The ‘Implications’ of Paul Baran, Pt 2

Today, as in the past, the marginalist supporters of the “free market” claim that only the market can rationally assign the labor available to society among the various branches of production. Why? Because only the market can price commodities of different use values according to their relative scarcities. They even have a term for it—“consumer sovereignty.” Under capitalism, these bourgeois economists proclaim, the consumer is king.

Among the supporters of this view was John Maynard Keynes. Not just the young economic liberal Keynes, but the Keynes of the “General Theory.”

He wrote in the last chapter:

“…I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.”

Paul Baran in the “Implications” strongly disagreed with Keynes on this point as far as monopoly capitalism was concerned, though he seemed to believe it was more or less true for competitive capitalism. According to Baran, even if monopoly capitalism could achieve, with the help of “Keynesian” government spending, something like “full employment” of workers and machines, it would not come close to meeting the rational needs of consumers. In contrast to Keynes, Baran believed that under monopoly capitalism whether nine million out of 10 million workers are employed or the full 10 million are employed, their labor will to a considerable extent be misdirected.

Why did Baran believe that this was so? During the epoch of “free competition”—according to Baran, corresponding to the time of Adam Smith through the time of Karl Marx—the wages of labor were close to biological subsistence, just enough to keep the workers alive and allow them to raise the next generation and little more. This meant that the workers’ consumption was extremely limited. What commodities the workers did get to consume had simple straightforward use values that met their needs to stay alive and raise a new generation. If they hadn’t, capitalism wouldn’t have been possible at all. To this extent, the market mechanism did its job.

The spartan capitalists of the competitive era

The personal consumption of the capitalist class under competitive capitalism was quite limited as well, Baran held. Under the pressure of competition, the capitalists were forced to transform as much of the surplus value—profit—as they possibly could into new capital. This meant that the capitalists had to limit their own consumption to what was necessary to keep themselves alive and raise a new generation of capitalists. True, I think Baran would concede that the average capitalist lived better than the average worker, but he believed that compared to earlier landed ruling classes they maintained a comparatively spartan life style. (1)

However, according to Baran, things changed drastically with the coming of monopoly capitalism, essentially from the last quarter of the 19th century onward. As monopoly grew, the monopoly capitalists had to restrict the growth of production in order to generate monopoly profits. If they did not restrict production, the super-profits that are the whole point of monopoly would disappear. Finding themselves increasingly unable to find outlets for investment of their growing mass of super-profits without destroying them, the monopolists had to find unproductive—of surplus value—ways of spending their profits. The most obvious way of spending the super-profits that could not be invested was to spend them on an increasingly luxurious lifestyle.

Monopoly capitalism and the consumer society

The wages of the workers, according to Baran, also gradually but progressively rose from the near biological subsistence that had been the rule under competitive capitalism. As we saw last month, Baran as well Sweezy, following Sraffa, believed that the workers increasingly shared in the surplus product—surplus value—as capitalism developed. To a lesser extent than the capitalists, true, but to a growing extent all the same, the workers also got to consume a mass of products that increasingly exceeded their purely biological needs to live and work and thus produce more surplus value and reproduce.

According to Baran, the more monopoly capitalism developed, the more this was so, since Baran like Sweezy believed that a gradual rise in real wages was a basic law of capitalist development. Therefore, with the coming of monopoly capitalism, though Baran did not use the term, the “consumer society” was born.

A basic feature of monopoly capitalism that distinguished it from the earlier competitive capitalism, according to both Baran and Sweezy, was the virtual disappearance of price competition. (2) With the coming of monopoly capitalism, price competition increasingly retreated to the shrinking “competitive sector,” where the centralization of capitalism was low. This didn’t mean, however, that competition for market share among the giant corporations or monopolies disappeared entirely. Indeed, the giant corporations that dominate monopoly competition do struggle with one another for market share. But the battle for market share, according to both Baran and Sweezy, was now fought with different weapons than it was in the days of classic capitalist competition.

Advertising replaces price cutting as the competitive weapon of choice. Each giant corporation uses advertising to create a need for the products they produce. On billboards, radio and TV—and now the Internet, we would add—consumers are subject to a vast and ever-growing stream of tendentious and often outright false propaganda about the alleged benefits of the commodities produced by the giant monopolistic corporations. While the old-time industrial capitalists of the days of Adam Smith, David Ricardo and Karl Marx responded to real human needs as transmitted through the mechanism of the market, the modern corporation creates demand for the commodities it produces.

Therefore, Baran (and Sweezy) asked, what mechanism ensured that the human needs created by the monopolies through advertising actually corresponded to real rational human needs? None at all! Indeed, not only does an increasing quantity of the commodities that are produced fail to meet rational human needs, many are harmful to their consumers.

If under the competitive capitalism analyzed by the classical economists and Marx, people were victimized as producers, under monopoly capitalism they are increasingly victimized as consumers. This emphasis on the oppression of people as consumers was common to both Baran and Sweezy and others writing in the imperialist countries during the “great boom” that followed the Depression and World War II. (3)

Paul Baran’s unique ideas about the value-producing properties of labor

Baran developed some rather unique ideas about the value-creating properties of labor. Marx had held that in order for a product of private, independent human labor to become a commodity it must satisfy some actual human need. If a product of human labor did not satisfy some human need, then the labor that went into producing it did not in fact create any value. This observation of Marx became the starting point for Baran’s views on the value-producing property of human labor.

Baran asked, what if the “need” that a product of private human labor meets is not a rational need at all but arises only because the unfortunate consumer has fallen victim to advertising propaganda? We have a situation where the commodity does indeed find a buyer but where the commodity will deliver no genuine use value for its buyers and may well even harm them. (4) In that case, is the labor that went into the production of the product value-producing labor?

Baran answered no. He reasoned that since such commodities meet no rational need, the labor that goes into producing them is not value-creating labor. And labor that does not create value obviously cannot create surplus value. In the sense of producing surplus value, such labor is therefore unproductive. But, and here is the crucial point if we are to understand Baran’s concept of “the surplus,” such labor does produce a surplus but not surplus value. I say Baran and not Baran and Sweezy, because Sweezy either did not understand, or more likely did not accept, Baran’s definition of “the surplus,” as we will see below.

The interpretation of production and the sales effort, according to Baran

This gives rise to what Baran called the interpenetration of production and the sales effort, or, using more traditional Marxist language, production and circulation. This interpenetration, Baran believed, was quite unknown to either Marx or the classical economists, because it did not exist to any significant degree in the days of competitive capitalism. In the early 1960s, when Baran wrote the “Implications,” the U.S. auto industry provided the classical example of what Baran was getting at.

By the middle of the 20th century, U.S. automobile production was overwhelmingly dominated by “the big three”—General Motors, Ford and Chrysler. In addition, at the time that the “Implications” was written—though it turned out not for much longer—the U.S. dominated the world auto industry.

In the heyday of “the big three” U.S. global automobile monopoly, genuine technical progress in automobiles had virtually ceased. (5) Early in the 20th century, at the dawn of the automobile industry, the steam engine and the electric motor had competed with the internal combustion engine. But soon the internal combustion engine had not only eliminated both the steam engine and the electric motor—the latter is now staging comeback—it was no longer being improved in any meaningful way.

By mid-century, the automobile had its modern streamlined shape. Therefore, as far as the basic use value was concerned—the ability to go from one place to another place in a short period of time—one automobile produced by the “big three” within a given price range was identical to any other automobile.

This created a problem for the automobile monopolists. If buyers held on to their cars—assuming periodic repairs—the cars would take about 10 years to wear out. This would have meant that the demand for automobiles—the size of the automobile market—would have been much smaller than it actually was. But the big three monopolists managed to convince a great many U.S. automobile buyers to replace their cars not once every 10 years but every two or three years. How did they manage to do this?

The solution the “big three” arrived at was to introduce new models on an annual basis. For example, there was the 1949 Ford, the 1950 Ford, the 1951 Ford, and so on. One model was virtually identical to its predecessor as far as all the essentials were concerned. But the automobile manufacturers would make superficial changes in order to “differentiate” this year’s “must have model” from last years “must have model.”

A favorite way of doing this was to make minor changes in the chrome decorations on the automobiles. These chrome designs did not affect the ability of the automobile to get you from point x to point y in a given period of time, nor did it affect gasoline mileage, nor improve operation of the automobile as a means of transportation in any way.

Then, the automobile manufacturers would launch massive advertising campaigns using all the available media of the day—billboards, newspapers, radio, and the then new medium of television to convince potential car buyers of the need to dump their current perfectly functional cars for this year’s model, in large part because it had a unique chrome design that was different—but not better—than any previous model.

The chrome, however, was after all a physical object that had to be produced and then attached to the cars by assembly-line workers. But though produced by the “traditional blue collar” industrial workers, it was nothing more than an advertising gimmick. This was perhaps the classic example of what Baran called the “interpenetration of production and the sales effort.”

According to Baran—and this is the crucial point we must grasp if we are to understand what Baran meant by “the surplus”—the labor that produced and attached the chrome decorations to the automobiles on Detroit’s assembly lines did not produce value and therefore produced no surplus value. But—and here is the key point—this labor did produce a “surplus.” To Baran—but not to Sweezy—this was to be the central point of “Monopoly Capital,” its key advance beyond Marx’s “Capital,” Hilferding’s “Finance Capital” and Lenin’s “Imperialism.”

Ever since “Monopoly Capital” was first published 46 years ago, a debate has raged over whether “the surplus” was simply a popular name for surplus value or something different. Remember, “Monopoly Capital,” though it was written in a popular style, claimed to be far more than yet another popularization or update of “Capital” such as Sweezy’s own “Theory of Capitalist Development.” Rather, it claimed to do for monopoly capitalism what “Capital” had done for competitive capitalism.

Surplus value is the key category in Marx’s “Capital.” It explains how the exploitation of the working class by the capitalist class arises even if “equal exchange” prevails. It thus lays bare the basic material antagonism between the two main classes of capitalist society. But in order to succeed at this very ambitious task, Marx had to deliver a crystal clear explanation of the nature and origins of surplus value. Any lack of clarity on this point would have doomed “Capital.”

As it turned out, Marx was so successful at his assigned task that not only were generations of class-conscious workers raised on it, but the attempts of generations of bourgeois economists to refute Marx’s explanation of surplus value led them ever deeper into the swamp of apologetics. With little risk of exaggeration, we can say that Marx’s theory of surplus value is the greatest triumph of all social science. Can the same be said of “the surplus” concept of “Monopoly Capital”? Whether “Monopoly Capital” can be seen as the successor to “Capital” depends on the answer we give to this question.

For almost half a century, students of “Monopoly Capital” have argued among themselves exactly what its authors meant by “the surplus.” Those who see “Monopoly Capital” as the “new Capital” have hailed the discovery of this economic category as doing for the study of monopoly capitalism what surplus value did for competitive capitalism.

Those, in contrast, who see the claims made on behalf of “Monopoly Capital” to be the “new Capital” as over-hyped, to say the least, have held either that “the surplus” is simply another name for “surplus value” or that it lacks any clear meaning at all.

Ironically, Paul Sweezy belonged to the latter category in that he claimed that “the surplus” was simply another name for surplus value and regretted that he and Baran had not used the traditional term “surplus value” in “Monopoly Capital.”

Fifty-year-old mystery resolved

Now, thanks to Monthly Review’s decision to publish the correspondence between Baran and Sweezy in February-March 1964 in what turned out to be the final weeks of Baran’s life, this almost 50-year-old mystery involving the real meaning of “Monopoly Capital” and its key category “the surplus” is resolved at last.

First, we now can see that Baran and Sweezy, who since the publication of “Monopoly Capital” have often been treated as though they were virtually a single person, were indeed two quite different human beings. They agreed on many things but disagreed on other things. Among the things they disagreed on—and this is a crucial point—was Baran’s concept of “the surplus.”

By February 1964, both authors felt that the time had come to finally publish what they called their “opus.” Maybe this was because Baran, who unlike Sweezy was in poor health, sensed that for him at least time was running out. The problem that the two economists faced, however, was that they had not resolved some key disagreements, especially their disagreement on “the surplus.” Sweezy had been planning to visit Baran in California in an attempt to work out his disagreements—especially on “the surplus”—when Baran suffered a massive heart attack and died on the evening of March 26, 1964.

Sweezy to Baran on March 2, 1964 (6): “I am not clear what is ‘the difference between what we call “economic surplus” and aggregate surplus value.’ I would be inclined to say that we have, perhaps implicitly, defined surplus as aggregate surplus value minus the share of it which the workers are able to capture for themselves.”

But Sweezy was not really sure that he had understood what Baran was trying to say. “Am I right about this?” he asked Baran.

If we accept Sweezy’s definition given here, then “the surplus” is smaller than “surplus value,” because this “surplus” is the surplus value appropriated by non-workers minus the share of surplus value that workers capture for themselves.

In a letter dated March 3, 1964, Baran explained that this is not what he—Baran—meant by “the surplus”:

“The surplus we are talking about is much larger [emphasis added—SW] than surplus value. In the first place, the ‘interpenetration effect’ [of production and the sales effort] on which I have been now laboring for weeks, has obviously no room in the surplus value concept. In the surplus value concept the sales effort is a deduction from surplus value even as rent, interest, and government taxes. In the surplus concept as we have been trying to develop it a good deal of productive work is surplus without producing surplus value [emphasis added—SW]. Under the surplus value concept how could you classify the man hammering chrome on the automobile to be a surplus producer…. This, I thought, was the principal thesis of the opus.”

But it turns out that Sweezy either rejected or failed to understand what Baran considered to be the “principal thesis” of the “opus”—”Monopoly Capital”—itself! If one of the co-authors of “Monopoly Capital”—namely Sweezy—failed to grasp or understand the book’s “principal thesis,” according to the other co-author, is it any wonder why “Monopoly Capital” lacks a certain coherence?

We can only speculate what would have happened if Baran had lived. Perhaps the two authors because of their disagreement on the meaning of “the surplus” would have aborted their “opus” altogether. In that case, we would have no “Monopoly Capital” at all. Or perhaps they would have resolved their disagreements in one way or another.

But with Baran’s untimely death, the fate of “Monopoly Capital” was now in Sweezy’s hands alone. He could have decided to abort “Monopoly Capital” altogether due to his unresolved disagreements with Baran. (7) But since he and Baran had already put so much effort into it and promised the readers of Monthly Review magazine that the book was on its way, Sweezy rejected that solution.

He could have edited “the Implications” much like Foster has so capably done and included it in “Monopoly Capital.” But Sweezy rejected that solution as well, because in that case he would be taking responsibility for ideas he basically disagreed with. Apparently, his scientific conscience simply wouldn’t allow this solution.

So Sweezy chose to publish “Monopoly Capital” with what Baran considered to be its key theoretical chapter omitted—leaving the whole proposed category of “the surplus” hanging in mid-air, so-to-speak. Therefore, in my opinion, though “Monopoly Capital” remains an interesting essay about mid-20th century U.S. society by two very penetrating critics, it simply comes nowhere near being the replacement for “Capital” that some of its enthusiastic admirers in the Monthly Review school claim for it.

An attempt at a critique and a resolution

Baran’s category of the surplus in my opinion is really a tool for analyzing the problems of the transition from capitalist (expanded) reproduction to socialist reproduction. While capitalist reproduction is the reproduction and expansion of value—abstract human labor embodied in commodities—socialist reproduction is the production of use values to meet human needs.

Remember, Baran had spent two of his formative years—1926 to 1928—in the Soviet Union. The problem confronting the Soviet government and the then ruling Communist Party was passing from the at best simple reproduction of the New Economic Policy—the NEP—to expanded socialist reproduction, or to Preobrazhensky’s primitive socialist accumulation if you prefer. Not surprisingly, among both the leaders and the ranks of the Soviet Communist Party, there were radically different views on how this problem was to be tackled.

Suppose as a thought experiment the world working class were to win power tomorrow on a global basis. The new workers’ governments that would replace the U.S. world empire and all other capitalist governments would immediately face the problem of how to deal with all the needs of more than 7 billion people. These problems would not be quite as easy to solve as some of the more simplistic socialist propaganda makes it seem.

If Keynes was right, however, the problem would be rather simple. The new workers’ governments would simply see to it that industry would keep on producing the same use values in the same proportions that it had been under capitalism, only seeing to it that genuine “full employment” of workers and the means of production prevailed—a goal Keynes believed could be achieved under capitalism as well.

In reality, the new workers’ governments would not only face the problem of unemployed workers and machines. This would be solved rather quickly once the abolition of private ownership of the means of production eliminated the commodity nature of the product. This would indeed solve the problem of “monetarily effective demand” that so bedevils capitalist production. But then the real problems would begin.

It is here that Baran’s surplus concept comes into its own. First, of course, the victorious working class would eliminate the production of the means of destruction. (8) This would free tremendous resources for socialist construction. Second, the factories, machines and workers devoted to the production of luxury goods for the rich would be converted to the production of necessities for the workers or possibly additional means of production.

In addition, not only would demobilized soldiers be put to work producing useful things—whether means of personal consumption or means of production to make means of consumption—the same would be true of the vast armies of people employed in sales and advertising. Stories appear in the capitalist press from time to time explaining that due to the cutbacks in government support for science many young scientists and mathematicians have found employment on Wall Street. With the padlocking of the New York and other stock exchanges, these people would be invited to resume their scientific work, and now they would enjoy the full support of the workers’ government.

Of course, this process wouldn’t be without friction. The retraining of lawyers, stockbrokers and sales people in productive labor—in the sense of resolving the problems facing our species and planet and not in the sense of producing surplus value—won’t be easy in every case. And those who have become accustomed to the very high standard of living provided to some by the “consumer society” won’t all be pleased by the relative austerity for them that of necessity will accompany the transition from capitalist to socialist production and reproduction.

And finally, there will be the question of the transforming—essentially the rehabilitation—of the former capitalists into productive members of society. While some of them might welcome this transformation, we can assume that not all of them will, especially as it will entail the loss of social status and the end of their luxurious standard of living.

Baran’s surplus concept, therefore, is a powerful tool in analyzing the problems as well as the great possibilities that the transition from capitalist to socialist reproduction will bring. And I think that it is no accident that of the two authors of “Monopoly Capital” the surplus concept was developed by the one who actually had lived for awhile in a country that was embarking on the road of socialist transformation—Baran—and not the one—Sweezy—who had lived his whole life within monopoly capitalist society. Here, too, being determined consciousness, and it may explain the real difficulty Sweezy had in comprehending and appreciating what Baran was getting at.

Do the workers get to share in surplus value as capitalism develops?

I believe, however, that both Baran and Sweezy made a huge error when they accepted Sraffa’s claim that as capitalism develops the workers increasingly share in the surplus product—surplus value—as their wages rise above bare biological subsistence.

First, this was clearly not Marx’s view. For example, in analyzing the tendency of the rate of profit to fall, Marx assumed a stable rate of surplus value of 100 percent but a rising organic composition of capital. By implication, the standard of living of the workers will rise quite a bit in this case, since the rising organic composition of capital implies a rising productivity of labor. But it never occurred to Marx that this would mean that the workers would now be sharing the surplus value with the capitalists.

I do believe that when we analyze capitalist monopolies and their super-profits, the monopoly capitalists can share with a part of the working class a portion of the surplus value that they appropriate from non-monopoly capitalists in the form of super-profits. (See previous post.) Under these conditions, wages of some workers can rise above the value of labor power. This explains the rise of a labor aristocracy that did so much damage to the workers’ movement in the 20th century. Nor do I want to imply that this problem is a thing of the past, though the extreme examples we saw of this in the United States when “Monopoly Capital” was being written are certainly fading. More on this next month.

The mistake Baran and Sweezy made was to generalize this phenomenon. Just as super-profits cannot be generalized, neither can the sharing of surplus value by the working class. Suppose the working class as a whole—not just the workers’ aristocracy that happens to be employed by monopoly capitalists—succeeds in raising its standard of living. If that happens, and an individual capitalist offers a job at a wage that just covers the workers’ basic need to live and raise a few children, the employer will find no takers. In this case, we have a rise in the value of labor power above the level that would represent biological subsistence, not a rise in the price of labor power above its value.

Workers are not simply biological organisms but conscious human beings who are able to and do fight for a better standard of living. This is something that Marx, who was a lot more than the greatest economic theorist who ever lived—though he was that—but also an active leader of the workers’ movement, never forgot. As his friend and co-worker Frederick Engels explained at his graveside in March 1883, Marx was above all a revolutionary.

In addition, because of the time and place in which “Monopoly Capital” and the “Implications” were written—the leading imperialist country during the great economic expansion that followed the super-crisis of 1929-33 and the ensuing Depression—combined with the great impact of the Russian Revolution that was a lot fresher then than it is today—the two authors tended to overestimate, to say the very least, the extent to which the standard of living of the global working class tends to rise in the course of capitalist development.

The problem of money and monopoly prices

In analyzing Paul Sweezy’s work in this blog, I have emphasized that he never examined the Marxist theory of money. Since I have written extensively on this elsewhere on this blog (for example, here) I will not dwell on it now. Here I will simply remind our readers that without a theory of money it is not possible to have a meaningful theory of price. In his early “Theory of Capitalist Development,” published 1942, Sweezy quite specifically decided not to deal with the Marxist theory of money.

This has remained a weakness in the Monthly Review school right down to the present. Is there anything in the “Implications” to indicate that Baran had anything to offer in this regard that would help plug this huge hole in Sweezy’s own work? Unfortunately, at least as far as the “Implications” piece is concerned, the answer has to be no. Baran has little to say about monetary theory as such in the “Implications.”

However, there are indications within the “Implications” that Baran, like Sweezy, had little interest or understanding of Marxist monetary theory. The first indication is that the text—as edited and published by Foster, at least—repeatedly refers to “exchange value”—the form of value—when it should simply say value.

Second, Baran praises so-called advances in bourgeois economics, including on the question of gold. The wording and the context seem to indicate that Baran approved of the Keynesian claim that gold can and should be replaced by paper money under the capitalist system. If Baran indeed failed to understand Marx’s theory of money and its importance, he would not be the only 20th-century Marxist who made that mistake!

Once we realize that prices must be measured in terms of physical quantities of money material—a given commodity measured in terms of use value—we see the limits of monopoly prices in a new light. If the producers of money material are themselves monopolists, their own monopoly power will cancel out the monopoly pricing power of the non-money material producing capitalists. It is important to keep this in mind when analyzing and criticizing Baran and Sweezy’s claim that monopolies can realize super-profits by deduction—that is, by selling commodities at money prices that are above their values.

Even if the money material-producing capitalists belong to the competitive sector, they still have to make a profit in the long run or they will cease to produce at all. (9) This means there will be strict limits on how far above the value of commodities the prices of commodities as a whole can rise. Once prices have risen to a level that renders the production of money material unprofitable, no further rise in prices can be sustained on a long-term basis. I have examined this important question extensively elsewhere on this blog (for example, in the series on the phases of the industrial cycle beginning here), so I won’t examine it any further now.

Currency devaluations and profits by deduction

One issue that neither Baran nor Sweezy examined, perhaps because of their apparent lack of any meaningful theory of money, was the question of currency devaluations on the rate of surplus value. When a currency is devalued against gold, all things remaining equal, money wages measured in terms of gold are cut. Since such devaluations are sooner or later followed by price rises in terms of the devalued currency, the real wages of the workers are reduced as well, as occurred during the inflationary 1970s. Therefore, currency devaluations are actually a key source of “profits by deduction.” (10)

Indeed, this is so true that a new term has recently been coined in light of the European crisis—”internal devaluation.” Under the euro system, all European countries that are part of the euro zone, from Greece to Germany, share a common currency, the euro. If, for example, Greece and Germany still had separate currencies, it is virtually certain that the Greek currency would have been sharply devalued by now against the German currency and considerably more against gold than the euro actually has been since the crisis began.

Indeed, it appears that most Greeks oppose Greece’s withdrawal from the euro zone, because they fear, not without reason, that a new Greek currency would be massively devalued against the euro—as well against gold—leading to surging inflation and plunging real wages. Indeed, Syriza, the left-wing coalition that has made dramatic gains in the last two Greek elections, is very much for the retention of the euro.

Since the euro system prevents the weaker capitalist countries such as Greece from devaluing their currencies, this forces them, according to the (bourgeois) economists to carry out “internal devaluations.” That is, to cut wages the old-fashioned way in terms of euros. This gives away a big secret. The currency devaluations often championed by “pro-labor” Keynesian progressives such as Dean Baker or Paul Krugman are actually disguised forms of wage cutting, or “profits by deduction.”

The limits of monopoly profits

There are limits on monopoly profits as well. As both Baran and Sweezy understood, monopoly profits arise from the ability of monopoly capitalists to make either explicit or implicit agreements to limit production in order to maintain high prices—relative to the prices of production—and thus high profits.

However, this creates another problem for the monopolists, as both Baran and Sweezy understood. What are the monopolists to do with their swollen mass of profits? If they consume them unproductively, their capital stagnates. If they hoard them, more and more of their capital will consist of money that yields no profit. Capitalists are interested in the yield on their total capital, not simply part of their capital. It does a monopolist no good if he makes a super-profit on a part of his capital but at the price of making less than the average rate of profit on his capital as a whole. He must strive to make a super-profit on his entire capital. If monopoly capitalists hold more and more of their capital in the form of idle money, the rate of profit on their total capital will progressively fall.

Of course, our capitalists will not actually hoard their profits in the form of chests filled with currency or gold bars but will loan their surplus money capital out at interest. But since the rate of interest is below the average rate of profit—not to speak of the monopoly rate of profit—the rate of profit on their total capital will eventually fall below the average rate of profit toward the limit of the usually much lower rate of interest.

Therefore, in the long run the only solution for the monopoly capitalists is to invade the domain of other monopoly capitalists. Competition will flare up anew and monopoly profits and for awhile even any profit at all will vanish. This is exactly what we have seen with the U.S. “big three” auto monopoly, including its central player, the “old” General Motors Corporation that so impressed both Baran and Sweezy half a century ago.

Not only did GM’s monopoly profits disappear—and its ability to share them with its workers in the form of high hourly wages and extensive social wages—but its profits vanished altogether, leading to the bankruptcy of the “old” General Motors. The “new” General Motors is based on paying much lower hourly and social wages to its workers. It remains to be seen whether this originally government-owned—though now privatized—company will remain profitable in the long run, especially when it faces the inevitable new downturns in the industrial cycle.

While Baran and Sweezy believed that monopoly profits were essentially permanent, monopoly profits have proven in reality to be transitory with the exception of the monopoly profits of the oil companies. And these profits consist in no small part of ground rent. Any person who has studied Marx’s theory of rent presented in Volume III of “Capital”—or even the classical theory of rent as presented in the works of Ricardo—will understand that rent is a monopoly profit that competition does not tend to eliminate. This is because rent, unlike other forms of super-profit, is based on a monopoly of wealth produced not by human labor but by nature.

Leaving aside rent, experience as well as theory has shown that the crucial difference between competitive capitalism and monopoly capitalism is that the more competitive the capitalist economy is the less time it takes for competition to eliminate super-profits. Monopoly capitalism is therefore like an aging organism whose reflexes are slowing, though it is only with death that the reflexes—the equalization of the rate of profit—disappear altogether.

Baran and Sweezy vindicated on advertising

Time, however, has undoubtedly vindicated Baran (and Sweezy) on one question, the growing role of advertising—especially in the age of the Internet, which was still well in the future when “Monopoly Capital” was written. Indeed, whole new industries and capitalist monopolies—Google, Facebook and Twitter come to mind—have joined radio and TV in making their money by selling advertising space. TV programs are interrupted more often and for longer intervals by advertisements. The Weather Channel, though it provides interesting information on weather, spends about a half hour of every hour of its broadcasts on advertisements. The once advertisement-free PBS system in the U.S. also has advertisements. Today, computers are even programmed to deliver advertisements over telephones.

The political economy of advertising

The classical economists implicitly and Marx explicitly defined productive labor in the capitalist sense as labor that produces surplus value. Does labor employed in advertising create surplus value?

Suppose a corporation buys the labor power of an advertising specialist to sell its commodities. Does such labor produce surplus value? No. The use value for the buyer of the advertising labor power helps the corporation to gain, or at least defend, its market share against other corporations, and thus helps it realize surplus value but does not produce any surplus value. Therefore, the use value to the capitalist purchaser of the advertising labor power is something other than the production of surplus value.

But suppose a capitalist starts an advertising agency with the aim of producing advertisements for corporations that need them for the purpose of realizing surplus value. The capitalist buys the labor power of advertising specialists with this aim in view. Is this labor power of the advertising agents productive labor? Yes it is, because in this case the capitalist hires the labor power to produce advertisements—commodities in their own right that indeed have a definite use value to their purchasers and also embody value—abstract human labor—including surplus value.

So paradoxically—and I hate commercials as much as anybody—much of the human labor employed by the advertising industry is actually surplus value-producing labor in the capitalist sense.

Next month I will examine some of the changes in monopoly capital that have occurred since “Monopoly Capital” was published almost 50 years ago.


1 I think this is overstated, though even today aspiring capitalists sometimes restrict their personal consumption to build up their businesses. But if they are successful, they usually—and certainly their heirs do—soon begin to give in to the temptation to “live like gentlemen.”

2 As I explained elsewhere, this is very impressionistic and does not stand up when examined closely. Actually, the biggest price deflations in the known history of prices, the deflations of 1920-21 and 1929-33, occurred well within the monopoly phase of capitalism. While there have been no major price deflations when calculated in terms of currency prices since 1933, periodic price deflations since then have been staved off only by repeated currency devaluations against gold. If we measure prices in terms of gold directly rather than in terms of devalued currencies, there were drastic declines in prices during the 1970s and to a lesser extent—so far—since the economic crisis that began in July-August 2007.

3 The idea that people are victimized as consumers was a popular theme during the booming 1960s and was commented upon not only by Baran and Sweezy but by Ernest Mandel as well. We hear less about this since the great capitalist prosperity of the 1960s ended, especially since the crash of 2008. In this sense, “Monopoly Capital” is very much a book of its time.

4 For example, advertisements that encourage young people to take up smoking and drinking alcoholic beverages, as well as the consumption of medicines that later turn out to be harmful.

Since “Monopoly Capital” was written, the capitalist state has been obliged to pass laws in various countries that limit the advertising of cigarettes and alcoholic beverages. The capitalist state, as the representative of the capitalist class as a whole, has done this not because the capitalists are concerned about the health of the workers for their own sake but because they are trying to drive down the value of labor power by reducing the need for medical care caused by the consumption of harmful commodities such as cigarettes or by excessive consumption of alcohol.

The corporations that produce these harmful commodities have fought these restrictions every inch of the way. In doing this, they are defending their interests as individual profit-making capitalists as opposed to the need of the capitalist class as whole to hold down the value of labor power in order to raise
the average rate of profit.

5 Today, technological progress in automobiles has resumed due to the growing use of computers in automobiles and the re-introduction of the electric motor. While computer technology was still far too undeveloped to be used in automobiles when “Monopoly Capital” was written, it is possible that more could have been done to increase gasoline mileage, and electric motors could have been considered even then as a possible alternative to the internal combustion engine, which depends on a finite nonrenewable resource. But the tight monopoly control—just three corporations dominating the U.S. and to a great extent even the global auto market—encouraged technological stagnation, not innovation.

6 In my printed version as well as the online version, the letter from which this quote is taken is dated May 2, 1964, and not March 2, 1964. However the May 2, 1964, date is impossible because Baran died on March 26, 1964. Whether this is a typo by the editors or whether Sweezy by mistake dated his letter May 2 is not important here, since the context makes clear that the letter could only have been written around or on March 2, 1964.

7 This would explain why Sweezy was less than forthcoming about the “Implications” and its publication in a possible second edition of “Monopoly Capital when Foster raised this possibility with him. Instead, according to Foster, Sweezy considered a second edition of “Monopoly Capital” that would include a section on credit and financialization but ultimately rejected this idea as well. However, a section on credit could hardly have been added to “Monopoly Capital” without dealing with the question of the theory of money, which after all lies at the base of the credit system. In the end, Sweezy decided to leave “Monopoly Capital” as is.

8 This was not, of course, possible for the Soviet Union in the 1920s. On the contrary, the Soviet government was obliged to increase the production of the means of destruction to defend itself against imperialist aggression.

9 Because of their lack of a theory of money, which undermined their theory of prices, both Baran and Sweezy greatly exaggerated the possibilities of the capitalists exploiting the workers through selling them commodities above their value and realizing profits by deduction through profit upon alienation.

10 As we have seen elsewhere, there are limits to using currency devaluations as a means of increasing the rate of surplus value. First, the financial capitalists—money capitalists—are also adversely affected by currency devaluations. They do not stand idly by in the face of repeated currency devaluations but eventually seek to recoup their position by demanding higher interest rates as happened in the 1970s, the consequences of which we are still feeling today.

Second, eventually the workers catch on and demand higher wages. In the long run, the pressure of the “industrial reserve army of the unemployed” remains capital’s primary way of holding down wages and increasing the rate of surplus value, just like it was in the days of Marx. But there is no doubt that periodic currency devaluations have become an important auxiliary method of increasing the exploitation of the working class.

Posted September 2, 2012

6 thoughts on “The ‘Implications’ of Paul Baran, Pt 2

  1. Did Paul Baran say that the chrome decorations for new automobiles did not add value unless they were rational decorations?

    I will not argue over whether the chrome decorations were rational or not rational.

    Volume I of Capital begins:

    “THE wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

    “A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference.”

    Commodities satisfy human wants. The nature of such wants makes no difference.

    There is fashion style in the auto business. But to me the classic example is ladies fashion.

    Who will call ladies’ fashion decorations rational?

    Is ladies fashion rational? Not all of it. Not all fashion is rational for ladies comfort. Not all fashion is rational for their feet. But that makes no difference. While these ladies fancy that they are fashion, these decorations have use value.

    Nor does it make any difference when decorations are chrome ones, fixed to cars and sold to men.

    Paul Baran was thinking of value. So far I am just thinking of use value.

  2. Extremely interesting, hope you develop your critique of the ‘Implications’ further. Since you mentioned rent, and particularly on oil, let me suggest the reading of ‘Theories of Surplus Value’ alongside Volume III, where it becomes clear Marx’s critique of Ricardo, Anderson and Smith. What you are referring to is actually part of a broader criticism of Marx’s. I would suggest a re-reading of those passages before hinting at the validity of Ricardo’s theory of rent. To me, it sounded like an old-fashioned omen: “Beware of the absolute!” Rent, that is.

  3. It does not make much sense that advertisement in any form should create surplus value. Suppose a firm creates a shell company for the advertisement process. If it does by itself then there is no surplus value addition but if it does by its shell then it will surplus value addition, though we know that nothing of that sort exists in reality. I think Wolff-Resnick definiton of fundamental and subsumed class processes make more sense. There should not be any value addition because of advertisement. Waiting for your comment!

  4. Paataal, you are correct that if “a firm creates a shell company for the advertisement process” that works exclusively for the parent company and does not offer its services on the market, no surplus value is created by the advertising workers.

    However, it is completely in line with Marx’s views on productive and unproductive labor to state that the employees of an advertising agency that *does* offer its services on the market, such as the agencies portrayed in the TV series “Mad Men,” *do* produce surplus value.

    The key to seeing the difference is whether the products/services produced are offered on the market (and therefore are commodities) or are simply produced to meet the needs of an individual entity, be it a company or an actual person as in Marx’s example of the services provided by a personal servant.

    For a more detailed discussion of productive and unproductive labor, I would encourage you to read this blog’s response to a reader on the topic (see link in right-hand column).

  5. Jon, thanks for your reply. I really appreciate it. But I think we should investigate more. I think we are discussing outsourcing here. The profit earned by ad agency may depend upon new innovation which would appear to increase productivity and therefore it would appear to gain a little over average profit. Or most likely the outsourced firm will appear to try to increase absolute surplus value. But this is going to be fictitious value addition, because outsourcing is still happening in the domain of circulation. What has happened is that parent firm just reduced its advertising cost by outsourcing it. I think what has happened here is that there is a reduction in a part of the surplus value created by productive worker (non-ad worker) that should have gone to feed the ad worker. Thats the rationale behind outsourcing. If you would have been paying x% of surplus value created by the productive worker of your firm to the ad-worker of your firm, now you pay y% of the same s.v. to ad agency with the consition that y < x. Now that ad agency will further divide this y% of s.v. among its own workers and owners. There is no new surplus value creation over here.

  6. One clarification more: Also what has happened is that probably the input material cost of the ad agency is cheaper. That would mean that the ad agency was able to buy an equipment for which value was produced elsewhere in the global chain, and perhaps that value was lesser than the equipment used in the parent firm. In other words, this ad agency fed upon the cheapening ad equipments probably maded by cheap labour in the global South. This is covered in The ‘Implications’ of Paul Baran, Pt 3.

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