The ‘Implications’ of Paul Baran

In its July-August 2012 issue, Monthly Review has published a new document, entitled “Some Theoretical  Implications” and written by Paul Baran, that was originally intended to be a chapter of “Monopoly Capital.”  The summer issue also includes the correspondence between Paul Sweezy and Baran during what turned out to be the final weeks of Baran’s life. Written between February and March 1964, we see two of the greatest economists of the 20th century discuss among themselves the “Implications.”

Monthly Review editor John Bellamy Foster put together the “Implications” piece as it appears in the summer 2012 issue from two texts by Baran that were recently found in Sweezy’s papers. These documents were long believed to have been lost, so their discovery and publication is an event of the highest significance for the history of 20th-century economic thought.

Monthly Review plans to publish next year an additional document by Baran that was to be a second chapter on the quality of life under U.S. monopoly capitalism. As it was published in 1966, “Monopoly Capital” has only one such chapter.

While all indications are that Foster has done an extraordinary job editing the Baran documents, they are so important for the history of economic thought it might be a good idea to scan the original texts and make them available online so that future economists and historians can examine them just as Baran and Sweezy left them.

Though all the materials in this fascinating issue of Monthly Review will be posted online before the end of August, I would urge my readers if they possibly can to purchase the issue in hard copy. It is well worth the 12 U.S. and Canadian dollars, 9 euros or 8 British pounds, unless you are really broke.

The importance of the “Implications” document is that it is here that Baran explores the relationship between “the surplus” and Marx’s surplus value. What Marx called surplus value is the most important category of all economics. Ever since “Monopoly Capital” was published in 1966, the question has been asked: Is “the surplus” simply another name for Marx’s surplus value? Or is it something else?

Now a half a century after “Monopoly Capital” was published, we have material that for the first time allows us to answer this question.

The term “the surplus” was used by Paul Baran in his influential “Political Economy of Growth,” published in 1957. In this work, Baran demonstrated that “the surplus” produced by workers and peasants of the oppressed countries—whether outright colonies, as many of them still were in 1957, semi-colonies, or neo-colonies—was large enough to finance their rapid industrialization.

However, huge quantities of the surplus were either pumped out of these countries by the monopoly corporations, not realized at all due to unemployment and excess capacity, squandered unproductively by the personal consumption of the ruling classes and their hangers-on, or devoured by the military and security forces.

Baran, a tenured professor of economics at Stanford University in Northern California, was a Marxist—indeed the only avowed Marxist—with a tenured professorship in any U.S. university. (1) When he wrote the “Political Economy of Growth,” however, he had a non-Marxist audience in mind.

Baran had little choice in the matter. Few U.S. economists and economics students at the time had even a rudimentary acquaintance with Marxist economics, and unlike in Europe U.S. workers were also almost entirely unfamiliar with Marxism.

As a result, Baran was obliged to use the standard economics lingo designed for marginalist economists if he wanted to be understood at all. The result was that the relationship of “the surplus” to Marx’s surplus value remained of necessity somewhat ambiguous.

It is not unprecedented for a Marxist writer to produce works on economics that avoid the use of specific Marxist terminology in order to reach a broader audience. This is exactly what Lenin did in his most influential economic work “Imperialism, the Highest Stage of Capitalism,” written in 1916. But in the light of Lenin’s other writings, there was never any doubt that Lenin was in economic theory very much an “orthodox Marxist.” So those familiar with Marxism could “fill in the blanks,” so to speak, when they read the pamphlet, while those unfamiliar with Marxist economic ideas could still follow the main argument.

In “Monopoly Capital,” a joint work of Baran and Sweezy published after Baran’s death in 1964, the authors used the same terminology that Baran had used in “The Political Economy of Growth.” Just like was the case with that work, Baran and Sweezy were trying to reach an audience, especially young economics students, who were completely ignorant of Marxist economics. The authors assumed that the readers of “Monopoly Capital,” if they were familiar with economics at all, knew only the “neo-classical” marginalist theory taught in U.S. universities.

In my opinion, a problem arose because the authors of “Monopoly Capital” set themselves a task that was far more ambitious than Baran’s “Political Economy of Growth,” Hilferding’s “Finance Capital,” or Lenin’s pamphlet “Imperialism.” The authors indicated within the text of “Monopoly Capital” itself that they believed that Marx’s “Capital” only explained the laws that governed “competitive capitalism.” But according to them, monopoly capitalism, which developed during the last quarter of the 19th century, was governed by “laws of motion” very different than those that Marx examined in “Capital.”

If this was indeed true, then “Capital” was out of date shortly after it was published in 1867, since it described the laws of an economic system that had largely ceased to exist even before the end of the 19th century.

Baran and Sweezy were well aware that they were not the first Marxists to deal with the problem of monopoly capitalism. Before “Monopoly Capital,” the best-known works on this subject were Rudolf Hilferding’s book “Finance Capital” (2) and Lenin’s pamphlet “Imperialism.”

The problem with these two works, according to the authors of “Monopoly Capital,” is that they were still working within the framework of Marx’s “Capital” and assumed that capitalism was still basically a “competitive system.” Therefore, by implication, if “Capital” was out of date shortly after it was written, both “Finance Capital” and “Imperialism” were out of date before they were written.

If capitalism had changed as much as Baran and Sweezy believed it had since “Capital” was written, what was  necessary was not to write yet another popularization of Marxist ideas adapted to American readers of the  1960s (3) using non-Marxist language that was comprehensible to them. It was rather to fully explore the radical changes in the capitalist mode of production and how these affected the operations of the basic economic  categories used by or developed by Marx, such as value and its form exchange value, wage labor and labor power, money, credit, and—most important of all—surplus value. In other words, the task that Baran and Sweezy set for themselves was not to write an updated  1960s version of  Hilferding’s “Finance Capital” and Lenin’s “Imperialism” but rather a new “Capital.”

However, as it was published in 1966 by Sweezy, “Monopoly Capital” simply didn’t measure up to this extremely ambitious task. With the publication of the “Implications” document, however, we now have a  “Monopoly Capital” that is quite different than the work we have had for the last 50 years. Over the next few months, I plan to explore the “new” “Monopoly Capital.” How much the publication of the chapter on the “Quality of Life” under U.S. monopoly capitalism will further transform “Monopoly Capital” remains to be seen, but it seems unlikely to affect “Monopoly Capitalism” as much as the “Implications” document.

The debate on the “old” “Monopoly Capital” began shortly after its publication in 1966. David Horowitz—today a far-right Muslim-baiting Zionist but in those days considered a promising young Marxist writer and historian—praised the book for abandoning the labor theory of value and surplus value and replacing it with categories derived from the works of such bourgeois economists as Veblen and Keynes. Horowitz himself was an advocate of a so-called “neo-Marxist” analysis that as far as economic theory was concerned replaced “outdated” or “refuted” Marxist economics with the more “scientific,” up-to-date ideas of the best that modern bourgeois economics had to offer.

Therefore, even in those days it was clear that Horowitz was not much of a Marxist as far as economics was concerned. Paul Sweezy seemed a little embarrassed by the praise he received from such a source. He indicated that “the surplus” was simply another word for surplus value and rather regretted that he and Baran had introduced “the surplus” instead of sticking with “surplus value.” And there things stood for more than 50 years.

Paul Sweezy, born in 1910, was a scion of the ruling American financial oligarchy. His father, Everett Sweezy, was once a vice-president of the powerful First National Bank, a major Wall Street bank. (4) Everett, though, was a “free thinker” on religious questions and therefore something of a radical in the circles in which he moved. The Sweezy family had lost much, though not all, of its capital in the 1929 stock market crash. The young Paul, after studying marginalist economics at Harvard, turned toward Marxism in the 1930s—though he also was heavily influenced by the “Keynesian revolution” in academic bourgeois economics, which was then in full swing—and never looked back.

Far less known is the life of “Monopoly Capital” co-author Paul Baran. While Baran’s life of about 54 years was far shorter than Sweezy’s, it was in many ways the more interesting since it intersected with the greatest event of the 20th century, the Russian Revolution.

Paul Alexander Baran

Paul Alexander Baran was hardly your typical U.S. professor of economics. Baran was born either in 1909 or 1910—the  sources are in conflict—to a Jewish family in Mykolaiv in Ukraine, then part of the czarist empire. His father, a medical doctor, had been active in politics during the revolution of 1905 as a Menshevik. The Mensheviks were the moderate wing of the Russian Social Democratic Labor Party who were opposed by the more radical Bolshevik faction, led by Lenin.

The Baran family left Russia after the October Revolution for Germany but moved to Moscow the capital of what was now the Soviet Union in the middle 1920s. The young Baran was a student of economics at the Plekhanov Institute, a branch of the University of Moscow that specialized in economic theory, between 1926-28.

This was no ordinary time. A great debate was raging within the ruling Communist Party of the Soviet Union on the prospects of building socialism in what was still largely an underdeveloped agrarian country. How could the Soviet Union as an industrially underdeveloped and isolated socialist state possibly find “the surplus,” to use the language of Baran’s “Political Economy of Growth,” to finance industrialization?

Among Baran’s teachers was the veteran Bolshevik revolutionary and economist Evgeny Preobrazhensky (1886-1937). Preobrazhensky developed the concept of what he called “primitive socialist accumulation” in analogy with the “primitive or primary accumulation of capital” that Marx had analyzed in “Capital.”

Since the  Soviet Union had no colonies, Preobrazhensky argued that the socialist state would have to “exploit” the peasantry by carrying out an “unequal exchange” with the peasants through supplying them in terms of labor with fewer products than the grain and other agricultural commodities the peasants would provide the socialist state in return. In this way, the peasants would perform unpaid labor for the socialist state, and “the surplus” thus produced would be used to finance “primitive socialist accumulation.”

This idea was extremely unpopular in what was still an overwhelmingly peasant country. Preobrazhensky’s opponents in the Communist Party—and there were many—pointed out that the October Revolution had been made to end exploitation and not establish new forms of exploitation. But among those who were impressed with Preobrazhensky’s arguments was the general secretary of the Communist party, Joseph Stalin.

Preobrazhensky was not a Stalin supporter but instead backed Stalin’s arch-opponent, Leon Trotsky and his “Left Opposition.” The Left Opposition (5) proposed a program of accelerated industrialization that was to be financed by increased taxes on the wealthier peasants. Trotsky himself never endorsed the slogan of “exploiting the peasantry,” which was the political kiss of death in the still mostly peasant Soviet Union.

After Stalin adopted a program of accelerated industrialization, Preobrazhensky broke with Trotsky and shifted his support to the Stalin group within the Communist Party. However, Preobrazhensky’s attempts to work with Stalin’s supporters soon broke down, since Preobrazhensky did not approve of the extreme methods—compulsory  collectivization—that the Stalin leadership used to finance “primitive socialist accumulation.” Eventually, Preobrazhensky was executed during the terror of 1937 after he refused to confess to the crimes he was charged with committing.

Due to the increasingly repressive political atmosphere in the country, Baran decided to leave the Soviet Union in 1928 and move back to Germany, which was enjoying the kind of politically tolerant atmosphere under the Weimar republic that was far more congenial to an intellectual like Baran. There he became associated with the Frankfurt Institute, which also included another Marxist economist of note, Henryk Grossman.

Baran wrote for the Social Democratic press in Germany, though under an assumed name to protect his parents living in the Soviet Union. The young Baran even got to meet Rudolf Hilferding in person, the author of “Finance Capital” and one of the pioneering theorists of monopoly capitalism. However, the politically tolerant atmosphere of Germany was not to last. In January 1933, Adolf Hitler was appointed chancellor and moved to rapidly consolidate a full-scale fascist dictatorship that was both anti-left and anti-Semitic.

Baran was doomed on both counts. He left Germany in 1933 to escape Hitler’s emerging dictatorship and moved to Paris. However, the young  economist could find no work in Depression-bound France and received a visa in December 1934 to visit his parents in the Soviet Union.

Baran’s visit to the Soviet Union coincided with the assassination of the popular Leningrad Communist Party leader Sergei Kirov, and the political atmosphere in the Soviet Union was taking a radical turn for the worse. Many of his friends who were associated with either the Trotskyist Left Opposition or the Right Opposition of Bukharin had been arrested. Baran’s visa was not renewed and he had to leave the USSR in early 1935. The political climate in the USSR in any case did not encourage Baran to attempt to take up Soviet citizenship and live permanently in the Soviet Union.

Instead, Baran moved to Poland to work in a business that was owned by relatives. In 1939, he managed to emigrate to the United States just ahead of the Nazi invasion of Poland, which would have almost certainly been fatal to Baran as a Jew if he had not gotten out of the country in time.

In 1939, shortly after arriving in the United States, he met Paul Sweezy, his future co-worker in the writing of “Monopoly Capital.” He then studied economics at Harvard. Like many other left-wing intellectuals, including Paul Sweezy himself, and Herbert Marcuse, he was employed by the forerunner of the CIA, the Office of Strategic Services, during World War II. He also got to work with the famed American economist John Kenneth Galbraith studying the effects of the massive carpet bombing of Germany that Britain and the United States had carried out during World War II.

Perhaps because of Baran’s decision not to remain in the Soviet Union in the 1920s and his departure from the Soviet Union again in the 1930s, combined with his activity with the Social Democratic Party rather than the Communist Party in Germany, he was able to find employment with the U.S. Commerce Department and then the New York Federal Reserve Bank before finally obtaining a teaching job at Stanford University in 1948 as a professor of economics, obtaining tenure from Stanford in 1951. If, however, Baran’s employers believed that because of his experience in the Soviet Union he would prove to be a harmless pro-imperialist, anti-Soviet type of State Department “socialist,” they were destined to be disappointed.

Baran wrote for Monthly Review, Paul Sweezy’s and his militantly anti-imperialist and pro-Soviet magazine, though under an assumed name as the McCarthyite witch hunt was now reaching its peak. In addition, Baran’s “Political Economy of Growth,” much like Monthly Review, was strongly anti-imperialist and took a favorable view of Soviet industrialization. Later, he was an outspoken defender of the Cuban Revolution and visited revolutionary Cuba. He was attacked for his support of the Cuban Revolution by many of Stanford’s wealthy alumni.

Because Baran had tenure, Stanford could not fire him. But the university did everything to make life for him as unpleasant as it possibly could. Unlike other tenured professors, he was loaded up with course work and was never given a raise. Perhaps the university authorities hoped that he would take the hint and resign, but he refused to do so. He was also at times hounded by the notorious U.S. FBI political police. On one occasion, J. Edgar Hoover’s cops accused Baran of being a Polish spy because he allegedly met with the well-known Polish economist Oskar Lange!

It is quite possible that Stanford’s harassing of Baran played a role in his early death in March 1964 as he was working with Sweezy on finishing up “Monopoly Capital.” If Baran had lived, the “Implications” document would have been a part of “Monopoly Capital” from the beginning, as had been the original intention of both Baran and Sweezy, and the history of left-wing and Marxist economics in the U.S. over the last half century would have been somewhat different.

The theory of wages and surplus value, from the classical economists to Lenin

The classical economists assumed that wages were and would remain at the biological subsistence level. Like any other commodity, the price of labor—they didn’t distinguish between labor and labor power—fluctuated around its natural price—or value, the same thing to the bourgeois classics. According to the classical economists, the price of labor had to be high enough to sustain and reproduce the working class but no more.

If the price of labor rose above the level necessary to reproduce the working class, the number of workers would increase until the price of labor once again fell to or below subsistence. If the price of labor fell below the level that was necessary to reproduce the working class, the number of workers would fall until once again the price of labor rose back to the levels that were necessary to reproduce the working class.

Marx and the theory of wages

This is the theory of wages that Marx inherited from Ricardo and other classical economists. Unlike the classical economists, however, Marx was a leader of the working class. While Marx always emphasized that the developing workers’ movement would have to aim to abolish the entire wages system—capitalism—he was also, unlike some other early socialists, a strong champion of the daily struggle of the workers to raise wages whenever possible. In light of his radically different perspective as a theoretician, and above all as a leader of the early workers’ movement, Marx modified the theory of wages that he had inherited from the classical economists.

First, Marx distinguished between the labor the workers actually perform for the capitalists and the workers’ ability to perform labor—labor power—which the workers must sell to the capitalists in order to live and produce the next generation.

Unlike other commodities under capitalist production, labor power isn’t itself produced by industrial capitalists. Instead, the capitalists must pay the workers a sum of money in exchange for a given quantity of labor power measured in terms of time. The workers then use the money to purchase other commodities—which are produced by industrial capitalists—whose material use value is precisely to renew their ability to work and raise the next generation of workers. The market basket of commodities the workers consume transfers its value to the labor power of the workers.

Like all commodities, the value of the market basket of commodities that workers consume—called in today’s economic slang “wage goods” (6)—have both use values and values. The use values of the commodities that the workers purchase are that they enable the workers to live and reproduce the next generation of workers. The value of the commodities is the quantity of abstract human labor that is necessary to produce these commodities.

Unlike the classical economists, Marx divided the use values of the commodities that the workers consume to reproduce their labor power into two parts. The first part was the part that is the absolute minimum necessary to keep the workers alive and healthy enough to work and reproduce the next generation of workers. If wages fell below this level—and they sometimes did and still do—the health and the ability of the working class to work and reproduce its labor power over time would be undermined.

If the situation persisted, the workers would begin to die off, the production of surplus value would eventually fall, and capitalist production would eventually grind to a halt.

The other portion of the wage represented an additional, historical and moral element above and beyond what is strictly necessary to reproduce the workers biologically. As the productivity of labor grows, the use values that make up the workers’ wages in real terms fall in terms of value. If real wages remain unchanged in use value terms, the value of labor power in terms of the quantity of abstract human labor it represents falls with the rise in labor productivity.

If we assume the  workday remains unchanged, the rate of surplus value rises. Marx calls this “relative surplus value” as opposed to the absolute surplus value that rises if the workday is extended without a rise in the daily wage, the productivity of labor remaining unchanged. As the productivity of labor rises, the growth in relative surplus value takes on special importance.

The falling value of “wage goods” creates the possibility of a rise in real wages above the strict biological minimum without a fall in the rate of surplus value. The more the productivity of labor rises the more it becomes possible for real wages to rise while the rate of surplus value actually increases. It is quite possible for the workers to be living in material terms better than ever while they are also more exploited than ever.

In this way, as Marx put it, it becomes possible for the workers to participate to a certain degree in the progress of civilization. Though to what extent they are able to do so depends on their degree of organization, since the natural tendency of capitalist production is to drive wages down toward their biological minimum.

An additional assumption that Marx made in analyzing wages and surplus value was that that all commodities including the commodities consumed by the workers are sold at their values. Under this assumption, the value of money—the quantity of money material that the tokens the workers receive in their wage packets represents—exactly equals the value of the commodities that they purchase in order to live and raise their families.

Marx didn’t make this assumption because he thought it was the case—on the contrary, market prices fluctuate around prices of production, so it would almost certainly never be true—but in order to lay bare the basic relations of capitalist production and the real nature of surplus value. In this way, Marx, unlike either Ricardo or the Ricardian socialists, was able to explain surplus value on the basis of the equal exchange of commodities.

This, Marx believed, was his most important discovery in economics. The theory of surplus value is therefore at the very center of Marx’s economic theory. This is the theory of wages and surplus value that Baran and Sweezy inherited from Marx. We might call this the classical Marxist theory of wages.

Baran and Sweezy modify Marx’s theory of wages

As John Bellamy Foster explains in his introduction, “Monopoly Capital” was widely criticized for ignoring the whole question of wages. As Foster points out, this impression arose because we did not actually have the entire book, since the chapter that would deal with wages and the production of surplus value, the “Implications” chapter, was left out. If Baran had simply reproduced Marx’s basic arguments, there would be nothing new here. We would simply say that, David Horowitz notwithstanding, the authors of “Monopoly Capital” were supporters of Marx’s theory of wages and surplus value and had nothing fundamentally new to say. However, as we will see, this was not the case.

The world of ‘Monopoly Capital’

All meaningful books on political economy and its critique reflect the historical and economic conditions under which they were written. How can they not? For example, the wage theory of the classical economists represented the grim conditions of the industrial revolution, when the real wages of the workers were pretty close to the biological minimum.

Marx’s “Capital” was written in the early days of the workers’ movement when the working class was beginning to fight back against capitalist exploitation and achieving initial results such as the shortening of the legal workday and some rises in wages, though the material conditions of the workers was still grim.

In contrast, “Monopoly Capital” was written during the post-World War II economic prosperity and the Cold War in the richest, most powerful imperialist country that the world had ever seen. It was a time when the capitalist world dominated by the U.S. world empire forged during World War II faced a socialist bloc headed by the Soviet Union. The working class in almost every other imperialist country with the exception of the U.S. had created by then mass labor-based parties that had gained considerable representation in parliament and often headed governments. Even in the U.S., the trade union movement wielded clout that far exceeded anything seen before in the history of U.S. capitalism.

As a result, the real wages of the workers in imperialist industrial countries had in terms of both hourly and social wages risen to unprecedented levels. As far as its material conditions of life were concerned, the  working class in the U.S. and Western Europe, and increasingly Japan as well, had come a long way since the days of Marx and Engels, not to speak of the days of Ricardo and other classical economists. Under these new conditions, the question arose: Was Marx’s theory of wages and surplus value still valid?

Do workers receive surplus value?

In his small book “Commodities Produced by Means of Commodities,” the neo-Ricardian economist Piero Sraffa claimed that workers received a growing part of the “surplus product” in their wages. In Marxist terms, the “surplus product” is simply the use value form of surplus value.

Before we can deal with the “Implications” document, we should review what the classical economists and then Marx had to say on this question. Well before Marx, the classical economists had made the distinction between productive and unproductive labor. As Marx later explained, by productive workers the classical economists meant the workers that produce surplus value as opposed to those workers who consume surplus value. So the idea that at least some workers consume surplus value originates not with Sraffa but with the classical economists themselves.

The classical example of unproductive workers was the personal servants that the rich in the late 18th and early 19th century hired in great numbers to care for their every need, as well as solders and clergymen. (7) The productive workers were the workers in the emerging factories of the industrial revolution, in agriculture and in mining. Both types of workers, productive and unproductive, sold their labor (power) to their employers, whether private individuals or the state as was the case of soldiers and clergymen. (8)

The difference between a productive and unproductive worker was the use value of the purchased labor power to its purchaser. In the case of servants, for example, the use value of the labor power for the rich purchasers was to perform some personal service, such as making their beds, cleaning their vast mansions, maintaining their gardens, preparing meals or opening doors as they moved from room to room in their mansions.

Marx explained that such unproductive labor (power) might even be used to produce material objects such as furniture. But as long as the material objects were consumed as use values and not sold as commodities by the purchaser of the labor power that produced them, the labor power was not used to produce surplus value. Therefore, such labor power was unproductive.

Since the labor of the unproductive workers was not value producing labor, these workers, whether their wages were high or low, were paid out of surplus value. So according to the classical economists, a part of the working class was indeed paid out of what Marx was later to call surplus value.

The liberal classical economists such as Adam Smith and David Ricardo saw the key to increasing the wealth of a nation—the accumulation of capital—as being the reduction of the number of unproductive workers to a minimum so as to increase as much as possible the number of workers employed producing new wealth in the form of surplus value. Therefore, according  to the classical liberal economists, the larger the proportion of the workers engaged in productive labor as opposed to unproductive labor the faster the nation would grow wealthy. This formed the basis of the program of classical economic liberalism with advocacy of “cheap” government.

About half way between the time of Marx and the time of Baran and Sweezy, we have the time of Lenin. In August 1914, Lenin was shocked when the German Social Democratic Party, after promising to oppose any imperialist war, suddenly went over to the side of German imperialism and voted for war credits. Lenin had less time than Marx to write about economic theory—he had other things to do. But Lenin, whose interests were always overwhelmingly political, felt compelled as a Marxist to find the material basis for the collapse of the classical Social Democracy of the Second International.

The basic explanation Lenin found was that the monopoly capitalists were sharing some of their super-profits with a section of the working class of the imperialist countries—the labor aristocracy—which in turn became the basis of support for the labor bureaucracy that increasingly ran the trade unions and the Social Democratic parties. The “bribed” workers who were receiving super-profits felt that they had a material interest in supporting their “own” capitalists, both against rival capitalists and other workers.

What are super-profits?

It was well known to the classical economists and to Marx that the rate of profit tended to equalize among the various branches of production. The freer the competition, the faster the rate of profit would equalize. Suppose the average rate of profit is 10 percent per year. As long as there are no monopolies—except for the monopoly of the means of production by the capitalist class, without which there can be no capitalism by definition—any super-profit above and beyond the average rate of profit will be short lived.

But suppose for some reason a monopoly arises. It becomes very difficult if not impossible for new capital in search of the highest rate of profit to flow into the monopoly sector over an extended period of time. The capitalists of the monopoly sector will be able to charge prices for the commodities they produce that are above the prices of production of these commodities as long as their monopoly lasts. The profit the monopolists appropriate above the average rate of profit is a “super-profit.”

Suppose instead of realizing a 10 percent rate of profit, the monopolists realize a profit rate of 20 percent. If they think they can get away with it, our monopoly capitalists will appropriate the entire super-profit while continuing to pay their workers only the value of their labor power.

In this case, where does their extra profit or super-profit come from? It will come at the expense of the capitalists who do not have a monopoly position. Depending on the relative size of the monopoly sector, the rate of profit in the rest of the  economy—the competitive sector—will be somewhat reduced. Perhaps instead of receiving a rate of profit of 10 percent the non-monopoly capitalists will now have to settle for a rate of 8 percent.

However, the very existence of a super-profit creates the possibility that they can share some of the  super-profits with their workers. For example, in order to buy “labor peace,” the monopolists might instead of appropriating all their profits share some with their workers by paying the workers wages in excess of the value of their labor power. For example, they might settle for a rate of profit of “only” 15 percent. This is what Lenin believed lay behind the collapse of the Social Democracy as a revolutionary movement.

The super-profits above and beyond the value of the labor power of the workers in the imperialist countries where the monopolies were located was corrupting a portion of the workers of the rich countries that were exploiting  other capitalist—and pre-capitalist—countries. The privileged workers who were receiving some of the super-profits of their monopolists in the form of wages above the value of their labor power were the workers that were best organized into trade unions and formed the backbone of the Social Democratic parties of the Second International.

Since members of the labor aristocracy were sharing in a portion of the super-profits of their “own” monopolists, the implication was clear that a portion of their wages represented surplus value. However, if the monopolists were sharing with their workers a portion of the surplus value they had obtained from other capitalists through monopoly pricing, the overall rate of profit—the combination of the super-profits of the monopolists and the reduced rate of profit in the competitive sector—would still fall.

Lenin pointed out that the imperialist monopolists were in a position to make up for this lost profit by super-exploiting workers and peasants in the oppressed colonial and semi-colonial countries. The super-exploited workers were being paid less than the value of their labor power. In this way, capital as a whole could stave off a fall in the rate of surplus value while still “buying off” the “labor aristocracy” of the imperialist countries. The paying of some workers more than the value of their labor power was backed up by paying other workers less than the value of their labor power.

This is the classical “Leninist” theory of of monopoly capital, wages and surplus value developed midway between the time of “Capital” and “Monopoly Capital.” This theory came to dominate the revolutionary wing of the workers’ movement in the wake of the Russian Revolution.

Monopoly cannot be generalized

It is important to grasp that according to the “classical” theory of monopoly capitalism developed by Hilferding and Lenin, monopoly profits and wages in excess of the value of labor power cannot by definition be generalized.

The theory of wages and profits in ‘Monopoly Capital’ in light of the ‘Implications’ document

In the “Implications” document, Baran accepts Sraffa’s claim that as capitalism develops and real wages rise, the workers as a whole come to share a portion of the surplus product or surplus value. The higher the productivity of labor is the more material use values a given quantum of human abstract labor—value—will represent. Therefore, as human labor becomes more productive it is possible for wages to rise above the biological subsistence minimum while at the same time actually falling in terms of labor value.

As long as labor productivity is rising—and ever-rising labor productivity is a crucial feature of the capitalist mode of production and indeed its main historical justification—it is perfectly possible for real wages to rise while the relative surplus value is also rising. Or in more popular language, the workers can be more exploited than ever and yet “enjoy” rising real wages.

Indeed, when the original revisionists criticized what they called Marx’s theory of “impoverishment” of the working class, the “orthodox Marxists” explained that the working class was becoming “relatively impoverished” even as the absolute standard of living of at least the organized sections of the working class was rising during the powerful economic booms of the end of the 19th century and the opening years of the 20th century.

Paul Baran took the view in the “Implications” document that the difference between the wages the workers receive and the biological minimum should indeed be classified as surplus value. The more capitalism develops and the higher the productivity of labor the more surplus value is therefore appropriated to the workers. Unlike the case with the classical theory of “unproductive labor” and the Hilferding-Lenin theory of “monopoly capitalism,” this is a phenomenon that can be generalized.

In traditional Marxist theory, surplus value is equated with the sum of profit of enterprise and interest plus ground rent. If a wealthy money capitalist hired personal servants, like they generally did, the wages of the servants were derivative of interest. If an industrial or commercial capitalist hired personal servants, the servants’ incomes would be derivative of the profit of enterprise. And similarly for the servants hired by landlords, their incomes would be derivative of rent.

And to the extent the landowners, money capitalists, commercial and industrial capitalists paid taxes, the wages of the employees of the state would be drawn from all three primary incomes: rent, profit of enterprise and interest.

Since the workers, however, were receiving little more than biological subsistence wages, Ricardo opposed taxes on wages income. Such taxes, Ricardo held, would depress wages below the biological subsistence of the workers, which would cause nominal wages—wages before taxes—to rise. So in the end, any tax would fall on profits, interest and rent—surplus value—after all. Therefore, Ricardo held, it was pointless to try to tax wages.

But if you hold a considerable part of the “average wage” earned by the “average” global worker to be “surplus value,” then the total sum of rent, profit of enterprise and interest will be less than the total surplus value. Using the definition that Baran accepted, we would have to define surplus value as the sum of rent, profit of enterprise and interest plus wages minus the part of the wage that corresponds to the biological minimum.

Profits by deduction

Marx explained surplus value by assuming that all commodities including labor power sell at their values. But Marx also noted that the capitalists could earn an extra profit if they paid the workers less than the value of their labor power, which Marx believed they often did in practice. This would create an extra profit by “deduction.”

In this case, the labor power of the workers would only be partially reproduced. Obviously, as long as wages were not far above the biological minimum, there were limits on how far wages could fall below the value of labor power before the working class would begin to shrink in numbers and the workers would be so weak and sickly that their productivity would be adversely affected.

As Baran noted, the closer wages are to the biological minimum, the smaller the possibilities will be for “profits by deduction.”  However, if the real wage that corresponds to the value of labor power rises substantially above the biological minimum, the possibilities for the capitalists of earning extra profits through “deduction” expand accordingly. Baran believed that profits by deduction, though insignificant during the  phase of “competitive capitalism,” had grown tremendously under monopoly capitalism.

Profit upon alienation

The capitalists do not as a rule buy labor power with consumer commodities—wage goods—directly but with money. The workers use the money they have received in exchange for their labor power to purchase the commodities they need to reproduce their labor power and raise the next generation of workers.

If we assume that all commodities sell at their values—or direct prices—then the rate of surplus value calculated in terms of money and in terms of commodities will be identical. But suppose the capitalists sell the commodities that the workers need to reproduce their labor power at monopoly prices. According to Baran, the workers would be paid the value of their labor power plus a portion of the surplus value in money terms but will have to return to the capitalists a portion of the surplus value they received in money when they purchase the commodities at monopoly prices needed to reproduce their labor power. This is called “profit upon alienation.”

Baran assumed that in the days of Marx, or competitive capitalism, commodities rarely sold at monopoly prices. It could be assumed that the surplus value calculated in terms of money and in terms of commodities was more or less identical. And even if the capitalists could have sold consumer commodities to the workers at monopoly prices, wages were so close to biological subsistence that “real wages” would have fallen below the level necessary to reproduce the working class. Therefore, any “profits upon  alienation” would be insignificant.

But according to the “Implications” document, the rise of labor productivity means that the workers’ wages now contain a considerable and growing amount of surplus value. At the same time, the growing monopoly power of ever larger and more monopolistic  corporations means that they can win some of the surplus value that is contained in workers’ money wages back through charging monopoly prices for “wage goods.” Therefore, according to the “Implications” document, Marx’s general rejection of the claim that “profits arise upon alienation,” though true for competitive capitalism, is no longer true for monopoly capitalism.

Beyond this point, we arrive at the well-known conclusions of the Monthly Review school, which are close to those of “left Keynesianism.”

First, according to the Monthly Review school, price competition has been banished to the increasingly marginal competitive sectors of the economy. Competition for market share is now carried on mostly through advertising. This combination of the virtual end of price competition and the possibility of realizing profits upon alienation cause the mass of profit—or surplus—to swell to tremendous proportions. Or in the language of “Monopoly Capital,” the surplus tends to rise.

The problem that now confronts the monopoly corporations is what to do with this swollen mass of profits. Under competitive capitalism, once the capitalists’ own personal expenditures are deducted, the profit is transformed into new capital. But if the monopoly capitalists transform their swollen mass of profit into new capital, the monopoly pricing that is the basis of their profits upon alienation will disappear.

If the monopoly capitalists hoard their profits, considerable potential monetarily effective demand becomes frozen in the banks. Mass unemployment and excess capacity appear—stagnation. If dramatic innovations like the railroad or automobile appear, the monopoly capitalists will indeed transform their swollen profits into new capital. (9) In effect, they will act much like the capitalists did in the days of Marx. This is indeed what Baran and Sweezy believed happened in the late 19th and early 20th centuries when first the railroad and then the automobile produced huge fields of potential new investment—or to use the language of “Monopoly Capital”—absorbed the surplus.

But in the absence of such earthshaking new technologies, the monopoly capitalists will tend to simply hoard their swollen profits in the banks. If they do this, the result is depression—or stagnation—massive excess capacity on one hand and mass unemployment on the other.

In this case, the “swelling mass of surplus value” appropriated through profits upon alienation will not in fact be realized. While the natural tendency of the competitive capitalism analyzed by Marx in “Capital” was toward economic growth—or to use the more technical term, expanded reproduction—the natural tendency of monopoly capitalism is therefore economic stagnation.

This, however, does not mean that that monopoly capitalism is doomed to a more or less permanent depression occasionally interrupted by some great wave of innovation centered on a revolutionary technology like the railroad or the automobile that may or may not come along.

Even in the absence of revolutionary innovations, monopoly capital can escape from stagnation through the growth of unproductive—of surplus value—expenditures. Some of these saving unproductive expenditures occur within the private sector itself.

Perhaps the most important way of “absorbing the surplus” is the sales effort. As advertising largely replaces the price competition of “competitive capitalism,” the monopoly corporations use advertising to create artificial needs and wants. This creates huge sales costs—what Marx called the false costs of production—that must be covered by monopoly prices. The huge army of salespeople and advertising workers that emerges is paid out of “the surplus” and become purchasers of commodities to recover the growing sales costs.

But as monopoly and the surplus value appropriated by the monopolists through profits upon alienation keep rising, the sales effort is not enough to stave off the tendency toward stagnation. Therefore, at a certain point the government must step in with expenditures of its own, whether financed through taxes or through borrowing—deficit spending—to keep money circulating in the economy, or to use the terminology of Baran and Sweezy—”absorb the surplus.”

However, in a capitalist society the capitalists or special groups of capitalists are able to prevent the government from spending on socially useful projects. For example, the private real estate interests successfully undermined the New Deal-era public housing programs. So instead of spending money on useful if unproductive of surplus value projects, the central government ends up spending money on weapons. This has been dubbed “military Keynesianism.”

While these expenditures are effective in staving off stagnation and depression and even maintaining something close to “full employment” with important “exceptions”—like African American youth in the U.S.—an increasing amount of the total product does not meet genuine or rational human needs but is pure waste. The waste includes not only weapons but consumer commodities that don’t meet any real needs, as well as the production of advertising itself.

The result is an increasingly “irrational” society. However, unproductive expenditures do maintain prosperity in the imperialist or “core” countries in the sense that there is near to “full employment”—leaving certain “marginal” groups aside—and the real wages of the workers do continue to rise over time.

And if serious recession does threaten, the government can always increase its expenditure to absorb still more of “the surplus” and thus stave off serious depression. However, since most of this additional expenditure will be on weapons, the danger that this will end sooner or later in war increases. If the government cannot for whatever reason “absorb” enough of the “surplus” by spending on weapons and the military, a kind of creeping stagnation will set in as happened to some extent in the late 1950s and early 1960s.

In that period, both unemployment and excess capacity rose in the U.S. before falling again in the mid-1960s as both the Vietnam war and the boom of the 1960s gained momentum. Overall, however, Baran and Sweezy saw little hope that the workers in the “core” countries would ever draw revolutionary conclusions. They were too well integrated into the system as “consumers,” and the power of the capitalist states to stave off really deep depression by absorbing more surplus was simply too great.

The situation is different, however, if we look at things globally. The increasingly wasteful and unproductive consumption of “the surplus” means that expanded capitalist reproduction, to use the Marxist term, is greatly reduced on a global basis. If the laws of competitive capitalism were still in effect, the underdeveloped countries would experience a rapid industrialization. But the wasteful absorption of the surplus largely prevents this, dooming the vast majority of humanity to virtually permanent poverty unless they overthrow imperialism and capitalism altogether and embark on the road of socialist revolution. The real hope for an eventual move toward socialism lies not in the industrial working class of the imperialist countries—but in the vast impoverished, largely peasant masses of the “third world.”

That is why Sweezy, especially in the years after Baran’s death, put so much hope in the Chinese Revolution and Maoism.

Does this mean that according to Baran “the surplus” and surplus value are identical after all? In order to answer this question, we must examine Baran’s views on productive versus unproductive labor, and closely related to that, Baran’s interesting interpretation of production and the sales effort. We will examine these questions in next month’s post.

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1 So much for academic freedom in Cold War America.

2 Unlike Baran and Sweezy in “Monopoly Capital” and Lenin in “Imperialism, the Highest Stage of  Capitalism,” Hilferding did use the categories that Marx developed in “Capital,” though he put forward a false theory of “non-commodity” money as Lenin briefly noted in “Imperialism.” The theory of money, or rather the lack of any theory of money, in “Monopoly Capitalism” and in the “Implications” document will be dealt with in coming months in this blog.

3 The worst of the witch hunt had ended by the time “Monopoly Capital” was published in 1966, and it would soon become possible for a few Marxist to gain tenure either in economics departments or in other social science departments. But the witch hunt had left a trail of devastation across the American labor movement and intellectual and academic landscape that is still all too visible even today.

4 First National Bank was a corporate bank that did no business with even middle-class people but only with corporations and extremely wealthy individuals. It was considered a part of the financial interest group founded by J.P. Morgan Sr. In 1955, it merged with the National City Bank, which became First National City Bank, a forerunner of today’s Citicorp.

5 In addition to the Left Opposition, there was also a Right Opposition, which was led by N.I. Bukharin, who was also a prominent Marxist economist. Starting in 1928, the Right Opposition denounced Stalin for going over to Preobrazhensky’s views on primitive socialist accumulation and the need to exploit the peasantry to finance it.

6 The problem with the slang term “wage goods” is that it overlooks the fact that the workers must purchase the goods they need to reproduce their labor power as commodities. It is okay to use this slang as long as we keep this in mind.

7 Though it isn’t emphasized by most of his present-day right-wing admirers, it seems that Adam Smith was not a Christian and took a dim view of religion in general.

8 The Anglican Church was and is the official state church in Britain and thus supported out of state funds.

9 This reflects the influence on the Monthly Review school of Joseph Schumpeter, a personal friend of Sweezy’s—despite their opposite political views—during his Harvard years.

Posted August 5, 2012

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