Although the state capitalism of the twentieth century (as opposed to the earlier misnamed "laissez faire" variant, in which the statist character of the system was largely disguised as a "neutral" legal framework) had its roots in the mid-nineteenth century, it received great impetus as an elite ideology during the depression of the 1890s. From that time on, the problems of overproduction and over-accumulation, the danger of domestic class warfare, and the need for the state to solve them, figured large in the perception of the corporate elite. The unregulated market was increasingly viewed as destructive and inefficient. The shift in elite consensus in the 1890s (toward corporate liberalism and foreign commercial expansion) was as profound as that of the 1970s, when reaction to wildcat strikes, the "crisis of governability," and the looming "capital shortage" led the power elite to abandon corporate liberalism in favor of neo-liberalism.

Martin Sklar commented that the "corporate reconstruction of American capitalism" that arose out of the Depression of the 1890s was as fundamental a revolution in American life as had been the Civil War and Reconstruction.

The answer to Sklar's question, in my opinion, is that the corporate reconstruction of the 1890s took place without violent political transformation precisely because the "civil war and revolution" of 1861-77 had already established all the political prerequisites for a peaceful corporate reconstruction of the economy. The withdrawal and subsequent political transformation of the South, followed by the ascendancy of the "redeemers," with their national-capitalist orientation, gave the Republicans uncontested political terrain and a free hand to impose the full Whig economic agenda. The corporate economy was made possible by high industrial tariffs and the full-scale subsidy of "internal improvements"--along with corporate personhood, "substantive due process," and the rest of the legal regime growing out of the Fourteenth Amendment. The creation of the latter legal regime was analogous, on a smaller scale, to the legal regime of Bretton Woods and GATT that provided a political structure for global capitalism after WWII.

The rise of an economy dominated by firms operating on a continental scale, and of industries in which a relative few firms predominated, was not an outgrowth of the 1890s. It evolved over the previous two or three decades, as a result of the Whig-Republican triumph of 1861-77. And the economic crises of the 1890s, to which full-blown corporatism was a response, were themselves a result of the destabilizing tendencies of the previous corporate evolution. The growing geographic scale, centralization, and levels of accumulation characteristic of American business organization during the previous decades culminated in the full-blown crisis of over-accumulation and under-consumption of the 1890s.

As Martin Sklar himself pointed out, the process of "industrial concentration," which he distinguished from corporate reconstruction, had been going on for some time before the 1890s. And the 1880s were a decade of unprecedented accumulation that continued into the crisis decade of the '90s.² The crisis of the 1890s was the outcome of this concentration and over-accumulation; but they, in turn, were the result of the Whig-Republican state capitalist intervention, and not of the "unregulated" or "competitive" market.

The American ruling class, therefore, was wrong in seeing the crises of overproduction and surplus capital as "natural or inevitable outgrowths of a market society."³ Nevertheless, from the Depression of the 1890s onward, through most of the Twentieth Century, corporatist solutions to these crisis tendencies dominated the state's economic policy. But every subsequent corporatist measure, adopted to solve the previous problems of over-accumulation, itself further exacerbated the problems of over-accumulation.

The ultimate result was a spiral into further statism, culminating in the corporatism of the New Deal and the permanent war economy of WWII and the Cold War.

In the realm of foreign policy, the problem of over-accumulation and under-consumption led to the regime known as "export-dependent monopoly capitalism," relying on what William A. Williams called a policy of "Open Door Empire." We will study the history of monopoly capitalism as it affected U.S. foreign policy in Chapter 7.

The state's remedies to the crisis of over-accumulation and under-consumption (primarily Keynesian demand-management, corporatist labor policy and the welfare state) themselves lead to opposing crisis tendencies: the crisis of under-accumulation and the fiscal crisis of the state. The ways in which these conflicting crisis tendencies interact, and their likely final outcome, are the subject of Chapter 8.

The primary subject matter of this chapter is the rise of monopoly capitalism itself, and the state's policies for cartelizing the economy. The effects of the state's subsidies and regulations are 1) to encourage creation of production facilities on such a large scale that they are not viable in a free market, and cannot dispose of their full product domestically; 2) to promote monopoly prices above market clearing levels; and 3) to set up market entry barriers and put new or smaller firms at a competitive disadvantage, so as to deny adequate domestic outlets for investment capital. The result is a crisis of overproduction and surplus capital, and a spiraling process of increasing statism as politically connected corporate interests act through the state to resolve the crisis. The best single analysis of this process I am aware of is Joseph Stromberg's in "The Role of State Monopoly Capitalism in the American Empire"⁵

Stromberg's argument, to which we are heavily indebted, is based on Murray Rothbard's Austrian theory of regulatory cartelization. Economists of the Austrian school, especially Rothbard and his followers on the Rothbardian left, have taken a view of state capitalism in many respects resembling that of the New Left. That is, both groups portray it as a movement of large-scale, organized capital to obtain its profits through state intervention into the economy, although the regulations entailed in this project are usually sold to the public as "progressive" restraints on big business. This parallelism between the analyses of the New Left and the libertarian Right was capitalized upon by Rothbard in his own overtures to the Left. In such projects as his journal Left and Right, and in the anthology A New History of Leviathan (co-edited with New Leftist Ronald Radosh), he sought an alliance of the libertarian Left and Right against the corporate state.

Rothbard treated the "war collectivism" of World War I as a prototype for twentieth century state capitalism. He described it as

This view of state capitalism, shared by New Leftists and Rothbardians alike, flies in the face of the dominant American ideological framework. Before we can analyze the monopoly capitalism of the twentieth century, we must rid ourselves of this pernicious conventional wisdom, common to mainstream left and right. Both mainline "conservatives" and "liberals" share the same mirror-imaged view of the world (but with "good guys" and "bad guys" reversed), in which the growth of the welfare and regulatory state reflected a desire to restrain the power of big business. According to this commonly accepted version of history, the Progressive and New Deal programs were forced on corporate interests from outside, and against their will. In this picture of the world, big government is a populist "countervailing power" against the "economic royalists." This picture of the world is shared by Randroids and Chicago boys on the right, who fulminate against "looting" by "anti-capitalist" collectivists; and by NPR liberals who confuse the New Deal with the Second Advent. It is the official ideology of the publick skool establishment, whose history texts recount heroic legends of "trust buster" TR combating the "malefactors of great wealth," and Upton Sinclair's crusade against the meat packers. It is expressed in almost identical terms in right-wing home school texts bemoaning the defeat of business at the hands of the collectivist state, or describing the New Deal as an example of the masses voting themselves largesse from the public treasury.

The conventional understanding of government regulation was succinctly stated by Arthur Schlesinger, Jr., the foremost spokesman for corporate liberalism: "Liberalism in America has ordinarily been the movement on the part of the other sections of society to restrain the power of the business community."⁷ Mainstream liberals and conservatives may disagree on who the "bad guy" is in this scenario, but they are largely in agreement on the anti-business motivation. For example, Theodore Levitt of the Harvard Business Review lamented in 1968: "Business has not really won or had its way in connection with even a single piece of proposed regulatory or social legislation in the last three-quarters of a century."⁸

The problem with these conventional assessments is that they are an almost exact reverse of the truth. The New Left has produced massive amounts of evidence to the contrary, virtually demolishing the official version of American history. (The problem, as in most cases of "paradigm shift," is that the consensus reality doesn't know it's dead yet). Scholars like James Weinstein, Gabriel Kolko and William Appleman Williams, in their historical analyses of "corporate liberalism," have demonstrated that the main forces behind both Progressive and New Deal "reforms" were powerful corporate interests. The following is intended only as a brief survey of the development of the corporate liberal regime, and an introduction to the New Left (and Austrian) analysis of it.

Despite Schlesinger's aura of "idealism" surrounding the twentieth century welfare/regulatory state, it was in fact pioneered by the Junker Socialism of Prussia--the work of that renowned New Age tree-hugger, Bismarck. The mainline socialist movement at the turn of the century (i.e., the part still controlled by actual workers, and not coopted by Fabian intellectuals) denounced the tendency to equate such measures with socialism, instead calling it "state socialism"--state intervention in the economy on behalf of the capitalists. The International Socialist Review in 1912, for example, warned workers not to be fooled into identifying social insurance or the nationalization of industry with "socialism." Such state programs as workers' compensation, old age and health insurance, were only measures to strengthen and stabilize capitalism. And nationalization simply reflected the capitalist's realization "that he can carry on certain portions of the production process more efficiently through his government than through private corporations..... Some muddleheads find that will be Socialism, but the capitalist knows better."⁹ Friedrich Engels had taken the same view of public ownership:

The rise of "corporate liberalism" as an ideology at the turn of the twentieth century was brilliantly detailed in James Weinstein's The Corporate Ideal in the Liberal State.¹¹ It was reflected in the so-called "Progressive" movement in the U.S., and by Fabianism, the closest British parallel. The ideology was in many ways an expression of the world view of "New Class" apparatchiks, whose chief values were planning and the cult of "professionalism," and who saw the lower orders as human raw material to be managed for their own good. This class is quite close to the social base of the Insoc movement that Orwell described in 1984:

The key to efficiency, for the New Class, was to remove as much of life as possible from the domain of "politics" (that is, interference by non-professionals) and to place it under the control of competent authorities. "Democracy" was recast as a periodic legitimation ritual, with the individual returning between elections to his proper role of sitting down and shutting up. In virtually every area of life, the average citizen was to be transformed from Jefferson's self-sufficient and resourceful yeoman into a client of some bureaucracy or other. The educational system was designed to render him a passive and easily managed recipient of the "services" of one institution after another. In every area of life, as Ivan Illich wrote, the citizen/subject/resource was taught to "confuse process and substance."

As a corollary of this principle, the public was taught to "view doctoring oneself as irresponsible, learning on one's own as unreliable, and community organization, when not paid for by those in authority, as a form of aggression or subversion."¹³

This general phenomenon, in which passive human raw material was managed by "service" bureaucracies, was described by Edgar Friedenberg as the "conscript clientele."

Although Friedenberg treated public schools as the most obvious example of a conscripted clientele, they were by no means the only member of that class: "Ultimately, bureaucracies with conscript clienteles become real clients of one another, mutually dependent for referral of cases. They create conditions in one system that generate clients for another...." For example, the schools process human raw material to be taken over by the "human resources" bureaucracies of private industry (with the transition made as seamless as possible by the school-to-work movement), or by the bureaucracies of the welfare state and prison-industrial complex.¹⁴

Although the corporate liberal ideology is associated with the New Class world view, it intersected in many ways with that of "enlightened" employers who saw paternalism as a way of getting more out of workers. Much of corporate leadership at the turn of the century

The New Class mania for planning and rationality was reflected within the corporation in the Taylorist/Fordist cult of "scientific management," in which the workman was deskilled and control of the production process was shifted upward into the white collar hierarchy of managers and engineers.¹⁶

This new intersection of interests between the progressive social planners and corporate management was reflected, organizationally, in the National Civic Federation, whose purpose was to bring together the most enlightened and socially responsible elements of business, labor, and government.¹⁷ If, as Big Bill Haywood said of the I.W.W.'s founding convention, that body was "the Continental Congress of the working class," then the NCF was surely the Continental Congress of the New Class. The themes of corporate liberalism, as David Noble described them, were "cooperation rather than conflict, the natural harmony of interest between labor and capital, and effective management and administration as the means toward prosperity and general welfare."¹⁸

The New Class intellectuals, despite their prominent role in formulating the ideology, were co-opted as a decidedly junior partner of the corporate elite. As Hilaire Belloc and William English Walling perceived, "Progressives" and Fabians valued regimentation and centralized control much more than their allegedly "socialist" economic projects. They recognized, for the most part, that expropriation of the capitalists was impossible in the real world. The large capitalists, in turn, recognized the value of the welfare and regulatory state for maintaining social stability and control, and for making possible the political extraction of profits in the name of egalitarian values. The result was a devil's bargain by which the working class was guaranteed a minimum level of comfort and security, in return for which the large corporations were enabled to extract profits through the state. Of the "Progressive" intellectual, Belloc wrote:

The New Class, its appetite for power satiated with petty despotisms in the departments of education and human services, was put to work on its primary mission of cartelizing the economy for the profit of the corporate ruling class. Its "populist" rhetoric was harnessed to sell state capitalism to the masses. Those overeducated yahoos admirably served their masters in the capacity of useful idiots.

But whatever the "idealistic" motivations of the social engineers themselves, their program was implemented to the extent that it furthered the material interests of monopoly capital. Kolko used the term "political capitalism" to describe the general objectives big business pursued through the "Progressive" state:

From the turn of the twentieth century on, there was a series of attempts by corporate leaders to create some institutional structure by which price competition could be regulated and their respective market shares stabilized. "It was then," Paul Sweezy wrote,

But merely private attempts at cartelization before the Progressive Era--namely the so-called "trusts"--were miserable failures, according to Kolko. The dominant trend at the turn of the century--despite the effects of tariffs, patents, railroad subsidies, and other existing forms of statism--was competition. The trust movement was an attempt to cartelize the economy through such voluntary and private means as mergers, acquisitions, and price collusion. But the over-leveraged and over-capitalized trusts were even less efficient than before, and steadily lost market share at the hands of their smaller, more efficient competitors. Standard Oil and U.S. Steel, immediately after their formation, began a process of eroding market share. In the face of this resounding failure, big business acted through the state to cartelize itself--hence, the Progressive regulatory agenda. "Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it."²²

The FTC and Clayton Acts reversed this long trend toward competition and loss of market share and made stability possible.

The Federal Trade Commission created a hospitable atmosphere for trade associations and their efforts to prevent price cutting.²⁴ The two pieces of legislation accomplished what the trusts had been unable to: it enabled a handful of firms in each industry to stabilize their market share and to maintain an oligopoly structure between them. This oligopoly pattern has remained stable ever since.

In addition, the various safety and quality regulations introduced during this period also had the effect of cartelizing the market. They served essentially the same purpose as the later attempts in the Wilson war economy to reduce the variety of styles and features available in product lines, in the name of "efficiency." Any action by the state to impose a uniform standard of quality (e.g. safety), across the board, necessarily eliminates safety as a competitive issue between firms. Thus, the industry is partially cartelized, to the very same extent that would have happened had all the firms in it adopted a uniform level of quality standards, and agreed to stop competing in that area. A regulation, in essence, is a state-enforced cartel in which the members agree to cease competing in a particular area of quality or safety, and instead agree on a uniform standard. And unlike non-state-enforced cartels, which are unstable, no member can seek an advantage by defecting. Similarly, the provision of services by the state (R&D funding, for example) removes them as components of price in cost competition between firms, and places them in the realm of guaranteed income to all firms in a market alike. Whether through regulations or direct state subsidies to various forms of accumulation, the corporations act through the state to carry out some activities jointly, and to restrict competition to selected areas.

And Kolko provided abundant evidence that the main force behind this entire legislative agenda was big business. The Meat Inspection Act, for instance, was passed primarily at the behest of the big meat packers. In the 1880s, repeated scandals involving tainted meat had resulted in U.S. firms being shut out of several European markets. The big packers had turned to the U.S. government to conduct inspections on exported meat. By carrying out this function jointly, through the state, they removed quality inspection as a competitive issue between them, and the U.S. government provided a seal of approval in much the same way a trade association would--but at public expense. The problem with this early inspection regime was that only the largest packers were involved in the export trade; mandatory inspections therefore gave a competitive advantage to the small firms that supplied only the domestic market. The main effect of Roosevelt's Meat Inspection Act was to bring the small packers into the inspection regime, and thereby end the competitive disability it imposed on large firms. Upton Sinclair simply served as an unwitting shill for the meat-packing industry.²⁶ This pattern was repeated, in its essential form, in virtually every component of the "Progressive" regulatory agenda.

The same leitmotif reappears in the New Deal. The core of business support for the New Deal was, as Ronald Radosh described it, "leading moderate big businessmen and liberal-minded lawyers from large corporate enterprises."²⁷ Thomas Ferguson and Joel Rogers described them more specifically as "a new power bloc of capital-intensive industries, investment banks, and internationally oriented commercial banks."²⁸

Labor was a relatively minor part of the total cost package of such businesses; at the same time, capital-intensive industry, as Galbraith pointed out in his analysis of the "technostructure," depended on long-term stability and predictability for planning high-tech production. Therefore, this segment of big business was willing to trade higher wages for social peace in the workplace.²⁹ The roots of this faction can be traced to the relatively "progressive" employers described by James Weinstein in his account of the National Civic Federation at the turn of the century, who were willing to engage in collective bargaining over wages and working conditions in return for uncontested management control of the workplace.³⁰

This attitude was at the root of the Taylorist/Fordist social contract, in which the labor bureaucrats agreed to let management manage, so long as labor got an adequate share of the pie.³¹ Such an understanding was most emphatically in the interests of large corporations. The sitdown movement in the auto industry and the organizing strikes among West coast longshoremen were virtual revolutions among rank and file workers on the shop floor. In many cases, they were turning into regional general strikes. The Wagner Act domesticated this revolution and brought it under the control of professional labor bureaucrats.

Industrial unionism, from the employer's viewpoint, had the advantage over craft unionism of providing a single bargaining agent with which management could deal. One of the reasons for the popularity of "company unions" among large corporations, besides the obvious advantages in pliability, was the fact that they were an alternative to the host of separate craft unions of the AFL. Even in terms of pliability, the industrial unions of the Thirties had some of the advantages of company unions. By bringing collective bargaining under the aegis of federal labor law, corporate management was able to use union leadership to discipline their own rank and file, and to use the federal courts as a mechanism of enforcement.

Moderate members of the corporate elite also gained reassurance from the earlier British experience in accepting collective bargaining. Collective bargaining did not affect the distribution of wealth, for one thing: "Labor gains were made due to the general growth in wealth and at the expense of the consumer, which would mean small businessmen, pensioners, farmers, and nonunionized white collar employees." (Not to mention a large contingent of unskilled laborers and lumpenproles without bargaining leverage against the employing classes). And the British found that firms in a position of oligopoly, with a relatively inelastic demand, were able to pass increased labor costs on to the consumer at virtually no cost to themselves.³³

The Wagner Act served the central purposes of the corporate elite. To some extent it was a response to mass pressure from below. But the decision on whether and how to respond, the form of the response, and the implementation of the response, were all firmly in the hands of the corporate elite. According to Domhoff (writing in The Higher Circles), "The benefits to capital were several: greater efficiency and productivity from labor, less labor turnover, the disciplining of the labor force by labor unions, the possibility of planning labor costs over the long run, and the dampening of radical doctrines."³⁴ James O'Connor described it this way: "From the standpoint of monopoly capital the main function of unions was... to inhibit disruptive, spontaneous rank-and-file activity (e.g., wildcat strikes and slowdowns) and to maintain labor discipline in general. In other words, unions were... the guarantors of 'managerial prerogatives.'"³⁵ The objectives of stability and productivity were more likely to be met by such a limited Taylorist social compact than by a return to the labor violence and state repression of the late nineteenth century.

In The Power Elite and the State, Domhoff put forth a slightly more nuanced thesis.³⁶ It was true, he admitted, that a majority of large corporations opposed the Wagner Act as it was actually presented. But the basic principles of collective bargaining embodied in it had been the outcome of decades of corporate liberal theory and practice, worked out through policy networks in which "progressive" large corporations had played a leading role; the National Civic Federation, as Weinstein described its career, was a typical example of such networks. The motives of those in the Roosevelt administration who framed the Wagner Act were very much in the mainstream of corporate liberalism. Although they may have been ambivalent about the specific form of FDR's labor legislation, Swope and his corporate fellow travelers had played the major role in formulating the principles behind it. Whatever individual business leaders thought of Wagner, it was drafted by mainstream corporate lawyers who were products of the ideological climate created by those same business leaders; and it was drafted with a view to their interests. Although it was not accepted by big business as a whole, it was largely the creation of representatives of big business interests whose understanding of the act's purpose was largely the same as those outlined in Domhoff's quote above from The Higher Circles. And although it was designed to contain the threat of working class power, it enjoyed broad working class support as the best deal they were likely to get. Finally, the southern segment of the ruling class was willing to go along with it because it specifically exempted agricultural laborers.

Among the other benefits of labor legislation, corporate interests are able to rely on the state's police powers to impose an authoritarian character on labor relations. In the increasingly statist system, Bukharin pointed out in his analysis of state capitalism almost a century ago,

The relevance of this line of analysis to America can be seen with a cursory look at Cleveland's response to the Pullman strike, the Railway Labor Relations Act and Taft-Hartley (which, in James O'Connor's words, "included a ban on secondary boycotts and hence tried to 'illegalize' class solidarity..."³⁸), and Truman's and Bush's threats to use soldiers as scabs in, respectively, the steelworkers' and longshoremen's strikes.

The Social Security Act was the other major part of the New Deal agenda. In The Higher Circles, Domhoff described its functioning in language much like his characterization of the Wagner Act. Its most important result

In his later work The Power Elite and the State, Domhoff undertook a much more thorough analysis, with a literature review of his structuralist Marxists critics, that essentially verified his earlier position.⁴⁰

The New Deal and Great Society welfare state, according to Frances Piven and Richard Cloward, served a similar function to that of Social Security: it blunted the danger of mass political radicalism resulting from widespread homelessness and starvation. In addition, it also provided social control by bringing the underclass under the supervision of an army of intrusive, paternalistic social workers and welfare case workers.⁴¹ And like Social Security, it put a floor on aggregate demand.

To the extent that the welfare and labor provisions of FDR's New Deal have benefited average people, the situation resembles a parable of Tolstoy's:

The capitalist supporters of the welfare state are like an enlightened farmer who understands that his livestock will produce more for him, in the long run, if they are well treated.

Hilaire Belloc speculated that the industrial serfdom in his Servile State would only be stable if the State subjected the unemployable underclass to "corrective" treatment in forced labor camps, and forced everyone even marginally employable into a job, as a deterrent to deliberate parasitism or malingering. Society would "find itself" under the "necessity,"

This society would be organized on the pattern of Anthony Burgess' squalid and decaying welfare state, in which "everyone not a child, or with child, must be employed." But Belloc's speculation was not idle; since Fabians like the Webbs and H.G. Wells had proposed just such labor camps for the underclass in their paternalistic utopia.⁴⁴

Although we are still far from a formal requirement to be either employed or subjected to remedial labor by the State, a number of intersecting State policies have that tendency. For example, the imposition of compulsory unemployment insurance, with the State as arbiter of when one qualifies to collect:

Still another measure with this tendency is "workfare," coupled with subsidies to employers who hire the underclass as peon labor. Vagrancy laws and legal restrictions on jitney services, self-built temporary shelters, etc., serve to reduce the range of options for independent subsistence. And finally, the prison-industrial complex, as "employer" for the nearly half of its "clients" guilty of only consensual market transactions, is in effect a forced labor camp absorbing a major segment of the underclass.

The culmination of FDR's state capitalism was (of course) the military-industrial complex which arose from World War II, and has continued ever since. It has since been described as "military Keynesianism," or a "perpetual war economy." A first step in realizing the monumental scale of the war economy's effect is to consider that the total value of plant and equipment in the United States increased by about two-thirds (from $40 to $66 billion) between 1939 and 1945, most of it a taxpayer "gift" of forced investment funds provided to the country's largest corporations.⁴⁶ Profit was virtually guaranteed on war production through "cost-plus" contracts.⁴⁷ In addition, 67% of federal R&D spending was channeled through the 68 largest private laborotories (40% of it to the ten largest), with the resulting patents being given away to the companies that carried out the research under government contract.⁴⁸

Demobilization of the war economy after 1945 very nearly threw the overbuilt and government-dependent industrial sector into a renewed depression. For example, in Harry Truman and the War Scare of 1948, Frank Kofsky described the aircraft industry as spiraling into red ink after the end of the war, and on the verge of bankruptcy when it was rescued by Truman's new bout of Cold War spending on heavy bombers.⁴⁹

The Cold War restored the corporate economy's heavy reliance on the state as a source of guaranteed sales. Charles Nathanson argued that "one conclusion is inescapable: major firms with huge aggregations of corporate capital owe their survival after World War II to the Cold War...."⁵⁰ For example, David Noble pointed out that civilian jumbo jets would never have existed without the government's heavy bomber contracts. The production runs for the civilian market alone were too small to pay for the complex and expensive machine tools. The 747 is essentially a spinoff of military production.⁵¹

The heavy industrial and high tech sectors were given a virtually guaranteed outlet, not only by U.S. military procurement, but by grants and loan guarantees for foreign military sales under the Military Assistance Program. Although apologists for the military-industrial complex have tried to stress the relatively small fraction of total production represented by military goods, it makes more sense to compare the volume of military procurement to the amount of idle capacity. Military production runs amounting to a minor percentage of total production might absorb a major part of total excess production capacity, and have a huge effect on reducing unit costs. Besides, the rate of profit on military contracts tends to be quite a bit higher, given the fact that military goods have no "standard" market price, and the fact that prices are set by political means (as periodic Pentagon budget scandals should tell us).⁵²

But the importance of the state as a purchaser was eclipsed by its relationship to the producers themselves, as Charles Nathanson pointed out. The research and development process was heavily militarized by the Cold War "military-R&D complex." Military R&D often results in basic, general use technologies with broad civilian applications. Technologies originally developed for the Pentagon have often become the basis for entire categories of consumer goods.⁵³ The general effect has been to "substantially [eliminate] the major risk area of capitalism: the development of and experimentation with new processes of production and new products."⁵⁴

This is the case in electronics especially, where many products originally developed by military R&D "have become the new commercial growth areas of the economy."⁵⁵ Transistors and other forms of miniaturized circuitry were developed primarily with Pentagon research money. The federal government was the primary market for large mainframe computers in the early days of the industry; without government contracts, the industry might never have had sufficient production runs to adopt mass production and reduce unit costs low enough to enter the private market. And the infrastructure for the worldwide web itself was created by the Pentagon's DARPA, originally as a redundant global communications system that could survive a nuclear war. Any implied commentary on the career of Bill Gates is, of course, unintended.

Overall, Nathanson estimated, industry depended on military funding for around 60% of its research and development spending; but this figure is considerably understated by the fact that a significant part of nominally civilian R&D spending is aimed at developing civilian applications for military technology.⁵⁶ It is also understated by the fact that military R&D is often used for developing production technologies (like automated control systems in the machine tool industry) that become the basis for production methods throughout the civilian sector.

Seymour Melman described the "permanent war economy" as a privately-owned, centrally-planned economy that included most heavy manufacturing and high tech industry. This "state-controlled economy" was based on the principles of "maximization of costs and of government subsidies."⁵⁷

The state capitalism of the twentieth century differed fundamentally from the misnamed "laissez-faire" capitalism of the nineteenth century in two regards: 1) the growth of direct organizational ties between corporations and the state, and the circulation of managerial personnel between them; and 2) the eclipse of surplus value extraction from the worker through the production process (as described by classical Marxism), by the extraction of "super-profits" a) from the consumer through the exchange process and b) from the taxpayer through the fiscal process.

Although microeconomics texts generally describe the functioning of supply and demand curves as though the nature of the market actors were unchanged since Adam Smith's day, in fact the rise of the large corporation as the dominant type of economic actor has been a revolution as profound as any in history. It occurred parallel to the rise of the "positive" state (i.e., the omnicompetent, centralized regulatory state) in the nineteenth and early twentieth century. And, vitally important to remember, the two phenomena were mutually reinforcing. The state's subsidies, privileges and other interventions in the market were the major force behind the centralization of the economy and the concentration of productive power. In turn, the corporate economy's need for stability and rationality, and for state-guaranteed profits, has been the central force behind the continuing growth of the leviathan state.

The rise of the centralized state and the centralized corporation has created a system in which the two are organizationally connected, and run by essentially the same recirculating elites (a study of the careers of David Rockefeller, Averell Harriman, or Robert McNamara should be instructive on the last point). This phenomenon has been most ably described by the "power elite" school of sociologists, particularly C. Wright Mills and G. William Domhoff.

According to Mills, the capitalist class was not supplanted by a "managerial revolution," as James Burnham had claimed; but the elite's structure was still most profoundly affected by the corporate revolution. The plutocracy ceased to be a social "class" in the sense described by Marx: an autonomous social formation or amorphous mass of wealthy families, perpetuated largely through family lines of transmission and informal social ties, with its organizational links of firm ownership clearly secondary to its existence in the "social" realm. The plutocracy were no longer just a few hundred rich families who happened to invest their old money in one firm or another. Rather, Mills described it as "the managerial reorganization of the propertied classes into the more or less unified stratum of the corporate rich."⁵⁹ Rather than an amorphous collection of wealthy families, in which legal claims to an income from property were the defining characteristic, the ruling class came to be defined by the organizational structure through which it gained its wealth. It was because of this new importance of the institutional forms of the power structure that Mills preferred the term "power elite" to "ruling class": "'Class' is an economic term; 'rule' a political one. The phrase, 'ruling class,' thus contains the theory that an economic class rules politically.“⁶⁰

Domhoff, who retained more of the traditional Marxist idea of class than did Mill, described the situation in this way:

While Mills virtually replaced the traditional idea of a ruling class with that of the transcendent power elite, Domhoff saw the power elite as an action arm of the upper class; this action arm incorporated both elements of the upper class itself, who were active in business and government, and their managerial servants.⁶²

In language quite similar to that of Domhoff, Martin Sklar described the "corporate reconstruction of American capitalism," as it affected the nature of the ruling class, in this way:

Because of the corporate reorganization of the ruling class, senior corporate management has been incorporated as junior partners in the power elite. Contrary to theories of the "managerial revolution," senior management is kept firmly subordinated, through informal social ties and the corporate socialization process, to the goals of the owners. Even a Welch or Eisner understands that his career depends on being a "team player," and the team's objectives are set by the Rockefellers and Du Ponts.⁶⁴ The corporate reorganization of the economy has led to permanent organizational links between large corporations, government agencies, research institutions, and foundation money, and resulted in the plutocracy functioning organizationally on a class-wide basis.⁶⁵

The power elite theory of Mills and Domhoff had been anticipated, in many ways, by Bukharin. He wrote, in language that prefigured Mills, of intersecting corporate and state elites:

In a passage that could have been written by Mills, Bukharin described the rotation of personnel between "private" and "public" offices in the interlocking directorate of state and capitalist bureaucracies:

It is the common class background of the state and corporate elites, and the constant circulation of them between institutions, that underscores the utter ridiculousness of controlling corporate power through such nostrums as "clean election" reforms. The promotion of corporate aims by high-level policy makers is the result mainly, not of soft money and other forms of cartoonishly corrupt villainy, but of the policy makers' cultural background and world view. Mills commented ironically on the "pitiful hearings" on confirmation of corporate leaders appointed to government office:

Although the structuralist Marxists have created an artificial dichotomy between their position and that of institutional elitists like Mill and Domhoff,⁶⁹ they are entirely correct in pointing out that the political leadership does not have to be subject, in any crude way, to corporate control. Instead, the very structure of the corporate economy and the situations it creates compel the leadership to promote corporate interests out of perceived "objective necessity." Given not just the background and assumptions of the policy elite, but the dependence of political on economic stability, policies that stabilize the corporate economy and guarantee steady output and profits are the only imaginable alternatives. And regardless of how "progressive" the regulatory state's ostensible aims, the organizational imperative will make the corporate economy's managers and directors the main source of the processed data and technical expertise on which policy makers depend.

The public's control over the system's overall structure, besides, is severely constrained by the fact that people who work inside the corporate and state apparatus inevitably have an advantage in time, information, attention span, and agenda control over the theoretically "sovereign" outsiders in whose name they act. The very organs of cultural reproduction--the statist school system, the corporate press, etc.--shape the public's "common sense" understanding of what is possible, and what is to be relegated to the outer darkness of "extremism." So long as wire service and network news foreign correspondents write their copy in hotel rooms from government handouts, and half the column inches in newspapers are generated by government and corporate public relations departments, the "moderate" understanding will always be conditioned by institutional culture.

In making use of the "Power Elite" model of Mills and Domhoff, one must be prepared to counter the inevitable "tinfoil hat" charges from certain quarters. Power Elite theory, despite a superficial resemblance to some right-wing conspiracy theories, has key differences from them. The latter take, as the primary motive force of history, personal cabals united around some esoteric or gratuitously evil ideology.⁷⁰ Now, the concentration of political and economic power in the control of small, interlocking elites, is indeed likely to result in informal personal ties, and therefore to have as its side-effect sporadic conspiracies (Stinnett's Day of Deceit theory of Pearl Harbor is a leading example). But such conspiracy is not necessary to the working of the system--it simply occurs as a secondary phenomenon, and occasionally speeds up or intensifies processes that happen for the most part automatically. Although the CFR is an excellent proxy for the foreign policy elite, and some informal networking and coordination of policy no doubt get done through it, it is essentially a secondary organization, whose membership are ex officio representatives of the major institutions regulating national life. The primary phenomenon is the institutional concentration of power that brings such people into contact with each other, in the first place, in their official capacities.

We now proceed to the second difference between twentieth century monopoly capitalism and earlier variants of capitalism: the growth of surplus value extraction through exchange. In the "monopoly capitalism" model of Paul Baran and Paul Sweezy, the central figures in the Monthly Review group, the corporate system can maintain stable profit levels by passing its costs on to the consumer. The increased labor costs of unionized heavy manufacturing are paid, ultimately, by the non-cartelized sectors of the economy (the same is true of the corporate income tax and the rest of the burden of "progressive" taxation, although the authors do not mention it in this context). Capitalism is no longer predominantly, as Marx had assumed in the nineteenth century, a system of competition. As a result, the large corporate sector of the economy becomes immune to Marx's law of the falling tendency of the rate of profit.⁷¹

Direct collusion between the firms in an oligopoly market, whether open or hidden, is not required. "Price leadership," although the most common means by which corporations informally agree on price, is only one of several.

In this way, the firms in an oligopoly market can jointly determine their price very much as would a single monopoly firm. The resulting price surcharge passed on to the consumer is quite significant. According to an FTC study in the 1960s, "if highly concentrated industries were deconcentrated to the point where the four largest firms control 40% or less of an industry's sales, prices would fall by 25% or more."⁷⁴

This form of tacit collusion is not by any means free from breakdowns. When one firm develops a commanding lead in some new process or technology, or acquires a large enough market share or a low enough cost of production to be immune from retribution, it may well initiate a war of conquest on its industry.⁷⁵ Such suspensions of the rules of the game are identified, for example, with revolutionary changes like Wal-Mart's blitz of the retail market. But in between such disruptions, oligopoly markets can often function for years without serious price competition. As mentioned above, the Clayton Act's "unfair competition" provisions were designed to prevent the kind of catastrophic price wars that could destabilize oligopoly markets.

The "monopoly capital" theorists introduced a major innovation over classical Marxism by treating monopoly profit as a surplus extracted from the consumer in the exchange process, rather than from the laborer in the production process. This innovation was anticipated by the Austro-Marxist Hilferding in his description of the super profits resulting from the tariff:

Baran and Sweezy were quite explicit in recognizing the central organizing role of the state in monopoly capitalism. They described the political function of the regulatory state in ways quite similar to Kolko:

It is interesting, in this regard, to compare the effect of antitrust legislation in the U.S. to that of nationalization in European "social democracies." In most cases, the firms affected by both policies involve centrally important infrastructures or resources, on which the corporate economy as a whole depends. Nationalization in the Old World is used primarily in the case of energy, transportation and communication. In the U.S., the most famous antitrust cases have been against Standard Oil, AT&T, and Microsoft: all cases in which excessive prices in one firm could harm the interests of monopoly capital as a whole. And recent "deregulation," as it has been applied to the trucking and airline industries, has likewise been in the service of those general corporate interests harmed by monopoly transportation prices. In all these cases, the state has on occasion acted as an executive committee on behalf of the entire corporate economy, by thwarting the mendacity of a few powerful corporations.

The common thread in all these lines of analysis is that an ever-growing portion of the functions of the capitalist economy have been carried out through the state. According to James O'Connor, state expenditures under monopoly capitalism can be divided into "social capital" and "social expenses."

According to O'Connor, such state expenditures counteract the falling general rate of profit that Marx predicted. Monopoly capital is able to externalize many of its operating expenses on the state; and since the state's expenditures indirectly increase the productivity of labor and capital at taxpayer expense, the apparent rate of profit is increased.

O'Connor listed several of the main ways in which monopoly capital externalizes its operating costs on the political system:

As suggested already by our reference above to O'Connor, these forms of state expenditure have the practical effect of promoting several of the "counteracting influences" to the declining rate of profit that Marx described in Volume 3 of Capital. The second such influence Marx listed, for example, was the "depression of wages below the value of labor power." Through welfare, taxpayer-funded education, and other means of subsidizing the reproduction cost of labor-power, the state reduces the minimum sustainable cost of labor-power that must be paid by employers. This is true, likewise, of Marx's third influence: the "cheapening of the elements of constant capital." The state, by subsidizing many of the operating costs of large corporations, artificially shifts their balance sheet further into the black. The fourth influence listed, "relative overpopulation," is promoted by state subsidies to the adoption of capital-intensive forms of production and to the education of technically skilled manpower at government expense--with the effect of artificially increasing the supply of labor relative to demand, and thus reducing its bargaining power in the labor market.⁸¹

We should briefly recall here our examination above of how such socialization of expenditures serves to cartelize industry. By externalizing such costs on the state, through the general tax system, monopoly capital removes these expenditures as an issue of competition between individual firms. It is as if all the firms in an industry formed a cartel to administer these costs in common, and agreed not to include them in their price competition. The costs and benefits are applied uniformly to the entire industry, removing it as a competitive disadvantage for some firms.

Although it flies in the face of "progressive" myth, big business is by no means uniformly opposed to national health insurance and other forms of social insurance. Currently, giant corporations in the monopoly capital sector are the most likely to provide private insurance to their employees; and such insurance is one of the fastest-rising components of labor costs. Consequently, firms that are already providing this service at their own expense are the logical beneficiaries of a nationalized system. The effect of such a national health system would be to remove the cost of this benefit as a competitive disadvantage for the companies that provided it. Even if the state requires only large corporations in the monopoly sector to provide health insurance, it is an improvement of the current situation, from the monopoly capital point of view: health insurance ceases to be a component of price competition among the largest firms. A national health system provides a competitive advantage to a nation's firms at the expense of their foreign competitors, who have to fund their own employee health benefits--hence, American capital's hostility to the Canadian national health, and its repeated attempts to combat it through the WTO. The cartelizing effects of socializing the costs of social insurance, likewise, was one reason a significant segment of monopoly capital supported FDR's Social Security agenda.

Daniel Gross, although erroneously treating it as a departure from the alleged traditional big business hostility to the welfare state, has made the same point about more recent big business support of government health insurance.⁸² Large American corporations, by shouldering the burden of health insurance and other employee benefits borne by the state in Europe and Japan, is at a competitive disadvantage both against companies there and against smaller firms here.

Democratic presidential candidate Dick Gephart, or rather his spokesman Jim English, admitted to a corporate liberal motivation for state-funded health insurance in his 2003 Labor Day address. Gephart's proposed mandatory employer coverage, with a 60% tax credit for the cost, would (he said) eliminate competition from companies that don't currently provide health insurance as an employee benefit. It would also reduce competition from firms in countries with a single-payer system.⁸³

Another "progressive" cause du jour, the reform of corporate governance, likewise serves elite interests. It's odd that so much of the populist outrage against corporations these days is focused, not on billionaire stockholders, but on their hired help. It's a misguided populism that buys into the misleading "pension fund socialism" or "people's capitalism" image of stock ownership. Although stock is indeed distributed more widely, a great majority of it is still owned by a fairly small fraction of the population. So all the agitation to rein in the misbehavior of senior management, supposedly on behalf of the average working Joe whose 401k is tanking, is a con job. The main effect of "corporate accountability" legislation is to protect the assets of David Rockefeller and his ilk against depreciation through white collar crime.

The level of technical training necessary to keep the existing corporate system running, the current level of capital intensiveness of production, and the current level of R&D efforts on which it depends, would none of them pay for themselves on a free market. The state's education system provides a technical labor force at public expense, and whenever possible overproduces technical specialists on the level needed to ensure that technical workers are willing to take work on the employers' terms. On this count, O'Connor quoted Veblen: the state answers capital's "need of a free supply of trained subordinates at reasonable wages..."⁸⁴ Starting with the Morrill Act of 1862, which subsidized agricultural and mechanical colleges, the federal government has underwritten a major part of the reproduction costs of technical labor.⁸⁵ In research and development, likewise, federal support goes back at least to the agricultural and experiment stations of the late nineteenth century, created pursuant to the Hatch Act of 1887.⁸⁶

The state's cartelization and socialization of the cost of reproducing a technically sophisticated labor force, and its subsidies to R&D, make possible a far higher technical level of production than would support itself in a free market. The G.I. Bill was an integral part of the unprecedentedly high scale of state capitalism created during and after WWII.

At best, from the point of view of the employer, the state creates a "reserve army" of scientific and technical labor--as William Appleman Williams described it, the elite has "seen to it that experts are a glut on the market."⁸⁸ At worst, when there is a shortage of such labor, the state at least absorbs the cost of producing it and removes it as a component of private industry's production costs. In either case, "the greater the socialization of the costs of variable capital, the lower will be the level of money wages, and... the higher the rate of profit in the monopoly sector."⁸⁹ And since the monopoly capital sector is able to pass its taxes onto the consumer or to the competitive capital sector, the effect is that "the costs of training technical laborpower are met by taxes paid by competitive sector capital and labor."⁹⁰

The "public" schools' curriculum can much more justly be described as servile than liberal education. Its objective is a human product which is capable of fulfilling the technical needs of corporate capital and the state, but at the same time docile and compliant, and incapable of any critical analysis of the system of power it serves. The public educationist movement and the creation of the first state school systems, remember, coincided with the rising factory system's need for a work force that was trained in obedience, punctuality, and regular habits. Technical competence and a "good attitude" toward authority, combined with twelve years of conditioning in not standing out or making waves, were the goal of the public educationists.

Even welfare expenses, although O'Connor classed them as a completely unproductive expenditure, are in fact another example of the state underwriting variable capital costs. Some socialists love to speculate that, if it were possible, capitalists would lower the prevailing rate of subsistence pay to that required to keep workers alive only when they were employed. But since that would entail starvation during periods of unemployment, the prevailing wage must cover contingencies of unemployment; otherwise, wages would be less than the minimum cost of reproducing labor. Under the welfare state, however, the state itself absorbs the cost of providing for such contingencies of unemployment, so that the uncertainty premium is removed as a component of wages in Adam Smith's "higgling of the market."

And leaving this aside, even as a pure "social expense," the welfare system acts primarily (in O'Connor's words) to "control the surplus population politically."⁹¹ The state's subsidies to the accumulation of constant capital and to the reproduction of scientific-technical labor provide an incentive for much more capital-intensive forms of production than would have come about in a free market, and thus contribute to the growth of a permanent underclass of surplus labor;⁹² the state steps in and undertakes the minimum cost necessary to prevent large-scale homelessness and starvation, which would destabilize the system, and to maintain close supervision of the underclass through the human services bureaucracy.⁹³

The general effect of the state's intervention in the economy, then, is to remove ever increasing spheres of economic activity from the realm of competition in price or quality, and to organize them collectively through organized capital as a whole.

We have, in this chapter, made a partial study of the problem of over-accumulation, and of the intensification of state capitalism in response to that crisis. In the following chapter, we will examine another response to the same crisis, the policy of foreign imperialism to dispose of surplus production abroad. And in Chapter Eight, we will see that these state capitalist policies not only intensify the problem of over-accumulation, but at the same time create contrary crisis tendencies toward under-accumulation; so that state capitalism is constantly balanced on a razor's edge between crises of over- and under-accumulation.