As May drew toward its end, the media was full of reports that the world economy was teetering on the edge of catastrophe. If the media is to be believed, the threat came not from the unsold commodities that accumulated due to the COVID aftermath boom. Rather, they said that unless the Democrats and Republicans reached a last-minute agreement to raise the debt limit, the government will be forced into default as the Treasury runs out of money.
In last month’s post, I declared that this crisis was fake. Sure enough, “at the last minute,” the crisis was averted. On Saturday, June 3, President Biden signed the compromise agreement allowing the government to keep borrowing into 2025. The compromise bill sailed through the House of Representatives with 314 voting yes and 117 voting no. In the Senate, the vote was 63-to-36. No small portion of that borrowed money will go to servicing federal government debt, the bulk of which is owned by wealthy capitalists.
Karl Marx on the national debt
Karl Marx wrote:
“The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.” (Capital, Volume 1, Chapter 31, Genesis of the Industrial Capitalist)
While Marx was writing about the national debt of his time, his statement is more true today. If you look at the consolidated balance sheet of the Federal Reserve Banks making up the Federal Reserve System, the assets standing behind the liabilities, such as Federal Reserve notes (dollar bills) and promises to pay on demand of holder in legal-tender money, are mostly U.S. Treasury Bills. The assets standing behind the currencies issued by other than Federal Reserve central banks are also mostly Treasury bills. (1)
Before the Great Depression, the assets behind currencies issued by central banks were either gold or commercial paper issued by private businesses, with government securities playing a minor role. Before 1932, Federal Reserve Banks weren’t even allowed to include government securities as collateral; they were legally required to hold gold and commercial paper against the currency. (2) Today, while gold remains the ultimate backing of the U.S. dollar and other national currencies, commercial paper plays a modest role. If the government failed to pay its debt, the rug would be pulled from under the entire global currency and credit system. For this reason, there was never any chance that the government wouldn’t pay its debts. It may pay in depreciated dollars, but pay them it will. (3)
As progressives have pointed out, if Biden really wanted to stand up to the reactionary demands of the Republican Party, he could simply have called their bluff. He could have gone on national TV and explained what the Republicans demanded. Their central demand was that people who depend on $6 a day worth of food stamps to avoid outright starvation should be forced to either work 20 or more hours per week or hit the pavement looking for work for that much time. Biden could have explained this demand was an attempt to increase competition among workers and drive down all workers’ wages. That the aim was to increase the profit rate on capital so that owners of capital who do no work can grow richer at a faster pace than they already are.
Other GOP demands were equally unpopular, including: Making it easier for fossil-fuel companies to increase extraction; forcing people with unpaid student loans to resume payments; and a demand to cut funding for the Internal Revenue Service so the rich can get out of paying the taxes they owe. Biden could have said that because of their demands, he would not negotiate with Republican House Speaker Kevin McCarthy and urged all Democratic representatives and senators to break off negotiations with the GOP.
There were suggestions from progressives that Biden could use a phrase in the 14th Amendment to the Constitution that can be interpreted to mean that the law limiting the debt is unconstitutional. It would then be left to the courts and, ultimately, the Supreme Court to determine whether or not to repudiate the national debt and collapse the world currency and global system. For these reasons, a Supreme Court decision wouldn’t be in doubt. Another suggestion was for the Treasury to buy about $2,000 in platinum and mint it into a trillion-dollar coin, filling their coffers.
In reality, Biden wouldn’t have had to resort to these measures or gimmicks. All he would have had to do was to stand firm and refuse to negotiate. The GOP would’ve had no alternative but to capitulate. Instead, he did the opposite. He kept negotiating and agreed to their main demands. Who pays? The poor, who’ll have to pound the sidewalks to find additional work because they’re not paid the value of their labor power, as well as other workers who’ll face increased competition from desperate, hungry people.
Why did Biden capitulate to the GOP? Because he represents the same capitalist class. The Democratic Party as a whole represents the capitalist class. Most Democratic voters, many non-capitalist activists, and even some officeholders are appalled by the agreement. But as long as they continue to accept the logic of the two-party system, they’ll remain politically impotent before the capitalists, who are the real bosses of the party. Effective resistance is only possible when we as a class build our own party that will fight for our own class interests.
The real crisis
The bipartisan agreement that ended the phony government debt crisis is designed to force more people into the labor market. This occurs when the Federal Reserve System’s avowed policy is to increase the unemployment rate. In May, the official unemployment rate, which vastly understates this rate, rose from 3.4% to 3.7%. However, the capitalist media focused not on this number but on total employment. The U.S. Labor Department estimates that total U.S. non-farm employment in May rose 300,000, well above the 180,000 expected by experts, the strongest since January. Headlines blared about the “blowout jobs report.” But as with the debt crisis, the media is deceiving us.
In reality, neither the government nor the media know the exact number of people working even part-time in May. Eventually, the number will be known through employer reports of contributions to Social Security and unemployment benefits. In reporting the “blowout” jobs report, the media “forgot” to explain that the Labor Department’s report only estimates the number of people working.
Labor Department statistics are based on surveys of large capitalist establishments asking how many people they employ. Estimates are drawn from this data and the number of jobs created in small and mid-size establishments based on job trends over the previous months. From the official Labor Department website: “Currently, the [Current Employment Statistics] sample includes about 122,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 666,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.”
So the active sample includes only one-third of all nonfarm jobs. The rest includes an estimate of the number of jobs created by new businesses minus the number of businesses that die along with their jobs. The problem with this method is that it overestimates the number of net jobs created when interest rates rise, banks tighten lending standards, and business slows. It, therefore, overestimates the number of jobs created in periods immediately preceding a recession. The media ignores these important qualifications.
We should carefully check these statistics against other data to see if they confirm or contradict the Labor Department estimate. One way is to see whether the Labor Department survey of employers is confirmed by its phone survey of individuals called the “household survey.” Statisticians call up people and ask them whether they or members of their households have worked in the last month. Most in this survey will be workers or people seeking employment. If the two surveys show the same general trend, this increases the confidence in the large establishment-based employment estimate as interpreted by the Labor Department statistical models. If the two surveys provide contradictory results, it decreases confidence in the estimate.
This May, the household survey showed employment falling. Yahoo Finance reported: “The household survey painted a different picture, with employment falling and the unemployment rate rising to its highest level since October,’ Nancy Vanden Houten and Ryan Sweet at Oxford Economics wrote on Friday.” These results contradict one another, so we should be skeptical that total U.S. non-farm employment increased.
Did total non-farm employment rise in May, or did it fall? The discrepancy in statistics makes them harder than usual to interpret. The press as the “Fourth Estate” should raise questions rather than running headlines about “blowout” job numbers.
Because the newly passed legislation forces more people onto the job market, there should be an interesting news story here. But the media isn’t asking questions; they report estimates as facts. Why are they doing this? It’s not a mystery. The media and their advertisers are capitalist employers who want increased unemployment to strengthen their position against their own workers. They don’t want to see anything done to reduce unemployment, such as a public works program — though with the state of U.S. infrastructure, increased spending on public works is certainly needed. The capitalist media has no interest in raising questions about dubious estimates showing rapid-growth employment — quite the contrary.
Employment growth doesn’t mean recession danger is receding
Even if the estimate for employment growth is accurate, it doesn’t preclude a recession. If anything, the opposite is true. Lower-than-average unemployment precedes the crises of overproduction we call recessions. That’s because as overproduction develops, employment grows more than is sustainable in the long run under capitalist production. The temporary increased demand for labor power puts the workers in a stronger position in the struggle with the capitalists over the rate of surplus value. Marx urged workers to take advantage of these periods of overproduction with their associated rapid employment growth to raise wages before a crisis arrived, and the capitalist class took advantage of a return of higher unemployment to slash wages and raise the surplus value rate.
The rapid growth of employment during periods of overproduction means the total amount of surplus value increases. This is seen in the rapid rise in profits accompanying a boom, another name for a period of overproduction.
The expansion of credit that goes with a boom keeps overproduction and employment growth possible for a while. But soon, the expansion of credit reaches its limit, credit contracts and profits fall because the increased surplus value production of the boom is not matched by a comparable realization of the surplus value on the market.
As a rule, relative overproduction in a boom causes it to end before a crisis of absolute overproduction of capital develops. In other words, before capitalists run out of workers. The fall in profits caused by the inability to realize increased surplus value production then replenishes the industrial reserve army, making it possible to increase the surplus value rate. This rate rise in each crisis is capital’s way of resisting the fall in the profit rate caused by rising organic composition. This converts the law of the profit rate into the tendency of the profit rate to fall.
During the period of overproduction, workers and our unions are in the best position to resist the long-term trend rise in the rate of surplus value. (4) Central bankers claim that the employment rate rise is too rapid because higher wages mean higher inflation. Inflation “must be wrung out of the system” if inflationary expectations are not to become “embedded.” According to Keynes and other capitalist economists, to do this, unemployment must be increased because money wages are rising so rapidly they’re causing inflation. Government reports indicate that price increases and wage increases are already declining. But a momentary decline in inflation is not enough for the central bankers. If the central bank eases “too soon,” they think inflation will come roaring back.
In reality, the central bank needs to “wring overproduction out of the system.” If they ease too soon, the boom (and overproduction) resumes before the previous boom’s overproduction has been adequately liquidated. (5) When the bank eases too soon, interest rates fall momentarily, and a rise in the industrial cycle seems to begin. But then demand for gold soars, and a new rise in inflation begins, first with primary commodities and then to wholesale and retail prices reflecting the depreciation of the currency against the money commodity — gold. As a result of money capitalists’ declining confidence in the currency, interest rates reverse, rising to new highs. Faced with a new surge in inflation, the bank is forced to take stronger action to what they say is necessary to curb inflation but is, in reality, to end overproduction and its associated credit-fueled overtrading.
The central bank can successfully ease only when production and employment have fallen enough, so there’s no fear demand will suddenly revive, leaving the industrial and commercial capitalists unable to meet demand from their current inventories, causing customers to turn to competitors. Instead, they must fear finding themselves with excess inventories and unsold commodities while being short on cash to meet their bills. In addition, before the central bank can safely ease, only when enough excess capacity exists so the industrial capitalist doesn’t react to increasing demand by increasing investment “too much” in new plant and equipment.
There must be enough excess capacity so they can increase production to meet rising demand without expanding capacity. This is how the Keynesian accelerator effect is held in check. Most importantly for workers, when production has fallen enough to liquidate overproduction, the bosses rebuild their inventories without immediately hiring new workers. They use the existing workforce more efficiently and concentrate on rebuilding the cash balances depleted during the previous boom. After the crisis, capitalists concentrate on accumulating money capital instead of accumulating real capital. Only then is inflation — overproduction — finally “wrung out of the system” — until the next boom.
We can be confident that over the next few years, the Fed and other capitalist central banks around the world will succeed in lowering inflation — overproduction — with a resulting rise in unemployment, though when and by how much, no one can be sure. We do know that Biden and Democrats working with Republicans, assisted and egged on by the media, have just passed a bill designed to increase competition among workers, making it easier for the capitalists to raise the surplus value rate and profit in the years ahead.
All three branches of state power wage war on the working class
Anyone who knows anything about the U.S. Constitution knows there are three branches of government (or, in more scientific terms, the central state power): the executive, legislative, and judicial. During the staged debt crisis, the executive branch — represented by Biden — and the legislative branch — represented by the Republican-majority House of Representatives and the Democratic-majority Senate — worked in a bipartisan way to pass a bill to increase the rate at which the capitalist class exploits the working class.
But what about the judicial branch of state power — the Supreme Court? That branch hasn’t been idle. On June 1, the court ruled in an 8-to-1 opinion that Glacier Northwest Inc. has the right to sue Teamster Local 174 for financial damages it suffered during a strike. The whole point of strikes is to inflict or at least threaten financial damages on the capitalists when they fail to pay workers the value of their labor power. If, after a strike, capitalists can turn around and sue the workers’ union for financial damages in the capitalist courts, the right to strike is rendered pointless. This is, of course, the aim of the decision by the robed servants of capital sitting on the high court, including both the Republican conservative majority wing and the Democratic liberal wing.
The only dissident voice was the newest Justice, Ketanji Brown Jackson. In her dissent, she wrote, “Workers are not indentured servants, bound to continue laboring until any planned work stoppage would be as painless as possible for their master.” However, in the land of the free and the home of the brave, that’s exactly what workers face.
Teamster President Sean O’Brien stated: “The political hacks at the Supreme Court have again voted in favor of corporations over working people. These corruptible justices should be ashamed of themselves for throwing out long-standing precedent and legislating from the bench.
“The ability to strike has been on the books for nearly 100 years, and it’s no coincidence that this ruling is coming at a time when workers across the country are fed up and exercising their rights more and more. Make no mistake — this ruling has everything to do with giving companies more power to hobble workers if any attempt is made to fight back against a growing system of corruption.
“The Supreme Court is not upholding the law, nor is it advancing the American people. Supreme Court justices are ruling on behalf of billionaires alone — the very ones they socialize with at cocktail parties and who they owe their jobs to in the first place. American workers must remember that their right to strike has not been taken away. All workers, union and nonunion alike, will forever have the right to withhold their labor.
“The Teamsters will strike any employer when necessary, no matter their size or the depth of their pockets. Unions will never be broken by this court or any other. Today’s shameful ruling is simply one more reminder that the American people cannot rely on their government or their courts to protect them. They cannot rely on their employers. We must rely on each other. We must engage in organized, collective action. We can only rely on the protections inherent in the power of our unions.”
Leadership crisis in the ruling class
On June 8, a federal grand jury indicted former President Donald Trump in the so-called “documents case” on 37 felony counts. Unlike the earlier case in New York State involving falsifying financial records, these new federal charges involve crimes against national security — crimes against the state power itself. He’s accused of retaining classified documents, keeping them in non-secure locations, and showing or discussing their contents with individuals lacking security clearances. By doing this, he allegedly risked informing other countries of plans by the U.S. to attack them militarily and in other ways, thereby endangering the national security — the world empire — of the United States. If Trump is eventually convicted on all counts and sentenced to the maximum sentence — very unlikely — he could be sentenced to about a hundred years in prison. This compares to only four years in prison on the New York State charges. This is a fast-developing story that will be dealt with in future posts.
The U.S. “Party of Order,” comprised of Democrats and Republicans alike, has rallied around President Biden, who will be 82 at the time of the November 2024 presidential election. He’s announced he will be a candidate for a second term. The Party of Order had hoped Florida Governor Ron DeSantis would be able to defeat Trump in Republican in the 2024 primaries. On May 24, he formally announced his candidacy. DeSantis has been running far to the right, hoping to win over Trump’s reactionary base. But unlike Trump, DeSantis is considered a reliable servant of the Party of Order, made up of top Democratic and Republican politicians that govern in the interests of the capitalist ruling class.
The problem is that Trump’s base isn’t buying DeSantis so far. In their view, he’s betrayed the former president by running against him just as he’s under massive attack in the media and in the criminal justice system from his enemies in the Party of Order. It’s still early in the game, but at this point, it’s beginning to look like DeSantis resembles another former Florida governor, Jeb Bush — George W. Bush’s brother. Jeb Bush was the favorite Party of Order candidate for the Republican nomination in 2016. He was easily defeated in the primaries by Trump. There are other Republican candidates, but no one else has made much of a mark in the polls.
The history of U.S. elections indicates that 2024 should be a great year for the Republicans, and their candidate should easily win the presidency. One reason to believe this is that Biden is polling around 35%, a disastrous level for an incumbent seeking a second term. Neither Biden nor the Democrats have kept any promises made in the 2020 elections.
One example: they’ve made no move to pass a law to overrule the Supreme Court’s anti-abortion decision. They could have since they controlled both Houses of Congress at the time of the decision. The PRO (Protecting the Right to Organize) Act, which was supposed to restore some of the labor rights taken away by the 1947 Taft-Hartley Act, has gone nowhere in Congress, nor has the $15.00 federal minimum wage. Democrats haven’t passed legislation to counter Republican voter suppression tactics, though, in theory, this is in the Democrat’s favor in future elections. The Biden administration worked with Republicans to end the health emergency declared after the COVID pandemic. Due to this bipartisan move, states are again purging Medicaid rolls reminding us that medical care is not a right in this country, unlike all other developed and some not-so-developed countries. Biden has also continued Trump’s policies against immigrants even if he has avoided the racist rhetoric that Trump employed.
On foreign policy, Biden has continued many of Trump’s policies, including a renewed blockade on Iran, tightening the blockade against Cuba, and retaining many of his high protective tariffs. Like his predecessors, Biden has continued arming Israel with only mild criticisms of the apartheid state’s ultra-right, ultra-racist, Zionist-religious fundamentalist government.
Biden has reversed Trump’s move to normalize relations with the Democratic Peoples Republic of Korea (North Korea). He’s reversed Trump’s attempt to achieve better relations with Russia which played no small role in triggering the still-raging Russo-Ukrainian war. Biden’s been generous in arming the Nazi-infested Kiev government that still threatens to lead to an all-out U.S.-Russian military war.
Biden has also followed an aggressive policy toward the People’s Republic of China, including defending the U.S. client separatist politicians in Taiwan in an attempt to safeguard U.S. domination of the world’s semiconductor markets. About the only positive achievement of his administration was his carrying through Trump’s policy of ending the U.S. military war in Afghanistan— the longest war in U.S. history — replacing it with an economic war against the people and government of that country. (6)
To claim something positive, Biden has taken credit for the relatively low unemployment rate of the COVID aftermath boom as though this was some kind of personal achievement rather than the effect of the pandemic on the economy. But the high inflation that accompanied the boom has driven down real wages. This hasn’t prevented Biden from negotiating a deal with the GOP to further drive down workers’ wages. This came just before the Supreme Court’s latest attack on union rights, that in the words of Justice Jackson, treats U.S. workers like indentured servants.
Factoring in a recession with all leading indicators pointing to possible stagflation depending on the policies of the Federal Reserve, Biden and the Democratic Party should be toast in 2024. They do have two things going for them: 1. The Republican-dominated Supreme Court’s decision to take away the right to abortion, and 2. Donald Trump. The majority in the U.S. despise Trump, as does the Party of Order.
More on this next month. Now I turn to the differences between Anwar Shaikh and Lenin on the issue of the monopoly phase of capitalism.
Lenin versus Shaikh on monopoly capital
I want to compare the views of Shaikh and Lenin on whether there’s such a thing as a monopolistic phase of capitalism. The quotes are from Lenin’s 1916 pamphlet on “Imperialism,” written 100 years before Shaikh’s “Capitalism.” The two works were written for different audiences and served different purposes. I’ll concentrate on Lenin’s concept of monopolies.
Shaikh’s one thousand-page book, “Capitalism” is an academic restatement of Marx’s economic theory as understood and interpreted by the Marxist fundamentalist school. Different parts of the book are addressed to different audiences, using differing terminology, with some parts addressed to academic Marxists and others to non-Marxist professional economists. Shaikh does not participate in nor does he attempt to build any kind of revolutionary proletarian party.
In contrast, Lenin’s main interest in writing “Imperialism” was to build a revolutionary proletarian party in the Russian Empire and internationally. To do this, Lenin had to explain the economic roots of what we now call World War I and the roots of the split in what had been the Second International. It was written just before the outbreak of the Russian Revolution, though Lenin didn’t know this at the time.
The pamphlet was written to advance Lenin’s political goal of building a new Third International to replace the Second International. The latter had been ripped to shreds by the outbreak of the 1914 imperialist war. It split on the issue of whether or not to support their respective imperialist fatherlands’ war efforts or to follow an internationalist course in opposition to the war. Members had promised to oppose their own capitalists but failed to do so. Anti-war sentiment was divided into what might be called a pacifist wing and a revolutionary wing. The pacifist wing dreamed of restoring the Second International on the old basis. The revolutionary wing wanted to build a new revolutionary Third International that would exclude opportunists and centrists who wavered between revolutionists on the left and opportunists on the right. Lenin led the revolutionary wing. (7)
With “Imperialism,” Lenin tried to reach as many socialists as possible, not all of whom were knowledgeable or particularly interested in the finer points of Marxist economic theory. Lenin doesn’t directly refer to value, surplus value, price of production, or market price. However, he was aware of these economic categories, and the knowledgeable reader can see them lurking in the background. This is why he subtitled his pamphlet “A Popular Outline,” indicating he aimed at a broad audience. Lenin didn’t see his pamphlet as a replacement for Marx’s “Capital.” Nor did he see it as a popularization or an extension of Marx’s work. “Imperialism” was to be a tool to build the Third International.
Lenin wanted to build the new international on a solid Marxist foundation. While he praises Hilferding’s “Finance Capital” in a prefix, he included an important qualification: “In 1910, there appeared in Vienna the work of the Austrian Marxist, Rudolf Hilferding, ‘Finance Capital’ (Russian edition, Moscow, 1912). In spite of the mistake the author makes on the theory of money, and in spite of a certain inclination on his part to reconcile Marxism with opportunism, this work gives a very valuable theoretical analysis of ‘the latest phase of capitalist development,’ as the subtitle runs.” Lenin mentions “the mistake the author makes on the theory of money.” He doesn’t elaborate on this, but he thought it was worth mentioning. His reasons will become clear in next month’s post.
Hilferding’s mistaken theory of money
In Chapter 2, Hilferding wrote, “A system of pure paper currency might be envisaged in the abstract along the following lines. Imagine a closed trading nation which issues legal tender state paper money in a quantity sufficient for the average requirements of circulation, and further, that this quantity cannot be increased. (8) The needs of circulation would be met, aside from this paper money, by bank notes, etc., exactly as in the case of a metallic currency. By analogy with most modern legislation governing banks of issue, the paper money would serve as cover for these bank notes, which would also be covered by the resources of the banks. The impossibility of increasing the supply of paper money would protect it against depreciation. Under such circumstances, paper money would behave as gold does today; it would flow into the banks or be hoarded by individuals when circulation contracts, and would return to circulation when that expands. The minimum of circulating media required at any time would remain in circulation, while the fluctuations in circulation would be covered by an expansion or contraction of bank notes. The value of the state paper money would remain stable. Only in the event of a collapse of the credit structure, and a monetary crisis, would there be any likelihood of an insufficiency in the amount of paper money. It would then command a premium, as was the case with gold and greenbacks during the recent monetary crisis in the United States.” (This is a reference to the crisis of 1907 -SW)
Hilferding thought it was theoretically possible that the currency could be freed from its metallic base if a single global capitalist state was established. Though he didn’t think this would happen in practice, he kept the door open to establishing non-commodity money without abolishing capitalist commodity production. Today the mistaken belief that non-commodity money is possible under capitalism is held by Shaikh’s fundamentalist school of Marxism and the Monthly Review school. Today’s MR school takes non-commodity money for granted while not attempting to justify the belief theoretically. Indeed, the Monthly Review magazine website’s top menu bar links to “Money on the Left.” If the reader clicks on the link, it opens a section of the site dedicated to supporting the anti-Marxist “Modern Monetary Theory,” in “partnership with Monthly Review magazine.”
MMT claims that the money relationship of production arises not from the exchange of commodities but from state power. According to MMT, money is a state-issued token that doesn’t have to be a commodity. Instead, money arises because the state puts its subjects into debt to itself through taxation. To pay their debts and stay out of jail, subjects must pay them through a token the state creates specifically for this purpose. By never defending Marx’s theory of money and instead including a section that champions MMT, “Monthly Review” implicitly endorses MMT. This is because MMT is useful for those who believe in building a cross-class alliance with a section of the capitalist class. It’s hard to imagine anything more alien than this to Lenin’s theory, practice, or politics.
Hilferding wrote “Finance Capital” in 1910 at the peak of the international gold standard. Shaikh has done his work since the collapse of the Bretton Woods System, which occurred between 1968 and 1973 and was the last phase of the old international gold standard. While Hilferding saw non-commodity money as a future theoretical possibility, Shaikh sees non-commodity money — he calls it “pure fiat money” — as a reality since the year 1940.
Lenin versus Shaikh on monopoly
Modern capitalist monopolies take two basic forms: cartels and trusts. The term “trust” was widely used in economics during the 20th century but has fallen out of use in recent decades, replaced by the term “giant corporation.” The legal meaning of “trust” refers to assets managed by one person in the interests of another. John D. Rockefeller used this legal device to build his Standard Oil monopoly. Under this arrangement, the stocks of nominally independent oil corporations that had previously competed with Rockefeller’s company were put into a trust controlled by him. This meant that the non-Standard Oil corporations that still existed, under the trust supposedly independently, acted as a single capital.
Rockefeller’s oil trust was so blatantly monopolistic that it was declared illegal. He and other monopolists then found a legal alternative widely used today, the holding company. This is a corporation that doesn’t conduct business in its own right but confines itself to holding stocks of other corporations. Like Rockefeller’s original trust, the holding company controls other nominally independent corporations.
A cartel, in contrast, is an agreement among independent capitals that ally among themselves to divide up markets, limit production, and set market prices above the price of production. They often work through a syndicate that acts as a single seller, tying the cartel together. As far as the centralization of capital is concerned, cartels represent a lower stage of the centralization of capital than trusts.
Since cartels represent an alliance of independent capitals, they are unstable. They work best during periods of good business. But during overproduction crises and the periods of stagnation that follow, cartels are prone to break up as competition-driven independent capitals attempt to seize portions of the market they had previously ceded to other cartel members. A cartel is an attempt by independent capitals to stave off trustification, defined as the swallowing up of a group of independent capitals by a single one. Cartelization often precedes trustification.
At the turn of the 20th century, Germany was considered the model of cartelization, and Britain was the model of trustification. Lenin quotes Professor Hermann Levy, who, in his work “Monopolies, Cartels, and Trusts,” studied the growth of monopoly in both countries. An important difference between Britain and Germany at that time was that while Germany used protective tariffs, Britain had followed a free trade policy since the repeal of the corn laws in 1846. Cartels and tariffs are naturally related as tariffs protect the home market that forms part of the world market from capitalists of other countries. Tariffs represent a cartel-like division of the world market and work by hindering the international centralization of capital. Cartels hinder the national centralization of capital though they can also be international, where they work like tariffs to stave off international centralization of capital.
Lenin quotes Levy, “In Great Britain it is the size of the enterprise and its high technical level which harbour a monopolist tendency. This, for one thing, is due to the great investment of capital per enterprise, which gives rise to increasing demands for new capital for the new enterprises and thereby renders their launching more difficult. Moreover (and this seems to us to be the more important point), every new enterprise that wants to keep pace with the gigantic enterprises formed by concentration would here produce such an enormous quantity of surplus goods that it could dispose of them only by being able to sell them profitably as a result of an enormous increase in demand; otherwise, this surplus would force prices down to a level that would be unprofitable both for the new enterprise and for the monopoly combine — a couple of dozen or so … Here the influence of concentration on the formation of large industrial monopolies in a whole sphere of industry stands out with crystal clarity.”
Levy makes an important point. In neoclassical economics, under conditions of perfect competition, individual capitalist firms face “a flat demand curve.” The curve is flat because no matter how much it varies its level of production, it will be able to sell its entire output at the prevailing price. It makes no sense for a firm to reduce its price because it won’t be able to gain additional market share by doing so. As long as perfect competition prevails, market share is determined by how much it produces. On the other hand, if a firm attempts to earn (using neoclassical terminology) economic profit beyond the rate of interest by increasing its prices, it won’t be able to sell any of its products at all — facing the neoclassical “flat” demand curve.
Now let’s assume the opposite situation: A single trust gains control of an entire branch of production. If the trust increases production, it faces a drop in demand unless it cuts prices at the same time. The demand curve slopes downward. If the trust cuts production, it can raise prices, but if it increases production, it has to cut prices. Neoclassical theory says competition is perfect only when the largest firm has a market share that approaches the mathematical limit of zero percent. A monopoly is “perfect” when a single firm has a market share of 100%. Competition is imperfect when individual firms control enough of the market that individual decisions by these firms on how much to produce have a measurable effect on prices. This is sometimes called oligopoly — a few sellers — or in Kalecki’s terminology, there’s a degree of monopoly. The degree of monopoly reaches its highest point when a single trust captures control of an entire industry.
The neoclassical-based concept of “imperfect competition” enabled the Monthly Review School to build a model of monopoly capitalism on the foundation of the neoclassical model itself. The difference between the MR school and neoclassical orthodoxy is that while the neoclassical orthodoxy plays down oligopoly, claiming that real-world competition approaches perfect competition, the MR school puts oligopoly at the center of its economic analysis.
Shaikh and his “fundamentalists” point out correctly that the MR school’s theory of monopoly capitalism is built on neoclassical foundations. In their attempt to defend Marxist theory against the MR school, fundamentalists play down monopoly altogether. In reality, the weakness of the MR analysis is not that it recognizes the growing power of monopoly — or oligopoly — but that because it ignores the categories of value, surplus value, price of production, and market price, its analysis of the effects of oligopoly are shallow and impressionistic.
The MR school has no notion of the nature of money and no interest in exploring this question. Seeing only monopoly, it believes competition withers away under monopoly capitalism. This is far from the case and was not Lenin’s view. The MR school never asks how, in the absence of price competition, the law of value can make possible the reproduction of the monopoly capitalist economy. And if the law of the value of commodities does not regulate the monopoly capitalist economy, what does? They have no answers.
In contrast, when analyzing modern capitalism, Shaikh and his fundamentalists ask these questions and come up with essentially the same answers as Marx. That’s why they’re called fundamentalists. But they either ignore or play down the significance of the progressive centralization of capital that proceeds over the lifetime of the capitalist mode of production. The errors of the MR school that the fundamentalists criticize don’t mean the centralization of capital has no significance, far from it!
The centralization of capital and crises
Anybody who’s studied the history of crises knows they affect industry and agriculture differently. Capitalist relations of production have been slower to take hold in agriculture than in industry proper. Even where they do prevail, capitalist agricultural enterprises have historically been smaller than manufacturing. Capital is now becoming more centralized in agriculture. How this will affect future crises is of great interest.
The greater the degree of the centralization of capital, the more sensitive the level of production is to fluctuations in demand. One consequence is that in industries where capital is more centralized, the more likely the industries will remain profitable during a crisis. The converse is also true. When demand rises after a crisis in centralized industries, the huge amount of excess capacity created by production cuts made in the previous crisis makes it possible for production to rise rapidly.
The increase in production in capital-centralized industries makes a rise in supply possible after a crisis, meaning prices will have to rise less than for more decentralized industries to equalize supply with demand. During recoveries, prices and profits rise less in these industries. Shaikh documents this effect but fails to realize its significance. It’s not a question about the behavior of centralized versus decentralized industries. The more capital becomes centralized, the more cyclically unstable capitalism as a whole becomes regarding production and employment, while profits and prices tend to become more stable, though the outbreak of price wars is far from excluded in centralized industries.
What we don’t see is a sustained generalized rise in prices relative to values, as claimed by the MR school. The claim of such a rise that then gives birth to a tendency of the surplus to rise — profit upon alienation — is the main error made by the MR school. Such a secular rise in market prices relative to values and production prices is prohibited by the law of the value of commodities, and however much it’s undermined, it continues to rule monopoly capital.
Agriculture as an example of decentralized production
During general crises of agricultural overproduction, at least historically, where capital is least centralized, production declines very little. Small farmers who command individually a tiny portion of the market cannot raise their prices by cutting their production. Individual small farmers and peasants, therefore, face a flat demand curve. To the extent that the neoclassical model of “perfect competition” reflects reality at all, it reflects a generalization of the situation in agricultural markets where capitalism is least developed. Under these conditions, unless the government intervenes by paying individual farmers not to produce — like under the New Deal — the only way that production can ultimately be reduced is for a portion of the peasants and small farmers to give up farming and move to the city to look for jobs in industry. Indeed historically, this played a key role in the formation of the industrial proletariat. This is a prolonged and painful process that unfolds over decades as small working farmers and peasants attempt against increasing odds to cling to their small farms and traditional way of life. (9)
The way the law of value operates in agriculture and other decentralized industries is different from how it operates where capital is centralized. Where capital is centralized, overproduction crises take the form of relatively short periods of sharply reduced production and employment. This is because when individual firms take the form of “trusts” that command large portions of the market, they respond to declines in demand by cutting production and employment. This allows them to maintain market prices closer to the prices of production. Large centralized “trusts” that command a huge section of the total market normally face downward demand curves. Their demand curve only “flattens” during periods of exceptional demand. In contrast, small producers that command only tiny portions of the total market always face flat demand curves. (10)
How does the law of value affect the volume of commodity production changes as capital becomes more and more centralized? The more centralized, the more the demand curve tends to slope downward. While centralization tends to stabilize market prices around production prices, this is paid for by the increased instability in the volume of production and employment.
The increasingly violent fluctuations in production and employment in centralized industries show the need to shift from production for profit to production for use. However, this shift means abolishing private ownership and commodity production. Until this is accomplished, even the largest, most monopolistic trusts remain slaves of the market. Commodity production, with the rise of cartels and more so by the rise of trusts, still reigns. The resulting growth in the instability of production and employment led to great social, political, and military catastrophes.
Frustrated by the evolution of capitalism in the sphere of production, bourgeois political economists seek a solution in the sphere of demand. The only way production and employment can be stabilized under monopoly capitalism is through a steady, rapid growth in demand. But how can sufficiently high demand be arranged? Keynes was aware that such sufficiently high demand — not temporarily during a boom but permanently — can only be arranged with the help of non-commodity money. However, non-commodity money is impossible under capitalism.
Shaikh fails to understand capitalism’s evolution because he doesn’t understand that pure fiat money — non-commodity money — is impossible without abolishing commodity production itself. He believes modern money (Shaikh’s pure fiat money) enables the capitalist state, working through the central bank and fractional reserve banking system, to create the amount of demand needed to absorb commodities produced by the large trustified enterprises of present-day capitalism.
The problem then becomes producing an adequate amount of surplus value and its use value form, the surplus product. Shaikh isn’t able to penetrate the effects of the limits to demand confronting the trusts even to the extent that the now-forgotten first half of the 20th-century bourgeois economist Hermann Levy was able to do. Shaikh is unable to grasp the evolution of the capitalist production mode from its origin in highly decentralized commodity production to monopoly capitalism and, finally, its transformation into a communist society. The law of value works through the anarchy of production and achieves approximately correct proportions between the different branches of production necessary to reproduce capitalist society. This he understands well.
What Shaikh and other fundamentalists fail to understand is that the law of value working through anarchy creates, against the capitalists’ will, the basic structure of a planned communist society to come within the shell of the old capitalist society. The only thing left to do is break the capitalist shell and liberate the communist society that has been taking shape within the capitalist shell. Monopoly capitalist society is a two-faced one: one face looks backward to the past of decentralized commodity production ruled by free competition; the other face looks forward to the inevitable coming of a communist society based on centralized, planned, globalized production.
Crises and monopolization
Lenin quotes the bourgeois economist Th.Vogelstein:
“Isolated examples of capitalist monopoly could be cited from the period preceding 1860; in these could be discerned the embryo of the forms that are so common today; but all this undoubtedly represents the prehistory of the cartels. The real beginning of modern monopoly goes back, at the earliest, to the sixties. The first important period of development of monopoly commenced with the international industrial depression of the seventies and lasted until the beginning of the nineties.” “If we examine the question on a European scale, we will find that the development of free competition reached its apex in the sixties and seventies. It was then that Britain completed the construction of her old-style capitalist organization. In Germany, this organization had entered into a fierce struggle with handicraft and domestic industry and had begun to create for itself its own forms of existence.
“The great revolution commenced with the crash of 1873, or rather, the depression which followed it and which, with hardly discernible interruptions in the early eighties, and the unusually violent, but short-lived boom round about 1889, marks twenty-two years of European economic history … During the short boom of 1889-90, the system of cartels was widely resorted to in order to take advantage of favorable business conditions. An ill-considered policy drove prices up still more rapidly and still higher than would have been the case if there had been no cartels, and nearly all these cartels perished ingloriously in the smash. Another five-year period of bad trade and low prices followed, but a new spirit reigned in industry; the depression was no longer regarded as something to be taken for granted: it was regarded as nothing more than a pause before another boom.
“The cartel movement entered its second epoch: instead of being a transitory phenomenon, the cartels have become one of the foundations of economic life. They are winning one field of industry after another, primarily, the raw materials industry. At the beginning of the nineties the cartel system had already acquired in the organisation of the coke syndicate on the model of which the coal syndicate was later formed — a cartel technique which has hardly been improved on. For the first time the great boom at the close of the nineteenth century and the crisis of 1900-03 occurred entirely — in the mining and iron industries at least — under the aegis of the cartels. And while at that time it appeared to be something novel, now the general public takes it for granted that large spheres of economic life have been, as a general rule, removed from the realm of free competition.”
Summarizing Vogelstein, Lenin adds, “Thus, the principal stages in the history of monopolies are the following: (1) 1860-70, the highest stage, the apex of development of free competition; monopoly is in the barely discernible, embryonic stage. (2) After the crisis of 1873, a lengthy period of development of cartels; but they are still the exception. They are not yet durable. They are still a transitory phenomenon. (3) The boom at the end of the nineteenth century and the crisis of 1900-03. Cartels become one of the foundations of the whole of economic life. Capitalism has been transformed into imperialism.”
The growth of monopoly is intertwined with the history of crises. Before the crisis of 1873, cartels played a minor role, and trusts didn’t exist. Afterward, a long period of depression set in and, with some interruptions, lingered until the mid-1890s. The whole era was marked by a fall in the general price level. Since profits are calculated in terms of money — gold — profits are harder to come by than in the era of rising prices that followed the gold discoveries in California (1848) and Australia (1851) that lowered the value of gold relative to non-money commodities. During this period, capitalism based on free competition — not neoclassical perfect competition — reached its highest stage of development. Free competition in the sense that cartels play a minimal role, and trusts — giant corporations in the modern sense — are absent.
It isn’t so much the acute crisis in the money markets and stock markets that hit Austria and Germany in the spring of 1873 and in the U.S. in the fall of that year — Northern Hemisphere — but the long period of depressed prices that gave a tremendous impulse to the growth of cartels that until then played a minor role. Rockefeller’s Standard Oil Trust, the prototype of today’s “giant corporations,” emerged at that time in the United States.
Thanks to the development of the cyanide process that made it possible to extract more gold from poor ores and the Yukon and Klondike gold discoveries, the value of gold fell in the 1890s. With the defeat of Williams Jennings Bryan in the 1896 U.S. presidential election by “pro-gold” William McKinley, the long depression that began with the crisis of 1873 was replaced by an extraordinary boom that drove the general price level upward. This boom was interrupted by a crisis in the new electrical industry between 1900 and 1903. This crisis eliminated the weaker enterprises in the new industry — called a “shake out” in the lingo of today’s financial press — and the cartel structure that was destined to dominate the industry for decades was consolidated. In Lenin’s terms, capitalism based on free competition was replaced by monopoly capitalism, also known as imperialism.
Shaikh’s attack on Lenin’s theory of monopoly capitalism and imperialism
The word “imperialism” can refer to different economic and political phenomena. We can refer to it in the sense of ancient empires such as the Egyptian Empire, or the Babylonian, Persian, Roman, Indian, or Chinese Empires. We can also describe the wave of colonization of the 16th century by European powers of the “new world” that ushered the capitalist system into existence as imperialism, as Lenin did himself.
But in “Imperialism,” Lenin used the word in a narrower sense, referring to a stage in the history of production between capitalism based on free competition and the future communist society. During the transitional phase of monopoly capitalism, elements of the future communist society come into being. Huge enterprises and industrial trusts that rely on large numbers of workers whose labor is increasingly socialized on an international scale foreshadow the communist future of large-scale planned production centralized for use. The future communist society comes into existence within the womb of monopoly capitalism.
During the stage of monopoly capital, the capitalist “shell” has not been broken. Commodity production is undermined by the existence of large-scale socialized production, but it still reigns. While the large-scale trustified production that belongs to the communist future appears, the shell of private ownership, and with it the division of society into capitalists (who own the means of production) and the workers (who have nothing but their labor power to sell) is retained and brought to its highest stage of development.
The commodity character of money is retained. The accumulation of money capital remains parallel but separate from the accumulation of real capital, as during the age of “free competition.” The contradiction between the socialization of labor during the era of imperialism and the private appropriation of the product develops beyond that reached during the free competition era. Nor does free competition disappear during the monopolistic phase of capitalism. Despite Baran and Sweezy’s claims that it withers away, free competition exists side by side with monopoly.
Contrary to predictions of the opportunist wing of the Second International, crises become more acute in the age of monopoly. Contradictions inherent in capitalist production, in general, reach their highest stage of development during the period of monopoly capitalism. This contradiction will continue to develop and sharpen until the shell of capitalist private ownership of the means of production is broken. No matter how long it lasts, monopoly capitalism-imperialism is, in the historical sense, the eve of the socialist revolution.
Though Shaikh plays down the importance of monopoly, he doesn’t deny it completely. In “Capitalism” (page 379), he writes, “The argument that competition is the dominant mechanism even in modern capitalism does not exclude the possibility of true monopoly power or collusion … Working from a data set that encompasses hundreds of international cartels extending back to the eighteenth century, and considering practices which were legal then but are illegal now, Bolotova concludes ‘that cartels are successful in raising market prices, and many of them manage to do this for a relatively long period of time.”
Trusts are not mentioned by Shaikh, only cartels, which represent a lower stage of monopoly.
In contrast, Lenin saw the growth of cartels and trusts as part of a progressive economic evolution of society in the direction of communism. Shaikh’s quote from Bolotova talks about cartels from the 18th century to today. Cartels can sometimes raise prices even for relatively long periods, but there’s no suggestion they are more important today than in earlier times. Society seems no closer to communism now than it was then. It appears capitalist society will keep expanding through unchanging “real competition” until it devours the earth and maybe the entire solar system. Unlike with Lenin or Marx, there’s no progressive evolution.
Shaikh comes from Pakistan and considers capitalism to be thoroughly imperialistic. He’s aware that a handful of capitalist powers are blocking the development of the great majority of countries, as shown by his criticism of the theory of comparative advantage, and workers in the “developing” capitalist countries are paid lower wages than those of the imperialist countries. What Shaikh lacks is an understanding that capitalist society is evolving through the centralization of capital toward a communist society where the means of production will be owned by the associated producers.
To be continued
(1) Before 1933, the Federal Reserve Banks were obliged to redeem Federal Reserve Notes (dollar bills) in “lawful money.” That was understood to mean gold coins. As recently as August 1971, the Treasury promised to redeem dollars held by foreign central banks and Treasuries in gold. Today, neither the Treasury nor the Federal Reserve Bank is obliged to redeem dollar bills in anything. The bills no longer say they are redeemable in “lawful money.” However, paper dollars and promises by the Federal Reserve Banks to pay their depositors — commercial banks — in dollars on demand are still considered liabilities on the balance sheet of the Federal Reserve Bank. (back)
(2) If full-scale hyperinflation ever hits the U.S. dollar — a run on the dollar into gold worse than anything that occurred in the 1970s or the beginning of the 1980s — it’s possible the government might repudiate some of its debts in a bid to stabilize the dollar. Russia did that when it repudiated its internal debts in 1998. In this operation, government securities were sacrificed to save the ruble. Another possibility for a future government is bankruptcy after the fall in the dollar system. The government may have to take out debt denominated in gold or some foreign currency. The government might then be unable to pay its non-dollar-denominated debt and be forced into bankruptcy. Last but not least, when a workers’ government comes to power in the U.S., it may, and probably will, renounce the part of the national debt that’s owed to wealthy capitalists. However, none of these factors were at play in the recent debt “crisis”. There wasn’t any possibility that the debt would not be paid one way or another. (back)
(3) Unfortunately, the reverse is not the case. (back)
(4) Ultimately, however, this is a losing battle. This is one reason why we have to look beyond union battles over the exact rate at which we are exploited and struggle to abolish the wage system itself. (back)
(5) The COVID aftermath boom was more than a normal cyclical boom. It followed the forced liquidation of inventories, not because of an overproduction crisis, but by government-ordered shutdowns aimed at halting the pandemic. The shutdowns interrupted the normal development of the industrial cycle. As soon as they were eased, businesses moved to rebuild their inventories, which got out of hand, triggering the COVID aftermath boom. The impending recession will have to liquidate the overproduction of this boom, resetting the industrial cycle interrupted by the shutdowns. (back)
(6)The longest war before the one in Afghanistan was the 15-year war the U.S. fought against the Philippine people after seizing the Philippines from Spain in the wake of the Spanish-American war in 1898. (back)
(7) The founding Congress of the Third International was held in March 1919 in Moscow. It was formally dissolved in May 1943, its mission of an international socialist revolution unaccomplished, and was succeeded by the more loosely organized International Communist Movement. (back)
(8) Interestingly, the idea of a token currency that cannot be increased is a central idea behind Bitcoin and other cryptocurrencies. (back)
(9) It’s a peculiarity of agriculture that decisions on how much crop to raise must be made at certain times of the year. Decisions to change the level of production can’t be as sensitive to changes in demand as in other branches of production, regardless of how far the centralization of capital progresses in agriculture. As small-scale family farming and peasant agriculture continue to decline and small capitalist farmers make way for giant agricultural trusts, we can expect agricultural production to become more sensitive to demand and more sensitive to changes in demand. (back)
(10) Price supports for agricultural products amount to cartelization of agricultural production organized by the government. Individual working farmers, peasants, or even small farmers are too disorganized to achieve cartelization on their own without government intervention. Experience shows in the long run that though price support policies can slow down, they can’t prevent the progressive disappearance of small producers from agriculture. The experience of the U.S. is especially elegant in this respect. (back)
A Critique of Crisis Theory 