligopolistic firms. As Richard B. Du Boff points out, efficiency
can also be "impaired when market power so reduces competitive pressures
that administrative reforms can be dispensed with. One notorious case was
. . . U.S. Steel [formed in 1901]. Nevertheless, the company was hardly
a commercial failure, effective market control endured for decades, and
above normal returns were made on the watered stock. . . Another such case
was Ford. The company survived the 1930s only because of cash reserves
stocked away in its glory days. 'Ford provides an excellent illustration
of the fact that a really large business organisation can withstand a
surprising amount of mismanagement.'" [_Accumulation and Power_, p. 174]

Thus Big Business reduces efficiency within an economy on many levels
as well as having significant and lasting impact on society's social,
economic and political structure. 

The effects of the concentration of capital and wealth on society are very
important, which is why we are discussing capitalism's tendency to result
in big business. The impact of the wealth of the few on the lives of the
many is indicated in section D of the FAQ. As shown there, in addition to
involving direct authority over employees, capitalism also involves indirect
control over communities through the power that stems from wealth.

Thus capitalism is not the free market described by such people as Adam
Smith -- the level of capital concentration has made a mockery of the ideas
of free competition.

C.4.3 What does the existence of Big Business mean for economic theory
   and wage labour?

Here we indicate the impact of Big Business on economic theory itself and
wage labour. In the words of Michal Kalecki, perfect competition is
"a most unrealistic assumption" and "when its actual status of a handy
model is forgotten becomes a dangerous myth." [quoted by Malcolm C. Sawyer,
_The Economics of Michal Kalecki_, p. 8] Unfortunately mainstream capitalist
economics is *built* on this myth. Ironically, it was against a "background
[of rising Big Business in the 1890s] that the grip of marginal economics,
an imaginary world of many small firms. . . was consolidated in the
economics profession." Thus, "[a]lmost from its conception, the theoretical
postulates of marginal economics concerning the nature of companies [and
of markets, we must add] have been a travesty of reality." [Paul Ormerod,
Op. Cit., pp. 55-56]

That the assumptions of economic ideology so contradicts reality has important
considerations on the "voluntary" nature of wage labour. If the competitive
model assumed by neo-classical economics held we would see a wide range of
ownership types (including co-operatives, extensive self-employment and
workers hiring capital) as there would be no "barriers of entry" associated
with firm control. This is not the case -- workers hiring capital is
non-existent and self-employment and co-operatives are marginal. The 
dominant control form is capital hiring labour (wage slavery).

With a model based upon "perfect competition," supporters of capitalism
could build a case that wage labour is a voluntary choice -- after all,
workers (in such a market) could hire capital or form co-operatives
relatively easily. But the *reality* of the "free" market is such that
this model does not exist -- and as an assumption, it is seriously
misleading. If we take into account the actuality of the capitalist
economy, we soon have to realise that oligopoly is the dominant form
of market and that the capitalist economy, by its very nature, restricts
the options available to workers -- which makes the notion that wage
labour is a "voluntary" choice untenable.

If the economy is so structured as to make entry into markets difficult
and survival dependent on accumulating capital, then these barriers are
just as effective as government decrees. If small businesses are
squeezed by oligopolies then chances of failure are increased (and so
off-putting to workers with few resources) and if income inequality is
large, then workers will find it very hard to find the collateral
required to borrow capital and start their own co-operatives. Thus,
looking at the *reality* of capitalism (as opposed to the textbooks) it
is clear that the existence of oligopoly helps to maintain wage labour
by restricting the options available on the "free market" for working
people. Chomsky states the obvious:

"If you had equality of power, you could talk about freedom, but when
all the power is concentrated in one place, then freedom's a joke. 
People talk about a 'free market.' Sure. You and I are perfectly free 
to set up an automobile company and compete with General Motors. 
Nobody's stopping us. That freedom is meaningless . . . It's just that
power happens to be organised so that only certain options are available.
Within that limited range of options, those who have the power say,
'Let's have freedom.' That's a very skewed form of freedom. The 
principle is right. How freedom works depends on what the social 
structures are. If the freedoms are such that the only choices you
have objectively are to conform to one or another system of power,
there's no freedom." [_Language and Politics_, pp. 641-2]

As we noted in section C.4, those with little capital are reduced to
markets with low set-up costs and low concentration. Thus, claim the
supporters of capitalism, workers still have a choice. However, this
choice is (as we have indicated) somewhat limited by the existence of
oligopolistic markets -- so limited, in fact, that less than 10% of
the working population are self-employed workers. Moreover, it is
claimed, technological forces may work to increase the number of
markets that require low set-up costs (the computing market is often
pointed to as an example). However, similar predictions were made over
100 years ago when the electric motor began to replace the steam
engine in factories. "The new technologies [of the 1870s] may have been
compatible with small production units and decentralised operations. . .
That. . . expectation was not fulfilled." [Richard B. Du Boff, Op. Cit.,
p. 65] From the history of capitalism, we imagine that markets
associated with new technologies will go the same way.

The reality of capitalist development is that even *if* workers invested
in new markets, one that require low set-up costs, the dynamic of the
system is such that over time these markets will also become dominated by
a few big firms. Moreover, to survive in an oligopolised economy small
cooperatives will be under pressure to hire wage labour and otherwise act
as capitalist concerns (see section J.5.11). Therefore, even if we ignore
the massive state intervention which created capitalism in the first place
(see section B.3.2), the dynamics of the system are such that relations of
domination and oppression will always be associated with it -- they cannot
be "competed" away as the actions of competition creates and re-enforces
them (also see sections J.5.11 and J.5.12 on the barriers capitalism places
on co-operatives and self-management even though they are more efficient).

So the effects of the concentration of capital on the options open to us
are great and very important. The existence of Big Business has a direct
impact on the "voluntary" nature of wage labour as it produces very
effective "barriers of entry" for alternative modes of production. The
resultant pressures big business place on small firms also reduces the
viability of co-operatives and self-employment to survive *as* co-operatives
and non-employers of wage labour, effectively marginalising them as true
alternatives. Moreover, even in new markets the dynamics of capitalism are
such that *new* barriers are created all the time, again reducing our
options.

Overall, the *reality* of capitalism is such that the equality of opportunity
implied in models of "perfect competition" is lacking. And without such
equality, wage labour cannot be said to be a "voluntary" choice between
available options -- the options available have been skewed so far in one
direction that the other alternatives have been marginalised.

C.5 Why does Big Business get a bigger slice of profits?

As described in the last section, due to the nature of the capitalist market,
large firms soon come to dominate. Once a few large companies dominate a
particular market, they form an oligopoly from which a large number of
competitors have effectively been excluded, thus reducing competitive
pressures. In this situation there is a tendency for prices to rise above
what would be the "market" level, as the oligopolistic producers do not
face the potential of new capital entering "their" market (due to the
relatively high capital costs and other entry/movement barriers). This form 
of competition results in Big Business having an "unfair" slice of available
profits as oligopolistic profits are "created at the expense of individual 
capitals still caught up in competition." [Paul Mattick, _Economics, Politics, 
and the Age of Inflation_, p. 38]

As argued in section C.1, the price of a commodity will tend towards
its production price (which is costs plus average profit). In a
developed capitalist economy it is not as simple as this -- there are
various "average" profits depending on what Michal Kalecki termed the
"degree of monopoly" within a market. This theory "indicates that profits
arise from monopoly power, and hence profits accrue to firms with more
monopoly power. . . A rise in the degree of monopoly caused by the growth
of large firms would result in the shift of profits from small business
to big business." [Malcolm C. Sawyer, _The Economics of Michal Kalecki_,
p. 36] Thus a market with a high "degree of monopoly" will have a higher
average profit level (or rate of return) than one which is more competitive.

The "degree of monopoly" reflects such factors as level of market
concentration and power, market share, extent of advertising, barriers
to entry/movement, collusion and so on. The higher these factors, the
higher the degree of monopoly and the higher the mark-up of prices over
costs (and so the share of profits in value added). Our approach to this
issue is similar to Kalecki's in many ways although we stress that the
degree of monopoly affects how profits are distributed *between* firms,
*not* how they are created in the first place (which come, as argued in
section C.2, from the "unpaid labour of the poor" -- to use Kropotkin's 
words).

There is substantial evidence to support such a theory. J.S Bain
in _Barriers in New Competition_ noted that in industries where the
level of seller concentration was very high and where entry barriers
were also substantial, profit rates were higher than average. Research
has tended to confirm Bain's findings. Keith Cowling summarises this
later evidence:

"[A]s far as the USA is concerned. . . there are grounds for believing
that a significant, but not very strong, relationship exists between
profitability and concentration. . . [along with] a significant
relationship between advertising and profitability [an important factor 
in a market's "degree of monopoly"]. . . [Moreover w]here the estimation 
is restricted to an appropriate cross-section [of industry] . . . both
concentration and advertising appeared significant [for the UK]. By
focusing on the impact of changes in concentration overtime . . . [we are]
able to circumvent the major problems posed by the lack of appropriate
estimates of price elasticities of demand . . . [to find] a significant
and positive concentration effect. . . It seems reasonable to conclude on
the basis of evidence for both the USA and UK that there is a significant
relationship between concentration and price-cost margins." [_Monopoly
Capitalism_, pp. 109-110]

We must note that the price-cost margin variable typically used in these
studies subtracts the wage and *salary* bill from the value added in
production. This would have a tendency to reduce the margin as it does
not take into account that most management salaries (particularly those
at the top of the hierarchy) are more akin to profits than costs (and
so should *not* be subtracted from value added). Also, as many markets
are regionalised (particularly in the USA) nation-wide analysis may
downplay the level of concentration existing in a given market.

This means that large firms can maintain their prices and profits above
"normal" (competitive) levels without the assistance of government simply
due to their size and market power (and let us not forget the important fact 
that Big Business rose during the period in which capitalism was closest
to "laissez faire" and the size and activity of the state was small). As 
much of mainstream economics is based on the idea of "perfect competition" 
(and the related concept that the free market is an efficient allocator of 
resources when it approximates this condition) it is clear that such a 
finding cuts to the heart of claims that capitalism is a system based upon 
equal opportunity, freedom and justice. The existence of Big Business and 
the impact it has on the rest of the economy and society at large exposes 
capitalist economics as a house built on sand (see sections C.4.2 and C.4.3).

Another side effect of oligopoly is that the number of mergers will tend
to increase in the run up to a slump. Just as credit is expanded in an
attempt to hold off the crisis (see section C.8), so firms will merge
in an attempt to increase their market power and so improve their profit
margins by increasing their mark-up over costs. As the rate of profit
levels off and falls, mergers are an attempt to raise profits by increasing
the degree of monopoly in the market/economy. However, this is a short 
term solution and can only postpone, but stop, the crisis as its roots lie in
production, *not* the market (see section C.7) -- there is only so much
surplus value around and the capital stock cannot be wished away. Once the
slump occurs, a period of cut-throat competition will start and then, slowly,
the process of concentration will start again (as weak firms go under,
successful firms increase their market share and capital stock and so on).

The development of oligopolies within capitalism thus causes a redistribution
of profits away from small capitalists to Big Business (i.e. small businesses
are squeezed by big ones due to the latter's market power and size). Moreover,
the existence of oligopoly can and does result in increased costs faced by 
Big Business being passed on in the form of price increases, which can force
other companies, in unrelated markets, to raise *their* prices in order to 
realise sufficient profits. Therefore, oligopoly has a tendency to create
price increases across the market as a whole and can thus be inflationary.

For these (and other) reasons many small businessmen and members of the
middle-class wind up hating Big Business (while trying to replace them!) and 
embracing ideologies which promise to wipe them out. Hence we see that both
ideologies of the "radical" middle-class -- Libertarianism and fascism --
attack Big Business, either as "the socialism of Big Business" targeted
by Libertarianism or the "International Plutocracy" by Fascism.

As Peter Sabatini notes in _Libertarianism: Bogus Anarchy_, "[a]t the turn
of the century, local entrepreneurial (proprietorship/partnership) business
[in the USA] was overshadowed in short order by transnational corporate
capitalism. . . . The various strata comprising the capitalist class
responded differentially to these transpiring events as a function of
their respective position of benefit. Small business that remained as
such came to greatly resent the economic advantage corporate capitalism
secured to itself, and the sweeping changes the latter imposed on the
presumed ground rules of bourgeois competition. Nevertheless, because
capitalism is liberalism's raison d'etre, small business operators had
little choice but to blame the state for their financial woes, otherwise
they moved themselves to another ideological camp (anti-capitalism).
Hence, the enlarged state was imputed as the primary cause for
capitalism's 'aberration' into its monopoly form, and thus it became
the scapegoat for small business complaint."

However, despite the complaints of small capitalists, the tendency of
markets to become dominated by a few big firms is an obvious side-effect
of capitalism itself. "If the home of 'Big Business' was once the public
utilities and manufacturing it now seems to be equally comfortable
in any environment." [M.A. Utton, Op. Cit., p. 29] This is because in
their drive to expand (which they must do in order to survive), capitalists
invest in new machinery and plants in order to reduce production costs 
and so increase profits (see section C.2 and related sections). Hence a
successful capitalist firm will grow in size over time and squeeze out
competitors.

C.5.1 Aren't the super-profits of Big Business due to its higher efficiency?

Obviously the analysis of Big Business profitability presented in section C.5
is denied by supporters of capitalism. H. Demsetz of the pro-"free" market 
"Chicago School" of economists (which echoes the right-libertarian "Austrian"
position that whatever happens on a free market is for the best) argues that
*efficiency* (not degree of monopoly) is the cause of the super-profits
for Big Business. His argument is that if oligopolistic profits are due
to high levels of concentration, then the big firms in an industry will
not be able to stop smaller ones reaping the benefits of this in the form
of higher profits. So if concentration leads to high profits (due, mostly,
to collusion between the dominant firms) then smaller firms in the same
industry should benefit too.

However, his argument is flawed as it is not the case that oligopolies
practice overt collusion. The barriers to entry/mobility are such that
the dominant firms in a oligopolistic market do not have to compete by price
and their market power allows a mark-up over costs which market forces
cannot undermine. As their only possible competitors are similarly large
firms, collusion is not required as these firms have no interest in reducing
the mark-up they share and so they "compete" over market share by non-price
methods such as advertising (advertising, as well as being a barrier to
entry, reduces price competition and increases mark-up).

In his study, Demsetz notes that while there is a positive correlation
between profit rate and market concentration, smaller firms in the oligarchic
market are *not* more profitable than their counterparts in other markets
[see M.A. Utton, _The Political Economy of Big Business_, p. 98]. From
this Demsetz concludes that oligopoly is irrelevant and that the efficiency
of increased size is the source of excess profits. But this misses the
point -- smaller firms in concentrated industries will have a similar
profitability to firms of similar size in less concentrated markets,
*not* higher profitability. The existence of super profits across *all*
the firms in a given industry would attract firms to that market, so
reducing profits. However, because profitability is associated with the
large firms in the market the barriers of entry/movement associated with
Big Business stops this process happening. *If* small firms were as
profitable, then entry would be easier and so the "degree of monopoly"
would be low and we would see an influx of smaller firms.

While it is true that bigger firms may gain advantages associated with
economies of scale the question surely is, what stops the smaller firms
investing and increasing the size of their companies in order to reap
economies of scale within and between workplaces? What is stopping 
market forces eroding super-profits by capital moving into the industry 
and increasing the number of firms, and so increasing supply? If barriers
exist to stop this process occurring, then concentration, market power
and other barriers to entry/movement (not efficiency) is the issue.
Competition is a *process,* not a state, and this indicates that
"efficiency" is not the source of oligopolistic profits (indeed, what
creates the apparent "efficiency" of big firms is likely to be the
barriers to market forces which add to the mark-up!).

It seems likely that large firms gather "economies of scale" due to
the size of the firm, not plant, as well as from the level of concentration
within an industry. "Considerable evidence indicates that economies of
scale [at plant level] . . . do not account for the high concentration
levels in U.S. industry" [Richard B. Du Boff, _Accumulation and Power_,
p. 174] and, further, "the explanation for the enormous growth in
aggregate concentration must be found in factors other than economies
of scale at plant level." [M.A. Utton, Op. Cit., p. 44] Co-ordination of
individual plants by the visible hand of management seems to be the key
to creating and maintaining dominant positions within a market. And, of
course, these structures are costly to create and maintain as well as
taking time to build up. Thus the size of the firm, with the economies of
scale *beyond* the workplace associated with the administrative co-ordination
by management hierarchies, also creates formidable barriers to entry/movement.

Another important factor influencing the profitability of Big Business
is the clout that market power provides. This comes in two main forms -
horizontal and vertical controls:

"Horizontal controls allow oligopolies to control necessary steps in an
economic process from material supplies to processing, manufacturing,
transportation and distribution. Oligopolies. . . [control] more of the
highest quality and most accessible supplies than they intend to market
immediately. . . competitors are left with lower quality or more expensive
supplies. . . [It is also] based on exclusive possession of technologies,
patents and franchises as well as on excess productive capacity [. . .]

"Vertical controls substitute administrative command for exchange between
steps of economic processes. The largest oligopolies procure materials
from their own subsidiaries, process and manufacture these in their own
refineries, mills and factories, transport their own goods and then market
these through their own distribution and sales network." [Allan Engler,
_Apostles of Greed_, p. 51]

Moreover, large firms reduce their costs due to their privileged access to
credit and resources. Both credit and advertising show economies of scale,
meaning that as the size of loans and advertising increase, costs go down.
In the case of finance, interest rates are usually cheaper for big firms
than small ones and while "firms of all sizes find most [about 70% between
1970 and 1984] of their investments without having to resort to [financial] 
markets or banks" size does have an impact on the "importance of banks as a 
source of finance": "Firms with assets under $100 million relied on banks for 
around 70% of their long-term debt. . . those with assets from $250 million 
to $1 billion, 41%; and those with over $1 billion in assets, 15%." [Doug 
Henwood, _Wall Street_, p. 75] Also dominant firms can get better deals 
with independent suppliers and distributors due to their market clout and 
their large demand for goods/inputs, also reducing their costs.

This means that oligopolies are more "efficient" (i.e. have higher profits)
than smaller firms due to the benefits associated with their market power
rather than vice versa. Concentration (and firm size) leads to "economies
of scale" which smaller firms in the same market cannot gain access to.
Hence the claim that any positive association between concentration and
profit rates is simply recording the fact that the largest firms tend
to be most efficient, and hence more profitable, is wrong. In addition,
"Demsetz's findings have been questioned by non-Chicago [school] critics"
due to the inappropriateness of the evidence used as well as some of
his analysis techniques. Overall, "the empirical work gives limited support"
to this "free-market" explanation of oligopolistic profits and instead
suggest market power plays the key role. [William L. Baldwin, _Market 
Power, Competition and Anti-Trust Policy_, p. 310, p. 315]

Unsurprisingly we find that the "bigger the corporation in size of assets
or the larger its market share, the higher its rate of profit: these findings
confirm the advantages of market power. . . Furthermore, 'large firms in 
concentrated industries earn systematically higher profits than do all
other firms, about 30 percent more. . . on average,' and there is less
variation in profit rates too." [Richard B. Du Boff, _Accumulation and
Power_, p. 175]

Thus, concentration, not efficiency, is the key to profitability, with those 
factors what create "efficiency" themselves being very effective barriers to 
entry which helps maintain the "degree of monopoly" (and so mark-up and 
profits for the dominant firms) in a market. Oligopolies have varying degrees 
of administrative efficiency and market power, all of which consolidate 
its position -- "[t]he barriers to entry posed by decreasing unit costs 
of production and distribution and by national organisations of managers,
buyers, salesmen, and service personnel made oligopoly advantages 
cumulative - and were as global in their implications as they were
national." [Ibid., p. 150]

This recent research confirms Kropotkin's analysis of capitalism found in
his classic work _Fields, Factories and Workshops_ (first published in 1899).
Kropotkin, after extensive investigation of the actual situation within the
economy, argued that "it is not the superiority of the *technical* organisation
of the trade in a factory, nor the economies realised on the prime-mover,
which militate against the small industry . . . but the more advantageous 
conditions for *selling* the produce and for *buying* the raw produce 
which are at the disposal of big concerns." Since the "manufacture being 
a strictly private enterprise, its owners find it advantageous to have all the
branches of a given industry under their own management: they thus 
cumulate the profits of the successful transformations of the raw 
material. . . [and soon] the owner finds his advantage in being able
to hold the command of the market. But from a *technical* point of
view the advantages of such an accumulation are trifling and often
doubtful." He sums up by stating that "[t]his is why the 'concentration' 
so much spoken of is often nothing but an amalgamation of capitalists 
for the purpose of *dominating the market,* not for cheapening the 
technical process." [_Fields, Factories and Workshops Tomorrow_, 
p. 147, p. 153 and p. 154]

All this means is that the "degree of monopoly" within an industry helps
determine the distribution of profits within an economy, with some of the
surplus value "created" by other companies being realised by Big Business. 
Hence, the oligopolies reduce the pool of profits available to other companies
in more competitive markets by charging consumers higher prices than a
more competitive market would. As high capital costs reduce mobility within
and exclude most competitors from entering the oligopolistic market,
it means that only if the oligopolies raise their prices *too* high can
real competition become possible (i.e. profitable) again and so "it should 
not be concluded that oligopolies can set prices as high as they like. If
prices are set too high, dominant firms from other industries would be
tempted to move in and gain a share of the exceptional returns. Small
producers -- using more expensive materials or out-dated technologies
-- would be able to increase their share of the market and make the
competitive rate of profit or better." [Allan Engler, Op. Cit., p. 53]

Big Business, therefore, receives a larger share of the available surplus
value in the economy, due to its size advantage and market power, not due
to "higher efficiency".

C.6 Can market dominance by Big Business change?

Capital concentration, of course, does not mean that in a given market,
dominance will continue forever by the same firms, no matter what. However,
the fact that the companies that dominate a market can change over time
is no great cause for joy (no matter what supporters of free market capitalism
claim). This is because when market dominance changes between companies 
all it means is that *old* Big Business is replaced by *new* Big Business:

"Once oligopoly emerges in an industry, one should not assume that
sustained competitive advantage will be maintained forever. . . once
achieved in any given product market, oligopoly creates barriers to entry
that can be overcome only by the development of even more powerful forms
of business organisation that can plan and co-ordinate even more complex
specialised divisions of labour." [William Lazonick, _Business Organisation
and the Myth of the Market Economy_, p. 173]

Hardly a great improvement as changing the company hardly changes the impact 
of capital concentration or Big Business on the economy. While the faces
may change, the system itself remains the same.

In a developed market, with a high degree of monopoly (i.e. high market
concentration and capital costs that create barriers to entry into it),
new companies can usually only enter under four conditions:

1) They have enough capital available to them to pay for set-up costs and
any initial losses. This can come from two main sources, from other parts
of their company (e.g. Virgin going into the cola business) or large
firms from other areas/nations enter the market. The former is part of
the diversification process associated with Big Business and the second
is the globalisation of markets resulting from pressures on national
oligopolies (see section C.4). Both of which increases competition
within a given market for a period as the number of firms in its
oligopolistic sector has increased. Over time, however, market forces
will result in mergers and growth, increasing the degree of monopoly
again.

2) They get state aid to protect them against foreign competition (e.g.
the South East Asian "Tiger" economies or the 19th century US economy) -
"Historically, political strategies to develop national economies have
provided critical protection and support to overcome. . . barriers to
entry." [William Lazonick, Op. Cit., p. 87]

3) Demand exceeds supply, resulting in a profit level which tempts other
big companies into the market or gives smaller firms already there excess
profits, allowing them to expand. Demand still plays a limiting role
in even the most oligopolistic market (but this process hardly decreases
barriers to entry/mobility or oligopolistic tendencies in the long run).

4) The dominant companies raise their prices too high or become complacent
and make mistakes, so allowing other big firms to undermine their position
in a market (and, sometimes, allow smaller companies to expand and do the
same). For example, many large US oligopolies in the 1970s came under
pressure from Japanese oligopolies because of this. However, as noted
in section C.4.2, these declining oligopolies can see their market control
last for decades and the resulting market will still be dominated by
oligopolies (as big firms are generally replaced by similar sized, or
bigger, ones).

Usually some or all of these processes are at work at once.

Let's consider the US steel industry as an example. The 1980's saw the
rise of the so-called "mini-mills" with lower capital costs. The
mini-mills, a new industry segment, developed only after the US steel
industry had gone into decline due to Japanese competition. The creation
of Nippon Steel, matching the size of US steel companies, was a key factor
in the rise of the Japanese steel industry, which invested heavily in
modern technology to increase steel output by 2,216% in 30 years (5.3
million tons in 1950 to 122.8 million by 1980). By the mid 1980's, the
mini-mills and imports each had a quarter of the US market, with many
previously steel-based companies diversifying into new markets.

Only by investing $9 billion to increase technological competitiveness,
cutting workers wages to increase labour productivity, getting relief
from stringent pollution control laws and (very importantly) the US
government restricting imports to a quarter of the total home market
could the US steel industry survive. The fall in the value of the dollar
also helped by making imports more expensive. In addition, US steel
firms became increasingly linked with their Japanese "rivals," resulting
in increased centralisation (and so concentration) of capital.

Therefore, only because competition from foreign capital created space in
a previously dominated market, driving established capital out, combined
with state intervention to protect and aid home producers, was a new segment
of the industry able to get a foothold in the local market. With many
established companies closing down and moving to other markets, and once
the value of the dollar fell which forced import prices up and state
intervention reduced foreign competition, the mini-mills were in an
excellent position to increase US market share.

This period in the US steel industry was marked by increased "co-operation"
between US and Japanese companies, with larger companies the outcome.
This meant, in the case of the mini-mills, that the cycle of capital
formation and concentration would start again, with bigger companies
driving out the smaller ones through competition.

So, while the actual companies involved may change over time, the economy
as a whole will always be marked by Big Business due to the nature of
capitalism. That's the way capitalism works -- profits for the few at the
expense of the many.

C.7 What causes the capitalist business cycle? 

The business cycle is the term used to describe the boom and slump nature
of capitalism. Sometimes there is full employment, with workplaces producing
more and more goods and services, the economy grows and along with it 
wages. However, as Proudhon argued, this happy situation does not last:

"But industry, under the influence of property, does not proceed with such 
regularity. . . As soon as a demand begins to be felt, the factories fill 
up, and everybody goes to work. Then business is lively. . . Under
the rule of property, the flowers of industry are woven into none but
funeral wreaths. The labourer digs his own grave. . . [the capitalist] 
tries. . . to continue production by lessening expenses. Then comes the 
lowering of wages; the introduction of machinery; the employment of women 
and children . . . the decreased cost creates a larger market. . . [but] the
productive power tends to more than ever outstrip consumption. . . To-day
the factory is closed. Tomorrow the people starve in the streets. . . In
consequence of the cessation of business and the extreme cheapness of
merchandise. . . frightened creditors hasten to withdraw their funds [and]
Production is suspended, and labour comes to a standstill." [P-J Proudhon,
_What is Property_, pp. 191-192]

Why does this happen? For anarchists, as Proudhon noted, it's to do with 
the nature of capitalist production and the social relationships it creates 
("the rule of property"). The key to understanding the business cycle is
to understand that, to use Proudhon's words, "Property sells products to
the labourer for more than it pays him for them; therefore it is impossible."
[Op. Cit., p. 194] In other words, the need for the capitalist to make a 
profit from the workers they employ is the underlying cause of the business
cycle. If the capitalist class cannot make enough profit, then it will stop
production, sack people, ruin lives and communities until such as enough 
profit can again be extracted from the workers.

So what influences this profit level? There are two main classes of pressure
on profits, what we will call the "subjective" and "objective." The objective
pressures are related to what Proudhon termed the fact that "productive power
tends more and more to outstrip consumption" and are discussed in sections
C.7.2 and C.7.3. The "subjective" pressures are to do with the nature of
the social relationships created by capitalism, the relations of domination
and subjection which are the root of exploitation and the resistance to
them. In other words the subjective pressures are the result of the fact 
that "property is despotism" (to use Proudhon's expression). We will 
discuss the impact of the class struggle (the "subjective" pressure) in 
the next section.

Before continuing, we would like to stress here that all three factors 
operate together in a real economy and we have divided them purely to 
help explain the issues involved in each one. The class struggle, market 
"communication" creating disproportionalities and over-investment all 
interact. Due to the needs of the internal (class struggle) and external 
(inter-company) competition, capitalists have to invest in new means of 
production. As workers' power increase during a boom, capitalists innovate 
and invest in order to try and counter it. Similarly, to get market advantage 
(and so increased profits) over their competitors, a company invests in 
new machinery. However, due to lack of effective communication within 
the market caused by the price mechanism and incomplete information provided 
by the interest rate, this investment becomes concentrated in certain parts 
of the economy. Relative over-investment can occur, creating the possibility 
of crisis. In addition, the boom encourages new companies and foreign 
competitors to try and get market share, so decreasing the "degree of 
mmonopoly" in an industry, and so reducing the mark-up and profits of big 
business (which, in turn, can cause an increase in mergers and take-overs 
towards the end of the boom). Meanwhile, workers power is increasing, 
causing profit margins to be eroded, but also reducing tendencies to 
over-invest by resisting the introduction of new machinery and technics 
and by maintaining demand for the finished goods. This contradictory 
effect of class struggle matches the contradictory effect of investment. 
Just as investment causes crisis because it is useful (i.e. it helps 
increase profits for individual companies in the short term, but it 
leads to collective over-investment and falling profits in the long 
term), the class struggle both hinders over-accumulation of capital 
and maintains aggregate demand (so postponing the crisis) while at 
the same time eroding profit margins at the point of production (so 
accelerating it). Thus subjective and objective factors interact and 
counteract with each other, but in the end a crisis will result 
simply because the system is based upon wage labour and the producers 
are not producing for themselves. Ultimately, a crisis is caused when 
the capitalist class does not get a sufficient rate of profit. If 
workers produced for themselves, this decisive factor would not be 
an issue as no capitalist class would exist.

And we should note that these factors work in reverse during a slump,
creating the potential for a boom. During a crisis, capitalists still try
to improve their profitability (i.e. increase surplus value). Labour is 
in a weak position due to the large rise in unemployment and so, usually,
accept the increased rate of exploitation this implies to remain in work.
In the slump, many firms go out of business, so reducing the amount
of fixed capital in the economy. In addition, as firms go under the "degree
of monopoly" of each industry increases, which increases the mark-up and
profits of big business. Eventually this increased surplus value production 
is enough relative to the (reduced) fixed capital stock to increase the 
rate of profit. This encourages capitalists to start investing again and a
boom begins (a boom which contains the seeds of its own end).

And so the business cycle continues, driven by "subjective" and "objective"
pressures -- pressures that are related directly to the nature of capitalist
production and the wage labour on which it is based.

C.7.1 What role does class struggle play in the business cycle? 

At its most basic, the class struggle (the resistance to hierarchy in all
its forms) is the main cause of the business cycle. As we argued in section
B.1.2 and section C.2, capitalists in order to exploit a worker must first 
oppress them. But where there is oppression, there is resistance; where there 
is authority, there is the will to freedom. Hence capitalism is marked by a 
continuous struggle between worker and boss at the point of production as 
well as struggle outside of the workplace against other forms of hierarchy.

This class struggle reflects a conflict between workers attempts at
liberation and self-empowerment and capitals attempts to turn the 
individual worker into a small cog in a big machine. It reflects the 
attempts of the oppressed to try to live a fully human life, expressed 
when the "worker claims his share in the riches he produces; he claims 
his share in the management of production; and he claims not only 
some additional well-being, but also his full rights in the higher 
enjoyment of science and art." [Peter Kropotkin, _Anarchism_, pp. 48-49] 

As Errico Malatesta argued, if workers "succeed in getting what they 
demand, they will be better off: they will earn more, work fewer hours 
and will have more time and energy to reflect on things that matter to 
them, and will immediately make greater demands and have greater needs
. . . [T]here exists no natural law (law of wages) which determines 
what part of a worker's labour should go to him [or her]. . . Wages, 
hours and other conditions of employment are the result of the struggle 
between bosses and workers. The former try and give the workers as 
little as possible; the latter try, or should try to work as little, 
and earn as much, as possible. Where workers accept any conditions, or 
even being discontented, do not know how to put up effective resistance 
to the bosses demands, they are soon reduced to bestial conditions of 
life. Where, instead, they have ideas of how human beings should live 
and know how to join forces, and through refusal to work or the latent 
and open threat of rebellion, to win bosses respect, in such cases, 
they are treated in a relatively decent way . . . Through struggle, 
by resistance against the bosses, therefore, workers can, up to a 
certain point, prevent a worsening of their conditions as well as 
obtaining real improvement." [_Errico Malatesta: His Life and Ideas_, 
pp. 191-2]

It is this struggle that determines wages and indirect income such as 
welfare, education grants and so forth. This struggle also influences
the concentration of capital, as capital attempts to use technology to
control workers (and so extract the maximum surplus value possible from
them) and to get an advantage against their competitors (see section C.2.3). 
And, as will be discussed in section D.10 (How does capitalism affect 
technology?), increased capital investment also reflects an attempt to 
increase the control of the worker by capital (or to replace them with
machinery that cannot say "no") *plus* the transformation of the 
individual into "the mass worker" who can be fired and replaced 
with little or no hassle. For example, Proudhon quotes an "English 
Manufacturer" who states that he invested in machinery precisely to 
replace humans by machines because machines are easier to control:

"The insubordination of our workforce has given us the idea of dispensing
with them. We have made and stimulated every imaginable effort of the mind
to replace the service of men by tools more docile, and we have achieved
our object. Machinery has delivered capital from the oppression of labour."
[_System of Economical Contradictions_, p. 189]

(To which Proudhon replied "[w]hat a misfortunate that machinery cannot
also deliver capital from the oppression of consumers!" as the over-production
and inadequate market caused by machinery replacing people soon destroys 
these illusions of automatic production by a slump -- see section C.7.3).

Therefore, class struggle influences both wages and capital investment, 
and so the prices of commodities in the market. It also, more importantly, 
determines profit levels and it is profit levels that are the cause of
the business cycle. This is because, under capitalism, production's "only 
aim is to increase the profits of the capitalist. And we have, therefore, 
- the continuous fluctuations of industry, the crisis coming periodically. . . " 
[Kropotkin, Op. Cit., p. 55]

A common capitalist myth, derived from the capitalist Subjective Theory 
of Value, is that free-market capitalism will result in a continuous boom, 
since the cause of slumps is allegedly state control of credit and money. 
Let us assume, for a moment, that this is the case. (In fact, it is not the 
case, as will be highlighted in section C.8). In the "boom economy" of 
"free market" dreams, there will be full employment. But in a period 
of full employment, while it helps "increase total demand, its fatal 
characteristic from the business view is that it keeps the reserve army
of the unemployed low, thereby protecting wage levels and strengthening
labour's bargaining power." [Edward S. Herman, _Beyond Hypocrisy_, p. 93]

In other words, workers are in a very strong position under boom conditions,
a strength which can undermine the system. This is because capitalism always 
proceeds along a tightrope. If a boom is to continue smoothly, real wages must 
develop within a certain band. If their growth is too low then capitalists will 
find it difficult to sell the products their workers have produced and so, 
because of this, face what is often called a "realisation crisis" (i.e. the fact 
that capitalists cannot make a profit if they cannot sell their products). If 
real wage growth is too high then the conditions for producing profits are 
undermined as labour gets more of the value it produces. This means that
in periods of boom, when unemployment is falling, the conditions for 
realisation improve as demand for consumer goods increase, thus 
expanding markets and encouraging capitalists to invest. However, 
such an increase in investment (and so employment) has an adverse effect 
on the conditions for *producing* surplus value as labour can assert 
itself at the point of production, increase its resistance to the demands 
of management and, far more importantly, make its own.

If an industry or country experiences high unemployment, workers will put
up with longer hours, stagnating wages, worse conditions and new technology 
in order to remain in work. This allows capital to extract a higher level of 
profit from those workers, which in turn signals other capitalists to invest 
in that area. As investment increases, unemployment falls. As the pool of
available labour runs dry, then wages will rise as employers bid for scare
resources and workers feel their power. As workers are in a better position 
they can go from resisting capital's agenda to proposing their own (e.g. 
demands for higher wages, better working conditions and even for workers' 
control). As workers' power increases, the share of income going to capital
falls, as do profit rates, and capital experiences a profits squeeze and so 
cuts down on investment and employment and/or wages. The cut in
investment increases unemployment in the capital goods sector of the 
economy, which in turn reduces demand for consumption goods as 
jobless workers can no longer afford to buy as much as before. This 
process accelerates as bosses fire workers or cut their wages and the 
slump deepens and so unemployment increases, which begins the cycle 
again. This can be called "subjective" pressure on profit rates.

This interplay of profits and wages can be seen in most business 
cycles. As an example, let's consider the crisis which ended post-war 
Keynesianism in the early 1970's and paved the way for the "supply side 
revolutions" of Thatcher and Reagan. This crisis, which occurred in 
1973, had its roots in the 1960s boom. If we look at the USA we find 
that it experienced continuous growth between 1961 and 1969 (the 
longest in its history). From 1961 onwards, unemployment steadily 
fell, effectively creating full employment. From 1963, the number 
of strikes and total working time lost steadily increased (from 
around 3 000 strikes in 1963 to nearly 6 000 in 1970). The number 
of wildcat strike rose from 22% of all strikes in 1960 to 36.5% 
in 1966. By 1965 both the business profit shares and business 
profit rates peaked. The fall in profit share and rate of profit 
continued until 1970 (when unemployment started to increase), where 
it rose slightly until the 1973 slump occurred, In addition, after 
1965, inflation started to accelerate as capitalist firms tried to 
maintain their profit margins by passing cost increases to consumers 
(as we discuss below, inflation has far more to do with capitalist 
profits than it has with money supply or wages). This helped to reduce 
real wage gains and maintain profitability over the 1968 to 1973 
period above what it otherwise would have been, which helped 
postpone, but not stop, a slump.

Looking at the wider picture, we find that for the advanced capital countries
as a whole, the product wage rose steadily between 1962 and 1971 while 
productivity fell. The product wage (the real cost to the employer of hiring 
workers) met that of productivity in 1965 (at around 4%) -- which was 
also the year in which profit share in income and the rate of profit peaked . 
From 1965 to 1971, productivity continued to fall while the product wage 
continued to rise. This process, the result of falling unemployment and 
rising workers' power (expressed, in part, by an explosion in the number 
of strikes across Europe and elsewhere), helped to ensure that the actual 
post-tax real wages and productivity in a the advanced capitalist 
countries increased at about the same rate from 1960 to 1968 (4%). 
But between 1968 and 1973, post-tax real wages increased by an average 
of 4.5% compared to a productivity rise of only 3.4%. Moreover, due to 
increased international competition companies could not pass on wage 
rises to consumers in the form of higher prices (which, again, would
only have postponed, but not stopped, the slump). As a result of these 
factors, the share of profits going to business fell by about 15% in 
that period. 

In addition, outside the workplace a "series of strong liberation movements 
emerged among women, students and ethnic minorities. A crisis of social 
institutions was in progress, and large social groups were questioning the 
very foundations of the modern, hierarchical society: the patriarchal 
family, the authoritarian school and university, the hierarchical workplace 
or office, the bureaucratic trade union or party." [Takis Fotopoulos, 
"The Nation-state and the Market," p. 58, _Society and Nature_, Vol. 3, 
pp. 44-45] 

These social struggles resulted in an economic crisis as capital could no 
longer oppress and exploit working class people sufficiently in order 
to maintain a suitable profit rate. This crisis was then used to discipline 
the working class and restore capitalist authority within and without the
workplace (see section C.8.2). We should also note that this process of 
social revolt in spite, or perhaps because of, the increase of material 
wealth was predicted by Malatesta. In 1922 he argued that:

"The fundamental error of the reformists is that of dreaming of solidarity, 
a sincere collaboration, between masters and servants. . . 

"Those who envisage a society of well stuffed pigs which waddle contentedly
under the ferule of a small number of swineherd; who do not take into account
the need for freedom and the sentiment of human dignity. . . can also imagine
and aspire to a technical organisation of production which assures abundance
for all and at the same time materially advantageous both to bosses and the
workers. But in reality 'social peace' based on abundance for all will remain
a dream, so long as society is divided into antagonistic classes, that is 
employers and employees. . . 

"The antagonism is spiritual rather than material. There will never be a 
sincere understanding between bosses and workers for the better exploitation 
[sic!] of the forces of nature in the interests of mankind, because the 
bosses above all want to remain bosses and secure always more power at 
the expense of the workers, as well as by competition with other bosses, 
whereas the workers have had their fill of bosses and don't want more!" 
[Op. Cit., pp. 78-79]

The experience of the post-war compromise and social democratic reform 
indicates well that, ultimately, the social question is not poverty but 
rather freedom. However, to return to the impact of class struggle on 
capitalism.

More recently, the panics in Wall Street that accompany news that 
unemployment is dropping in the USA reflect this fear of working class 
power. Without the fear of unemployment, workers may start to fight for 
improvements in their conditions, against capitalist oppression and 
exploitation and *for* liberty and a just world. Every slump within 
capitalism has occurred when workers have seen unemployment fall and 
their living standards improve -- not a coincidence. 

The Philips Curve, which indicates that inflation rises as unemployment
falls is also an indication of this relationship. Inflation is the situation
when there is a general rise in prices. Neo-classical (and other pro-"free 
market" capitalist) economics argue that inflation is purely a monetary 
phenomenon, the result of there being more money in circulation than is 
needed for the sale of the various commodities on the market. However, 
this is not true. In general, there is no relationship between the money 
supply and inflation. The amount of money can increase while the rate 
of inflation falls, for example (as was the case in the USA between 
1975 and 1984). Inflation has other roots, namely it is "an expression 
of inadequate profits that must be offset by price and money policies. . . 
Under any circumstances, inflation spells the need for higher profits. . ." 
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 19] 
Inflation leads to higher profits by making labour cheaper. That is, 
it reduces "the real wages of workers. . . [which] directly benefits 
employers. . . [as] prices rise faster than wages, income that would 
have gone to workers goes to business instead." [J. Brecher and 
T. Costello, _Common Sense for Hard Times_, p. 120] 

Inflation, in other words, is a symptom of an on-going struggle over
income distribution between classes and, as workers do not have any
control over prices, it is caused when capitalist profit margins are 
reduced (for whatever reason, subjective or objective). This means 
that it would be wrong to conclude that wage increases "cause"
inflation as such. To do so ignores the fact that workers do not 
set prices, capitalists do. Inflation, in its own way, shows the 
hypocrisy of capitalism. After all, wages are increasing due to 
"natural" market forces of supply and demand. It is the capitalists 
who are trying to buck the market by refusing to accept lower profits 
caused by conditions on that market. Obviously, to use Tucker's 
expression, under capitalism market forces are good for the goose 
(labour) but bad for the gander (capital).

This does not mean that inflation suits all capitalists equally (nor,
obviously, does it suit those social layers who live on fixed incomes and 
who thus suffer when prices increase but such people are irrelevant in the
eyes of capital). Far from it - during periods of inflation, lenders tend to 
lose and borrowers tend to gain. The opposition to high levels of inflation 
by many supporters of capitalism is based upon this fact and the division 
within the capitalist class it indicates. There are two main groups of 
capitalists, finance capitalists and industrial capitalists. The latter can 
and do benefit from inflation (as indicated above) but the former sees high
inflation as a threat. When inflation is accelerating it can push the real
interest rate into negative territory and this is a horrifying prospect 
to those for whom interest income is fundamental (i.e. finance capital).
In addition, high levels of inflation can also fuel social struggle, as 
workers and other sections of society try to keep their income at a steady
level. As social struggle has a politicising effect on those involved, a
condition of high inflation could have serious impacts on the political 
stability of capitalism and so cause problems for the ruling class.

How inflation is viewed in the media and by governments is an expression 
of the relative strengths of the two sections of the capitalist class and
of the level of class struggle within society. For example, in the 1970s, 
with the increased international mobility of capital, the balance of power 
came to rest with finance capital and inflation became the source of all 
evil. This shift of influence to finance capital can be seen from the rise
of rentier income. The distribution of US manufacturing profits indicate
this process -- comparing the periods 1965-73 to 1990-96, we find that 
interest payments rose from 11% to 24%, dividend payments rose from 
26% to 36% while retained earnings fell from 65% to 40% (given that
retained earnings are the most important source of investment funds,
the rise of finance capital helps explain why, in contradiction to the
claims of the right-wing, economic growth has become steadily worse 
as markets have been liberalised -- funds that would have been resulted
in real investment have ended up in the finance machine). In addition, 
the waves of strikes and protests that inflation produced had worrying 
implications for the ruling class. However, as the underlying reasons 
for inflation remained (namely to increase profits) inflation itself was 
only reduced to acceptable levels, levels that ensured a positive real 
interest rate and acceptable profits. 

It is the awareness that full employment is bad for business which is the
basis of the so-called "Non-Accelerating Inflation Rate of Unemployment" 
(NAIRU). This is the rate of unemployment for an economy under which 
inflation, it is claimed, starts to accelerate. While the basis of 
this "theory" is slim (the NAIRU is an invisible, mobile rate and so the 
"theory" can explain every historical event simply because you can prove 
anything when your datum cannot be seen by mere mortals) it is very
useful for justifying policies which aim at attacking working people,
their organisations and their activities. The NAIRU is concerned with a
"wage-price" spiral caused by falling unemployment and rising workers'
rights and power. Of course, you never hear of an "interest-price" 
spiral or a "rent-price" spiral or a "profits-price" spiral even though 
these are also part of any price. It is always a "wage-price" spiral, 
simply because interest, rent and profits are income to capital and 
so, by definition, above reproach. By accepting the logic of NAIRU, the
capitalist system implicitly acknowledges that it and full employment 
are incompatible and so with it any claim that it allocates resources
efficiently or labour contracts benefit both parties equally.

For these reasons, anarchists argue that a continual "boom" economy is 
an impossibility simply because capitalism is driven by profit considerations, 
which, combined with the subjective pressure on profits due to the class 
struggle between workers and capitalists, *necessarily* produces a continuous
boom-and-bust cycle. When it boils down to it, this is unsurprising, as
"[o]f necessity, the abundance of some will be based upon the poverty of
others, and the straitened circumstances of the greater number will have
to be maintained at all costs, that there may be hands to sell themselves
for a part only of that which they are capable of producing, without
which private accumulation of capital is impossible!" [Kropotkin, Op. 
Cit., p. 128]

Of course, when such "subjective" pressures are felt on the system, when
private accumulation of capital is threatened by improved circumstances
for the many, the ruling class denounces working class "greed" and
"selfishness." When this occurs we should remember what Adam Smith 
had to say on this subject: 

"In reality high profits tend much more to raise the price of work than high
wages. . . That part of the price of the commodity that resolved itself into
wages would. . . rise only in arithmetical proportion to the rise in wages. But
if profits of all the different employers of those working people should be
raised five per cent., that price of the commodity which resolved itself into
profit would. . . rise in geometrical proportion to this rise in profit. . . 
Our merchants and master manufacturers complain of the bad effects of
high wages in raising the price and thereby lessening the sale of their
goods at home and abroad. They say nothing concerning the bad effects 
of high profits. They are silent with regard to the pernicious effects of
their own gains. They complain only of those of other people" [_The 
Wealth of Nations_, pp. 87-88]

As an aside, we must note that these days we would have to add 
economists to Smith's "merchants and master manufacturers." Not 
that this is surprising, given that economic theory has progressed 
(or degenerated) from Smith's disinterested analysis to apologetics 
for any action of the boss (a classic example, we must add, of supply 
and demand, with the marketplace of ideas responding to a demand for 
such work from "our merchants and master manufacturers"). Any 
"theory" which blames capitalism's problems on "greedy" workers 
will always be favoured over one that correctly places them in the 
contradictions created by wage slavery. Ultimately, capitalist economics 
blame every problem of capitalism on the working class refusing to kow-tow 
to the bosses (for example, unemployment is caused by wages being too high 
rather than bosses needing unemployment to maintain their power and profits
-- see section C.9.2 on empirical evidence that indicates that the second
explanation is the accurate one).

Before concluding, one last point. While it may appear that our analysis
of the "subjective" pressures on capitalism is similar to that of mainstream
economics, this is not the case. This s because our analysis recognises
that such pressures are inherent in the system, have contradictory effects
(and so cannot be easily solved without making things worse before
they get better) and hold the potential for creating a free society. Our 
analysis recognises that workers' power and resistance *is* bad for 
capitalism (as for any hierarchical system), but it also indicates that there 
is nothing capitalism can do about it without creating authoritarian regimes
(such as Nazi Germany) or by generating massive amounts of unemployment 
(as was the case in the early 1980s in both the USA and the UK, when 
right-wing governments deliberately caused deep recessions) and even this 
is no guarantee of eliminating working class struggle as can be seen, for 
example, from 1930s America or 1970s Britain. 

This means that our analysis shows the limitations and contradictions 
of the system as well as its need for workers to be in a weak bargaining 
position in order for it to "work" (which explodes the myth that capitalism 
is a free society). Moreover, rather than portray working people as victims 
of the system (as is the case in many Marxist analyses of capitalism) our
analysis recognises that we, both individually and collectively, have the 
power to influence and *change* that system by our activity. We should
be proud of the fact that working people refuse to negate themselves or
submit their interests to that of others or play the role of order-takers 
required by the system. Such expressions of the human spirit, of the
struggle of freedom against authority, should not be ignored or 
down-played, rather they should be celebrated. That the struggle 
against authority causes the system so much trouble is not an
argument against social struggle, it is an argument against a 
system based on hierarchy, exploitation and the denial of freedom.

To sum up, in many ways, social struggle is the inner dynamic of the 
system, and its most basic contradiction: while capitalism tries to turn 
the majority of people into commodities (namely, bearers of labour power), 
it also has to deal with the human responses to this process of objectification
(namely, the class struggle). However, it does not follow that cutting wages
will solve a crisis -- far from it, for, as we argue in section C.9.1, cutting 
wages will deepen any crisis, making things worse before they get better. 
Nor does it follow that, if social struggle were eliminated, capitalism would 
work fine. After all, if we assume that labour power is a commodity like any 
other, its price will rise as demand increases relative to supply (which will 
either produce inflation or a profits squeeze, probably both). Therefore, 
even without the social struggle which accompanies the fact that labour power 
cannot be separated from the individuals who sell it, capitalism would still 
be faced with the fact that only surplus labour (unemployment) ensures the 
creation of adequate amounts of surplus value.

Moreover, even assuming that individuals can be totally happy in a capitalist 
economy, willing to sell their freedom and creativity for a little money, 
putting up, unquestioningly, with every demand and whim of their bosses (and so
negating their own personality and individuality in the process), capitalism 
does have "objective" pressures limiting its development. So while social 
struggle, as argued above, can have a decisive effect on the health of the 
capitalist economy, it is not the only problems the system faces. This is 
because there are objective pressures within the system beyond and above 
the authoritarian social relations it produces (and the resistance to them). 
These pressures are discussed next, in sections C.7.2 and C.7.3.

C.7.2 What role does the market play in the business cycle?

A major problem with capitalism is the working of the capitalist market
itself. For the supporters of "free market" capitalism, the market
provides all the necessary information required to make investment and
production decisions. This means that a rise or fall in the price of a
commodity acts as a signal to everyone in the market, who then respond to
that signal. These responses will be co-ordinated by the market, resulting
in a healthy economy. For example, a rise in the price of a commodity will
result in increased production and reduced consumption of that good, and
this will move the economy towards equilibrium. 

While it can be granted that this account of the market is not without
foundation, its also clear that the price mechanism does not communicate
all the relevant information needed by companies or individuals. This
means that capitalism does not work in the way suggested in the economic
textbooks. It is the workings of the price mechanism itself which leads to
booms and slumps in economic activity and the resulting human and social
costs they entail. This can be seen if we investigate the actual
processes hidden behind the workings of the price mechanism. 

When individuals and companies make plans concerning future production,
they are planning not with respect of demand *now* but with respect
to expected demand at some *future time* when their products reach
the market. The information the price mechanism provides, however, is the
relation of supply and demand (or market price with respect to the market
production price) at the current time. While this information *is*
relevant to people's plans, it is not *all* the information that is
relevant or is required by those involved. 

The information which the market does *not* provide is that of the
plans of *other* people's reactions to the supplied information. This
information, moreover, cannot be supplied due to competition. Simply put,
if A and B are in competition, if A informs B of her activities and B does
not reciprocate, then B is in a position to compete more effectively than
A. Hence communication within the market is discouraged and each
production unit is isolated from the rest. In other words, each person or
company responds to the same signal (the change in price) but each acts
independently of the response of other producers and consumers. The result
is often a slump in the market, causing unemployment and economic
disruption. 

For example, lets assume a price rise due to a shortage of a commodity.
This results in excess profits in that market, leading the owners of
capital to invest in this branch of production in order to get some of
these above-average profits. However, consumers will respond to the price
rise by reducing their consumption of that good. This means that when 
the results of these independent decisions are realised, there is an
overproduction of that good in the market in relation to effective demand
for it. Goods cannot be sold and so there is a realisation crisis as
producers cannot make a profit from their products. Given this
overproduction, there is a slump, capital disinvests, and the market 
price falls. This eventually leads to a rise in demand against supply,
production expands leading to another boom and so on.

Proudhon described this process as occurring because of the "contradiction" of
 "the double character of value" (i.e. between value in use and value in exchange).
This contradiction results in a good's "value decreas[ing] as the production
of utility increases, and a producer may arrive at poverty by continually enriching
himself" via over-production. This is because a producer "who has harvested
twenty sacks of wheat. . . believes himself twice as rich as if he had harvested
only ten. . . Relatively to the household, [they] are right; looked at in their 
external relations, they may be utterly mistaken. If the crop of wheat is double 
throughout the whole country, twenty sacks will sell for less than ten would 
have sold for if it had been as half as great." [_The System of Economical
Contradictions_, p. 78, pp. 77-78]

This, it should be noted, is not a problem of people making a series of
unrelated mistakes. Rather, it results because the market imparts the same
information to all involved and this information is not sufficient for
rational decision making. While it is rational for each agent to expand 
or contract production, it is not rational for all agents to act in this
manner. In a capitalist economy, the price mechanism does not supply all
the information needed to make rational decisions. In fact, it actively
encourages the suppression of the needed extra information concerning 
the planned responses to the original information.

It is this irrationality and lack of information which feed into the
business cycle. These local booms and slumps in production of the 
kind outlined here can then be amplified into general crises due to the
insufficient information spread through the economy by the market. However,
disproportionalities of capital between industries do not *per se* result
in a general crisis. If this was that case the capitalism would be in a
constant state of crisis because capital moves between markets during periods 
of prosperity as well as just before periods of depression. This means that 
market dislocations cannot be a basis for explaining the existence of 
a general crisis in the economy (although it can and does explain localised
slumps).

Therefore, the tendency to general crisis that expresses itself in a 
generalised glut on the market is the product of deeper economic changes.
While the suppression of information by the market plays a role in producing 
a depression, a general slump only develops from a local boom and slump 
cycle when it occurs along with the second side-effect of capitalist 
economic activity, namely the increase of productivity as a result of 
capital investment, as well as the subjective pressures of class struggle.

The problems resulting from increased productivity and capital investment 
are discussed in the next section.

C.7.3 What role does investment play in the business cycle?

Other problems for capitalism arise due to increases in productivity which
occur as a result of capital investment or new working practices which aim
to increase short term profits for the company. The need to maximise 
profits results in more and more investment in order to improve the 
productivity of the workforce (i.e. to increase the amount of surplus
value produced). A rise in productivity, however, means that whatever 
profit is produced is spread over an increasing number of commodities. 
This profit still needs to be realised on the market but this may prove
difficult as capitalists produce not for existing markets but for expected 
ones. As individual firms cannot predict what their competitors will do, it 
is rational for them to try to maximise their market share by increasing 
production (by increasing investment). As the market does not provide the 
necessary information to co-ordinate their actions, this leads to supply 
exceeding demand and difficulties realising the profits contained in the
produced commodities. In other words, a period of over-production occurs 
due to the over-accumulation of capital.

Due to the increased investment in the means of production, variable capital 
(labour) uses a larger and larger constant capital (the means of production). 
As labour is the source of surplus value, this means that in the short term 
profits must be increased by the new investment, i.e. workers must produce
more, in relative terms, than before so reducing a firms production costs
for the commodities or services it produces. This allows increased profits 
to be realised at the current market price (which reflects the old costs of 
production). Exploitation of labour must increase in order for the return 
on total (i.e. constant *and* variable) capital to increase or, at worse, 
remain constant. 

However, while this is rational for one company, it is not rational when all 
firms do it, which they must in order to remain in business. As investment 
increases, the surplus value workers have to produce must increase faster. 
If the mass of available profits in the economy is too small compared to 
the total capital invested then any problems a company faces in making 
profits in a specific market due to a localised slump caused by the price 
mechanism may spread to affect the whole economy. In other words, a fall 
in the rate of profit (the ratio of profit to investment in capital and labour) 
in the economy as a whole could result in already produced surplus value, 
earmarked for the expansion of capital, remaining in its money form and 
thus failing to act as capital. No new investments are made, goods cannot 
be sold resulting in a general reduction of production and so increased 
unemployment as companies fire workers or go out of business. This 
removes more and more constant capital from the economy, increasing 
unemployment which forces those with jobs to work harder, for longer 
so allowing the mass of profits produced to be increased, resulting 
(eventually) in an increase in the rate of profit. Once profit rates 
are high enough, capitalists have the incentive to make new investments 
and slump turns to boom. 

It could be argued that such an analysis is flawed as no company would
invest in machinery if it would reduce it's rate of profit. But such an 
objection is flawed, simply because (as we noted) such investment is
perfectly sensible (indeed, a necessity) for a specific firm. By investing
they gain (potentially) an edge in the market and so increased profits.
Unfortunately, while this is individually sensible, collectively it is not
as the net result of these individual acts is over-investment in the economy
as a whole. Unlike the model of perfect competition, in a real economy 
capitalists have no way of knowing the future, and so the results of 
their own actions, nevermind the actions of their competitors. Thus 
over-accumulation of capital is the natural result of competition 
simply because it is individually rational and the future is unknowable. 
Both of these factors ensure that firms act as they do, investing in
machinery which, in the end, will result in a crisis of over-accumulation.

Cycles of prosperity, followed by over-production and then depression 
are the natural result of capitalism. Over-production is the result of 
over-accumulation, and over-accumulation occurs because of the need to 
maximise short-term profits in order to stay in business. So while the 
crisis appears as a glut of commodities on the market, as there are 
more commodities in circulation that can be purchased by the aggregate 
demand ("Property sells products to the labourer for more than it pays
him for them," to use Proudhon's words), its roots are deeper. It lies 
in the nature of capitalist production itself. 

A classic example of these "objective" pressures on capitalism is the 
"Roaring Twenties" that preceded the Great Depression of the 1930s. After
the 1921 slump, there was a rapid rise in investment in the USA with 
investment nearly doubling between 1919 and 1927.

Because of this investment in capital equipment, manufacturing production
grew by 8.0% per annum between 1919 and 1929 and labour productivity grew
by an annual rate of 5.6% (this is including the slump of 1921-22). This
increase in productivity was reflected in the fact that over the post-1922
boom, the share of manufacturing income paid in salaries rose from 17% to 
18.3% and the share to capital rose from 25.5% to 29.1%. Managerial salaries
rose by 21.9% and firm surplus by 62.6% between 1920 and 1929. With costs 
falling and prices comparatively stable, profits increased which in turn 
lead to high levels of capital investment (the production of capital goods 
increased at an average annual rate of 6.4%). 

Unsurprisingly, in such circumstances, in the 1920s prosperity was concentrated
at the top 60% of families made less than $2000 a year, 42% less than $1000.
One-tenth of the top 1% of families received as much income as the bottom
42% and only 2.3% of the population enjoyed incomes over $10000. While the
richest 1% owned 40% of the nation's wealth by 1929 (and the number of
people claiming half-million dollar incomes rose from 156 in 1920 to 
1489 in 1929) the bottom 93% of the population experienced a 4% drop 
in real disposable per-capita income between 1923 and 1929.

However, in spite of this, US capitalism was booming and the laissez-faire 
capitalism was at its peak. But by 1929 all this had changed with the stock 
market crashing -- followed by a deep depression. What was its cause? Given
our analysis presented above, it may have been expected to have been caused 
by the "boom" decreasing unemployment, so increased working class power 
and leading to a profits squeeze, but this was not the case.

This slump was *not* the result of working class resistance, indeed the
1920s were marked by a labour market which remained continuously favourable
to employers. This was for two reasons. Firstly, the "Palmer Raids" at the
end of the 1910s saw the state root out radicals in the US labour movement
and wider society. Secondly, the deep depression of 1920-21 (during which 
national unemployment rates averaged over 9%) combined with the use of legal 
injunctions by employers against work protests and the use of industrial 
spies to identify and sack union members made labour weak and so the 
influence and size of unions fell as workers were forced to sign "yellow-dog" 
contracts to keep their jobs.

During the post-1922 boom, this position did not change. The national 3.3%
unemployment rate hid the fact that non-farm unemployment averaged 5.5%
between 1923 and 1929. Across all industries, the growth of manufacturing
output did not increase the demand for labour. Between 1919 and 1929, 
employment of production workers fell by 1% and non-production employment
fell by about 6% (during the 1923 to 29 boom, production employment
only increased by 2%, and non-production employment remained constant). 
This was due to the introduction of labour saving machinery and the rise 
in the capital stock. In addition, the high productivity associated with
farming resulted in a flood of rural workers into the urban labour market.

Facing high unemployment, workers' quit rates fell due to fear of loosing
jobs (particularly those workers with relatively higher wages and employment
stability). This combined with the steady decline of the unions and the very
low number of strikes (lowest since the early 1880s) indicates that labour 
was weak. Wages, like prices, were comparatively stable. Indeed, the share 
of total manufacturing income going to wages fell from 57.5% in 1923-24 to 
52.6% in 1928/29 (between 1920 and 1929, it fell by 5.7%). It is interesting 
to note that even *with* a labour market favourable to employers for over 
5 years, unemployment was still high. This suggests that the neo-classical 
"argument" that unemployment within capitalism is caused by strong unions 
or high real wages is somewhat flawed to say the least (see section C.9).

The key to understanding what happened lies the contradictory nature of
capitalist production. The "boom" conditions were the result of capital
investment, which increased productivity, thereby reducing costs and
increasing profits. The large and increasing investment in capital goods 
was the principal device by which profits were spent. In addition, those 
sectors of the economy marked by big business (i.e. oligopoly, a market 
dominated by a few firms) placed pressures upon the more competitive ones. 
As big business, as usual, received a higher share of profits due to their market 
position (see section C.5), this lead to many firms in the more competitive 
sectors of the economy facing a profitability crisis during the 1920s. 

The increase in investment, while directly squeezing profits in the more
competitive sectors of the economy, also eventually caused the rate of 
profit to stagnate, and then fall, over the economy as a whole. While the 
mass of available profits in the economy grew, it eventually became too 
small compared to the total capital invested. Moreover, with the fall in the
share of income going to labour and the rise of inequality, aggregate demand
for goods could not keep up with production, leading to unsold goods (which
is another way of expressing the process of over-investment leading to
over-production, as over-production implies under-consumption and vice
versa). As expected returns (profitability) on investments hesitated, a decline 
in investment demand occurred and so a slump began (rising predominantly 
from the capital stock rising faster than profits). Investment flattened out in 
1928 and turned down in 1929. With the stagnation in investment, a great 
speculative orgy occurred in 1928 and 1929 in an attempt to enhance 
profitability. This unsurprisingly failed and in October 1929 the stock 
market crashed, paving the way for the Great Depression of the 1930s.

The crash of 1929 indicates the "objective" limits of capitalism. Even with 
a very weak position of labour, crisis still occurred and prosperity turned
to "hard times." In contradiction to neo-classical economic theory, the events 
of the 1920s indicate that even if the capitalist assumption that labour is
a commodity like all others *is* approximated in real life, capitalism 
is still subject to crisis (ironically, a militant union movement in the
1920s would have postponed crisis by shifting income from capital to labour,
increasing aggregate demand, reducing investment and supporting the more
competitive sectors of the economy!). Therefore, any neo-classical "blame 
labour" arguments for crisis (which were so popular in the 1930s and 1970s) 
only tells half the story (if that). Even if workers *do* act in a servile 
way to capitalist authority, capitalism will still be marked by boom and
bust (as shown by the 1920s and 1980s).

To take another example, America's 100 largest firms, employing 5 million
persons and having assets of $126 billion, saw their average amount of
assets per worker grow from $12,200 in 1949 to $20,900 in 1959 and to
$24,000 in 1962 [First National City Bank, _Economic Letter_, June 1963]. 
As can be seen, the rate of increase in average assets per worker falls off
over time. The initial period of high capital formation was followed by a
recessionary period between 1957 and 1961. These years were marked by a
sharp increase in unemployment (from 3 million in 1956 to a high of 5 
million in 1961) and a higher unemployment rate after the slump than 
before (an increase of 1 million from 1956 figures to around 4 million 
in 1962). [T. Brecher and T. Costello, _Common Sense for Hard Times_, 
chart 2]

We have referred to data from this period, because some supporters of
"free market" capitalism have used the same period to argue for the
advantages of capital investment. This data actually indicates, however,
that increased capital formation helps to create the potential for
recession, because although it increases productivity (and so profits) for
a period, it reduces profit rates in the long run because there is a 
relative scarcity of surplus value in the economy (compared to invested
capital). This fall in profit rates is indicated by the decrease in
capital formation, which is the point of production in the first place
within capitalism, as well as by the increase of unemployment during that
period. 

So, if the profit rate falls to a level that does not allow capital formation
to continue, a slump sets in. This general slump is usually started by
overproduction for a specific commodity, possibly caused by the process
described in section C.7.2. If there are enough profits in the economy, 
localised slumps have a reduced tendency to grow and become general. A slump 
only becomes general when the rate of profit over the whole economy falls.
A local slump spreads through the market because of the lack of information 
the market provides producers. When one industry over-produces, it cuts
back production, introduces cost-cutting measures, fires workers and so on
in order to try and realise more profits. This reduces demand for industries 
that supplied the affected industry and reduces *general* demand due to 
unemployment. The related industries now face over-production themselves 
and the natural response to the information supplied by the market is for 
individual companies to reduce production, fire workers, etc., which again
leads to declining demand. This makes it even harder to realise profit on the 
market and leads to more cost cutting, deepening the crisis. While individually 
this is rational, collectively it is not and so soon all industries face the 
same problem. A local slump is propagated through the economy because the
capitalist economy does not communicate enough information for producers to
make rational decisions or co-ordinate their activities.

"Over-production," we should point out, exists only from the viewpoint of 
capital, not of the working class: 

"What economists call over-production is but a production that is above
the purchasing power of the worker. . . this sort of over-production 
remains fatally characteristic of the present capitalist production,
because workers cannot buy with their salaries what they have produced
and at the same time copiously nourish the swarm of idlers who live
upon their work." [Peter Kropotkin, Op. Cit., pp. 127-128]

In other words, over-production and under-consumption reciprocally imply
each other. There is no over production except in regard to a given level
of solvent demand. There is no deficiency in demand except in relation to
a given level of production. The goods "over-produced" may be required 
by consumers, but the market price is too low to generate a profit and so 
production must be reduced in order to artificially increase it. So, for 
example, the sight of food being destroyed while people go hungry is 
a common one in depression years.

So, while the crisis appears on the market as a "commodity glut" (i.e. as a
reduction in effective demand) and is propagated through the economy by the 
price mechanism, its roots lie in production. Until such time as profit levels 
stabilise at an acceptable level, thus allowing renewed capital expansion, the 
slump will continue. The social costs of such cost cutting is yet another 
"externality," to be bothered with only if they threaten capitalists' power 
and wealth. 

There are means, of course, by which capitalism can postpone (but not stop) 
a general crisis developing. Imperialism, by which markets are increased and
profits are extracted from less developed countries and used to boost the 
imperialist countries profits, is one method ("The workman being unable to
purchase with their wages the riches they are producing, industry must search
for markets elsewhere" - Kropotkin, Op. Cit., p. 55). Another is state 
manipulation of credit and other economic factors (such as minimum wages, 
the incorporation of trades unions into the system, arms production, 
maintaining a "natural" rate of unemployment to keep workers on their 
toes etc.). Another is state spending to increase aggregate demand, which
can increase consumption and so lessen the dangers of over-production. Or 
the rate of exploitation produced by the new investments can be high enough 
to counteract the increase in constant capital and keep the profit rate 
from falling. However, these have (objective and subjective) limits and 
can never succeed in stopping depressions from occurring.

Hence capitalism will suffer from a boom-and-bust cycle due to the
above-mentioned objective pressures on profit production, even if we
ignore the subjective revolt against authority by workers, explained 
earlier. In other words, even if the capitalist assumption that workers 
are not human beings but only "variable capital" *was* true, it would 
not mean that capitalism was a crisis free system. However, for most 
anarchists, such a discussion is somewhat academic for human beings are 
not commodities, the labour "market" is not like the iron market, and the 
subjective revolt against capitalist domination will exist as long as 
capitalism does.

C.8 Is state control of money the cause of the business cycle? 

As explained in the last section, capitalism will suffer from a 
boom-and-bust cycle due to objective pressures on profit 
production, even if we ignore the subjective revolt against
authority by working class people. It is this two-way pressure 
on profit rates, the subjective and objective, which causes the 
business cycle and such economic problems as "stagflation." 
However, for supporters of the free market, this conclusion 
is unacceptable and so they usually try to explain the business 
cycle in terms of *external* influences rather than those generated
by the way capitalism works. Most pro-"free market" capitalists 
blame government intervention in the market, particularly state 
control over money, as the source of the business cycle. This 
analysis is defective, as will be shown below.

It should be noted that many supporters of capitalism ignore the
"subjective" pressures on capitalism that we discussed in section 
C.7.1. In addition, the problems associated with rising capital 
investment (as highlighted in section C.7.3) are also usually 
ignored, because they usually consider capital to be "productive" 
and so cannot see how its use could result in crises. This leaves 
them with the problems associated with the price mechanism, as 
discussed in section C.7.2.

The idea behind the "state-control-of-money" theory of crises is that
interest rates provide companies and individuals with information about
how price changes will affect future trends in production. Specifically,
the claim is that changes in interest rates (i.e. changes in the demand
and supply of credit) indirectly inform companies of the responses of
their competitors. For example, if the price of tin rises, this will lead
to an expansion in investment in the tin industry, so leading to a rise in
interest rates (as more credit is demanded). This rise in interest rates
lowers anticipated profits and dampens the expansion. State control of
money stops this process (by distorting the interest rate) and so results 
in the credit system being unable to perform its economic function. 
This results in overproduction as interest rates do not reflect *real*
savings and so capitalists over-invest in new capital, capital which
appears profitable only because the interest rate is artificially low.
When the rate inevitably adjusts upwards towards its "real" value, the
invested capital becomes unprofitable and so over-investment appears. 
Hence, according to the argument, by eliminating state control of 
money these negative effects of capitalism would disappear. 

Before discussing whether state control of money *is* the cause of
the business cycle, we must point out that the argument concerning
the role of the interest rate does not, in fact, explain the occurrence
of over-investment (and so the business cycle). In other words, the 
explanation of the business cycle as lying in the features of the 
credit system is flawed. This is because it is *not* clear that the 
*relevant* information is communicated by changes in interest rates. 
Interest rates reflect the general aggregate demand for credit in 
an economy. However, the information which a *specific* company 
requires is about the over-expansion in the production of the specific 
good they produce and so the level of demand for credit amongst 
competitors, *not* the general demand for credit in the economy as 
a whole. An increase in the planned production of some good by a 
group of competitors will be reflected in a proportional change in 
interest rates only if it is assumed that the change in demand for 
credit by that industry is identical with that found in the economy 
as a whole. 

There is no reason to suppose such an assumption is true, given the
different production cycles of different industries and their differing
needs for credit (in both terms of amount and of intensity). Therefore, 
assuming uneven changes in the demand for credit between industries
reflecting uneven changes in their requirements, it is quite possible 
for over-investment (and so over-production) to occur, even if the 
credit system is working as it should in theory (i.e. the interest 
rate is, in fact, accurately reflecting the *real* savings available). 
The credit system, therefore, does not communicate the *relevant* 
information, and for this reason, it cannot be the case that the 
business cycle can be explained by departure from an "ideal system" 
(i.e. laissez-faire capitalism).

Therefore, it cannot be claimed that removing state-control of money
will also remove the business-cycle. However, the arguments that the
state control of money do have an element of truth in them. Expansion
of credit above the "natural" level which equates it with savings can 
and does allow capital to expand further than it otherwise would and 
so encourages over-investment (i.e. it builds upon trends already present
rather than *creating* them). While we have ignored the role of credit 
expansion in our comments above to stress that credit is not fundamental
to the business cycle, it is useful to discuss this as it is an essential
factor in real capitalist economies. Indeed, without it capitalist 
economies would not have grown as fast as they have. Credit is 
fundamental to capitalism, in other words.

There are two main approaches to the question of eliminating state 
control of money in "free market" capitalist economics -- Monetarism 
and what is often called "free banking." We will take each in turn
(a third possible "solution" is to impose a 100% gold reserve
limit for banks, but as this is highly interventionist, and so not
laissez-faire, simply impossible as there is not enough gold to
go round and has all the problems associated with inflexible money
regimes we highlight below, we will not discuss it). 

Monetarism was very popular in the 1970s and is associated with the
works of Milton Friedman. It is far less radical that the "free banking" 
school and argues that rather than abolish state money, its issue should
be controlled. Friedman stressed, like most capitalist economists, that
monetary factors are the important feature in explaining such problems
of capitalism as the business cycle, inflation and so on. This is 
unsurprising, as it has the useful ideological effect of acquitting 
the inner-workings of capitalism of any involvement in such problems.
Slumps, for example, may occur, but they are the fault of the state
interfering in the economy. This is how Friedman explains the Great 
Depression of the 1930s in the USA, for example (see his "The Role 
of Monetary Policy" in _American Economic Review_, March, 1968).
He also explains inflation by arguing it was a purely monetary
phenomenon caused by the state printing more money than required
by the growth of economic activity (for example, if the economy
grew by 2% but the money supply increased by 5%, inflation would
rise by 3%). This analysis of inflation is deeply flawed, as we
will see.

Thus Monetarists argued for controlling the money supply, of 
placing the state under a "monetary constitution" which ensured 
that the central banks be required by law to increase the quantity 
of money at a constant rate of 3-5% a year. This would ensure that 
inflation would be banished, the economy would adjust to its natural 
equilibrium, the business cycle would become mild (if not disappear) 
and capitalism would finally work as predicted in the economics 
textbooks. With the "monetary constitution" money would become 
"depoliticised" and state influence and control over money would 
be eliminated. Money would go back to being what it is in 
neo-classical theory, essentially neutral, a link between 
production and consumption and capable of no mischief on its own.

Unfortunately for Monetarism, its analysis was simply wrong. Even 
more unfortunately for both the theory and vast numbers of people, 
it was proven wrong not only theoretically but also empirically. 
Monetarism was imposed on both the USA and the UK in the early 
1980s, with disastrous results. As the Thatcher government in 1979 
applied Monetarist dogma the most whole-heartedly we will concentrate 
on that regime (the same basic things occurred under Reagan as well). 

Firstly, the attempt to control the money supply failed, as predicted 
in 1970 by the radical Keynesian Nicholas Kaldor (see his essay 
"The New Monetarism" in _Further Essays on Applied Economics_, for 
example). This is because the money supply, rather than being set 
by the central bank or the state (as Friedman claimed), is a 
function of the demand for credit, which is itself a function 
of economic activity. To use economic terminology, Friedman had 
assumed that the money supply was "exogenous" and so determined 
outside the economy by the state when, in fact, it is "endogenous" 
in nature (i.e. comes from *within* the economy). This means that 
any attempt to control the money supply will fail. Charles P. 
Kindleburger comments:

"As a historical generalisation, it can be said that every
time the authorities stabilise or control some quantity of
money. . . in moments of euphoria more will be produced. Or
if the definition of money is fixed in terms of particular
assets, and the euphoria happens to 'monetise' credit in 
new ways that are excluded from the definition, the amount
of money defined in the old way will not grow, but its 
velocity will increase. . .fix any [definition of money]
and the market will create new forms of money in periods
of boom to get round the limit." [_Manias, Panics and
Crashes_, p. 48]

The experience of the Thatcher and Reagan regimes indicates
this well. The Thatcher government could not meet the
money controls it set -- the growth was 74%, 37% and 23%
above the top of the ranges set in 1980 [Ian Gilmore,
_Dancing With Dogma_, p. 22]. It took until 1986 before 
the Tory government stopped announcing monetary targets,
persuaded no doubt by its inability to hit them. In addition, 
the variations in the money supply also showed that Milton 
Friedman's argument on what caused inflation was also wrong. 
According to his theory, inflation was caused by the money 
supply increasing faster than the economy, yet inflation
*fell* as the money supply increased. As the moderate 
conservative Ian Gilmore points out, "[h]ad Friedmanite 
monetarism. . . been right, inflation would have been about 
16 per cent in 1982-3, 11 per cent in 1983-4, and 8 per 
cent in 1984-5. In fact . . . in the relevant years it 
never approached the levels infallibly predicted by 
monetarist doctrine." [Op. Cit., p. 52] From an anarchist 
perspective, however, the fall in inflation was the result 
of the high unemployment of this period as it weakened 
labour, so allowing profits to be made in production 
rather than in circulation (see section C.7.1). With no 
need for capitalists to maintain their profits via 
price increases, inflation would naturally decrease as
labour's bargaining position was weakened by massive
unemployment. Rather than being a purely monetary phenomena
as Friedman claimed, it is a product of the profit needs
of capital and the state of the class struggle.

It is also of interest to note that even in Friedman's own
test of his basic contention, the Great Depression of 1929-33,
he got it wrong. Kaldor noted pointed out that "[a]ccording to 
Friedman's own figures, the amount of 'high-powered money'. . .
in the US increased, not decreased, throughout the Great
Contraction: in July 1932, it was more than 10 per cent higher
than in July, 1929. . . The Great Contraction of the money
supply . . . occurred *despite* this increase in the monetary
base." [Op. Cit., pp. 11-12] Other economists also investigated
Friedman's claims, with similar result -- "Peter Temin took 
issue with Friedman and Schwartz from a Keynesian point of
view [in the book _Did Monetary Forces Cause the Great
Depression?_]. He asked whether the decline in spending 
resulted from a decline in the money supply or the other way
round. . . [He found that] the money supply not only did not
decline but actually increased 5 percent between August 1929
and August 1931. . . Temin concluded that there is no evidence
that money caused the depression between the stock market 
crash and. . . September 1931." [Charles P. Kindleburger, 
Op. Cit., p. 60]

In other words, causality runs from the real economy to money,
not vice versa, and fluctuations in the money supply results from
fluctuations in the economy. If the money supply is endogenous,
and it is, this would be expected. Attempts to control the money
supply would, of necessity, fail and the only tool available would
take the form of raising interest rates. This would reduce 
inflation, for example, by depressing investment, generating
unemployment, and so (eventually) slowing the growth in wages.
Which is what happened in the 1980s. Trying to "control" the money 
supply actually meant increasing interest rates to extremely
high levels, which helped produce the worse depression since 
the end of the war (a depression which Friedman notably failed 
to predict).

Given the absolute failure of Monetarism, in both theory and
practice, it is little talked about now. However, in the 1970s
it was the leading economic dogma of the right -- the right 
which usually likes to portray itself as being strong on the
economy. It is useful to indicate that this is not the case.
In addition, we discuss the failure of Monetarism in order to 
highlight the problems with the "free banking" solution to state 
control of money. This school of thought is associated with the 
"Austrian" school of economics and right-wing libertarians in 
general. It is based on totally privatising the banking system 
and creating a system in which banks and other private companies 
compete on the market to get their coins and notes accepted by 
the general population. This position is not the same as anarchist 
mutual banking as it is seen not as a way of reducing usury to 
zero but rather as a means of ensuring that interest rates work 
as they are claimed to do in capitalist theory.

The "free banking" school argues that under competitive pressures,
banks would maintain a 100% ratio between the credit they provide
and the money they issue with the reserves they actually have (i.e.
market forces would ensure the end of fractional reserve banking).
They argue that under the present system, banks can create more
credit than they have funds/reserves available. This pushes the
rate of interest below its "natural rate" (i.e. the rate which
equates savings with investment). Capitalists, mis-informed by
the artificially low interest rates invest in more capital
intensive equipment and this, eventually, results in a crisis,
a crisis caused by over-investment ("Austrian" economists term
this "malinvestment"). If banks were subject to market forces, 
it is argued, then they would not generate credit money, interest 
rates would reflect the real rate and so over-investment, and 
so crisis, would be a thing of the past.

This analysis, however, is flawed. We have noted one flaw above,
namely the problem that interest rates do not provide sufficient
or correct information for investment decisions. Thus relative 
over-investment could still occur. Another problem follows
on from our discussion of Monetarism, namely the endogenous 
nature of money and the pressures this puts on banks. The noted 
post-keynesian economist Hyman Minsky created an analysis which
gives an insight into why it is doubtful that even a "free banking"
system would resist the temptation to create credit money (i.e.
loaning more money than available savings). This model is often
called "The Financial Instability Hypothesis."

Let us assume that the economy is going into the recovery period
after a crash. Initially firms would be conservative in their
investment while banks would lend within their savings limit 
and to low-risk investments. In this way the banks do ensure 
that the interest rate reflects the natural rate. However, this
combination of a growing economy and conservatively financed
investment means that most projects succeed and this gradually
becomes clear to managers/capitalists and bankers. As a result,
both managers and bankers come to regard the present risk 
premium as excessive. New investment projects are evaluated
using less conservative estimates of future cash flows. This
is the foundation of the new boom and its eventual bust. In
Minsky's words, "stability is destabilising."

As the economy starts to grow, companies increasingly turn to
external finance and these funds are forthcoming because the
banking sector shares the increased optimism of investors.
Let us not forget that banks are private companies too and so
seek profits as well. Providing credit is the key way of doing
this and so banks start to accommodate their customers and
they have to do this by credit expansion. If they did not,
the boom would soon turn into slump as investors would have
no funds available for them and interest rates would increase,
thus forcing firms to pay more in debt repayment, an increase
which many firms may not be able to do or find difficult. This
in turn would suppress investment and so production, generating 
unemployment (as companies cannot "fire" investments as easily 
as they can fire workers), so reducing consumption demand along 
with investment demand, so deepening the slump.

However, due to the rising economy bankers accommodate their
customers and generate credit rather than rise interest rates.
In this way they accept liability structures both for themselves
and for their customers "that, in a more sober expectational
climate, they would have rejected." [Minsky, _Inflation, 
Recession and Economic Policy_, p. 123] The banks innovate
their financial products, in other words, in line with demand. 
Firms increase their indebtedness and banks are more than 
willing to allow this due to the few signs of financial strain
in the economy. The individual firms and banks increase their
financial liability, and so the whole economy moves up the
liability structure.

However, eventually interest rates rise (as the existing extension 
of credit appears too high) and this affects all firms, from the 
most conservative to the most speculative, and "pushes" them up 
even higher up the liability structure (conservative firms no 
longer can repay their debts easily, less conservative firms 
fail to pay them and so on). The margin of error narrows and 
firms and banks become more vulnerable to unexpected developments, 
such a new competitors, strikes, investments which do not generate 
the expected rate of return, credit becoming hard to get, interest
rates increase and so on. In the end, the boom turns to slump 
and firms and banks fail. 

The "free banking" school reject this claim and argue that 
private banks in competition would *not* do this as this 
would make them appear less competitive on the market and 
so customers would frequent other banks (this is the same 
process by which inflation would be solved by a "free 
banking" system). However, it is *because* the banks are 
competing that they innovate -- if they do not, another 
bank or company would in order to get more profits. This 
can be seen from the fact that "[b]ank notes. . . and 
bills of exchange. . . were initially developed because 
of an inelastic supply of coin" [Kindleburger, Op. Cit., 
p. 51] and "any shortage of commonly-used types [of money] 
is bound to lead to the emergence of new types; indeed, 
this is how, historically, first bank notes and the 
chequing account emerged." [Kaldor, Op. Cit., p. 10]

This process can be seen at work in Adam Smith's _The Wealth
of Nations_. Scotland in Smith's time was based on a competitive
banking system and, as Smith notes, they issued more money than 
was available in the banks coffers:

"Though some of those notes [the banks issued] are continually
coming back for payment, part of them continue to circulate for
months and years together. Though he [the banker] has generally
in circulation, therefore, notes to the extent of a hundred
thousand pounds, twenty thousand pounds in gold and silver
may frequently be a sufficient provision for answering 
occasional demands." [_The Wealth of Nations_, pp. 257-8]

In other words, the competitive banking system did not, in 
fact, eliminate fractional reserve banking. Ironically enough, 
Smith noted that "the Bank of England paid very dearly, not 
only for its own imprudence, but for the much greater 
imprudence of almost all of the Scotch [sic!] banks." [Op. 
Cit., p. 269] Thus the central bank was more conservative
in its credit generation than the banks under competitive 
pressures! Indeed, Smith argues that the banking companies 
did not, in fact, act in line with their interests as assumed 
by the "free banking" school:

"had every particular banking company always understood and
and attended to its own particular interest, the circulation
never could have been overstocked with paper money. But every
particular baking company has not always understood and
attended to its own particular interest, and the circulation
has frequently been overstocked with paper money." [Op. Cit.,
p. 267]

Thus we have reserve banking plus bankers acting in ways
opposed to their "particular interest" (i.e. what economics
consider to be their actual self-interest rather than what
the bankers actually thought was their self-interest!) in a
system of competitive banking. Why could this be the case?
Smith mentions, in passing, a possible reason. He notes that
"the high profits of trade afforded a great temptation to
over-trading" and that while a "multiplication of banking
companies. . . increases the security of the public" by forcing
them "to be more circumspect in their conduct" it also "obliges
all bankers to be more liberal in their dealings with their
customers, lest their rivals should carry them away." [Op.
Cit., p. 274, p. 294]

Thus "free banking" is pulled in two directions at once, to
accommodate their customers while being circumspect in their
activities. Which factor prevails would depend on the state
of the economy, with up-swings provoking liberal lending (as
described by Minsky). Moreover, given that the "free banking"
school argues that credit generation produces the business
cycle, it is clear from the case of Scotland that competitive
banking does not, in fact, stop credit generation (and so
the business cycle, according to "Austrian" theory). This 
also seemed the case with 19th century America, which did 
not have a central bank for most of that period -- "the up 
cycles were also extraordinary [like the busts], powered 
by loose credit and kinky currencies (like privately issued 
banknotes)." [Doug Henwood, _Wall Street_, p. 94] 

Most "free banking" supporters also argue that regulated systems
of free banking were more unstable than unregulated. Perhaps this
is the case, but that implies that the regulated systems could
not freely accommodate their customers by generating credit 
and the resulting inflexible money regime created problems by 
increasing interest rates and reducing the amount of money 
available, which would result in a slump sooner rather than 
later. Thus the over supply of credit, rather than being the 
*cause* of the crisis is actually a symptom. Competitive 
investment also drives the business-cycle expansion, which 
is allowed and encouraged by the competition among banks in 
supplying credit. Such expansion complements -- and thus amplifies 
-- other objective tendencies towards crisis, such as over-investment 
and disportionalities.

In other words, a pure "free market" capitalist would still have a business
cycle as this cycle is caused by the nature of capitalism, not by state
intervention. In reality (i.e. in "actually existing" capitalism), state 
manipulation of money (via interest rates) is essential for the capitalist 
class as it is more related to indirect profit-generating activity, such as 
ensuring a "natural" level of unemployment to keep profits up, an acceptable 
level of inflation to ensure increased profits, and so forth, as well as
providing a means of tempering the business cycle, organising bailouts
and injecting money into the economy during panics. If state manipulation 
of money caused the problems of capitalism, we would not have seen the 
economic successes of the post-war Keynesian experiment or the business 
cycle in pre-Keynesian days and in countries which had a more free banking 
system (for example, nearly half of the late 19th century in the US was 
spent in periods of recession and depression, compared to a fifth since 
the end of World War II). 

It is true that all crises have been preceded by a speculatively-enhanced
expansion of production and credit. This does not mean, however, that
crisis *results* from speculation and the expansion of credit. The 
connection is not causal in free market capitalism. The expansion and 
contraction of credit is a mere symptom of the periodic changes in the 
business cycle, as the decline of profitability contracts credit just 
as an increase enlarges it.

Paul Mattick gives the correct analysis: 

"[M]oney 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. . . 
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 survive the crisis. . . 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." [_Economics, Politics and the 
Age of Inflation_, pp. 17-18]

In short, the apologists of "free market" capitalism confuse the 
symptoms for the disease. 

Where there is no profit to be had, credit will not be sought. While
extension of the credit system "can be a factor deferring crisis, the
actual outbreak of crisis makes it into an aggravating factor because 
of the larger amount of capital that must be devalued." [Paul Mattick, 
_Economic Crisis and Crisis Theory_, p. 138] But this is also a problem 
facing private companies using the gold standard, as advocated by 
right-wing Libertarians (who are supporters of "free market" capitalism
and banking). The money supply reflects the economic activity within 
a country and if that supply cannot adjust, interest rates rise and 
provoke a crisis. Thus the need for a flexible money supply (as 
desired, for example, by the US Individualist Anarchists). As Adam 
Smith pointed out, "the quantity of coin in every country is regulated 
by the value of the commodities which are to be circulated by it: 
increase that value and . . . the additional quantity of coin 
requisite for circulating them [will be found]." [Op. Cit., p. 385] 

Token money came into being because commodity money proved to be too 
inflexible for this to occur, as "the expansion of production or trade 
unaccompanied by an increase in the amount of money must cause a fall 
in the price level. . . Token money was developed at an early date to 
shelter trade from the enforced deflations that accompanied the use of 
specie when the volume of business swelled. . . Specie is an 
inadequate money just because it is a commodity and its amount 
cannot be increased at will. The amount of gold available may be
increased by a few per cent a year, but not by as many dozen within 
a few weeks, as might be required to carry out a sudden expansion of
transactions. In the absence of token money business would have to 
be either curtailed or carried on at very much lower prices, thus 
inducing a slump and creating unemployment." [Karl Polyani, _The 
Great Transformation_, p. 193]

To sum up, "[i]t 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." [Paul Mattick, 
_Economics, Politics and the Age of Inflation_, p. 18] Hence token 
money would increase and decrease in line with capitalist profitability, 
as predicted in capitalist economic theory. But this could not affect 
the business cycle, which has its roots in production for capital (i.e.
profit) and capitalist authority relations, to which the credit supply
would obviously be tied, and not vice versa.

C.8.1 Does this mean that Keynesianism works?

If state control of credit does not cause the business cycle, does that
mean Keynesianism capitalism can work? Keynesian economics, as opposed
to free market capitalism, maintains that the state can and should 
intervene in the economy in order to stop economic crises from occurring. 
The post-war boom presents compelling evidence that it can be effect the
business cycle for the better by reducing its impact from developing into 
a full depression.

The period of social Keynesianism after the war was marked by reduced
inequality, increased rights for working people, less unemployment, a 
welfare state you could actually use and so on. Compared to present-day 
capitalism, it had much going for it. However, Keynesian capitalism is still 
capitalism and so is still based upon oppression and exploitation. It was, in 
fact, a more refined form of capitalism, within which the state intervention 
was used to protect capitalism from itself while trying to ensure that working
class struggle against it was directed, via productivity deals, into 
keeping the system going. For the population at large, the general idea 
was that the welfare state (especially in Europe) was a way for society 
to get a grip on capitalism by putting some humanity into it. In a confused
way, the welfare state was supported as an attempt to create a society in 
which the economy existed for people, not people for the economy.

While the state has always had a share in the total surplus value produced 
by the working class, only under Keynesianism is this share increased 
and used actively to manage the economy. Traditionally, placing checks on 
state appropriation of surplus value had been one of the aims of classical 
capitalist thought (simply put, cheap government means more surplus value 
available for capitalists to compete for). But as capital has accumulated, 
so has the state increased and its share in social surplus (for control over 
the domestic enemy has to be expanded and society protected from the 
destruction caused by free market capitalism).

Indeed, such state intervention was not *totally* new for "[f]rom its origins, 
the United States had relied heavily on state intervention and protection for 
the development of industry and agriculture, from the textile industry in the 
early nineteenth century, through the steel industry at the end of the century,
to computers, electronics, and biotechnology today. Furthermore, the same has
been true of every other successful industrial society." [_World Orders,
Old and New_, p. 101]

The roots of the new policy of higher levels and different forms of state 
intervention lie in the Great Depression of the 1930s and the realisation 
that attempts to enforce widespread reductions in money wages and costs 
(the traditional means to overcome depression) were impossible because 
the social and economic costs would have been too expensive. A militant 
strike wave involving a half million workers occurred in 1934, 
with factory occupations and other forms of militant direct action 
commonplace.

Instead of attempting the usual class war (which may have had revolutionary
results), sections of the capitalist class thought a new approach was
required. This involved using the state to manipulate credit in order to
increase the funds available for capital and to increase demand by state
orders. As Paul Mattick points out:

"The additional production made possible by deficit financing does appear
as additional demand, but as demand unaccompanied by a corresponding 
increase in total profits. . . [this] functions immediately as an increase 
in demand that stimulates the economy as a whole and can become the point
for a new prosperity" if objective conditions allow it. [_Economic
Crisis and Crisis Theory_, p. 143]

State intervention can, in the short term, postpone crises by stimulating
production. This can be seen from the in 1930s New Deal period under Roosevelt
when the economy grew five years out of seven compared to it shrinking
every year under the pro-laissez-faire Republican President Herbert Hoover
(under Hoover, the GNP shrank an average of -8.4 percent a year, under
Roosevelt it grew by 6.4 percent). The 1938 slump after 3 years of growth
under Roosevelt was due to a decrease in state intervention:

"The forces of recovery operating within the depression, as well as the
decrease in unemployment via public expenditures, increased production 
up to the output level of 1929. This was sufficient for the Roosevelt 
administration to drastically reduce public works. . . in a new effort to
balance the budget in response to the demands of the business world. . . The
recovery proved to be short-lived. At the end of 1937 the Business Index
fell from 110 to 85, bring the economy back to the state in which it had
found itself in 1935. . . Millions of workers lost their jobs once again."
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 138]

With the success of state intervention during the second world war, 
Keynesianism was seen as a way of ensuring capitalist survival. The
resulting boom is well known, with state intervention being seen as the
way of ensuring prosperity for all sections of society. Before the Second
World War, the USA (for example) suffered eight depressions, since the war
there has been none (although there has been periods of recession). There
is no denying that for a considerable time, capitalism has been able to 
prevent the rise of depressions which so plagued the pre-war world and 
that this was accomplished by government interventions.

This is because Keynesianism can serve to initiate a new prosperity and 
postpone crisis by the extension of credit. This can mitigate the conditions
of crisis, since one of its short-term effects is that it offers private
capital a wider range of action and an improved basis for its own efforts
to escape the shortage of profits for accumulation. In addition, Keynesianism 
can fund Research and Development in new technologies and working methods
(such as automation), guarantee markets for goods as well as transferring
wealth from the working class to capital via taxation and inflation.

In the long run, however, Keynesian "management of the economy by means of 
monetary and credit policies and by means of state-induced production must 
eventually find its end in the contradictions of the accumulation process." 
[Paul Mattick, Op. Cit., p. 18]

So, these interventions did not actually set aside the underlying causes 
of economic and social crisis. The modifications of the capitalist system 
could not totally countermand the subjective and objective limitations
of a system based upon wage slavery and social hierarchy. This can be seen 
when the rosy picture of post-war prosperity changed drastically in the 1970s 
when economic crisis returned with a vengeance, with high unemployment 
occurring along with high inflation. This soon lead to a return to a more 
"free market" capitalism with, in Chomsky's words, "state protection and 
public subsidy for the rich, market discipline for the poor." This process,
and its effects, are discussed in the next section.

C.8.2 What happened to Keynesianism in the 1970s?

Basically, the subjective and objective limitations to Keynesianism we
highlighted in the last section were finally reached in the early 1970s. 
Economic crisis returned with massive unemployment accompanied with high 
inflation, with the state interventions that for so long kept capitalism 
healthy making the crisis worse. In other words, a combination of social 
struggle and a lack of surplus value available to capital resulted in the 
breakdown of the successful post-war consensus.

The roots and legacy of this breakdown in Keynesianism is informative and
worth analysing. The post-war period marked a distinct change for capitalism, 
with new, higher levels of state intervention. So why the change? Simply put, 
because capitalism was not a viable system. It had not recovered from the 
Great Depression and the boom economy during war had obviously contrasted 
deeply with the stagnation of the 1930s. Plus, of course, a militant working 
class, which has put up with years of denial in the struggle against 
fascist-capitalism would not have taken lightly to a return to mass 
unemployment and poverty. So, politically and economically a change was 
required. This change was provided by the ideas of Keynes, a change which
occurred under working class pressure but in the interests of the ruling
class.

The mix of intervention obviously differed from country to country, based
upon the needs and ideologies of the ruling parties and social elites. In
Europe nationalisation was widespread as inefficient capital was taken
over by the state and reinvigorated by state funding and social spending
more important as Social Democratic parties attempted to introduce reforms.
Chomsky describes the process in the USA:

"Business leaders recognised that social spending could stimulate the
economy, but much preferred the military Keynesian alternative - for
reasons having to do with privilege and power, not 'economic rationality.'
This approach was adopted at once, the Cold War serving as the justification.
. . . The Pentagon system was considered ideal for these purposes. It extends
well beyond the military establishment, incorporating also the Department of
Energy. . . and the space agency NASA, converted by the Kennedy administration
to a significant component of the state-directed public subsidy to advanced
industry. These arrangements impose on the public a large burden of the
costs of industry (research and development, R&D) and provide a guaranteed
market for excess production, a useful cushion for management decisions.
Furthermore, this form of industrial policy does not have the undesirable
side-effects of social spending directed to human needs. Apart from unwelcome
redistributive effects, the latter policies tend to interfere with managerial
prerogatives; useful production may undercut private gain, while 
state-subsidised waste production. . . is a gift to the owner and manager,
to whom any marketable spin-offs will be promptly delivered. Social
spending may also resource public interest and participation, thus enhancing
the threat of democracy. . . The defects of social spending do not taint
the military Keynesian alternative. For such reasons, _Business Week_
explained, 'there's a tremendous social and economic difference between
welfare pump-priming and military pump-priming,' the latter being far
preferable." [_World Orders, Old and New_, pp. 100-101]

Over time, social Keynesianism took increasing hold even in the USA, partly
in response to working class struggle, partly due to the need for popular
support at elections and partly due to "[p]opular opposition to the Vietnam 
war [which] prevented Washington from carrying out a national mobilisation. . . 
which might have made it possible to complete the conquest without harm to 
the domestic economy. Washington was forced to fight a 'guns-and-butter' was 
to placate the population, at considerable economic cost." [Noam Chomsky,
Op. Cit., pp. 157-8]

Social Keynesianism directs part of the total surplus value to workers
and unemployed while military Keynesianism transfers surplus value from
the general population to capital and from capital to capital. This allows
R&D and capital to be publicly subsidised, as well as essential but 
unproductive capital to survive. As long as real wages did not exceed a 
rise in productivity, Keynesianism would continue. However, both functions 
have objective limits as the transfer of profits from successful capital to 
essential, but less successful, or long term investment can cause a crisis 
is there is not enough profit available to the system as a whole. The 
surplus value producing capital, in this case, would be handicapped due 
to the transfers and cannot respond to economic problems with freely as 
before.

This lack of profitable capital was part of the reason for the collapse
of the post-war consensus. In their deeply flawed 1966 book, _Monopoly 
Capital_, radical economists Baran and Sweezy point out that "[i]f military 
spending were reduced once again to pre-Second World War proportions the 
nation's economy would return to a state of profound depression" [p. 153] 

In other words, the US economy was still in a state of depression,
countermanded by state expenditures which allowed the system to appear
successful (for a good, if somewhat economic, critique of Baran and 
Sweezy see Paul Mattick's "Monopoly Capital" in _Anti-Bolshevik 
Communism_).

In addition, the world was becoming economically "tripolar," with a revitalised 
Europe and a Japan-based Asian region emerging as major economic forces. This
placed the USA under increased pressure, as did the Vietnam War. However, 
the main reason for its breakdown was social struggle by working people. The
only limit to the rate of growth required by Keynesianism to function is
the degree to which final output consists of consumption goods for the
presently employed population instead of investment. And investment is the
most basic means by which work, i.e. capitalist domination, is imposed. 
Capitalism and the state could no longer ensure that working class struggles
could be contained within the system.

This pressure on US capitalism had an impact in the world economy and was 
also accompanied by general social struggle across the world. This struggle
was directed against hierarchy in general, with workers, students, women, 
ethnic groups, anti-war protesters and the unemployed all organising successful 
struggles against authority. This struggle attacked the hierarchical core of 
capitalism as well increasing the amount of income going to labour, resulting 
in a profit squeeze (see section C.7) creating an economic crisis. 

In other words, post-war Keynesianism failed simply because it could not,
in the long term, stop the subjective and objective pressures which capitalism 
always faces.

C.8.3 How did capitalism adjust to the crisis in Keynesianism?

Basically by using, and then managing, the 1970s crisis to discipline the 
working class in order to reap increased profits and secure and extend the
ruling classes' power. It did this using a combination of crisis, free markets 
and adjusted Keynesianism as part of a ruling elite lead class war against 
labour.

In the face of crisis in the 1970s, Keynesianist redirection of profits 
between capitals and classes had become a burden to capital as a whole 
and had increased the expectations and militancy of working people to 
dangerous levels. The crisis, however, helped control working class power 
and was latter utilised as a means of saving capitalism.

Initially the crisis was used to justify attacks on working class people 
in the name of the free market. And, indeed, capitalism was made more market 
based, although with a "safety net" and "welfare state" for the wealthy. We 
have seen a partial return to "what economists have called freedom of industry 
and commerce, but which really meant the relieving of industry from the 
harassing and repressive supervision of the State, and the giving to it 
full liberty to exploit the worker, whom was still to be deprived of his 
freedom." [Peter Kropotkin, _The Great French Revolution_, vol.1 , p. 28] The
"crisis of democracy" was overcome and replaced with the "liberty to exploit 
human labour without any safeguard for the victims of such exploitation and 
the political power organised as to assure freedom of exploitation to the 
middle-class." [Op. Cit., p. 30]

Then under the rhetoric of "free market" capitalism, Keynesianism was used 
to manage the crisis as it had previously managed the prosperity. "Supply
Side" economics (combined with neo-classical dogma) was used to undercut
working class power and consumption and so allow capital to reap more
profits off working people. Unemployment was used to discipline a militant
workforce and as a means of getting workers to struggle *for* work instead
of *against* wage labour. With the fear of job loss hanging over their heads, 
workers put up with speedups, longer hours, worse conditions, less safety 
protection and lower wages and this increased the profits that could be 
extracted directly from workers as well as reducing business costs by allowing 
employers to reduce on-job safety and protection and so on. The labour
"market" was fragmented to a large degree into powerless, atomised units with 
unions fighting a losing battle in the face of state backed recession. In 
this way capitalism could successfully change the composition of demand from
the working class to capital.

This disciplining of the working class resulted in the income going to capital 
increasing by more than double the amount of that going to "labour." Between 
1979 and 1989, total labour income rose by 22.8%, total capital income rose 
by 65.3% and realised capital gains by 205.5%. The real value of a standard
welfare benefit package has also declined by some 26 percent since 1972. 
[Edward S. Herman, "Immiserating Growth: The First World", _Z Magazine_] 
And Stanford University economist Victor Fuch estimates that US children
have lost 10-12 hours of parental time between 1960 and 1986, leading to
a deterioration of family relations and values. Unemployment and 
underemployment is still widespread, with most newly created jobs 
being part-time.

We should point out that the growth in income going to labour includes all 
"labour" incomes and as such includes the "wages" of CEOs and high level 
managers. As we have already noted, these "wages" are part of the surplus 
value extracted from workers and so should not be counted as income to
"labour." The facts of the Reagan fronted class war of the 1980s is that 
while top management income has skyrocketed, workers wages have remained 
usually stable or decreased absolutely. For example, the median hourly wage 
of US production workers has fallen by some 13% since 1973 (we are not 
implying that only production workers create surplus value or are "the 
working class"). In contrast, US management today receives 150 times what 
the average worker earns. Unsurprisingly 70% of the recent gain in per capita 
income have gone to the top 1% of income earners (while the bottom lost 
absolutely). [Chomsky, Op. Cit., p. 141] Income inequality has increased, 
with the income of the bottom fifth of the US population falling by 18%, 
while that of the richest fifth rose by 8%.

Indirect means of increasing capital's share in the social income were also 
used, such as reducing environment regulations, so externalising pollution
costs onto current and future generations. In Britain, state owned
monopolies were privatised at knock-down prices allowing private capital 
to increase its resources at a fraction of the real cost. Indeed, some 
nationalised industries were privatised *as monopolies* allowing monopoly 
profits to be extracted from consumers for many years before the state allowed 
competition in those markets. Indirect taxation also increased, being used 
to reduce working class consumption by getting us to foot the bill for 
Pentagon-style Keynesianism. 

Exploitation of under-developed nations increased with $418 billion being 
transferred to the developed world between 1982 and 1990 [Chomsky, Op. Cit., 
p. 130] Capital also became increasingly international in scope, as it used 
advances in technology to move capital to third world countries where state 
repression ensured a less militant working class. This transfer had the 
advantage of increasing unemployment in the developed world, so placing 
more pressures upon working class resistance.

This policy of capital-led class war, a response to the successful working 
class struggles of the 1960s and 1970s, obviously reaped the benefits it
was intended to for capital. Income going to capital has increased and
that going to labour has declined and the "labour market" has been disciplined
to a large degree (but not totally we must add). Working people have been
turned, to a large degree, from participants into spectators, as required 
for any hierarchical system. The human impact of these policies cannot be 
calculated. Little wonder, then, the utility of neo-classical dogma to the 
elite - it could be used by rich, powerful people to justify the fact that 
they are pursuing social policies that create poverty and force children 
to die. 

As Chomsky argues, "one aspect of the internationalisation of the economy
is the extension of the two-tiered Third World mode to the core countries.
Market doctrine thus becomes an essential ideological weapon at home as
well, its highly selective application safely obscured by the doctrinal
system. Wealth and power are increasingly concentrated. Service for 
the general public - education, health, transportation, libraries, etc. -
become as superfluous as those they serve, and can therefore be limited
or dispensed with entirely." [_Year 501_, p. 109]

The state managed recession has had its successes. Company profits are
up as the "competitive cost" of workers is reduced due to fear of job
losses. The Wall Street Journal's review of economic performance 
for the last quarter of 1995 is headlined "Companies' Profits Surged 61% 
on Higher Prices, Cost Cuts." After-tax profits rose 62% from 1993, up 
from 34% for the third quarter. While working America faces market forces,
Corporate America posted record profits in 1994. _Business Week_
estimated 1994 profits to be up "an enormous 41% over [1993]," despite
a bare 9% increase in sales, a "colossal success," resulting in large part
from a "sharp" drop in the "share going to labour," though "economists say
labour will benefit -- eventually." [cited by Noam Chomsky, "Rollback III",
_Z Magazine_, April 1995]

Moreover, for capital, Keynesianism is still goes on as before, combined 
(as usual) with praises to market miracles. For example, Michael Borrus,
co-director of the Berkeley Roundtable on the International Economy (a 
corporate-funded trade and technology research institute), cites a 1988 
Department of Commerce study that states that "five of the top six fastest 
growing U.S. industries from 1972 to 1988 were sponsored or sustained, 
directly or indirectly, by federal investment." He goes on to state
that the "winners [in earlier years were] computers, biotechnology, jet 
engines, and airframes" all "the by-product of public spending." [cited by 
Chomsky, _World Orders, Old and New_, p. 109] 

As James Midgley points out, "the aggregate size of the public sector did 
not decrease during the 1980s and instead, budgetary policy resulted in a 
significant shift in existing allocations from social to military and law 
enforcement." ["The radical right, politics and society", _The Radical Right 
and the Welfare State_, Howard Glennerster and James Midgley (eds.), p. 11]

Indeed, the US state funds one third of all civil R&D projects, and the 
UK state provides a similar subsidy. [Chomsky, Op. Cit., p. 107] And after 
the widespread collapse of Savings and Loans Associations in deregulated 
corruption and speculation, the 1980s pro-"free market" Republican 
administration happily bailed them out, showing that market forces were 
only for one class.

The corporate owned media attacks social Keynesianism, while remaining
silent or justifying pro-business state intervention. Combined with
extensive corporate funding of right-wing "think-tanks" which explain why
(the wrong sort of) social programmes are counter-productive, the corporate 
state system tried to fool the population into thinking that there is no
alternative to the rule by the market while the elite enrich themselves
at the publics expense.

So, social Keynesianism has been replaced by Pentagon Keynesianism cloaked
beneath the rhetoric of "free market" dogma. Combined with a strange
mix of free markets (for the many) and state intervention (for the select
few), the state has become stronger and more centralised and "prisons also 
offer a Keynesian stimulus to the economy, both to the construction business 
and white collar employment; the fastest growing profession is reported to 
be security personnel." [Chomsky, _Year 501_, p. 110] 

While working class resistance continues, it is largely defensive, but, as
in the past, this can and will change. Even the darkest night ends with
the dawn and the lights of working class resistance can be seen across
the globe. For example, the anti-Poll Tax struggle in Britain against the
Thatcher Government was successful as have been many anti-cuts struggles
across the USA and Western Europe, the Zapatista uprising in Mexico is
inspiring and there has been continual strikes and protests across the 
world. Even in the face of state repression and managed economic recession,
working class people are still fighting back. The job for anarchists to is 
encourage these sparks of liberty and help them win.

C.9 Would laissez-faire capitalism reduce unemployment, as supporters of 
    "free market" capitalism claim? 

Firstly, we have to state that "actually existing capitalism" in the West 
actually manages unemployment to ensure high profit rates for the capitalist
class (see section C.8.3) - market discipline for the working class, state
protection for the ruling class, in other words. As Edward Herman points 
out:

"Conservative economists have even developed a concept of a 'natural rate
of unemployment' [which Herman defines as "the rate of unemployment
preferred by the propertied classes"] . . . [which] is defined as the
minimum level consistent with price level stability, but, as it is based
on a highly abstract model that is not directly testable, the natural
rate can only be inferred from the price level itself. That is, if prices
are going up, unemployment is below the 'natural rate' and too low. . .
Apart from the grossness of this kind of metaphysical legerdemain, the
very concept of a natural rate of unemployment has a huge built-in 
bias. It takes as granted all the other institutional factors that
influence the price level-unemployment trade-off (market structures
and independent pricing power, business investment policies at home
and abroad, the distribution of income, the fiscal and monetary mix, 
etc.) and focuses solely on the tightness of the labour market 
as the controllable variable. Inflation is the main threat, the 
labour market (i.e. wage rates and unemployment levels) is the 
locus of the solution to the problem." [_Beyond Hypocrisy_, p. 94]

In a sense, it is understandable that the ruling class within capitalism
desires to manipulate unemployment in this way and deflect questions 
about their profit, property and power onto the labour market. Managing
depression (as indicated by high unemployment levels) allows greater profits
to be extracted from workers as management hierarchy is more secure. When
times are hard, workers with jobs think twice before standing up to their
bosses and so work harder, for longer and in worse conditions. This ensures
that surplus value is increased relative to real wages (indeed, in the
USA, real wages have stagnated since 1973 while profits have grown 
massively). In addition, such a policy ensures that political discussion 
about investment, profits, power and so on ("the other institutional 
factors") are reduced and diverted because working class people are 
too busy trying to make ends meet. 

Of course, it can be argued that as this "natural" rate is both invisible 
and can move, historical evidence is meaningless -- you can prove anything
with an invisible, mobile value. But if this is the case then any attempts to 
maintain a "natural" rate is also meaningless as the only way to discover it 
is to watch inflation levels (and with an invisible, mobile value, the theory
is always true after the fact -- if inflation rises as unemployment rises, then
the natural rate has increased; if inflation falls as unemployment rises, it has
fallen!). Which means that people are being made unemployed on the off-chance 
that the unemployment level will drop below the (invisible and mobile) "natural" 
rate and harm the interests of the ruling class (high inflation rates harms interest 
incomes and full employment squeezes profits by increasing workers' power). 
Given that most mainstream economists subscribe to this fallacy, it just 
shows how the "science" accommodates itself to the needs of the powerful.

So, supporters of "free market" capitalism do have a point, "actually
existing capitalism" has created high levels of unemployment. The 
question now arises, will a "purer" capitalism create full employment?

First, we should point out that some supporters of "free market" capitalism 
claim that the market has no tendency to equilibrium at all, which means full 
employment is impossible, but few explicitly state this obvious conclusion
of their own theories. However, most claim that full employment can occur. 
Anarchists agree, full employment can occur in "free market" capitalism, 
but not for ever (nor for long periods). As the Polish economist Michal 
Kalecki pointed out in regards to pre-Keynesian capitalism, the "reserve
of capital equipment and the reserve army of unemployed are typical features 
of capitalist economy at least throughout a considerable part of the 
[business] cycle." [quoted by George R. Feiwel, _The Intellectual Capital 
of Michal Kalecki_, p. 130]

Cycles of short periods of full employment and longer periods of rising and
falling unemployment are actually a more likely outcome of "free market" 
capitalism than continued full employment. As we argued in sections B.4.4 
and C.7.1 capitalism needs unemployment to function successfully and so 
"free market" capitalism will experience periods of boom and slump, with 
unemployment increasing and decreasing over time (as can be seen from 19th 
century capitalism). So, full employment under capitalism is unlikely to last 
long (nor would full employment booms fill a major part of the full
business cycle). Moreover, the notion that capitalism naturally stays at 
equilibrium or that unemployment is temporary adjustments is false,
even given the logic of neo-classical economics. As Proudhon argued:

"The economists admit it [that machinery causes unemployment]: but
here they repeat their eternal refrain that, after a lapse of time, the 
demand for the product having increased in proportion to the reduction
in price [caused by the investment], labour in turn will come finally to 
be in greater demand than ever. Undoubtedly, *with time,* the equilibrium
will be restored; but I must add again, the equilibrium will be no sooner
restored at this point than it will be disturbed at another, because the 
spirit of invention never stops. . ." [_System of Economical 
Contradictions_, pp. 200-1]

That capitalism creates permanent unemployment and, indeed, needs it 
to function is a conclusion that few, if any, pro-"free market" capitalists 
subscribe to. Faced with the empirical evidence that full employment is 
rare in capitalism, they argue that reality is not close enough to their 
theories and must be changed (usually by weakening the power of 
labour by welfare "reform" and reducing "union power"). Thus 
reality is at fault, not the theory (to re-quote Proudhon, "Political 
economy -- that is, proprietary despotism -- can never be in the
wrong: it must be the proletariat." [Op. Cit. p. 187]) So if 
unemployment exists, then its because real wages are too high, not 
because capitalists need unemployment to discipline labour (see 
section C.9.2 for evidence that the neo-classical theory is false). Or 
if real wages are falling as unemployment is rising, it can only 
mean that the real wage is not falling fast enough -- empirical 
evidence is never enough to falsify logical deductions from 
assumptions!

(As an aside, it is one of amazing aspects of the "science" of economics 
that empirical evidence is never enough to refute its claims. As the 
left-wing economist Nicholas Kaldor once pointed out, "[b]ut unlike 
any scientific theory, where the basic assumptions are chosen on the
basis of direct observation of the phenomena the behaviour of which
forms the subject-matter of the theory, the basic assumptions of 
economic theory are either of a kind that are unverifiable. . . or
of a kind which are directly contradicted by observation." [_Further 
Essays on Applied Economics_, pp. 177-8] Or, if we take the standard
economics expression "in the long run," we may point out that unless
a time is actually given it will always remain unclear as to how much
evidence must be gathered before one can accept or reject the theory.)

Of course, reality often has the last laugh on any ideology. For example,
since the late 1970s and early 1980s right-wing capitalist parties
have taken power in many countries across the world. These regimes
made many pro-free market reforms, arguing that a dose of market 
forces would lower unemployment, increase growth and so on. The
reality proved somewhat different. For example, in the UK, by the
time the Labour Party under Tony Blair come back to office in 1997,
unemployment (while falling) was still higher than it had been
when the last Labour government left office in May, 1979. 18 years
of labour market reform had not reduced unemployment. It is no
understatement to argue, in the words of two critics of neo-liberalism,
that the "performance of the world economy since capital was
liberalised has been worse than when it was tightly controlled"
and that "[t]hus far, [the] actual performance [of liberalised
capitalism] has not lived up to the propaganda." [Larry Elliot 
and Dan Atkinson, _The Age of Insecurity_, p. 274, p. 223] 

Lastly, it is apparent merely from a glance at the history of capitalism
during its laissez-faire heyday in the 19th century that "free"
competition among workers for jobs does not lead to full employment.
Between 1870 and 1913, unemployment was at an average of 5.7% in 
the 16 more advanced capitalist countries. This compares to an average 
of 7.3% in 1913-50 and 3.1% in 1950-70. If laissez-faire did lead to 
full employment, these figures would be reversed. As discussed above 
(in section C.7.1), full employment *cannot* be a fixed feature of 
capitalism due to its authoritarian nature and the requirements of 
production for profit. To summarise, unemployment has more to 
do with private property than the wages of our fellow workers.

However, it is worthwhile to discuss why the "free market" capitalist is 
wrong to claim that unemployment within their system will not exist for 
long periods of time. In addition, to do so will also indicate the poverty
of their theory of, and "solution" to, unemployment and the human 
misery they would cause. We do this in the next section.

C.9.1 Would cutting wages reduce unemployment?

The "free market" capitalist (or neo-classical or neo-liberal or "Austrian") 
argument is that unemployment is caused by workers' real wage being higher 
than the market clearing level. Workers, it is claimed, are more interested 
in money wages than real wages (which is the amount of goods they can by with 
their money wages). This leads them to resist wage cuts even when prices are 
falling, leading to a rise in their real wages. In other words, they are 
pricing themselves out of work without realising it (the validity of the 
claim that unemployment is caused by high wages is discussed in the next 
section). 

From this analysis comes the argument that if workers were allowed to compete 
'freely' among themselves for jobs, real wages would decrease. This would reduce 
production costs and this drop would produce an expansion in production which 
provides jobs for the unemployed. Hence unemployment would fall. State intervention 
(e.g. unemployment benefit, social welfare programmes, legal rights to organise, 
minimum wage laws, etc.) and labour union activity according to this theory is 
the cause of unemployment, as such intervention and activity forces wages above 
their market level, thus increasing production costs and "forcing" employers to 
"let people go." 

Therefore, according to neo-classical economic theory, firms adjust production 
to bring the marginal cost of their products (the cost of producing one 
more item) into equality with the product's market-determined price. So a 
drop in costs theoretically leads to an expansion in production, producing 
jobs for the "temporarily" unemployed and moving the economy toward 
a full-employment equilibrium.

So, in neo-classical theory, unemployment can be reduced by reducing the
real wages of workers currently employed. However, this argument is flawed.
While cutting wages may make sense for one firm, it would not have this 
effect throughout the economy as a whole (as is required to reduce 
unemployment in a country as a whole). This is because, in all versions of
neo-classical theory, it is assumed that prices depend (at least in part)
on wages. If all workers accepted a cut in wages, all prices would fall
and there would be little reduction in the buying power of wages. In other
words, the fall in money wages would reduce prices and leave real wages 
nearly unchanged and unemployment would continue.

Moreover, if prices remained unchanged or only fell by a small amount (i.e. 
if wealth was redistributed from workers to their employers), then the effect 
of this cut in real wages would not increase employment, it would reduce it.
For people's consumption depends on their income, and if their incomes
have fallen, in real terms, so will their consumption. As Proudhon pointed
out in 1846, "if the producer earns less, he will buy less. . . [which will]
engender. . . over-production and destitution" because "though the 
workmen cost you [the capitalist] something, they are your customers: 
what will you do with your products, when driven away by you, they 
shall consume no longer? Thus, machinery, after crushing, is not show 
in dealing employers a counter-blow; for if production excludes 
consumption, it is soon obliged to stop itself." [_System of Economical
Contradictions_, p. 204, p. 190]

However, it can be argued, not everyone's real income would fall: incomes from 
profits would increase. But redistributing income from workers to capitalists, a 
group who tend to spend a smaller portion of their income on consumption than do 
workers, could reduce effective demand and increase unemployment. As David
Schweickart points out, when wages decline, so does workers' purchasing power; 
and if this is not offset by an increase in spending elsewhere, total demand 
will decline [_Against Capitalism_, pp. 106-107]. In other words, contrary to
neo-classical economics, market equilibrium might be established at any level
of unemployment. 

But in "free market" capitalist theory, such a possibility of market
equilibrium with unemployment is impossible. Neo-liberals reject the 
claim that cutting real wages would merely decrease the demand for 
consumer goods without automatically increasing investment sufficiently to
compensate for this. Neo-classicists argue that investment will increase
to make up for the decline in working class consumption.

However, in order make this claim, the theory depends on three critical 
assumptions, namely that firms can expand production, that they will expand 
production, and that, if they do, they can sell their expanded production. 
This theory and its assumptions can be questioned.

The first assumption states that it is always possible for a company to
take on new workers. But increasing production requires more than just
labour. If production goods and facilities are not available, employment
will not be increased. Therefore the assumption that labour can always be
added to the existing stock to increase output is plainly unrealistic. 

Next, will firms expand production when labour costs decline? Hardly. 
Increasing production will increase supply and eat into the excess profits
resulting from the fall in wages. If unemployment did result in a lowering
of the general market wage, companies might use the opportunity to replace
their current workers or force them to take a pay cut. If this happened,
neither production nor employment would increase. However, it could be
argued that the excess profits would increase capital investment in the 
economy (a key assumption of neo-liberalism). The reply is obvious: perhaps, 
perhaps not. A slumping economy might well induce financial caution and 
so capitalists could stall investment until they are convinced of the 
sustained higher profitability while last.

This feeds directly into the last assumption, namely that the produced
goods will be sold. But when wages decline, so does worker purchasing
power, and if this is not offset by an increase in spending elsewhere,
then total demand will decline. Hence the fall in wages may result in the
same or even more unemployment as aggregate demand drops and companies
cannot find a market for their goods. However, business does not (cannot) 
instantaneously make use of the enlarged funds resulting from the shift 
of wages to profit for investment (either because of financial caution 
or lack of existing facilities). This will lead to a reduction in aggregate 
demand as profits are accumulated but unused, so leading to stocks 
of unsold goods and renewed price reductions. This means that the 
cut in real wages will be cancelled out by price cuts to sell unsold 
stock and unemployment remains.

So, the traditional neo-classical reply that investment spending will increase
because lower costs will mean greater profits, leading to greater savings,
and ultimately, to greater investment is weak. Lower costs will mean greater 
profits only if the products are sold, which they might not be if demand 
is adversely affected. In other words, a higher profit margins do not result in
higher profits due to fall in consumption caused by the reduction of workers
purchasing power. And, as Michal Kalecki argued, wage cuts in combating 
a slump may be ineffective because gains in profits are not applied 
immediately to increase investment and the reduced purchasing power 
caused by the wage cuts causes a fall in sales, meaning that higher profit
margins do not result in higher profits. Moreover, as Keynes pointed out long 
ago, the forces and motivations governing saving are quite distinct from 
those governing investment. Hence there is no necessity for the two quantities 
always to coincide. So firms that have reduced wages may not be able to sell 
as much as before, let alone more. In that case they will cut production, 
adding to unemployment and further lowering demand. This can set off a 
vicious downward spiral of falling demand and plummeting production leading 
to depression (the political results of such a process would be dangerous
to the continued survival of capitalism). This downward spiral is described
by Kropotkin (nearly 40 years before Keynes made the same point in his
_General Theory of Employment, Interest and Money_):

"Profits being the basis of capitalist industry, low profits explain all
ulterior consequences.

"Low profits induce the employers to reduce the wages, or the number of
workers, or the number of days of employment during the week. . . [L]ow
profits ultimately mean a reduction of wages, and low wages mean a
reduced consumption by the worker. Low profits mean also a somewhat
reduced consumption by the employer; and both together mean lower
profits and reduced consumption with that immense class of middlemen
which has grown up in manufacturing countries, and that, again, means
a further reduction of profits for the employers." [_Fields, Factories and
Workshops Tomorrow_, p. 33]

Thus, a cut in wages will deepen any slump, making it deeper and longer
than it otherwise would be. Rather than being the solution to unemployment,
cutting wages will make it worse (we will address the question of whether 
wages being too high actually causes unemployment in the first place, as 
maintained by neo-classical economics, below). Given that, as we argued
in section C.7.1, inflation is caused by insufficient profits for capitalists
(they try to maintain their profit margins by price increases) this spiralling
effect of cutting wages helps to explain what economists term "stagflation"
-- rising unemployment combined with rising inflation (as seen in the 1970s). 
As workers are made unemployed, aggregate demand falls, cutting profit 
margins even more and in response capitalists raise prices in an attempt to 
recoup their losses. Only a very deep recession can break this cycle (along 
with labour militancy and more than a few workers and their families). 
Working people paying for capitalism's contradictions, in other words. 

All this means that working class people have two options in a slump -- 
accept a deeper depression in order to start the boom-bust cycle again or 
get rid of capitalism and with it the contradictory nature of capitalist 
production which produces the business cycle in the first place (not to 
mention other blights such as hierarchy and inequality).

The "Pigou" (or "real balance") effect is another neo-classical argument 
that aims to prove that (in the end) capitalism will pass from slump to
boom. This theory argues that when unemployment is sufficiently high, it 
will lead to the price level falling which would lead to a rise in the real 
value of the money supply and so increase the real value of savings. People 
with such assets will have become richer and this increase in wealth will 
enable people to buy more goods and so investment will begin again. In
this way, slump passes to boom naturally.

However, this argument is flawed in many ways. In reply, Michal Kalecki 
argued that, firstly, Pigou had "assumed that the banking system would 
maintain the stock of money constant in the face of declining incomes, 
although there was no particular reason why they should." If the money
stock changes, the value of money will also change. Secondly, that "the 
gain in money holders when prices fall is exactly offset by the loss to 
money providers. Thus, whilst the real value of a deposit in bank 
account rises for the depositor when prices fell, the liability 
represented by that deposit for the bank also rises in size." And, 
thirdly, "that falling prices and wages would mean that the real value 
of outstanding debts would be increased, which borrowers would find it 
increasingly difficult to repay as their real income fails to keep pace 
with the rising real value of debt. Indeed, when the falling prices and 
wages are generated by low levels of demand, the aggregate real income 
will be low. Bankruptcies follow, debts cannot be repaid, and a 
confidence crisis was likely to follow." In other words, debtors may 
cut back on spending more than creditors would increase it and so the 
depression would continue as demand did not rise. [Malcolm C. Sawyer, 
_The Economics of Michal Kalecki_, p. 90] 

However, even if we ignore this the capitalist argument is still likely
to be wrong as it the "conventional economic analysis of markets . . . 
is unlikely to apply" to the labour market and as a result "wages are
highly unlikely to reflect workers' contributions to production." This
is because economists treat labour as no different from other commodities
yet "economic theory supports no such conclusion." At its most basic,
labour is *not* produced for profit and the "supply curve for labour 
can 'slope backward' -- so that a fall in wages can cause an increase 
in the supply of workers." In addition, as noted at the end of 
section C.1.4, economic theory itself shows that workers will not 
get a fair wage when they face organised or very powerful employers 
unless they organise unions. [Keen, _Debunking Economics_, pp. 111-2 
and pp. 118-9]

The idea of a backward sloping supply curve for labour is just as easy
to derive from the assumptions used by economists to derive their 
standard one. This is because workers may prefer to work less as 
the wage rate rises as they will be better off even if they do not
work more. Conversely, very low wage rates are likely to produce a
very high supply of labour as workers need to work more to meet
their basic needs (this was a key aim of state intervention during
the rise of capitalism, incidentally). This means that the market
suply curve "could have any shape at all" and so economic theory 
"fails to prove that employment is determined by supply and demand,
and reinforces the real world observation that involuntary 
unemployment can exist" as reducing the wage need not bring the
demand and supply of labour into aligment. While the possibility
of backward-bending labour supply curves is sometimes pointed out
in textbooks, the assumption of an upward sloping supply curve
is taken as the normal situation but "there is no theoretical
-- or empirical -- justification for this." [Op. Cit., pp. 121-2]

Sadly for the world, this assumption is used to draw very strong 
conclusions by economists. The standard arguments against minimum
wage legislation, trade unions and demand management by government
are all based on it. Yet, as Keen notes, such important policy
positions "should be based upon robust intellectual or empirical
foundations, rather than the flimsy substrate of mere fancy. 
Economists are quite prone to dimiss alternative perspectives on
labour market policy on this very basis -- that they lack any
theoretical or empirical foundations. Yet their own policy 
positions are based as much on wishful thinking as on wisdom."
[Op. Cit., p. 123] Within a capitalist economy the opposite 
assumption to that taken by economics is far more likely, namely
that there *is* a backward sloping labour supply curve. This means 
that a fall in real wages may *increase* the supply of labour as 
workers are forced to work longer hours or take second jobs simply 
to meet their basic needs. In other words, the labour market is not 
a market, i.e. it reacts in different ways than other markets.

So, as Schweickart, Kalecki, Keen and others correctly observe, such 
considerations undercut the neo-classical contention that labour 
unions and state intervention are responsible for unemployment (or 
that depressions will easily or naturally end by the workings of the 
market). To the contrary, insofar as labour unions and various welfare 
provisions prevent demand from falling as low as it might otherwise 
go during a slump, they apply a brake to the downward spiral. Far 
from being responsible for unemployment, they actually mitigate it. 
This should be obvious, as wages (and benefits) may be costs for 
some firms but they are revenue for even more. 

C.9.2 Is unemployment caused by wages being too high?

As we noted in the last section, most capitalist economic theories argue
that unemployment is caused by wages being too high. Any economics
student will tell you that high wages will reduce the quantity of labour
demanded, in other words unemployment is caused by wages being 
too high -- a simple case of "supply and demand." From this theory
we would expect that areas with high wages will also be areas with 
high levels of unemployment. Unfortunately for the theory, this does
not seem to be the case.

Empirical evidence does not support the argument the neo-classical
argument that unemployment is caused by real wages being too high. 
The phenomenon that real wages increase during the upward swing 
of the business cycle (as unemployment falls) and fall during 
recessions (when unemployment increases) renders the neo-classical 
interpretation that real wages govern employment difficult to maintain
(real wages are "pro-cyclical," to use economic terminology). But this
is not the only evidence against the neo-classical theory of unemployment.
Will Hutton, the UK based neo-Keynesian economist, summaries research 
that suggests high wages do not cause unemployment (as claimed 
by neo-classical economists):

"the British economists David Blanchflower and Andrew Oswald [examined] . . . 
the data in twelve countries about the actual relation between wages and 
unemployment - and what they have discovered is another major challenge 
to the free market account of the labour market. . . [They found] precisely 
the opposite relationship [than that predicted in neo-classical theory]. The 
higher the wages, the lower the local unemployment - and the lower the 
wages, the higher the local unemployment. As they say, this is not a 
conclusion that can be squared with free market text-book theories of 
how a competitive labour market should work." [_The State We're In_, 
p. 102]

Blanchflower and Oswald state their conclusions from their research that
employees "who work in areas of high unemployment earn less, other
things constant, than those who are surrounded by low unemployment."
[_The Wage Curve_, p. 360] This relationship, the exact opposite of
that predicted by neo-classical economics, was found in many different
countries and time periods, with the curve being similar for different
countries. Thus, the evidence suggests that high unemployment is 
associated with low earnings, not high, and vice versa.

Looking at less extensive evidence we find that, taking the example of the 
USA, if minimum wages and unions cause unemployment, why did the 
South-eastern states (with a *lower* minimum wage and weaker unions) 
have a *higher* unemployment rate than North-western states during the 
1960's and 1970's? Or why, when the (relative) minimum wage declined 
under Reagan and Bush, did chronic unemployment accompany it? 
[Allan Engler, _The Apostles of Greed_, p. 107]

Or the Low Pay Network report "Priced Into Poverty" which discovered 
that in the 18 months before they were abolished, the British Wages 
Councils (which set minimum wages for various industries) saw a rise 
of 18,200 in full-time equivalent jobs compared to a net loss of 39,300 
full-time equivalent jobs in the 18 months afterwards. Given that nearly 
half the vacancies in former Wages Council sectors paid less than the 
rate which it is estimated Wages Councils would now pay, and nearly 15% 
paid less than the rate at abolition, there should (by the neo-classical 
argument) have been rises in employment in these sectors as pay falls.
The opposite happened. This research shows clearly that the falls in pay 
associated with Wages Council abolition have not created more employment. 
Indeed, employment growth was more buoyant prior to abolition than 
subsequently. So whilst Wages Council abolition has not resulted in more 
employment, the erosion of pay rates caused by abolition has resulted in 
more families having to endure poverty pay.

(This does not mean that anarchists support the imposition of a legal
minimum wage. Most anarchists do not because it takes the responsibility
for wages from unions and other working class organisations, where it
belongs, and places it in the hands of the state. We mention these 
examples in order to highlight that the neo-classical argument has 
flaws with it.)

While this evidence may come as a shock to neo-classical economics,
it fits well with anarchist and other socialist analysis. For anarchists,
unemployment is a means of disciplining labour and maintaining 
a suitable rate of profit (i.e. unemployment is a key means of ensuring
that workers are exploited). As full employment is approached, labour's
power increases, so reducing the rate of exploitation and so increasing
labour's share of the value it produces (and so higher wages). Thus, from 
an anarchist point of view, the fact that wages are higher in areas of low 
unemployment is not a surprise, nor is the phenomenon of pro-cyclical 
real wages. After all, as we noted in section C.3, the ratio between wages 
and profits are, to a large degree, a product of bargaining power and so 
we would expect real wages to grow in the upswing of the business cycle, 
fall in the slump and be high in areas of low unemployment. And, far more 
importantly, this evidence suggests that the neo-classical claim that 
unemployment is caused by unions, "too high" wage rates, and so on, 
is false. Indeed, by stopping capitalists appropriating more of the income 
created by workers, high wages maintain aggregate demand and contribute 
to higher employment (although, of course, high employment cannot be 
maintained indefinitely under wage slavery due to the rise in workers' 
power this implies). Rather, unemployment is a key aspect of the capitalist 
system and cannot be got rid off within it and the neo-classical "blame the 
workers" approach fails to understand the nature and dynamic of the system.

So, perhaps, high real wages for workers increases aggregate demand and
reduces unemployment from the level it would be if the wage rate was cut. 
Indeed, this seems to supported by research into the "wage curve" of
numerous countries. This means that a "free market" capitalism, marked 
by a fully competitive labour market, no welfare programmes, unemployment 
benefits, higher inequality and extensive business power to break unions 
and strikes would see aggregate demand constantly rise and fall, in line 
with the business cycle, and unemployment would follow suit. Moreover, 
unemployment would be higher over most of the business cycle (and 
particularly at the bottom of the slump) than under a capitalism with 
social programmes, militant unions and legal rights to organise because 
the real wage would not be able to stay at levels that could support 
aggregate demand nor could the unemployed use their benefits to 
stimulate the production of consumer goods.

In other words, a fully competitive labour market would increase the instability 
of the market, as welfare programmes and union activity maintain aggregate 
income for working people, who spend most of their income, so stabilising 
aggregate demand -- an analysis which was confirmed in during the 1980s 
("the relationship between measured inequality and economic stability. . . 
was weak but if anything it suggests that the more egalitarian countries 
showed a more stable pattern of growth after 1979" [Dan Corry and Andrew
Glyn, "The Macroeconomics of equality, stability and growth", in _Paying
for Inequality_, Andrew Glyn and David Miliband (Eds.) pp. 212-213]).

C.9.3 Are "flexible" labour markets the answer to unemployment?

The usual neo-liberal argument is that labour markets must become
more "flexible" to solve the problem of unemployment. This is done
by weakening unions, reducing (or abolishing) the welfare state, and so
on. However, we should note that the current arguments for greater 
"flexibility" within the labour market as the means of reducing
unemployment seem somewhat phoney. The argument is that by 
increasing flexibility, making the labour market more "perfect", the 
so-called "natural" rate of unemployment will drop (this is the rate at
which inflation is said to start accelerating upwards) and so unemployment 
can fall without triggering an accelerating inflation rate. Of course, that 
the real source of inflation is capitalists trying to maintain their profit
levels is not mentioned (after all, profits, unlike wages, are to be
maximised for the greater good). Nor is it mentioned that the history 
of labour market flexibility is somewhat at odds with the theory:

"it appears to be only relatively recently that the maintained greater
flexibility of US labour markets has apparently led to a superior performance
in terms of lower unemployment, despite the fact this flexibility is no new
phenomenon. Comparing, for example, the United States with the United 
Kingdom, in the 1960s the United States averaged 4.8 per cent, with the 
United Kingdom at 1.9 per cent; in the 1970s the United States rate rose 
to 6.1 per cent, with the United Kingdom rising to 4.3 per cent, and it was 
only in the 1980s that the ranking was reversed with the United States at 
7.2 per cent and the United Kingdom at 10 per cent. . . Notice that this 
reversal of rankings in the 1980s took place despite all the best efforts 
of Mrs Thatcher to create labour market flexibility. . . [I]f labour market 
flexibility is important in explaining the level of unemployment. . . why 
does the level of unemployment remain so persistently high in a country, 
Britain, where active measures have been taken to create flexibility?" 
[Keith Cowling and Roger Sugden, _Beyond Capitalism_, p. 9]

If we look at the fraction of the labour force without a job in America, we 
find that in 1969 it was 3.4% (7.3% including the underemployed) and *rose* 
to 6.1% in 1987 (16.8% including the underemployed). Using more recent data,
we find that, on average, the unemployment rate was 6.2% in 1990-97 compared
to 5.0% in the period 1950-65. In other words, labour market "flexibility" has
not reduced unemployment levels, in fact "flexible" labour markets have been
associated with higher levels of unemployment. 

Of course we are comparing different time periods. A lot has changed between
the 1960s and the 1990s and so comparing these periods cannot be the whole
answer. After all, the rise in flexibility and the increase in unemployment may
be unrelated. However, if we look at different countries over the same time 
period we can see if "flexibility" actually reduces unemployment. As one
British economist notes, this may not be the case:

"Open unemployment is, of course, lower in the US. But once we allow
for all forms of non-employment [such as underemployment, jobless
workers who are not officially registered as such and so on], there is
little difference between Europe and the US: between 1988 and 1994,
11 per cent of men aged 25-55 were not in work in France, compared
with 13 per cent in the UK, 14 per cent in the US and 15 per cent in
Germany." [Richard Layard quoted by John Gray in _False Dawn_,
p. 113]

In addition, all estimates of America's unemployment record must take
into account America's incarceration rates. Over a million people more
would be seeking work if the US penal policies resembled those of
any other Western nation. [John Gray, Op. Cit., p. 113] 

Taking the period 1983 to 1995, we find that around 30 per cent of the 
population of OECD Europe lived in countries with average unemployment 
rates lower than the USA and around 70 per cent in countries with lower
unemployment than Canada (whose relative wages are only slightly
less flexible than the USA). Furthermore, the European countries
with the lowest unemployment rates were not noted for their wage 
flexibility (Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9%
and Switzerland 1.7%). Britain, which probably had the most flexible 
labour market had an average unemployment rate higher than half of 
Europe. And the unemployment rate of Germany is heavily influenced 
by areas which were formally in East Germany. Looking at the former
West German regions only, unemployment between 1983 and 1995
was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK).

So, perhaps, "flexibility" is not the solution to unemployment some 
claim it is (after all, the lack of a welfare state in the 19th century 
did not stop unemployment nor long depressions occurring). Indeed, 
a case could be made that the higher open unemployment in Europe 
has a lot less to do with "rigid" structures and "pampered" citizens 
than it does with the fiscal and monetary austerity required by 
European unification as expressed in the Maastricht Treaty. As 
this Treaty has the support of most of Europe's ruling class such 
an explanation is off the political agenda.

Moreover, if we look at the rationale behind "flexibility" we find a strange 
fact. While the labour market is to be made more "flexible" and in line 
with ideal of "perfect competition", on the capitalist side no attempt
is being made to bring *it* into line with that model. Let us not forget
that perfect competition (the theoretical condition in which all resources,
including labour, will be efficiently utilised) states that there must be a 
large number of buyers and sellers. This is the case on the sellers side of the 
"flexible" labour market, but this is *not* the case on the buyers (where, as 
indicated in section C.4, oligopoly reigns). Most who favour labour market 
"flexibility" are also those most against breaking up of big business and 
oligopolistic markets or the stopping of mergers between dominant 
companies in and across markets. The model requires *both* sides to 
be "flexible," so why expect making one side more "flexible" will have a 
positive effect on the whole? There is no logical reason for this to be the 
case. Indeed, with the resulting shift in power on the labour market things 
may get worse as income is distributed from labour to capital. It is a bit 
like expecting peace to occur between two warring factions by disarming 
one side and arguing that because the number of guns have been halved 
peacefulness has doubled! Of course, the only "peace" that would result 
would be the peace of the graveyard or a conquered people -- subservience 
can pass for peace, if you do not look too close. In the end, calls for the
"flexibility" of labour indicate the truism that, under capitalism, labour
exists to meet the requirements of capital (or living labour exists to meet
the needs of dead labour, a truly insane way to organise a society).

All this is unsurprising for anarchists as we recognise that "flexibility" 
just means weakening the bargaining power of labour in order to increase 
the power and profits of the rich (hence the expression "flexploitation"!).
Increased "flexibility" has been associated with *higher,* not lower 
unemployment. This, again, is unsurprising, as a "flexible" labour market 
basically means one in which workers are glad to have any job and face 
increased insecurity at work (actually, "insecurity" would be a more honest 
word to use to describe the ideal of a competitive labour market rather than 
"flexibility" but such honesty would let the cat out of the bag). In such an 
environment, workers' power is reduced, meaning that capital gets a larger 
share of the national income than labour and workers are less inclined to stand 
up for their rights. This contributes to a fall in aggregate demand, so 
increasing unemployment. In addition, we should note that "flexibility" may 
have little effect on unemployment (although not on profits) as a reduction of 
labour's bargaining power may result in *more* rather than less unemployment. 
This is because firms can fire "excess" workers at will, increase the hours 
of those who remain (the paradox of overwork and unemployment is just an 
expression of how capitalism works) and stagnating or falling wages reduces 
aggregate demand. Thus the paradox of increased "flexibility" resulting in 
higher unemployment is only a paradox in the neo-classical framework. From 
an anarchist perspective, it is just the way the system works.

And we must add that whenever governments have attempted to make 
the labour market "fully competitive" it has either been the product of
dictatorship (e.g. Chile under Pinochet) or occurred at the same time
increased centralisation of state power and increased powers for the police 
and employers (e.g. Britain under Thatcher, Reagan in the USA). Latin 
American Presidents trying to introduce neo-liberalism into their
countries have had to follow suit and "ride roughshod over democratic
institutions, using the tradition Latin American technique of
governing by decree in order to bypass congressional opposition. . .
Civil rights have also taken a battering. In Bolivia, the government
attempted to defuse union opposition . . . by declaring a state of
siege and imprisoning 143 strike leaders. . . In Colombia, the
government used anti-terrorist legislation in 1993 to try 15 trade
union leaders opposing the privatisation of the state telecommunications
company. In the most extreme example, Peru's Alberto Fujimori dealt
with a troublesome Congress by simply dissolving it . . . and seizing
emergency powers." [Duncan Green, _The Silent Revolution_, p. 157]

This is unsurprising. People, when left alone, will create communities, 
organise together to collectively pursue their own happiness, protect 
their communities and environment. In other words, they will form 
associations and unions to influence the decisions that affect them. 
In order to create a "fully competitive" labour market, individuals must
be atomised and unions, communities and associations weakened, if not 
destroyed, in order to fully privatise life. State power must be used 
to disempower the mass of the population, restrict their liberty, control
popular organisations and social protest and so ensure that the free market 
can function without opposition to the human suffering, misery and pain
it would cause. People, to use Rousseau's evil term, "must be forced 
to be free." And, unfortunately for neo-liberalism, the countries that tried
to reform their labour market still suffered from high unemployment, plus
increased social inequality and poverty and where still subject to the 
booms and slumps of the business cycle.

Ultimately, the only real solution to unemployment is to end wage labour
and liberate humanity from the needs of capital.

C.9.4 Is unemployment voluntary?

Here we point out another aspect of the neo-classical "blame the workers" 
argument, of which the diatribes against unions and workers' rights 
highlighted above is only a part. This is the argument that unemployment is 
not involuntary but is freely chosen by workers. As the left-wing economist
Nicholas Kaldor put it, for "free market" economists involuntary employment
"cannot exist because it is excluded by the assumptions." [_Further Essays
on Applied Economics_, p. x] The neo-classical economists claim that 
unemployed workers calculate that their time is better spent searching 
for more highly paid employment (or living on welfare than working) and 
so desire to be jobless. That this argument is taken seriously says a lot 
about the state of modern capitalist economic theory, but as it is popular 
in many right-wing circles, we should discuss it. 

Firstly, when unemployment rises it is because of layoffs, not voluntary
quittings, are increasing. When a company fires a number of its workers,
it can hardly be said that the sacked workers have calculated that their
time is better spent looking for a new job. They have no option. Secondly,
unemployed workers normally accept their first job offer. Neither of these
facts fits well with the hypothesis that most unemployment is "voluntary."

Of course, there are numerous jobs advertised in the media. Does this not
prove that capitalism always provides jobs for those who want them?
Hardly, as the number of jobs advertised must have some correspondence to
the number of unemployed. If 100 jobs are advertised in an areas reporting
1,000 unemployed, it can scarcely be claimed that capitalism tends to
full employment.

In addition, it is worthwhile to note that the right-wing assumption that
higher unemployment benefits and a healthy welfare state promote 
unemployment is not supported by the evidence. As a moderate member 
of the British Conservative Party notes, the "OECD studied seventeen
industrial countries and found no connect between a country's unemployment
rate and the level of its social-security payments." [_Dancing with Dogma_,
p. 118] Moreover, the economists David Blanchflower and Andrew Oswald
"Wage Curve" for many different countries is approximately the same for
each of the fifteen countries they looked at. This also suggests that labour
market unemployment is independent of social-security conditions as
their "wage curve" can be considered as a measure of wage flexibility. 
Both of these facts suggest that unemployment is involuntary in nature 
and cutting social-security will *not* affect unemployment.

Another factor in considering the nature of unemployment is the effect of
nearly 20 years of "reform" of the welfare state conducted in both the USA 
and UK. During the 1960s the welfare state was far more generous than it 
was in the 1990s and unemployment was lower. If unemployment was 
"voluntary" and due to social-security being high, we would expect a 
decrease in unemployment as welfare was cut (this was, after all, the 
rationale for cutting it in the first place). In fact, the reverse occurred, 
with unemployment rising as the welfare state was cut. Lower 
social-security payments did not lead to lower unemployment, 
quite the reverse in fact.

Faced with these facts, some may conclude that as unemployment is independent
of social security payments then the welfare state can be cut. However, this 
is not the case as the size of the welfare state does affect the poverty rates 
and how long people remain in poverty. In the USA, the poverty rate was 11.7% 
in 1979 and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The 
net effect of cutting the welfare state was to help *increase* poverty. 
Similarly, in the UK during the same period, to quote the ex-Thatcherite 
John Gray, there "was the growth of an underclass. The percentage of British 
(non-pensioner) households that are wholly workless - that is, none of whose 
members is active in the productive economy - increased from 6.5 per cent in 
1975 to 16.4 per cent in 1985 and 19.1 per cent in 1994. . . Between 1992 
and 1997 there was a 15 per cent increase in unemployed lone parents. . . 
This dramatic growth of an underclass occurred as a direct consequence of 
neo-liberal welfare reforms, particularly as they affected housing." 
[_False Dawn_, p. 30] This is the opposite of the predictions of right-wing 
theories and rhetoric. As John Gray correctly argues, the "message of the 
American [and other] New Right has always been that poverty and the 
under class are products of the disincentive effects of welfare, not 
the free market." He goes on to note that it "has never squared with 
the experience of the countries of continental Europe where levels of 
welfare provision are far more comprehensive than those of the United 
States have long co-existed with the absence of anything resembling an 
American-style underclass. It does not touch at virtually any point the 
experience of other Anglo-Saxon countries." [Op.Cit., p. 42] He goes on 
to note that: 

"In New Zealand, the theories of the American New Right achieved a
rare and curious feat - self-refutation by their practical application.
Contrary to the New Right's claims, the abolition of nearly all universal
social services and the stratification of income groups for the purpose
of targeting welfare benefits selectively created a neo-liberal poverty
trap." [Ibid.]

So while the level of unemployment benefits and the welfare state may 
have little impact on the level of unemployment (which is to be expected 
if the nature of unemployment is essentially involuntary), it *does* have 
an effect on the nature, length and persistency of poverty. Cutting
the welfare state increases poverty and the time spent in poverty 
(and by cutting redistribution, it would also increase inequality).

If we look at the relative size of a nation's social security transfers 
as a percentage of Gross Domestic Product and its relative poverty rate 
we find a correlation. Those nations with a high level of spending have 
lower rates of poverty. In addition, there is a correlation between the
spending level and the number of persistent poor. Those nations with
high spending levels have more of their citizens escape poverty. For
example, Sweden has a single-year poverty rate of 3% and a poverty
escape rate of 45% and Germany has figures of 8% and 24% (and
a persistent poverty rate of 2%). In contrast, the USA has figures
of 20% and 15% (and a persistent poverty rate of 42%) [Greg J.
Duncan of the University of Michigan Institute for Social Research,
1994]. 

Given that a strong welfare state acts as a kind of floor under the 
wage and working conditions of labour, it is easy to see why 
capitalists and the supporters of "free market" capitalism seek
to undermine it. By undermining the welfare state, by making
labour "flexible," profits and power can be protected from working
people standing up for their rights and interests. Little wonder the
claimed benefits of "flexibility" have proved to be so elusive for the
vast majority while inequality has exploded. The welfare state, in
other words, reduces the attempts of the capitalist system to commodify
labour and increases the options available to working class people. While
it did not reduce the need to get a job, the welfare state did undermine 
dependence on any particular employee and so increased workers' 
independence and power. It is no coincidence that the attacks 
on unions and the welfare state was and is framed in the rhetoric 
of protecting the "right of management to manage" and of driving 
people back into wage slavery. In other words, an attempt to increase 
the commodification of labour by making work so insecure that 
workers will not stand up for their rights.

The human costs of unemployment are well documented. There is a stable
correlation between rates of unemployment and the rates of mental-hospital
admissions. There is a connection between unemployment and juvenile and
young-adult crime. The effects on an individual's self-respect and the
wider implications for their community and society are massive. As David 
Schweickart concludes:

 "The costs of unemployment, whether measured in terms of the cold cash 
of lost production and lost taxes or in the hotter unions of alienation, 
violence, and despair, are likely to be large under Laissez Faire" 
[_Against Capitalism_, p. 109] 

Of course, it could be argued that the unemployed should look for work and
leave their families, home towns, and communities in order to find it.
However, this argument merely states that people should change their whole
lives as required by "market forces" (and the wishes -- "animal spirits,"
to use Keynes' term -- of those who own capital). In other words, it just
acknowledges that capitalism results in people losing their ability to
plan ahead and organise their lives (and that, in addition, it can deprive
them of their sense of identity, dignity and self-respect as well),
portraying this as somehow a requirement of life (or even, in some cases,
noble).

It seems that capitalism is logically committed to viciously contravening
the very values upon which it claims it be built, namely the respect for
the innate worth and separateness of individuals. This is hardly
surprising, as capitalism is based on reducing individuals to the level of
another commodity (called "labour"). To requote Karl Polanyi: 

"In human terms such a postulate [of a labour market] implied for the 
worker extreme instability of earnings, utter absence of professional 
standards, abject readiness to be shoved and pushed about indiscriminately, 
complete dependence on the whims of the market. [Ludwig Von] Mises justly 
argued that if workers 'did not act as trade unionists, but reduced their 
demands and changed their locations and occupations according to the labour
market, they would eventually find work.' This sums up the position under
a system based on the postulate of the commodity character of labour. It
is not for the commodity to decide where it should be offered for sale, to
what purpose it should be used, at what price it should be allowed to
change hands, and in what manner it should be consumed or destroyed." 
[_The Great Transformation_, p. 176]

However, people are *not* commodities but living, thinking, feeling
individuals. The "labour market" is more a social institution than an
economic one and people and work more than mere commodities. If we reject
the neo-liberals' assumptions for the nonsense they are, their case fails.
Capitalism, ultimately, cannot provide full employment simply because
labour is *not* a commodity (and as we discussed in section C.7, this
revolt against commodification is a key part of understanding the business
cycle and so unemployment). 

C.10 Will "free market" capitalism benefit everyone, *especially* the poor? 

Murray Rothbard and a host of other supporters of "free-market" capitalism 
make this claim. Again, it does contain an element of truth. As capitalism 
is a "grow or die" economy (see section D.4.1), obviously the amount of 
wealth available to society increases for *all* as the economy expands. 
So the poor will be better off *absolutely* in any growing economy (at 
least in economic terms). This was the case under Soviet state capitalism 
as well: the poorest worker in the 1980's was obviously far better off 
economically than one in the 1920's. 

However, what counts is *relative* differences between classes and periods
within a growth economy. Given the thesis that free-market capitalism will
benefit the poor *especially,* we have to ask: can the other classes
benefit equally well?

As noted above, wages are dependent on productivity, with increases in the
wages lagging behind increases in productivity. If, in a free market, the
poor "especially" benefited, wages would need to increase *faster* than
productivity in order for the worker to obtain an increased share of
social wealth. However, if this were the case, the amount of profit going
to the upper classes would be proportionally smaller. Hence if capitalism
"especially" benefited the poor, it could not do the same for those who live
off the profit generated by workers. 

For the reasons indicated above, productivity *must* rise faster than 
wages or companies will fail and recession could result. This is why wages 
(usually) lag behind productivity gains. In other words, workers produce more 
but do not receive a corresponding increase in wages. This is graphically 
illustrated by Taylor's first experiment in his "scientific management" 
techniques. 

Taylor's theory was that when workers controlled their own work, they did
not produce to the degree wanted by management. His solution was simple.
The job of management was to discover the "one best way" of doing a
specific work task and then ensure that workers followed these (management
defined) working practices. The results of his experiment was a 360%
increase in productivity for a 60% increase in wages. Very efficient.
However, from looking at the figures, we see that the immediate result of
Taylor's experiment is lost. The worker is turned into a robot and
effectively deskilled (see section D.10). While this is good for profits
and the economy, it has the effect of dehumanising and alienating the
workers involved as well as increasing the power of capital in the labour
market. But only those ignorant of economic science or infected with
anarchism would make the obvious point that what is good for the economy
may not be good for people. 

This brings up another important point related to the question of whether
"free market" capitalism will result in everyone being "better off." The
typical capitalist tendency is to consider quantitative values as being
the most important consideration. Hence the concern over economic growth,
profit levels, and so on, which dominate discussions on modern life.
However, as E.P. Thompson makes clear, this ignores an important aspect 
of human life: 

"simple points must be made. It is quite possible for statistical 
averages and human experiences to run in opposite directions. A per 
capita increase in quantitative factors may take place at the same 
time as a great qualitative disturbance in people's way of life, 
traditional relationships, and sanctions. People may consume more 
goods and become less happy or less free at the same time" [_The 
Making of the English Working Class_, p. 231]

For example, real wages may increase but at the cost of longer hours 
and greater intensity of labour. Thus, "[i]n statistical terms, this 
reveals an upward curve. To the families concerned it might feel like
immiseration." [Thompson, Op. Cit., p. 231] In addition, consumerism may
not lead to the happiness or the "better society" which many economists
imply to be its results. If consumerism is an attempt to fill an empty
life, it is clearly doomed to failure. If capitalism results in an
alienated, isolated existence, consuming more will hardly change that. The
problem lies within the individual and the society within which they live.
Hence, quantitative increases in goods and services may not lead to
anyone "benefiting" in any meaningful way.

This is important to remember when listening to "free market" gurus
discussing economic growth from their "gated communities," insulated from
the surrounding deterioration of society and nature caused by the workings
of capitalism (see sections D.1 and D.4 for more on this). In other words,
quality is often more important than quantity. This leads to the important
idea that some (even many) of the requirements for a truly human life
cannot be found on any market, no matter how "free." 

However, to go back to the "number crunching" that capitalism so loves, we
see that the system is based on workers producing more profits for "their"
company by creating more commodities than they would by able to buy 
back with their wages. If this does not happen, profits fall and capital
dis-invests. As can be seen from the example of Chile (see section C.11)
under Pinochet, "free market" capitalism can and does make the rich richer
and the poor poorer while economic growth was going on. Indeed, the
benefits of economic growth accumulated into the hands of the few.

To put it simply, economic growth in laissez-faire capitalism depends 
upon increasing exploitation and inequality. As wealth floods upwards
into the hands of the ruling class, the size of the crumbs falling
downwards will increase (after the economy is getting bigger). This
is the real meaning of "trickle down" economics. Like religion, laissez 
faire capitalism promises pie at some future date. Until then we (at 
least the working class) must sacrifice, tighten our belts and trust in 
the economic powers that be to invest wisely for society. Of course, as 
the recent history of the USA or Chile shows, the economy can be made 
freer and grow while real wages stagnant (or fall) and inequality increase. 

This can also be seen from the results of the activities of the pro-"free 
market" government in the UK, where the number of people with less than 
half the average income rose from 9% of the population in 1979 to 25% in 
1993 and the share of national wealth held by the poorer half of the 
population has fallen from one third to one quarter. In addition, between 
1979 and 1992-3, the poorest tenth of the UK population experienced a fall 
in their real income of 18% after housing costs, compared to an unprecedented
rise of 61% for the top tenth. Of course, the UK is not a "pure" capitalist 
system and so the defenders of the faith can argue that their "pure" system 
will spread the wealth. However, it seems strange that movements towards the
"free market" always seem to make the rich richer and the poor poorer. In 
other words, the evidence from "actually existing" capitalism supports 
anarchist arguments that when ones bargaining power is weak (which is 
typically the case in the labour market) "free" exchanges tend to magnify 
inequalities of wealth and power over time rather than working towards an 
equalisation (see section F.3.1, for example). Similarly, it can hardly be 
claimed that these movements towards "purer" capitalism have "especially" 
benefited the poor, quite the reverse.

This is unsurprising as "free market" capitalism cannot benefit *all* 
equally, for if the share of social wealth falling to the working class 
increased (i.e. it "especially" benefited them), it would mean that the 
ruling class would be *worse off* (and vice versa). Hence the claim that 
all would benefit is obviously false if we recognise and reject the 
sleight-of-hand of looking at the absolute figures so loved by the 
apologists of capitalism. And as the evidence indicates, movements 
towards a purer capitalism have resulted in "free" exchanges benefiting
those with (economic) power more than those without, rather than 
benefiting all equally. This result is surprising, of course, only
to those who prefer to look at the image of "free exchange" within
capitalism rather than at its content.

In short, to claim that all would benefit from a free market ignores the
fact that capitalism is a profit-driven system and that for profits to
exist, workers *cannot* receive the full fruits of their labour. As the
individualist anarchist Lysander Spooner noted over 100 years ago, "almost
all fortunes are made out of the capital and labour of other men than
those who realise them. Indeed, large fortunes could rarely be made at all
by one individual, except by his sponging capital and labour from others."
[quoted by Martin J. James, _Men Against the State_, p. 173f]

So it can be said that laissez-faire capitalism will benefit all, 
*especially* the poor, only in the sense that all can potentially 
benefit as an economy increases in size. If we look at actually
existing capitalism, we can start to draw some conclusions about
whether laissez-faire capitalism will actually benefit working 
people. The United States has a small public sector by international 
standards and in many ways it is the closest large industrial nation 
to laissez-faire capitalism. It is also interesting to note that it 
is also number one, or close to it, in the following areas [Richard 
Du Boff, _Accumulation and Power_, pp. 183-4]:

	- 	lowest level of job security for workers, with greatest 
		chance of being dismissed without notice or reason.
	-	greatest chance for a worker to become unemployed without 
		adequate unemployment and medical insurance.
	-	less leisure time for workers, such as holiday time.
	-	one of the most lopsided income distribution profiles.
	-	lowest ratio of female to male earnings, in 1987 64% of 
		the male wage.
	-	highest incidence of poverty in the industrial world.
	-	among the worse rankings of all advanced industrial nations 
		for pollutant emissions into the air.
	- 	highest murder rates.
	-	worse ranking for life expectancy and infant morality.

It seems strange that the more laissez-faire system has the worse job 
security, least leisure time, highest poverty and inequality if laissez-faire 
will *especially* benefit the poor. Of course, defenders of laissez-faire 
capitalism will point out that the United States is far from being 
laissez-faire, but it seems strange that the further an economy moves 
from that condition the better conditions get for those who, it is claimed, 
will *especially* benefit from it.

Even if we look at economic growth (the rationale for claims that laissez
faire will benefit the poor), we find that by the 1960s the rate of
growth of per capita product since the 19th century was not significantly 
higher than in France and Germany, only slightly higher than in Britain 
and significantly lower than in Sweden and Japan (and do not forget that
France, Germany, Japan and Britain suffered serve damage in two world
wars, unlike America). So the "superior productivity and income levels 
in the United States have been accompanied by a mediocre performance
in the rise of those levels over time. The implication is no longer 
puzzling: if US per capita incomes did not grow particularly fast
but Americans on average enjoy living standards equal to or above those
of citizens of other developed nations, then the American starting
point must have been higher 100 to 150 years ago. We now know that 
before the Civil War per capita incomes in the United States were high 
by contemporary standards, surpassed through the 1870s only by the 
British. . . To a great extent this initial advantage was a gift 
of nature." [Op. Cit., p. 176]

Looking beyond the empirical investigation, we should point out the 
slave mentality behind these arguments. After all, what does this argument
actually imply? Simply that economic growth is the only way for
working people to get ahead. If working people put up with exploitative
working environments, in the long run capitalists will invest some of 
their profits and so increase the economic cake for all. So, like 
religion, "free market" economics argue that we must sacrifice in 
the short term so that (perhaps) in the future our living standards
will increase ("you'll get pie in the sky when you die" as Joe Hill
said about religion). Moreover, any attempt to change the "laws of 
the market" (i.e. the decisions of the rich) by collective action will 
only harm the working class. Capital will be frightened away to countries 
with a more "realistic" and "flexible" workforce (usually made so by state
repression). 

In other words, capitalist economics praises servitude over independence,
kow-towing over defiance and altruism over egoism. The "rational" person
of neo-classical economics does not confront authority, rather he 
accommodates himself to it. For, in the long run, such self-negation will
pay off with a bigger cake with (it is claimed) correspondingly bigger 
crumbs "trickling" downwards. In other words, in the short-term, the gains 
may flow to the elite but in the future we will all gain as some of it will
trickle (back) down to the working people who created them in the first
place. But, unfortunately, in the real world uncertainty is the rule 
and the future is unknown. The history of capitalism shows that economic 
growth is quite compatible with stagnating wages, increasing poverty and 
insecurity for workers and their families, rising inequality and wealth 
accumulating in fewer and fewer hands (the example of the USA and Chile 
from the 1970s to 1990s and Chile spring to mind). And, of course, even 
*if* workers kow-tow to bosses, the bosses may just move production 
elsewhere anyway (as tens of thousands of "down-sized" workers across 
the West can testify). For more details of this process in the USA see 
Edward S. Herman's article "Immiserating Growth: The First World" in
Z Magazine, July 1994.

For anarchists it seems strange to wait for a bigger cake when we can 
have the whole bakery. If control of investment was in the hands of those
it directly effects (working people) then it could be directed into
socially and ecologically constructive projects rather than being
used as a tool in the class war and to make the rich richer. The 
arguments against "rocking the boat" are self-serving (it is obviously 
in the interests the rich and powerful to defend a given income and 
property distribution) and, ultimately, self-defeating for those working 
people who accept them. In the end, even the most self-negating working 
class will suffer from the negative effects of treating society as a 
resource for the economy, the higher mobility of capital that accompanies 
growth and effects of periodic economic and long term ecological crisis. 
When it boils down to it, we all have two options -- you can do what is 
right or you can do what you are told. "Free market" capitalist economics 
opts for the latter.

Finally, the average annual growth rate per capita was 1.4% between 1820
and 1950. This is in sharp contrast to the 3.4% rate between 1950 and
1970. If laissez-faire capitalism would benefit "everyone" more than "really
existing capitalism," the growth rate would be *higher* during the earlier
period, which more closely approximated laissez faire. It is not.

C.11 Doesn't Chile prove that the free market benefits everyone? 

This is a common right-wing "Libertarian" argument, one which is supported 
by many other supporters of "free market" capitalism. Milton Friedman, for 
example, stated that Pinochet "has supported a fully free-market economy 
as a matter of principle. Chile is an economic miracle." [_Newsweek_, Jan, 
1982] This viewpoint is also commonplace in the more mainstream right,
with US President George Bush praising the Chilean economic record
in 1990 when he visited that country.

General Pinochet was the figure-head of a military coup in 1973 against 
the democratically elected left-wing government led by President Allende, a 
coup which the CIA helped organise. Thousands of people were murdered 
by the forces of "law and order" during the coup and Pinochet's forces 
"are conservatively estimated to have killed over 11 000 people in his first 
year in power." [P. Gunson, A. Thompson, G. Chamberlain, _The Dictionary 
of Contemporary Politics of South America_, p. 228] 

The installed police state's record on human rights was denounced as barbaric 
across the world. However, we will ignore the obvious contradiction in this 
"economic miracle", i.e. why it almost always takes authoritarian/fascistic 
states to introduce "economic liberty," and concentrate on the economic facts 
of the free-market capitalism imposed on the Chilean people.

Working on a belief in the efficiency and fairness of the free market,
Pinochet desired to put the laws of supply and demand back to work, and
set out to reduce the role of the state and also cut back inflation. He,
and "the Chicago Boys" -- a group of free-market economists -- thought
what had restricted Chile's growth was government intervention in the
economy -- which reduced competition, artificially increased wages, and
led to inflation. The ultimate goal, Pinochet once said, was to make Chile
"a nation of entrepreneurs."

The role of the Chicago Boys cannot be understated. They had a close
relationship with the military from 1972, and according to one expert
had a key role in the coup:

"In August of 1972 a group of ten economists under the leadership of
de Castro began to work on the formulation of an economic programme 
that would replace [Allende's one]. . . In fact, the existence of the plan
was essential to any attempt on the part of the armed forces to overthrow
Allende as the Chilean armed forces did not have any economic plan of 
their own." [Silvia Bortzutzky, "The Chicago Boys, social security and 
welfare in Chile", _The Radical Right and the Welfare State_, Howard 
Glennerster and James Midgley (eds.), p. 88]

It is also interesting to note that "[a]ccording to the report of the United 
States Senate on covert actions in Chile, the activities of these economists 
were financed by the Central Intelligence Agency (CIA)" [Bortzutzky, 
Op. Cit., p. 89] 

Obviously some forms of state intervention were more acceptable than others.

The actual results of the free market policies introduced by the dictatorship 
were far less than the "miracle" claimed by Friedman and a host of other 
"Libertarians." The initial effects of introducing free market policies
in 1975 was a shock-induced depression which resulted in national output
falling buy 15 percent, wages sliding to one-third below their 1970 level
and unemployment rising to 20 percent. [Elton Rayack, _Not so Free to 
Choose_, p. 57] This meant that, in per capita terms, Chile's GDP only 
increased by 1.5% per year between 1974-80. This was considerably less 
than the 2.3% achieved in the 1960's. The average growth in GDP was 1.5%
per year between 1974 and 1982, which was lower than the average Latin 
American growth rate of 4.3% and lower than the 4.5% of Chile in the 1960's. 
Between 1970 and 1980, per capita GDP grew by only 8%, while for Latin 
America as a whole, it increased by 40%. Between the years 1980 and 1982 
during which all of Latin America was adversely affected by depression 
conditions, per capita GDP fell by 12.9 percent, compared to a fall of 
4.3 percent for Latin America as a whole. [Op. Cit., p. 64] 

In 1982, after 7 years of free market capitalism, Chile faced yet another 
economic crisis which, in terms of unemployment and falling GDP was
even greater than that experienced during the terrible shock treatment
of 1975. Real wages dropped sharply, falling in 1983 to 14 percent 
below what they had been in 1970. Bankruptcies skyrocketed, as did 
foreign debt and unemployment. [Op. Cit., p. 69] By 1983, the Chilean
economy was devastated and it was only by the end of 1986 that Gross 
Domestic Product per capita (barely) equalled that of 1970. [Thomas 
Skidmore and Peter Smith, "The Pinochet Regime", pp. 137-138, 
_Modern Latin America_]

Faced with this massive collapse of a "free market regime designed by
principled believers in a free market" (to use Milton Friedman's words
from an address to the "Smith Centre," a conservative Think Tank at 
Cal State entitled "Economic Freedom, Human Freedom, Political
Freedom") the regime organised a massive bailout. The "Chicago Boys"
resisted this measure until the situation become so critical that they
could not avoid it. The IMF offered loans to Chile to help it out of
mess its economic policies had helped create, but under strict 
conditions. The total bailout cost 3 per cent of Chile's GNP for
three years, a cost which was passed on to the taxpayers. This follows
the usual pattern of "free market" capitalism -- market discipline for
the working class, state aid for the elite. During the "miracle," the
economic gains had been privatised; during the crash the burden for
repayment was socialised. 

The Pinochet regime *did* reduce inflation, from around 500% at the time
of the CIA-backed coup (given that the US undermined the Chilean economy
-- "make the economy scream", Richard Helms, the director of the CIA -- 
high inflation would be expected), to 10% by 1982. From 1983 to 1987, it 
fluctuated between 20 and 31%. The advent of the "free market" led to reduced 
barriers to imports "on the ground the quotas and tariffs protected inefficient
industries and kept prices artificially high. The result was that many 
local firms lost out to multinational corporations. The Chilean business 
community, which strongly supported the coup in 1973, was badly 
affected." [Skidmore and Smith, Op. Cit.] 

The decline of domestic industry had cost thousands of better-paying 
jobs. The ready police repression made strikes and other forms of
protest both impractical and dangerous. According to a report by the Roman 
Catholic Church 113 protesters had been killed during social protest against 
the economic crisis of the early 1980s, with several thousand detained for 
political activity and protests between May 1983 and mid-1984. Thousands 
of strikers were also fired and union leaders jailed. [Rayack, Op. Cit., 
p. 70] The law was also changed to reflect the power property owners have
over their wage slaves and the "total overhaul of the labour law system 
[which] took place between 1979 and 1981. . . aimed at creating a perfect 
labour market, eliminating collective bargaining, allowing massive dismissal 
of workers, increasing the daily working hours up to twelve hours and 
eliminating the labour courts." [Silvia Borzutzky, Op. Cit., p. 91]
Little wonder, then, that this favourable climate for business operations 
resulted in generous lending by international finance institutions.

By far the hardest group hit was the working class, particularly the urban
working class. By 1976, the third year of Junta rule, real wages had fallen 
to 35% below their 1970 level. It was only by 1981 that they has risen 
to 97.3% of the 1970 level, only to fall again to 86.7% by 1983. Unemployment,
excluding those on state make-work programmes, was 14.8% in 1976, falling
to 11.8% by 1980 (this is still double the average 1960's level) only to
rise to 20.3% by 1982. [Rayack, Op. Cit., p. 65]. Unemployment (including 
those on government make-work programmes) had risen to a third of the labour 
force by mid-1983. By 1986, per capita consumption was actually 11% lower 
than the 1970 level. [Skidmore and Smith, Op. Cit.] Between 1980 and 
1988, the real value of wages grew only 1.2 percent while the real value 
of the minimum wage declined by 28.5 percent. During this period, urban 
unemployment averaged 15.3 percent per year. [Silvia Bortzutzky, 
Op. Cit., p. 96] Even by 1989 the unemployment rate was still at 10% (the
rate in 1970 was 5.7%) and the real wage was still 8% lower than in 1970. 
Between 1975 and 1989, unemployment averaged 16.7%. In other words, 
after nearly 15 years of free market capitalism, real wages had still not 
exceeded their 1970 levels and unemployment was still higher. As would
be expected in such circumstances the share of wages in national income 
fell from 42.7% in 1970 to 33.9% in 1993. Given that high unemployment 
is often attributed by the right to strong unions and other labour market 
"imperfections," these figures are doubly significant as the Chilean regime, 
as noted above, reformed the labour market to improve its "competitiveness."

Another consequence of Pinochet's neo-classical monetarist policies "was 
a contraction of demand, since workers and their families could afford to
purchase fewer goods. The reduction in the market further threatened the
business community, which started producing more goods for export and less
for local consumption. This posed yet another obstacle to economic growth
and led to increased concentration of income and wealth in the hands of a
small elite." [Skidmore and Smith, Op. Cit.]

It is the increased wealth of the elite that we see the true "miracle" of
Chile. According to one expert in the Latin American neo-liberal revolutions,
the elite "had become massively wealthy under Pinochet" and when the leader 
of the Christian Democratic Party returned from exile in 1989 he said that 
economic growth that benefited the top 10 per cent of the population had 
been achieved (Pinochet's official institutions agreed). [Duncan Green, 
_The Silent Revolution_, p. 216; Noam Chomsky, _Deterring Democracy_, 
p. 231] In 1980, the richest 10% of the population took in 36.5% of the
national income. By 1989, this had risen to 46.8%. By contrast, the 
bottom 50% of income earners saw their share fall from 20.4% to 16.8%
over the same period. Household consumption followed the same pattern.
In 1970, the top 20% of households had 44.5% of consumption. This
rose to 51% in 1980 and to 54.6% in 1989. Between 1970 and 1989, 
the share going to the other 80% fell. The poorest 20% of households
saw their share fall from 7.6% in 1970 to 4.4% in 1989. The next 20%
saw their share fall from 11.8% to 8.2%, and middle 20% share fell from 
15.6% to 12.7%. The next 20% share their share of consumption fall
from 20.5% to 20.1%.

Thus the wealth created by the Chilean economy in during the Pinochet 
years did *not* "trickle down" to the working class (as claimed would 
happen by "free market" capitalist dogma) but instead accumulated 
in the hands of the rich. As in the UK and the USA, with the application
of "trickle down economics" there was a vast skewing of income 
distribution in favour of the already-rich. That is, there has 
been a 'trickle-up' (or rather, a *flood* upwards). Which is hardly 
surprising, as exchanges between the strong and weak will favour the 
former (which is why anarchists support working class organisation and 
collective action to make us stronger than the capitalists).

In the last years of Pinochet's dictatorship, the richest 10 percent of 
the rural population saw their income rise by 90 per cent between 1987 
and 1990. The share of the poorest 25 per cent fell from 11 per cent to 
7 per cent. [Duncan Green, Op. Cit., p. 108] The legacy of Pinochet's social 
inequality could still be found in 1993, with a two-tier health care system 
within which infant mortality is 7 per 1000 births for the richest fifth of 
the population and 40 per 1000 for the poorest 20 per cent. [Ibid., p. 101]

Per capita consumption fell by 23% from 1972-87. The proportion of the 
population below the poverty line (the minimum income required for basic 
food and housing) increased from 20% to 44.4% between 1970 and 1987. 
Per capita health care spending was more than halved from 1973 to 1985, 
setting off explosive growth in poverty-related diseases such as typhoid, 
diabetes and viral hepatitis. On the other hand, while consumption for the 
poorest 20% of the population of Santiago dropped by 30%, it rose by 
15% for the richest 20%. [Noam Chomsky, _Year 501_, pp. 190-191] The 
percentage of Chileans without adequate housing increased from 27 to 
40 percent between 1972 and 1988, despite the claims of the government 
that it would solve homelessness via market friendly policies.

In the face of these facts, only one line of defence is possible on the
Chilean "Miracle" -- the level of economic growth. While the share
of the economic pie may have dropped for most Chileans, the right
argue that the high economic growth of the economy meant that they
were receiving a smaller share of a bigger pie. We will ignore the well
documented facts that the *level* of inequality, rather than absolute 
levels of standards of living, has most effect on the health of a 
population and that ill-health is inversely correlated with income (i.e.
the poor have worse health that the rich). We will also ignore other
issues related to the distribution of wealth, and so power, in a society
(such as the free market re-enforcing and increasing inequalities via 
"free exchange" between strong and weak parties, as the terms of any
exchange will be skewed in favour of the stronger party, an analysis 
which the Chilean experience provides extensive evidence for with
its "competitive" and "flexible" labour market). In other words, growth 
without equality can have damaging effects which are not, and cannot 
be, indicated in growth figures. 

So we will consider the claim that the Pinochet regime's record on 
growth makes it a "miracle" (as nothing else could). However, when 
we look at the regime's growth record we find that it is hardly a "miracle" 
at all -- the celebrated economic growth of the 1980s must be viewed in 
the light of the two catastrophic recessions which Chile suffered in 1975 
and 1982. As Edward Herman points out, this growth was "regularly 
exaggerated by measurements from inappropriate bases (like the 
1982 trough)." [_The Economics of the Rich_] 

This point is essential to understand the actual nature of Chile's "miracle"
growth. For example, supporters of the "miracle" pointed to the period 1978 
to 1981 (when the economy grew at 6.6 percent a year) or the post 1982-84 
recession up-swing,. However, this is a case of "lies, damn lies, and 
statistics" as it does not take into account the catching up an economy 
goes through as it leaves a recession. During a recovery, laid-off workers 
go back to work and the economy experiences an increase in growth due to 
this. This means that the deeper the recession, the higher the subsequent 
growth in the up-turn. So to see if Chile's economic growth was a miracle 
and worth the decrease in income for the many, we need to look at whole 
business cycle, rather than for the upturn. If we do this we find that Chile 
had the second worse rate of growth in Latin America between 1975 and 
1980. The average growth in GDP was 1.5% per year between 1974 and 
1982, which was lower than the average Latin American growth rate of 
4.3% and lower than the 4.5% of Chile in the 1960's. 

Looking at the entire Pinochet era we discover that only by 1989 -- 14 
years into the free-market policies - did per capita output climb back 
up to the level of 1970. Between 1970 and 1990, Chile's total GDP 
grew by a decidedly average 2% a year. Needless to say, these years
also include the Allende period and the aftermath of the coup and so,
perhaps, this figure presents a false image of the regime's record. If 
we look at the 1981-90 period to (i.e. during the height of Pinochet's 
rule, beginning 6 years after the start of the Chilean "Miracle"), the 
figure is *worse* with the growth rate in GDP just 1.84% a year. This 
was slower than Chile during the 1950s (4%) or the 1960s (4.5%). Indeed, 
if we take population increase into account, Chile saw a per capita GDP 
growth of just 0.3% a year between 1981 and 1990 (in comparison, the UK 
GDP per capita grew by 2.4% during the same period and the USA by 1.9%). 

Thus the growth "miracles" refer to recoveries from depression-like 
collapses, collapses that can be attributed in large part to the free-market 
policies imposed on Chile! Overall, the growth "miracle" under Pinochet 
turns out to be non-existent. The full time frame illustrates Chile's lack 
of significant economic and social process between 1975 and 1989. Indeed, 
the economy was characterised by instability rather than real growth.
The high levels of growth during the boom periods (pointed to by 
the right as evidence of the "miracle") barely made up for the losses
during the bust periods.

Similar comments are possible in regards to the privatised pension
System, regarded by many as a success and a model for other countries. 
However, on closer inspection this system shows its weaknesses -- indeed,
it can be argued that the system is only a success for those companies
making extensive profits from it (administration costs of the Chilean
system are almost 30% of revenues, compared to 1% for the U.S. Social
Security system [Doug Henwood, _Wall Street_, p. 305]). For working people,
it is a disaster. According to SAFP, the government agency which regulates
the system, 96% of the known workforce were enrolled in February 1995, but
43.4% of these were not adding to their funds. Perhaps as many as 60% do
not contribute regularly (given the nature of the labour market, this is
unsurprising). Unfortunately, regular contributions are required to
receive full benefits. Critics argue that only 20% of contributors
will actually receive good pensions. 

It is interesting to note that when this programme was introduced, the
armed forces and police were allowed to keep their own generous public
plans. If the plans *were* are good as their supporters claim, you would
think that those introducing them would have joined them. Obviously
what was good enough for the masses were not suitable for the rulers.

The impact on individuals extended beyond purely financial considerations, 
with the Chilean labour force "once accustomed to secure, unionised jobs
[before Pinochet] . . . [being turned] into a nation of anxious individualists
. . . [with] over half of all visits to Chile's public health system 
involv[ing] psychological ailments, mainly depression. 'The repression
isn't physical any more, it's economic - feeding your family, educating
your child,' says Maria Pena, who works in a fishmeal factory in Concepcion.
'I feel real anxiety about the future', she adds, 'They can chuck us out
at any time. You can't think five years ahead. If you've got money you can
get an education and health care; money is everything here now.'" [Duncan
Green, Op. Cit., p. 96]

Little wonder, then, that "adjustment has created an atomised society, where 
increased stress and individualism have damaged its traditionally strong
and caring community life. . . suicides have increased threefold between 
1970 and 1991 and the number of alcoholics has quadrupled in the last 30 
years . . . [and] family breakdowns are increasing, while opinion polls
show the current crime wave to be the most widely condemned aspect of 
life in the new Chile. 'Relationships are changing,' says Betty Bizamar, a
26-year-old trade union leader. 'People use each other, spend less time
with their family. All they talk about is money, things. True friendship
is difficult now.'" [Ibid., p. 166]

The experiment with free market capitalism also had serious impacts for
Chile's environment. The capital city of Santiago became one of "the most 
polluted cities in the world" due the free reign of market forces. [Nathanial 
Nash, cited by Noam Chomsky, _Year 501_, p. 190] With no environmental 
regulation there is general environmental ruin and water supplies have 
severe pollution problems. [Noam Chomsky, Ibid.] With the bulk of the
country's experts being based on the extraction and low processing of
natural resources, eco-systems and the environment have been plundered
in the name of profit and property. The depletion of natural resources, 
particularly in forestry and fishing, is accelerating due to the 
self-interested behaviour of a few large firms looking for short term 
profit.

All in all, the experience of Chile under Pinochet and its "economic 
miracle" indicates that the costs involved in creating a free market 
capitalist regime are heavy, at least for the majority. Rather than 
being transitional, these problems have proven to be structural and
enduring in nature, as the social, environmental, economic and political 
costs become embedded into society. The murky side of the Chilean
"miracle" is simply not reflected in the impressive macroeconomic
indictors used to market "free market" capitalism, indicators themselves
subject to manipulation as we have seen.

Since Chile has become (mostly) a democracy (with the armed forces still 
holding considerable influence) some movement towards economic reforms 
have begun and been very successful. Increased social spending on health, 
education and poverty relief has occurred since the end of the dictatorship
and has lifted over a million Chileans out of poverty between 1987 and 
1992 (the poverty rate has dropped from 44.6% in 1987 to 23.2% in 1996,
although this is still higher than in 1970). However, inequality is still
a major problem as are other legacies from the Pinochet era, such as
the nature of the labour market, income insecurity, family separations,
alcoholism, and so on.

Chile has moved away from Pinochet's "free-market" model in other 
ways to. In 1991, Chile introduced a range of controls over capital, 
including a provision for 30% of all non-equity capital entering Chile 
to be deposited without interest at the central bank for one year. This 
reserve requirement - known locally as the encaje - amounts to a tax 
on capital flows that is higher the shorter the term of the loan.

As William Greider points out, Chile "has managed in the last 
decade to achieve rapid economic growth by abandoning the pure 
free-market theory taught by American economists and emulating 
major elements of the Asian strategy, including forced savings and 
the purposeful control of capital. The Chilean government tells 
foreign investors where they may invest, keeps them out of certain 
financial assets and prohibits them from withdrawing their capital 
rapidly." [_One World, Ready or Not_, p. 280] 

Thus the Chilean state post-Pinochet has violated its "free market" 
credentials, in many ways, very successfully too. Thus the claims 
of free-market advocates that Chile's rapid growth in the 1990s is 
evidence for their model are false (just as their claims concerning 
South-East Asia also proved false, claims conveniently forgotten 
when those economies went into crisis). Needless to say, Chile is 
under pressure to change its ways and conform to the dictates of 
global finance. In 1998, Chile eased its controls, following heavy 
speculative pressure on its currency, the peso.

So even the neo-liberal jaguar has had to move away from a purely 
free market approach on social issues and the Chilean government 
has had to intervene into the economy in order to start putting back 
together the society ripped apart by market forces and authoritarian 
government.

So, for all but the tiny elite at the top, the Pinochet regime of "economic
liberty" was a nightmare. Economic "liberty" only seemed to benefit one
group in society, an obvious "miracle." For the vast majority, the "miracle"
of economic "liberty" resulted, as it usually does, in increased poverty,
pollution, crime and social alienation. The irony is that many right-wing 
"libertarians" point to it as a model of the benefits of the free market. 

C.11.1 	But didn't Pinochet's Chile prove that "economic freedom is an 
	indispensable means toward the achievement of political freedom"? 

Pinochet did introduce free-market capitalism, but this meant real liberty
only for the rich. For the working class, "economic liberty" did not exist, 
as they did not manage their own work nor control their workplaces and 
lived under a fascist state. 

The liberty to take economic (never mind political) action in the forms 
of forming unions, going on strike, organising go-slows and so on was 
severely curtailed by the very likely threat of repression. Of course, the 
supporters of the Chilean "Miracle" and its "economic liberty" did not 
bother to question how the suppression of political liberty effected the 
economy or how people acted within it. They maintained that the 
repression of labour, the death squads, the fear installed in rebel 
workers could be ignored when looking at the economy. But in the 
real world, people will put up with a lot more if they face the barrel 
of a gun than if they do not.

The claim that "economic liberty" existed in Chile makes sense only
if we take into account that there was only *real* liberty for one class.
The bosses may have been "left alone" but the workers were not, unless
they submitted to authority (capitalist or state). Hardly what most people
would term as "liberty."

As far as political liberty goes, it was only re-introduced once it was
certain that it could not be used by ordinary people. As Cathy Scheider
notes, "economic liberty" has resulted in most Chileans having "little
contact with other workers or with their neighbours, and only limited time
with their family. Their exposure to political or labour organisations is
minimal. . . they lack either the political resources or the disposition
to confront the state. The fragmentation of opposition communities has
accomplished what brute military repression could not. It has transformed
Chile, both culturally and politically, from a country of active
participatory grassroots communities, to a land of disconnected,
apolitical individuals. The cumulative impact of this change is such that
we are unlikely to see any concerted challenge to the current ideology in
the near future." [_Report on the Americas_, (NACLA) XXVI, 4/4/93] 

In such circumstances, political liberty can be re-introduced, as no one 
is in a position to effectively use it. In addition, Chileans live with the
memory that challenging the state in the near past resulted in a fascist
dictatorship murdering thousands of people as well as repeated and 
persistent violations of human rights by the junta, not to mention the 
existence of "anti-Marxist" death squads -- for example in 1986 "Amnesty 
International accused the Chilean government of employing death squads." 
[P. Gunson, A. Thompson, G. Chamberlain, Op. Cit., p. 86] According to 
one Human Rights group, the Pinochet regime was responsible for 11,536
human rights violations between 1984 and 1988 alone. [Calculation of
"Comite Nacional de Defensa do los Derechos del Pueblo," reported in
_Fortin_, September 23, 1988]

These facts that would have a strongly deterrent effect on people 
contemplating the use of political liberty to actually *change* the 
status quo in ways that the military and economic elites did not approve 
of. In addition, it would make free speech, striking and other forms of 
social action almost impossible, thus protecting and increasing the power, 
wealth and authority of the employer over their wage slaves. The claim 
that such a regime was based on "economic liberty" suggests that those 
who make such claims have no idea what liberty actually is.

As Kropotkin pointed out years ago, "freedom of press. . . and all the rest,
are only respected if the people do not make use of them against the
privileged classes. But the day the people begin to take advantage of them
to undermine those privileges, then the so-called liberties will be cast
overboard." [_Words of a Rebel_, p. 42] Chile is a classic example of
this.

Moreover, post-Pinochet Chile is not your typical "democracy." Pinochet is 
a senator for life, for example, and he has appointed one third of the 
senate (who have veto power - and the will to use it - to halt efforts to 
achieve changes that the military do not like). In addition, the threat of 
military intervention is always at the forefront of political discussions. 
This was seen in 1998, when Pinochet was arrested in Britain in regard 
of a warrant issued by a Spanish Judge for the murders of Spanish 
citizens during his regime. Commentators, particularly those on the 
right, stressed that Pinochet's arrest could undermine Chile's "fragile 
democracy" by provoking the military. In other words, Chile was 
only a democracy in-so-far as the military let it be. Of course, few 
commentators acknowledged the fact that this meant that Chile 
was not, in fact, a democracy after all. Needless to say, Milton
Friedman considers Chile to have "political freedom" now.

It is interesting to note that the leading expert of the Chilean 
"economic miracle" (to use Milton Friedman's words) did not 
consider that political liberty could lead to "economic liberty" 
(i.e. free market capitalism). According to Sergio de Castro, the 
architect of the economic programme Pinochet imposed, fascism 
was required to introduce "economic liberty" because:

"it provided a lasting regime; it gave the authorities a degree of 
efficiency that it was not possible to obtain in a democratic regime; 
and it made possible the application of a model developed by experts 
and that did not depend upon the social reactions produced by its 
implementation." [quoted by Silvia Bortzutzky, "The Chicago Boys, 
social security and welfare in Chile", _The Radical Right and the 
Welfare State_, Howard Glennerster and James Midgley (eds.), 
p. 90]

In other words, fascism was an ideal political environment to introduce
"economic liberty" *because* it had destroyed political liberty. Perhaps 
we should conclude that the denial of political liberty is both necessary 
and sufficient in order to create (and preserve) "free market" capitalism? 
And perhaps to create a police state in order to control industrial disputes, 
social protest, unions, political associations, and so on, is no more than to 
introduce the minimum force necessary to ensure that the ground rules the 
capitalist market requires for its operation are observed? 

As Brian Barry argues in relation to the Thatcher regime in Britain which was 
also heavily influenced by the ideas of "free market" capitalists like Milton 
Friedman and Frederick von Hayek, perhaps it is:

"Some observers claim to have found something paradoxical in the fact
that the Thatcher regime combines liberal individualist rhetoric with
authoritarian action. But there is no paradox at all. Even under the
most repressive conditions . . . people seek to act collectively in order
to improve things for themselves, and it requires an enormous exercise
of brutal power to fragment these efforts at organisation and to force
people to pursue their interests individually. . . left to themselves,
people will inevitably tend to pursue their interests through collective
action - in trade unions, tenants' associations, community organisations
and local government. Only the pretty ruthless exercise of central power
can defeat these tendencies: hence the common association between 
individualism and authoritarianism, well exemplified in the fact that 
the countries held up as models by the free-marketers are, without 
exception, authoritarian regimes" ["The Continuing Relevance of 
Socialism", in _Thatcherism_, Robert Skidelsky (ed.), p. 146]

Little wonder, then, that Pinochet's regime was marked by authoritarianism,
terror and rule by savants. Indeed, "[t]he Chicago-trained economists 
emphasised the scientific nature of their programme and the need to replace 
politics by economics and the politicians by economists. Thus, the decisions 
made were not the result of the will of the authority, but they were 
determined by their scientific knowledge. The use of the scientific knowledge, 
in turn, would reduce the power of government since decisions will be made 
by technocrats and by the individuals in the private sector." [Silvia 
Borzutzky, Op. Cit., p. 90]

Of course, turning authority over to technocrats and private power does 
not change its nature - only who has it. Pinochet's regime saw a marked
shift of governmental power away from protection of individual rights to 
a protection of capital and property rather than an abolition of that power 
altogether. As would be expected, only the wealthy benefited. The working
class were subjected to attempts to create a "perfect labour market" - 
and only terror can turn people into the atomised commodities such a
market requires.

Perhaps when looking over the nightmare of Pinochet's regime we should 
ponder these words of Bakunin in which he indicates the negative effects 
of running society by means of science books and "experts":

"human science is always and necessarily imperfect. . . were we to force
the practical life of men - collective as well as individual - into rigorous 
and exclusive conformity with the latest data of science, we would thus 
condemn society as well as individuals to suffer martyrdom on a
Procrustean bed, which would soon dislocate and stifle them, since life
is always an infinitely greater thing than science." [_The Political
Philosophy of Bakunin_, p. 79]

The Chilean experience of rule by free market ideologues prove Bakunin's
points beyond doubt. Chilean society was forced onto the Procrustean
bed by the use of terror and life was forced to conform to the assumptions
found in economics textbooks. And as we proved in the last section, only 
those with power or wealth did well out of the experiment.

C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

Given the general lack of laissez-faire in the world, examples to show
the benefits of free market capitalism are few and far between. However, 
Hong Kong is often pointed to as an example of the power of capitalism 
and how a "pure" capitalism will benefit all. 

It is undeniable that the figures for Hong Kong's economy are impressive. 
Per-capita GDP by end 1996 should reach US$ 25,300, one of the highest in 
Asia and higher than many western nations. Enviable tax rates - 16.5% 
corporate profits tax, 15% salaries tax. In the first 5 years of the 
1990's Hong Kong's economy grew at a tremendous rate -- nominal per 
capita income and GDP levels (where inflation is not factored in) almost 
doubled. Even accounting for inflation, growth was brisk. The average 
annual growth rate in real terms of total GDP in the 10 years to 1995
was six per cent, growing by 4.6 per cent in 1995.

However, looking more closely, we find a somewhat different picture than 
that painted by those claim it as an example of the wonders of free 
market capitalism (for the example of Chile, see section C.11). 

Firstly, like most examples of the wonders of a free market, it is not 
a democracy, it was a relatively liberal colonial dictatorship run 
from Britain. But political liberty does not rate highly with many 
supporters of laissez-faire capitalism (such as right-libertarians,
for example). Secondly, the government owns all the land, which is 
hardly capitalistic, and the state has intervened into the economy many
times (for example, in the 1950s, one of the largest public housing schemes 
in history was launched to house the influx of about 2 million people 
fleeing Communist China). Thirdly, Hong Kong is a city state and cities
have a higher economic growth rate than regions (which are held back by
large rural areas). Fourthly, according to an expert in the Asian 
Tiger economies, "to conclude . . . that Hong Kong is close to a free 
market economy is misleading." [Robert Wade, _Governing the Market_, 
p. 332] 

Wade notes that:

"Not only is the economy managed from outside the formal institutions
of government by the informal coalition of peak private economic
organisations [notably the major banks and trading companies, which 
are closely linked to the life-time expatriates who largely run the 
government. This provides a "point of concentration" to conduct
negotiations in line with an implicit development strategy], but 
government itself also has available some unusual instruments for 
influencing industrial activity. It owns all the land. . . It controls 
rents in part of the public housing market and supplies subsidised 
public housing to roughly half the population, thereby helping to 
keep down the cost of labour. And its ability to increase or decrease 
the flow of immigrants from China also gives it a way of affecting 
labour costs." [Ibid.]

Wade notes that "its economic growth is a function of its service
role in a wider regional economy, as entrepot trader, regional 
headquarters for multinational companies, and refuge for nervous 
money." [Op. Cit., p. 331] In other words, an essential part of 
its success is that it gets surplus value produced elsewhere in
the world. Handling other people's money is a sure-fire way of 
getting rich (see Henwood's _Wall Street_ to get an idea of the 
sums involved) and this will have a nice impact on per-capita 
income figures (as will selling goods produced sweat-shops in 
dictatorships like China).

By 1995, Hong Kong was the world's 10th largest exporter of services 
with the industry embracing everything from accounting and legal services,
insurance and maritime to telecommunications and media. The contribution of
the services sectors as a whole to GDP increased from 60 per cent in 1970 to
83 per cent in 1994. Manufacturing industry has moved to low wage countries
such as southern China (by the end of the 1970's, Hong Kong's manufacturing
base was less competitive, facing increasing costs in land and labour -- in
other words, workers were starting to benefit from economic growth and so
capital moved elsewhere). The economic reforms introduced by Deng Xiaoping 
in southern China in 1978 where important, as this allowed capital access
to labour living under a dictatorship (just as American capitalists invested
heavily in Nazi Germany -- labour rights were null, profits were high). It 
is estimated about 42,000 enterprises in the province have Hong Kong
participation and 4,000,000 workers (nine times larger than the territory's
own manufacturing workforce) are now directly or indirectly employed by Hong
Kong companies. In the late 1980's Hong Kong trading and manufacturing 
companies began to expand further afield than just southern China. By
the mid 1990's they were operating across Asia, in Eastern Europe and 
Central America.

The gradual shift in economic direction to a more service-oriented economy
has stamped Hong Kong as one of the world's foremost financial centres. 
This highly developed sector is served by some 565 banks and deposit-taking
companies from over 40 countries, including 85 of the world's top 100 in
terms of assets. In addition, it is the 8th largest stock market in the 
world (in terms of capitalisation) and the 2nd largest in Asia.

Therefore it is pretty clear that Hong Kong does not really show the 
benefits of "free market" capitalism. Wade indicates that we can consider 
Hong Kong as a "special case or as a less successful variant of the 
authoritarian-capitalist state." [Op. Cit., p. 333] Its success lies
in the fact that it has access to the surplus value produced elsewhere
in the world (particularly that from the workers under the dictatorship 
in China and from the stock market) which gives its economy a nice boost. 

Given that everywhere cannot be such a service provider, it does not 
provide much of an indication of how "free market" capitalism would 
work in, say, the United States. And as there is in fact extensive 
(if informal) economic management and that the state owns all the 
land and subsidies rent and health care, how can it be even considered 
an example of "free market" capitalism in action?

