Monthly Archives: October 2012

Originally published May 5, 1986









BACK IN ONE of my early columns I threatened to say something about Marx’s theory of surplus value, and today I’m going to do it. If we keep our voices down, we may be able to make a few observations before the comrades accuse us of not commanding the literature and the Birchites accuse us of thinking.

Marx’s argument, stretching over Parts III, IV and V of Capital, turns on the notion that “The value of a day’s labor-power amounts to … the means of subsistence that are daily required for the production of labor-power. …” This is the exchange-value of labor-power and is what the worker is paid. But the use-value, or what the capitalist gets out of it, is very much greater (Marx usually estimates double), and the difference between the two is the surplus value the worker creates that the capitalist appropriates.

You will see at once that Marx has mixed apples and oranges. His workers sell their services at cost (apples), while his capitalist sells the product for whatever the market will bear (oranges). If both services and product were sold at cost, there would be no surplus value. If both services and product were sold at the market price, competition would theoretically force them back to cost, and again there would be no surplus value.

Competition doesn’t work as it is famed to do (see “Unthinkable Thoughts on Competition,” NL, April 2, 1984). In fact, today in the United States the sum of proprietors’ income, personal rental income, and personal dividend income is about 10 per cent of total personal income. (Were we to include personal interest income, the figure would jump to about 25 percent. From the point of view of an entrepreneur, though, interest is an expense, not part of a surplus. On the other hand, a large but undeterminable portion of proprietors’ income should be classified as wages rather than profit.)

Marx’s difficulty, which he shares with all economists of a materialist or realist persuasion, is that he wants to consider everything except cost as some unreal flim-flam. And he particularly wants the capitalist’s property to be a thing – a machine you can touch or land you can walk on.

Yet property is not and never has been a thing. It is, instead, a bundle of rights (see “Life, Liberty and Property,” NL, July 11-25, 1983). Different societies emphasize different bundles. Thus in the ancient world the household (the paterfamilias or patron, his family, his clients, his slaves) was the locus of power. Property was personal – by persons and in persons – and aspects of that arrangement survive to this day. In the medieval world, military power also a survivor – became crucial. In the early modern world, the factory came to the fore, and at present we are ruled by finance.

These distinctive emphases are close to what Marx meant by the modes (as distinguished from the means) of production. Although his need to see always in materialist terms skewed his analysis, he was insightful in recognizing that each society’s characteristic form of property engrosses the special rewards of the society and is protected by its legal and political organization. For this reason he noted at the start of the Grundrisse that J. S. Mill and his predecessors were wrong in claiming that an economy’s production of goods and consumption of goods are two different (and ahistorical) questions.

And for this reason he attacked Ferdinand Lassalle and the Social Democrats, who advocated “a fair distribution of the proceeds of labor.” In Critique of the Gotha Program [Marx] replied: “Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production …. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of non-workers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor-power. If the elements of production are so distributed, then the present day distribution of the means of consumption results automatically.”

There was a time – roughly the time of Marx’s life – when the material means of production did indeed dominate society. Factories were in the field (as Carey McWilliams said) as well as in buildings with smokestacks. Today, though the factories still exist, the ruling power is finance. The current observation, that we are moving from a production economy to a service economy, is true but superficial. There are no special rights attaching to service; there is, in our society, a special and encompassing bundle of rights attaching to finance, to money. Marx said money was a “purely ideal or mental” form of value. It certainly is, but it is not therefore imaginary or secondary or part of some sort of superstructure. This ideal form of value is now the ruling bundle of rights in our society. The owners of this bundle derive therefrom their claim to be entitled to the special rewards of the system.

Every system generates special rewards – rewards that go beyond what is necessary for the system’s day-to-day operation. How these surpluses are used is a question in macroeconomics (for a clear explanation thereof, I refer you to Profits and the Future of American Society by S. Jay Levy and David A. Levy). Why these surpluses are generated is a question in microeconomics.

More than that, it is a question in the philosophy of history. Since there is a present (otherwise, what are we doing?), there are both past and future, from which the present is distinguished. Whatever else you say about the future, you must say it is constitutionally unknowable. As Keynes concluded in his Treatise on Probability, “we simply do not know.” If we could know the future, it would then be the same as the present and the past.

A consequence of the unknowability of the future is the generation of surpluses or windfalls or profits. These cannot be contracted for (as wages and interest are); they are what is left over after all expenses are paid. Because what’s to come is still unsure, we can face the future with confidence only if we have sufficient resources to meet any eventuality. But what is sufficient for any eventuality is more than enough for most eventualities; and what is, most of the time, more than enough, becomes the surplus that every system generates if it is to survive.

Thus in the Middle Ages, the military power required to keep the peace in a given valley was much less than that needed to defend the valley from outside marauders. Yet even though the marauders appeared infrequently, the lord undertaking the valley’s defense had to have more than enough power for ordinary use. This surplus power took the form of a stronger and more magnificent castle, more and better equipped retainers, more impressive ceremonial displays, occasional forays to defend the domain by pushing its borders outside the limits of the valley, dynastic alliances with strategically placed peers … All of these emblems of power were at the same time the characteristic luxury or surplus goods of the society, and were exclusively enjoyed by those who wielded the power in the society.

SUCH INFLUENCE of the unknowable in our lives is pervasive. Thomas Hobbes saw it as the fear of death, which leads to “a perpetual and restless desire of power after power. And the cause of this,” he wrote, “is not always that a man hopes for a more intensive delight than he has already attained to, but because he cannot assure the power and means to live well … without the acquisition of more.” Or as Fritz Fischer has shown in a series of groundbreaking books, the leaders of pre-World War I Germany saw their options as “world power or decline.”

Likewise, it is often said that a business firm must expand or wither away. Even if it wants to stand pat, it cannot precisely anticipate its future business and so may find business booming and profits burgeoning. Alternatively, there is the risk that sales will be down and profits negative. Prudence dictates at least a defensive expansion – a drive for a larger market share, introduction of a new product, whatever. In any case, if expansion does result, its benefits accrue exclusively to the owners of the enterprise. It is an extra dividend or a capital gain.

The owners do not, however, necessarily accept the possible losses. The first sufferers are the firm’s workers, whose pay is cut, and some of whom are fired. Aside from the firing, it was not different for the underlings of an unsuccessful medieval lord. They were squeezed to rebuild the lord’s power, and this was reasonable because the lord – and the lord alone – maintained the peace. Without him there was anarchy, sometimes savagery. In the same way, without an ongoing enterprise, the workers have no jobs at all.

We are back in a familiar bind. If things turn out well, the owners of an enterprise get capital gains and other surplus or unearned income. If things turn out badly, the workers get fired. These outcomes are not inherent in any system, but the problem is inherent in every system, because it is inherent in life itself. The obvious solution is to unify society and make owners and workers the same people. Socialism does this, up to a point, but the dictatorship of the proletariat – that is, of the party – shows no sign of withering away. What is left? Well, if you have paid attention to previous lectures, you know that the answer is some form of employee ownership.

The New Leader

Originally published March 24, 1986

INTHE 1920s, bond salesmen were admired and envied. Later, when Wall Street laid its egg, they became butts of bitter jests (“Where are the customers’ yachts?” asked a book by Fred Schwed Jr.). In the end, they were objects of opprobrium and scorn. Today’s bond salesmen seem to be following in their grandfathers’ footsteps.

Salesmanship is now marvelously subtle, combining an ancient rhetorical device with an even more ancient childhood game. Long before Aristotle wrote his Rhetoric, Greek sophists found that an appearance of frankness could help them win a bad case; openly admitting a superficial weakness or two could get them good marks for sincerity. And since long before the sophists, children have known how to tempt their peers with the challenge, “I dare you.”

The device and the game are joined in the term “junk bonds.” The immediate connotation is of shoddy goods or a tangle of broken machinery, old plumbing fixtures and wrecked automobiles, partly hidden by a tumbled-down board fence as unsightly as what it pretends to hide. A secondary connotation is of junk mail, which almost everyone hates. The junk bonds metaphor boldly accepts both connotations and thus disarms criticism. No one, it winks, is trying to fool anyone.

At the same time, these negative connotations are modified by some that are at least ambiguous.  Those who send out junk mail presumably think well of it. Paraphrasing Abraham Lincoln, one might conclude that God must love churches and charities that raise money by mail, since He made so many of them. For another example, junk food is eaten by an awful lot of people, who apparently have a tolerance, if not taste, for it; and purveyors of junk food make an awful lot of money, something the purveyors and buyers of junk bonds hope to do, too.

In addition, the term admits risk and so suggests sport. I dare you to run the risks that may lead to a big killing. Are you big enough to afford such risks? You say that the capitalist system depends on risk taking: Do you dare put your money where your mouth is?

Yet just as a paranoiac may have real enemies, junk bonds may be really bad. They may not necessarily be bad for the new owners of the corporations that issue them or for the purchasers or for the underwriters, but they are almost invariably bad for the corporations themselves; they are also undeniably bad for the morale of our society (see “The Faith of Fiduciaries,” NL, December 24, 1984) and for the tax collections that support our society.

In spite of all the present hype, junk bonds are not new. Practically every railroad issued bonds at usurious rates – and ultimately paid the penalty. Neither are junk bonds the first securities of “less than investment grade” to be widely marketed in the United States. Most of our giant corporations – including many of those now being raided – were originally papered together with such securities. The chosen instrument was different, and the metaphor was different, but the results were similar. Stock was issued instead of bonds, and the stock was said to be watered like cheap whiskey.

In Other People’s Money, Louis D. Brandeis, later a Supreme Court justice, told how the United States Steel Corporation was formed in 1901: “The steel trust combines in one huge holding company the trusts previously formed in the different branches of the steel business. Thus the tube trust combined 17 tube mills, located in 16 different cities, scattered over 5 states, and owned by 13 different companies. The wire trust combined 19 mills; the sheet steel trust 26; the bridge and structural trust 27; and the plate trust 36 …. Finally, these and other companies were formed into the United States Steel Corporation, combining 228 companies in all …. ”

The tube trust, when it was put together a few years earlier, had been capitalized at $80 million. Half of that was common stock, and half of the common “was taken by J.P. Morgan & Co. and their associates for promotion services; and the $20 million stock so taken later became exchangeable for $25 million of Steel Common.” The tubes plainly held a lot of water, as did the other trusts that went into United States Steel. Nor was this all. The rest of Steel Common was watered in its turn, with nearly one-seventh issued directly or indirectly to the promoters.

Although Brandeis doesn’t give all the gory details, I would wager that at least half of the original 228 companies were enticed to sell out at greatly inflated (or pumped up) prices. Some of the others may have been squeezed a bit, but the total paid for the 228 was almost certainly far greater than their entire net worth. Once you add it together you have United States Steel, the first corporation capitalized at a billion dollars, and pretty close to half of it was water.

In Morgan’s time, high-flying corporations were overcapitalized. Currently they are undercapitalized, a.k.a. leveraged. The shift is a function of the tax laws, though you may read many an analysis of takeovers without coming across a mention of the part played by taxes.

When U.S. Steel was floated, there was no corporation tax. Since earnings were not taxed, interest paid on bonds was obviously not deductible. Interest was a fixed expense. Dividends, on the other hand, were not fixed (except for some on preferred stock). You paid dividends when you were flush; otherwise not.  Therefore a prudent company got its money from stock, rather than bonds. Today, with the corporation tax at 46 per cent (assuming a corporation pays any taxes at all), and with interest payments deductible, a clever company will issue bonds instead of stock, and a clever raider will happily issue junk bonds paying 14-15 per cent in order to buy up stock earning 5-6 per cent. (For reasons why no interest should be deductible, see “The Bottom Line of Tax Reform,” NL, November 26, 1984) After the deduction, the new load on the company is only about 6-8 per cent, and before it becomes oppressive, the raiders will be long gone.

That the debt will eventually become oppressive, there is usually little doubt. The interest payments will have to continue in bad times as well as in good. As profits fall or disappear, so will the benefit from deductibility. The corporation’s cash flow will be soaked up by the high interest. Even a sluggish cash flow can quickly lead to bankruptcy. Of course, bankruptcy may now be sought to break a labor contract, whereupon the company may become solvent again. Guess who’s left with the short end of the stick?

This result of undercapitalization is, you may be astonished to learn, not substantially different from the result of overcapitalization. How was the water in Big Steel paid for? As the man might say, there’s no such thing as a free drink. If the capitalization was half water, Steel’s earnings on its real assets would have had to be twice “normal.” Without a research assistant, I can only suggest the outline: First, the owners of the original 228 companies were well paid. Second, J.P. Morgan and his fellow underwriters were very well paid. Third, those who bought the watered stock received “normal” dividends. Fourth, the price of steel was not grossly exploitative (steel rails stayed at $28 per long ton for more than 10 years).

Here someone is sure to cut in with the claim that U.S. Steel was more efficient than its 228 components had been. Evidence for this is the fact that most of the 228 were shut down, while the surviving units were expanded. But if those shut down were inefficient, why were they bought in the first place? The competitive system is supposed to let inefficient companies die.

The case for technological efficiency is, if anything, worse. In 1911, 10 years after the emergence of U.S. Steel, Engineering News reported: “We are today something like five years behind Germany in iron and steel metallurgy, and such innovations as are being introduced  by our iron and steel manufacturers are most of them following the lead set by foreigners years ago.” (That might have been written yesterday.)

The question remains: Who paid for the water? Those who didn’t immediately answer “Labor!” will stay after class and be given a quick review of the effects of mass immigration, Taylor System management, and courts that issued injunctions against labor unions as conspiracies in restraint of trade.

THE Federal Reserve Board’s new rule limiting the use of junk bonds to 50 per cent of the price of a takeover may put a momentary hitch in a few raiders’ plans. And some say the present run-up of the stock market will put an end to takeovers by increasing the amount of money needed. The run-up, however, has been caused by the drop in interest rates, which increases the capitalized value of every income-earning asset. (An asset that earns $10 is worth $100 when the interest rate is 10 per cent, and jumps in value to $200 if the rate falls to 5 per cent.) For this reason, the bond market has been rising, too; the interest that investment-grade bonds must pay is falling-and so are the requirements for junk bonds.

Should President Reagan be successful in cutting corporation tax rates (as seems likely), the deductibility of interest payments will become less important and watered stock will tend to displace junk bonds in takeover schemes. In other words, look for an upsurge in new blue-sky issues. R.R. Palmer tells us in A History of the Modern World of an 18th-century promoter who issued shares in “a company ‘for an undertaking which in due time shall be revealed.” Does anyone doubt that if Carl Icahn made such an offering today it would be oversubscribed tomorrow? Whatever happens, the financing of the American economy will still be largely an incidental function of speculation, or as Keynes said, of running a casino.

My first “Dismal Science” column (NL, September 7, 1981) was entitled “Speculation Will Undo Reaganomics.” The title displays an innocence on my part. I did not imagine that the Reaganauts’ intention was to make paupers and millionaires. Speculation continues to have the effects I discussed; I still find it hard to believe that decent people think it’s grand.

Since the Civil War days of “Betcha Million” Gates and Jay Gould, speculation has resulted in American enterprises paying too much for capital. Andrew Carnegie observed in The Empire of Business (1902) that “railway managers today are … directed to obtain a return on more capital than would be required to duplicate their respective properties.” It matters little whether the capital is paid for with dividends on watered stock or with interest on junk bonds. Either way, it is the working man and woman-the people who put that capital to work – who do the ultimate paying.

The New Leader

Originally published February 24, 1986







AT SOME POINT recently, the United States crossed a great divide. Rather, we re-crossed the divide and became again a debtor nation, as we were until 70 years ago, owing more to the rest of the world than the rest of the world owes us. We owe so much, as a matter of fact, and our debts are piling up so fast, that very shortly we may become the world’s largest debtor, surpassing Brazil, the present leader.

Mention of South America’s biggest country causes our hearts to miss a beat. Only a decade ago our financial wise men were ecstatic about the Brazilian GNP and jostled each other in their eagerness to press our savings on the Brazilian government, on Brazilian entrepreneurs and on conspicuous Brazilian consumers. There’s no need to detail what happened. Will the same thing happen to us?

Our hearts must miss another beat when we reflect on the British, our creditor until World War I and an overall creditor for another decade. But in World War II they crossed the divide from general creditor to general debtor, and coincidentally entered upon a downward slide whose end is not yet. Does a similar fate await us?

Foreign debts-like national or even personal debts-come about in different ways that can have different effects. Since, as I never tire of saying, economics is not a natural science, the effects are not invariant nor, especially, are they invariably benign (or malign).

The most obvious source of foreign indebtedness is an unfavorable trade balance on current account. This means, merely, that we buy abroad more than we sell there. As a result, we increase our stock of capital goods (machine tools, for example, or knitting machines) and our supply or flow of consumer goods (automobiles or sports shirts). That is good, for it increases our common wealth and has a moderating effect on our inflation.

The moderation is achieved by substituting cheap foreign goods for expensive domestic goods. The domestic goods are expensive because our wages are relatively high. Foreign competition forces our prices down, which forces our wages down or, more usually, forces some of us out of work. That is not so good, though it is remarkable how steadfast our editorialists and economists are in the face of this outcome. (It would not be nice to suggest their steadfastness is strengthened by the fact that neither newspapers nor economics departments face foreign competition.)

Whatever its impact, an unfavorable balance on current account can continue as long as foreign sellers are willing to extend us credit. Of course, we must also be willing to buy. In both cases, the willingness is reinforced by (or is a sign of) the “strength” of the dollar. Our currency is strong (that is, attractive to foreigners) because our interest rates are high and our society is large, open and comparatively stable. Thanks to our size, there are a lot of dollars around, and practically all of our foreign sales and purchases and borrowings are in terms of dollars. Therefore, we are the masters of our fate; we (well, the Federal Reserve Board) set the terms of our trade.

Of course, the dollar can lose its strength, too. Indeed, we had a weak dollar not that long ago. This weakness was not of a piece with President Carter‘s alleged wimpishness; it was deliberately induced by President Nixon‘s alleged machismo. A weaker dollar means lower purchases and higher sales abroad, with both consequences producing higher employment and, probably, higher prices at home. No one really knows the extent of the consequences, but they can be handled, for there is very little we absolutely have to buy abroad: bauxite and a few such things that we don’t have, oil and a few such things that we’re too self-indulgent to manage properly, coffee and a few such things that are enjoyable yet hardly necessary. In short, since our national existence is far from dependent on foreign trade, we are not threatened by that part of our foreign indebtedness that is caused by the imbalance on current account.

The next most visible category of our foreign indebtedness consists of foreign purchases of U.S. government bonds (part of the capital account). Federal Reserve Board Chairman Paul A. Volcker considers he purchases important perhaps vital-in financing the Federal deficit. Without them, he argues, much less money would be available and the interest on government bonds would be much higher than it is. Moreover, the government would crowd private industry out of the money market. Businesses unable to afford the high rates would fail; even successful businesses would have to reduce operations-in other words, fire people. The quantity of money, however, is controlled by the Fed itself (at least the Fed thinks it is), making you wonder who is doing what to whom, and why.

In any case, we seem to have some sort of reason to be grateful for foreign purchases of our bonds. It’s pleasant to see that money coming in, but then the interest money has to go out, and the rate has to be high to induce people to buy the bonds. What do foreigners do with the dollars we pay them?

Well, the dollars can be used to buy American goods, whereupon our prices will tend to rise, the dollar will tend to strengthen, and we will have to sell them less for their money. Alternatively, they can use the dollars to buy their own currencies, whereupon the dollar will tend to fall, and we will be able to sell more goods abroad and to import less.

Now, that is very curious: The results are contradictory, yet both are largely favorable. There are two explanations, and I can only hint at them in this space. The first and more obvious one is that very few, if any, economic policies are all good or all bad-an unexampled blessing-and we are here accentuating the positive. The second and more important explanation is that our economy- faulty as it surely is-is more liberal than most of those of the rest of the world. That is to say, in the United States whatever is to the benefit of one class is likely to have some benefit for everybody. It is more nearly true that whatever is good for General Motors is good for America, I am suggesting, than that ours is a zero-sum economy. All workers are consumers and so benefit from low prices, and most consumers are workers and so benefit from high wages. If more American consumers had good jobs it would be better for all of us.

The third most visible category of our foreign debt involves investment in U.S. industries. Foreigners have played our stock exchanges and commodities markets for years. Major chunks of U.S. real estate-New York’s Pan Am building, for example-are foreign owned. Volkswagen had a U.S. assembly plant decades before Toyota and General Motors settled on their new joint venture. Foreign ownership has gone so far in Vermont that the state has now put obstacles in’its way. At first glance all this looks as though we were being colonized by foreigners. Is it really our fate to recapitulate Brazil’s experience?

The significant difference between Brazil and the U.S. is that foreigners invest their own currency in Brazil and take their interest out in their own currency, while their investments and returns in the United States are in United States currency. Foreigners can do with their income from U.S. investments what they do with their interest from U.S. bonds, and the consequences for us are the same. Foreign investment is not bad per se. To the extent that it provides jobs, it is good. To the extent that it produces goods for use in the producing country, it can be good. But to the extent that it is extractive, it is bad (see “The Wages of Exploitation,” NL, August 8-22, 1983).

BRAZIL and the rest of the Third World are choking to death on the rich loans we have fed them because their societies cannot now digest the kinds of investments we have urged on them (see “Starving All the Way from the Bank,” NL, May 6-20, 1985). To dramatize the problem, consider the Democratic Republic of Madagascar, a nation of some 8.7 million souls occupying 226,658 square miles. Suppose the Gallup Poll went into Madagascar and asked the people if they would like to have an automobile. You know they would answer in one voice, “You bet!” Conservatively, there is an abstract Madagascarian demand for 3 million automobiles-enough to support a fully diversified, computerized, robotized industry. Sweden has almost the same population on only 173,665 square miles, and seems to do pretty well in the automobile business. Why shouldn’t Madagascar get cracking?

We could list reasons from here to breakfast, and they would come down to one word (system) and to one fact (a system is not built in a day). The moral is this: Because of our system, international indebtedness does not have the same consequences for us (or for Sweden) as it may have for the Third World.

The heart of our system is us-we the people. I don’t mean that we’re a national resource, as conservatives of good will like Milton Friedman would have it. I mean that we are the nation. We could be a better nation. More of us could participate in the pleasures, the excitements, the excellences that some have discovered or developed. The shame of the Reagan Administration is that it has, at every turn, reinforced exclusion and resisted participation.

When it, too, has passed away, we’ll be left with that mountain of foreign debts. They will still be denominated in dollars and so under our control. This does not assure that we will control them wisely. If the Federal Reserve Board continues to manage the money supply instead of the interest rate (or try to), if our financial markets continue to be absorbed in takeovers and mergers, if our tax laws continue to reward speculation, then it is quite possible that our foreign debts will drain the enterprise out of our system. Britain is only the shell of her former greatness. It could happen here. But the danger is not in our stars, nor is it in indebtedness as such.

The New Leader

Originally published January 27, 1986

ON A RECENT Sunday the New York Times ran a long story headlined, Waking Up to the Glut Economy.” A series of  “graphics” preceding the text dramatized its major points: More of us are unemployed than in any pre-Reagan year since World War II; more downtown office space is vacant than in recent decades; there are excess supplies of oil and of most basic metals; our grain stocks have reached record levels; we have more computers than we know what to do with; despite billions said to have been spent on  productivity, our trade balance continues to worsen; and we have the largest reserve of unused production capacity since the ’30s.

Those facts certainly add up to what a layman thinks of when he uses the word “glut.” But I have a suspicion the headline writer had more than layman’s language in mind. For “glut” is a highly charged word in the history of economic thought. It was-given currency in 1803 by Jean- Baptiste Say (or his translator), of whom we’ve spoken several times before. The curious thing about Say is that he thought a universal glut impossible. My guess is that the headline writer was slyly calling attention to yet another failure of Say’s Law. I wish I thought the Times’ readers got the point.

As John Kenneth Galbraith told us in American Capitalism, “Whether a man accepted or rejected Say’s Law was, until well into the 1930s, the test of whether he was qualified for the company of reputable scholars or should be dismissed as a monetary crank.” When Galbraith published the first edition of American Capitalism in 1952, the Great Depression was scarcely over a decade in the past, and everyone, even academic economists, knew a universal glut was possible. We were there. It had happened to us. It wasn’t funny.

I don’t suppose 200 American economists have read deeply in Say’s Treatise on Political Economy. Nevertheless, the depressing truth is that his ideas are once more being taken as gospel, and not merely in ivory towers. Here are a few quotations: “It is production that opens a demand for products.” (This is the famous-or notorious-Say’s Law, which is aphoristically restated as “Production creates its own demand.”) Again: “Sales cannot be said to be dull because money is scarce, but because other products are so.” Again: “It is the aim of good government to stimulate production, of bad government to encourage consumption.”

Although the quotations are from a book published in 1803, you will surely remember hearing similar sentiments from contemporary lips. The first might have been pronounced yesterday by Congressman Jack Kemp; the second by Federal Reserve Board Chairman Paul Volcker; and the third by Senator Gary Hart. Of course, it is nothing against these ideas that they are 183 years old. As Alfred North Whitehead said, all philosophy is a series of footnotes to Plato, and Plato wrote more than two millennia before Say. What is against these ideas is that they’re misconceived, mistaken, grievously misleading. There is a speck of plausibility in all of them, but only a speck.

Over the past five years, however, they have made the rich very much more powerful (they were already as rich as need be). They have caused many millions to lose their jobs. They have forced many thousands of businesses into bankruptcy. And now they are going to be used to defeat many of the good provisions (such as they are) of House Ways and Means Committee Chairman Dan Rostenkowski‘s tax bill.

Any rational discussion of these matters should start by recalling that there really and truly was a universal glut from 1929 to World War II. It should then go on to note that there is indeed a universal glut at present, too, just as the Times says.

Say’s original error was characteristic of his times: He brushed aside the surface appearance of events and sought a hidden reality-what his contemporary Wordsworth called “something far more deeply interfused.” Therefore he easily convinced himself that money was a screen behind which real economic activity went on. “You say you only want money,” he wrote, “I say you want other commodities, and not money.” In a footnote he added, “Money, as money, has no other use than to buy with.” This sounds sensible enough (it is the speck of plausibility I mentioned), yet you have to be careful about the conclusions you draw from it.

Say was not careful, nor are those who follow in his footsteps. Their careless reasoning goes like this: Since commodities are really bought with other commodities, the thing to do is to get commodities made. Perhaps some will prove to be unsalable; but unless an officious government jostles the unseen hand (Say was an admirer of Adam Smith), those who have produced commodities will immediately exchange them with each other, and everyone will live happily ever after.

Modern econometricians have reduced this notion to a formula relating to the gross national product. Elementary textbooks define the GNP as the sum of personal consumption plus private investment plus government expenditures plus net exports. Since personal consumption and government expenditures seem purely passive (they seem to use things up, not to produce them), it is concluded that the way to increase the GNP must be to increase private investment and (if possible) net exports.

As you can see, the conclusion fits in very snugly with Say’s Law. It also underwrites the views of supply siders like Jack Kemp, of people like Gary Hart who want to rebuild America, and of White House Chief of Staff Donald Regan, who wants to tax consumption. It was the justification for the tax credits introduced under President John F. Kennedy and for the rapid depreciation regulations introduced under President Ronald Reagan. It prompts lobbyists for big business to misrepresent Rostenkowski’s tax bill as a blueprint for depression.

At this point a glimmer of common sense may give us pause. We already know that Say was wrong, that a universal glut is possible. We also know or should know-that we had a Jim Dandy depression (call it a recession if you want to kid yourself) from 1981 until well into 1983. And we know that depression was preceded by the Reagan tax law increasing investment tax credits and speeding up depreciation write offs. As a result, business’ share of the tax burden fell to 5.8 per cent-the lowest since the days of Herbert Hoover. Deserving companies like General Dynamics, in addition to paying no taxes at all, actually got hundreds of millions of dollars in rebates.

The fact that the depression of 1981-83 followed the 1981 tax breaks for big business may not be conclusive proof that the tax breaks caused the depression (it is post hoc, not necessarily propter hoc), but it is sure as shooting proof they didn’t cause prosperity. Moreover, the highly touted business recovery of 1983- 84 followed the 1982 tax law, taking back some of the earlier giveaways. This being the empirical record, it is at best quixotic to pretend that rescinding a few more of the tax breaks, as in the Rostenkowski bill, would bring on another recession. It is more than quixotic. I’ll compromise my reputation for mildness and say that it is illogical, devious and mischievous.

NOWLOOK BACK at the components of the GNP, in particular at personal consumption and government expenditures. These seem purely passive, but of course they aren’t. Quite apart from the fact that consumption is a human activity (note the syllable “act”), not a galvanic reaction, there are two sides to consumption, as there are two sides to everything in this double-entry world (see “The Chicken and the Egg,” NL, September 9, 1985). Nothing can be consumed unless it has been produced.

But isn’t that what Say said? No, it is almost the diametric opposite. Say and his followers claim that whatever is produced will be consumed (hence no glut is possible). What we are claiming is merely that whatever is consumed must have been produced. There is no way to consume more than has been produced; it is very easy to produce more than will be consumed. Every businessman knows this. It would be no great trick for Harper and Row to turn out 10 million (why not more?) copies of my book; they are timid, though, and fear they might not be able to sell them all. Even Say couldn’t avoid recognizing a further weakness of his Law. “There is nothing,” he wrote, “to be got by dealing with people who have nothing to pay.” In short, some products are not consumed because people don’t want them, and some because people can’t afford them. In either case, producing more won’t solve the problem. To put it another way: You can’t dissolve a glut by producing more of what you already have.

One of the great contributions of John Maynard Keynes-possibly the greatest-was his demonstration that in a capitalist system (or in any system that is advanced much beyond bare subsistence) glut is not only possible, it is always imminent. This is because of what he called “liquidity preference,” which is partly a function of the necessity to have assets (mainly money) on hand for daily needs and partly a function of our inevitable uncertainty about the future, leading us to keep assets readily available to guard against (or to  exploit) the unexpected. Everyone (except those who have no money at all) exhibits some preference for liquidity, the very rich probably more than the rest.

Whatever is kept liquid is neither consumed nor invested. It is withheld from the economy, making it impossible for the economy to buy and pay for everything it produces; hence a glut. Some sort of glut is inevitable; the problem is to keep it manageable. There are two principles guiding glut management: The first and (assuming the brotherhood of man) most important is to take steps to increase the purchasing power of the poor. The second is to make intelligent use of the purchasing power of the government (see “All You Need to Know about the Deficit,” NL, October 29, 1984).

Reaganomics has violated both principles. The Rostenkowski tax bill is a very modest attempt at correction. Gluttonous conservatives don’t like it because it deprives a few of the rich of a few of their recent benefits and re-imposes some taxes on corporations. The claim is the altogether smelly canard that incentives will be sapped if the rich and prosperous are asked to pay their share of the taxes. Equally disgusting and stupid is the attempt, in the face of a glutted economy, to “balance” the budget and thus reduce government expenditures at the very moment they should be expanded. There may be other ways to kill a cat, but choking it to death on cream may prove sufficient.

The New Leader

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