Chapter Seven--Monopoly Capitalism and Imperialism

Introduction: Elite Reaction to Crisis (with Digression on Maldistribution of Income)

William Appleman Williams summarized the lesson of the 1890s in this way: "Because of its dramatic and extensive nature, the Crisis of the 1890's raised in many sections of American society the specter of chaos and revolution."¹ American economic elites saw it as the result of overproduction and surplus capital, and believed it could be resolved only through access to a "new frontier." Without state-guaranteed access to foreign markets, output would be too far below capacity, unit costs would be driven up, and unemployment would reach dangerous levels.

The seriousness of the last threat was underscored by the radicalism of the Nineties. The Pullman Strike, Homestead, and the formation of the Western Federation of Miners (precursor to the IWW) were signs of dangerous levels of labor unrest and class consciousness. Coxey's Army marched on Washington, a small foretaste of the kinds of radicalism that could be produced by unemployment. The anarchist movement had a growing foreign component, more radical than the older native faction, and the People's Party seemed to have a serious chance of winning national elections. At one point Jay Gould, the mouthpiece of the robber barons, was threatening a capital strike (much like those in Venezuela recently) if the populists came to power. In 1894 businessman F. L. Stetson warned, "We are on the edge of a very dark night, unless a return of commercial prosperity relieves popular discontent."²

We should note, in passing, that from a mutualist perspective the roots of over-accumulation go much deeper than Stromberg's description of cartelization under monopoly capitalism. The origin of overproduction and over-accumulation lies in the legal privileges of "laissez-faire" capitalism, described under the headings of Tucker's "Big Four" in the last chapter.

J.A. Hobson, in his brilliant chapter on "The Economic Taproot of Imperialism," ascribed the problem to mal-distribution of purchasing power. Ever greater incomes had been concentrated in the hands of the plutocracy, who were unable to dispose of it on any conceivable amount of luxury; the result was that "a process of automatic saving set in..." This had the effect of exacerbating the problem of excess capital accumulation, expanding production facilities still further to produce even more output for which there was no demand. "The power of production has far outstripped the actual rate of consumption...."³ The excess of accumulation and shortfall in demand, by disrupting the circuit of capital and creating what Marx called a crisis of realization, led to a worsening business cycle.

In response to his rhetorical question of why over-saving and under-consumption occurred, and consumption failed to keep pace with productive capacity, Hobson pointed to the social system.

Over-saving results almost entirely from the surplus income of the rich.⁵

The question remains, what is the reason for this mal-distribution of income? Hobson approached, without ever reaching, an adequate explanation.

Hobson proposed, in response to this deficiency, what would later be called a Keynesian solution:

Hobson's reference to the divorce of consumption from the effort of production might have been written by Tucker. The natural wage of labor, when the state does not specially privilege ownership of land and capital, is its product. When labor receives its full product in payment for work done, the disutility of labor is directly related to its product by market price. The laborer is able to decide how much to work, based on how much he wants to consume--and to cease work when his needs are met. Whatever savings are made reflect the worker's own decision to work less in the future, either by living off present savings or by investing them in more efficient production. No superfluity is ever created. But under the capitalist system of privilege, the divorce of effort from consumption results in the same irrationality as any other violation of the cost principle that governs free markets. Because the disutility and the benefit of labor are not both fully internalized by the laborer, he is unable to govern productive output in relation to consumption. The laborer produces a surplus because the market relation between effort and consumption is distorted, and he does not receive the market signal to stop work when he had met his own needs. Because labor pays tribute for access to the means of production, the total output necessary to receive a given level of consumption is always greater than the amount consumed; meanwhile the rentier classes collect a surplus income for which they did not labor. The producing classes therefore create a surplus, not for their own consumption, but to be piled up by a privileged class that cannot possibly dispose of it all.

In the end, Hobson failed to isolate the "taproot" of this phenomenon. His analysis repeatedly grazed the true nature of the problem, without ever directly hitting it. The problem is not the failure to distribute income according to "need," but according to work: labor does not receive its full product as a wage. And the solution is not the Keynesian redistribution of income by the state from rich to poor, but an end to the state's existing redistribution of income from poor to rich. Thomas Hodgskin had stuck nearer the real root of the problem a couple of generations earlier:

The concentration of the economy in corporate form, in subsequent years, only intensified these inherent tendencies toward crisis.

Nevertheless, despite their faulty understanding of the reasons for the crisis, both business and government resounded with claims that U.S. productive capacity had outstripped the domestic market's ability to consume, and that the government had to take active measures to obtain outlets. We proceed to a brief survey of typical remarks from business and government leaders in the years following the depression of the 1890s. In reading the quotes over the next few pages, it's worth bearing in mind that they are not the ravings of Marxist ideologues; they are, rather, the measured reflections of sound, conservative businessmen. The theory of imperialism was the creation, not of Lenin, but of corporate leaders.

In 1897 NAM president Theodore C. Search said, "Many of our manufacturers have outgrown or are outgrowing their home markets, and the expansion of our foreign trade is our only promise of relief."⁹ In the same year, Albert J. Beveridge proclaimed: "American factories are making more than the American people can use; American soil is producing more than they can consume. Fate has written our policy for us; the trade of the world must and shall be ours."¹⁰ As the State Department's Bureau of Foreign Commerce put it in 1898,

In 1900, former Secretary of State John W. Foster wrote, "it has come to be a necessity to find new and enlarged markets for our agricultural and manufactured products. We cannot maintain our present industrial prosperity without them."¹²

Ohio governor McKinley emerged as spokesman for this new American consensus, proposing a combination of protective tariffs and reciprocity treaties to open foreign markets to American surplus output with help from the state.¹³ As keynote speaker at an organizational meeting of the National Association of Manufacturers in 1895, he said:

The imperialism of McKinley and Roosevelt, and the resulting Spanish-American War, were outgrowths of this orientation. They were not, however, the only or obvious form of state policy for securing foreign markets. Much more typical of U.S. policy, in the coming years, was the orientation outlined in John Hay's Open Door Notes (the first was written in 1899), which Williams called "Open Door Empire."

Open Door imperialism consisted of using U.S. political power to guarantee access to foreign markets and resources on terms favorable to American corporate interests, without relying on direct political rule. Its central goal was to obtain for U.S. merchandise, in each national market, treatment equal to that afforded any other industrial nation. Most importantly, this entailed active engagement by the U.S. government in breaking down the imperial powers' existing spheres of economic influence or preference. The result, in most cases, was to treat as hostile to U.S. security interests any large-scale attempt at autarky, or any other policy whose effect was to withdraw a major area from the disposal of U.S. corporations. When the power attempting such policies was an equal, like the British Empire, the U.S. reaction was merely one of measured coolness. When it was perceived as an inferior, like Japan, the U.S. resorted to more forceful measures, as events of the late 1930s indicate. And whatever the degree of equality between advanced nations in their access to Third World markets, it was clear that Third World nations were still to be subordinated to the industrialized West in a collective sense. Indeed, one think that Kautsky had the Open Door in mind in formulating his theory of "ultra-imperialism," in which the developed capitalist nations cooperated to exploit the Third World collectively.¹⁵

This Open Door system was the direct ancestor of today's neoliberal system, which is falsely called "free trade" in the apologetics of court intellectuals. It depended on active management of the world economy by dominant states, and continuing intervention to police the international economic order and enforce sanctions against states which did not cooperate. Woodrow Wilson, in a 1907 lecture at Columbia University, said:

Wilson warned during the 1912 election that "Our industries have expanded to such a point that they will burst their jackets if they cannot find a free [i.e., guaranteed by the state] outlet to the markets of the world."¹⁷

In a 1914 address to the National Foreign Trade Convention, Secretary of Commerce Redfield followed very nearly the same theme:

Under the Open Door system, the state and its loans were to play a central role in the export of capital. The primary purpose of foreign loans, historically, has been to finance the infrastructure which is a prerequisite for the establishment of enterprises in foreign countries. As Edward E. Pratt, chief of the Bureau of Foreign and Domestic Commerce, said in 1914:

It was, however, beyond the resources of individual firms or venture capitalists, or of the decentralized banking system, to raise the sums necessary for these tasks. One purpose of creating a central banking system (the Federal Reserve Act, 1914) was to make possible the large-scale mobilization of investment capital for overseas ventures. Under the New Deal, the mobilization began to take the form of direct state loans.²⁰ The state's financial policies, besides promoting the accumulation of capital for foreign investment, also underwrite foreign consumption of U.S. produce. As John Foster Dulles said in 1928, "We must finance our exports by loaning foreigners the where-with-all to pay for them...."²¹ These two functions were perfected in the Bretton Woods system after WWII.

The second Roosevelt's administration saw the guarantee of American access to foreign markets as vital to ending the Depression and the threat of internal upheaval that went along with it. Assistant Secretary of State Francis Sayre, chairman of Roosevelt's Executive Committee on Commercial Policy, warned: "Unless we can export and sell abroad our surplus production, we must face a violent dislocation of our whole domestic economy."²² FDR's ongoing policy of Open Door Empire, faced with the withdrawal of major areas from the world market by the autarkic policies of the Greater East Asia Co-Prosperity Sphere and Fortress Europe, led to American entry into World War II, and culminated in the postwar establishment of what Samuel Huntington called a "system of world order" guaranteed both by global institutions of economic governance like the IMF, and by a hegemonic political and military superpower.

In 1935, a War Department memorandum described the emerging Japanese threat in primarily economic terms. Japanese hegemony over Asia, it warned, would have "a direct influence on those people of Europe and America who depend on trade and commerce with this area for their livelihood." Germany, likewise, was defined as an "aggressor" because of its trade policies in Latin America.²³

After the fall of western Europe in the spring of 1940, Assistant Secretary of State Breckinridge Long warned that "every commercial order will be routed to Berlin and filled under its orders somewhere in Europe rather than in the United States," resulting in "falling prices and declining profits here and a lowering of our standard of living with the consequent social and political disturbances."²⁴

Beginning in the Summer of 1940, the CFR and State Department undertook a joint study to determine the minimum portion of the world the U.S. would have to integrate with its own economy, in order to provide sufficient resources and markets for economic stability; it also explored policy options for reconstructing the postwar world.²⁵ The study group found that Germany's continental system was far more self-sufficient in resources, and more capable of autarky, than was the United States. The U.S. economy could not survive in its existing form without access to the resources and markets not only of the Western Hemisphere, but of the British Empire and Far East (together called the Grand Area). But the latter region was rapidly being incorporated into Japan's economic sphere of influence. FDR made the political decision to contest Japanese power in the Far East, and if necessary to initiate war. In the end, however, he successfully maneuvered Japan into firing the first shot.²⁶ The American policy that emerged from these struggles was one of securing control over the markets and resources of the global "Grand Area" through institutions of global economic governance, reflected in the postwar Bretton Woods system.

The problem of access to foreign markets and resources was central to U.S. policy planning for a postwar world. Given the structural imperatives of "export dependent monopoly capitalism," the fear of a postwar depression was a real one. The original drive toward foreign expansion at the end of the nineteenth century reflected the fact that industry, with state capitalist encouragement, had expanded far beyond the ability of the domestic market to consume its output. Even before World War II, the state capitalist economy had serious trouble operating at the level of output needed for full utilization of capacity and cost control. Military-industrial policy during the war greatly exacerbated the problem of over-accumulation, increasing the value of plant and equipment by two-thirds at taxpayer expense. The end of the war, if followed by the traditional pattern of demobilization, would result in a drastic reduction in orders to this overbuilt industry at the same time that over ten million workers were dumped back into the civilian labor force. And four years of forced restraints on consumption had created a vast backlog of savings with no outlet in the already overbuilt domestic economy.

In November 1944, Dean Acheson addressed the Congressional committee on Postwar Economic Policy and Planning. He stressed the consequences if the war were be followed by a slide back into depression: "it seems clear that we are in for a very bad time, so far as the economic and social position of the country is concerned. We cannot go through another ten years like the ten years at the end of the twenties and the beginning of the thirties, without having the most far-reaching consequences upon our economic and social system." The problem, he said, was markets, not production. "You don't have a problem of production.... The important thing is markets. We have got to see that what the country produces is used and is sold under financial arrangements which make its production possible." Short of the introduction of a command economy, with controls over income and distribution to ensure the domestic consumption of all that was produced, Acheson said, the only way to achieve full output and full employment was through access to foreign markets.²⁷

A central facet of postwar economic policy, as reflected in the Bretton Woods agencies, was state intervention to guarantee markets for the full output of U.S. industry and profitable outlets for surplus capital. The World Bank was designed to subsidize the export of capital to the Third World, by financing the infrastructure without which Western-owned production facilities could not be established there. According to Gabriel Kolko's 1988 estimate, almost two thirds of the World Bank's loans since its inception had gone to transportation and power infrastructure.²⁸ A laudatory Treasury Department report referred to such infrastructure projects (comprising some 48% of lending in FY 1980) as "externalities" to business, and spoke glowingly of the benefits of such projects in promoting the expansion of business into large market areas and the consolidation and commercialization of agriculture.²⁹

Besides the benefit of building "an internal infrastructure which is a vital prerequisite for the development of resources and direct United States private investments," such banks (because they must be repaid in U.S. dollars) require the borrowing nations "to export goods capable of earning them, which is to say, raw materials...."³⁰

The International Monetary Fund was created to facilitate the purchase of American goods abroad, by preventing temporary lapses in purchasing power as a result of foreign exchange shortages. It was "a very large international currency exchange and credit-granting institution that could be drawn upon relatively easily by any country that was temporarily short of any given foreign currency due to trade imbalances."³¹

The Bretton Woods system by itself, however, was not nearly sufficient to ensure the levels of output needed to keep production facilities running at full capacity, or to absorb excess investment funds. First the Marshall Plan, and then the permanent war economy of the Cold War, came to the rescue.

The Marshall Plan was devised in reaction to the impending economic slump predicted by the Council of Economic advisers in early 1947 and the failure of Western Europe "to recover from the war and take its place in the American scheme of things." Undersecretary of State for Economic Affairs Clayton declared that the central problem confronting the United States was the disposal of its "great surplus."³² Dean Acheson defended the Marshall Plan in a May 1947 address:

One New Deal partisan implicitly compared foreign economic expansion to domestic state capitalism as analogous forms of surplus disposal: "it is as if we were building a TVA every Tuesday."³⁴

The permanent war economy, however, had another advantage over projects like the TVA that produced use-value for the civilian population: since it did not produce consumer goods, it did not add to the undisposable surplus or compete with the output of private capital in consumer markets. In the apt words of Immanuel Goldstein: "Even when weapons of war are not actually destroyed, their manufacture is still a convenient way of expending labor power without producing anything that can be consumed." War is a way of "shattering to pieces, or pouring into the stratosphere, or sinking in the depths of the sea," excess output and capital.³⁵

Besides facilitating the export of goods and capital, the Bretton Woods agencies play a central role in the discipline of recalcitrant regimes. There is a considerable body of radical literature on the Left on the use of debt as a political weapon to impose pro-corporate policies (e.g., the infamous "structural adjustment program") on Third World governments, analogous to the historic function of debt in keeping miners and sharecroppers in their place.³⁶ Cheryl Payer compared Third World debt to individual debt peonage, in that the aim of the latter was "neither to collect the debt once and for all, nor to starve the employee to death, but rather to keep the labourer permanently indentured through his debt to his employer...."³⁷ David Korten argued, likewise:

Another way the Bretton Woods agencies exercise political power over recalcitrant regimes is the punitive withholding of aid. This powerful political weapon has been used at times to undermine elective democracies whose policies fell afoul of corporate interests, and to reward compliant dictatorships. For example, the World Bank refused to lend to the Goulart government in Brazil; but following the installation of a military dictatorship by the 1964 coup, the Bank's lending averaged $73 million a year for the rest of the decade, and reached almost a half-billion by the mid-70s. Chile, before and after the Pinochet coup, followed a similar pattern.³⁹ Or as Ambassador Korry warned, in the latter-day equivalent of a papal interdict, "Not a nut or bolt shall reach Chile under Allende. Once Allende comes to power we shall do all within our power to condemn Chile and all Chileans to utmost deprivation and poverty."⁴⁰

Cheryl Payer's The Debt Trap is an excellent historical survey of the use of debt crises to force countries into standby arrangements, precipitate coups, or provoke military crackdowns. In addition to their use against Goulart and Allende, as mentioned above, she provides case studies of the Suharto coup in Indonesia and Marcos' declaration of martial law in the Phillippines. Walden Bello, in Development Debacle,⁴¹ goes into much greater depth on the Phillippines specifically, based on extensive documentation of World Bank collaboration with Marcos in support of the authoritarian crackdown preceding his austerity programs.

Among the many features of the so-called structural adjustment program, mentioned above, the policy of "privatization" (by selling state assets to "latter-day Reconstructionists," as Sean Corrigan says below) stands out. Joseph Stromberg described the process, as it has been used by the Iraq Provisional Authority, as "funny auctions, that amounted to new expropriations by domestic and foreign investors...." Such auctions of state properties will "likely lead... to a massive alienation of resources into the hands of select foreign interests."⁴²

The promotion of unaccountable, technocratic Third World governments, insulated from popular pressure and closely tied to international financial elites, has been a central goal of Bretton Woods agencies since World War II.

The World Bank created the Economic Development Institute in 1956 specifically to enculture Third World elites into the values of the Bretton Woods system. It offered a six-month course in "the theory and practice of development," whose 1300 alumni by 1971 included prime ministers, ministers of planning, and ministers of finance.⁴⁴

Despite the vast body of scholarly literature on the issues discussed in this passage, perhaps the most apt description of it was a pithy comment by a free market libertarian, Sean Corrigan:

The American economy could have had access to the resources it was willing to buy on mutually satisfactory terms, and marketed its own surplus to those countries willing to buy it, without the apparatus of transnational corporate mercantilism. Such a state of affairs would have been genuine free trade. What the American elite really wanted, however, has been ably stated by Thomas Friedman in one of his lapses into frankness:

It was not true that the American corporate economy was ever in any real danger of losing access to the raw materials it needed, in the absence of an activist foreign policy to secure access to those resources. As free market advocates often point out, countries with disproportionate mineral wealth--say, large oil reserves--are forced to center a large part of their economic activity on the extraction and sale of those resources. And once they sell them, the commodities enter a world market in which it is virtually impossible to control who eventually buys them. The real issue, according to Baran and Sweezy, is that the American corporate economy depended on access to Third World resources on favorable terms set by the United States, and those favorable terms depended on the survival of pliable regimes.

The "system of world order" enforced by the U.S. since World War II, and lauded in Friedman's remarks about the "visible hand," is nearly the reverse of the classical liberal notion of free trade. This new version of "free trade" is aptly characterized in a passage by Christopher Layne and Benjamin Schwarz:

Oliver MacDonagh pointed out that the modern neoliberal conception, far from agreeing with Cobden's idea of free trade, resembled the "Palmerstonian system" that the Cobdenites so despised. Cobden objected, among other things, to the "dispatch of a fleet 'to protect British interests' in Portugal," to the "loan-mongering and debt-collecting operations in which our Government engaged either as principal or agent," and generally, all "intervention on behalf of British creditors overseas." Cobden favored the "natural" growth of free trade, as opposed to the forcible opening of markets. Genuine free traders opposed the confusion of "free trade" with "mere increases of commerce or with the forcible 'opening up' of markets."⁵⁰

I can't resist quoting Joseph Stromberg's only half tongue-in-cheek prescription "How to Have Free Trade":

And by the way, it's doubtful that superpower competition with the Soviets had much to do with the role of the U.S. in shaping the postwar "system of world order," or in acting as "hegemonic power" in maintaining that system of order. Layne and Schwarz cited NSC-68 to the effect that the policy of "attempting to develop a healthy international community" was "a policy which we would probably pursue even if there were no Soviet threat."

The policy planners who designed the Bretton Woods system and the rest of the postwar framework of world order, apparently, paid little or no mind to the issue of Soviet Russia's prospective role in the world. The record that appears, rather, in Shoup and Minter's heavily documented account, is full of references to the U.S. as a successor to Great Britain as guarantor of a global political and economic order, and to U.S. global hegemony as a war aim (even before the U.S. entered the war). As early as 1942, when Soviet Russia's continued existence was very much in doubt, U.S. policy makers were referring to "domination after the war," "Pax Americana," and "world control." To quote G. William Domhoff, "the definition of the national interest that led to these interventions was conceived in the years 1940-42 by corporate planners in terms of what they saw as the needs of the American capitalist system, well before communism was their primary concern."⁵³

Considering the continuity in the pattern of U.S. Third World intervention during the Cold War with its gunboat diplomacy of the 20s and 30s, or with its actions as the world's sole superpower since the fall of communism, should also be instructive. Indeed, since the collapse of the USSR, the U.S. has been frantically scrambling to find (or create) another enemy sufficient to justify continuing its role as world policeman.

Despite Chomsky's periodic rhetorical excesses, his characterization of the postwar era was essentially correct: "Putting second-order complexities to the side, for the USSR the Cold War has been primarily a war against its satellites, and for the US a war against the Third World. For each, it has served to entrench a particular system of domestic privilege and coercion."⁵⁴

If anything, the Cold War with the Soviet Union appears almost as an afterthought to American planning for a postwar order. Far from being the cause of the U.S. role as guarantor of a system of world order, the Soviet Empire acted as a spoiler to preexisting U.S. plans for acting as a sole global superpower. Historically, any rival power which has refused to be incorporated into the Grand Area, or which has encouraged other countries (by "defection from within") to withdraw from the Grand Area, has been viewed as an "aggressor." Quoting Domhoff once again,

Likewise, as Domhoff's last sentence in the above quote suggests, any country which has interfered with U.S. attempts to integrate the markets and resources of any region of the world into its international economic order has been viewed as a "threat." The Economic and Financial Group of the CFR/State Department postwar planning project, produced, on July 24, 1941, a document (E-B34), warning of the need for the United States to "defend the Grand Area," not only against external attack by Germany, but against "defection from within," particularly against countries like Japan (which, along with the rest of east Asia, was regarded as part of the Grand Area) bent on "destroying the area for its own political reasons."⁵⁶ The centrality of this consideration is illustrated by the report of a 1955 study group of the Woodrow Wilson Center, which pointed to the threat of "a serious reduction in the potential resource base and market opportunities of the West owing to the subtraction of the communist areas and their economic transformation in ways that reduce their willingness and ability to complement the industrial economies of the West."⁵⁷

One way of defending against "defection from within" is to ensure that Third World countries have the right kind of government. That can be done either by supporting authoritarian regimes, or what neoconservatives call "democracy." The key quality for Third World elites, in either case, is an orientation toward what Thomas Barnett calls "connectivity." The chief danger presented by "outlaw regimes," according to Barnett, lies in their being disconnected "from the globalizing world, from its rule sets, its norms, and all the ties that bind countries together in mutually assured dependence."⁵⁸

The neoconservative version of democracy is more or less what Noam Chomsky means by "spectator democracy": a system in which the public engages in periodic legitimation rituals called "elections," choosing from a narrow range of candidates all representing the same elite. Having thus done its democratic duty, the public returns to bowling leagues and church socials, and other examples of "civil society," and leaves the mechanics of policy to its technocratic betters--who immediately proceed to take orders from the World Bank and IMF. This form of democracy is nearly synonymous with what neocons call "the rule of law," which entails a healthy dose of Weberian bureaucratic rationality. The stability and predictability associated with such "democracies" is, from the business standpoint, greatly preferable to the messiness of dictatorship or death squads.

American "pro-democratic" policy in the Third World, traditionally, has identified "democracy" with electoralism, and little else. In Central America, for example, a country is viewed as a "democracy" if its government "came to power through free and fair elections." But this policy ignores the vital dimension of popular participation, "including the free expression of opinions, day-to-day interaction between the government and the citizenry, the mobilization of interest groups," etc. The "underlying objective" of pro-democracy policies is "to maintain the basic order of what... are quite undemocratic societies." Democracy is a means of "relieving pressure for more radical change," but only through "limited, top-down forms of democratic change that [do] not risk upsetting the traditional structures of power with which the United States has been allied."⁵⁹ Democracy policy in El Salvador, more specifically, promoted a form of "democracy" through the Duarte regime that did not touch the power of the military or the landed elite.⁶⁰

American elites prefer "democracy" whenever possible, but will resort to dictatorship in a pinch. The many, many cases in which the U.S. Assistance Program, the School of the Americas, the CIA, the World Bank and IMF, and others from the list of usual suspects have collaborated in just this expedient are recounted, in brutal detail, by William Blum in Killing Hope.⁶¹

Even an authoritarian communist regime is preferable, as an ultimate last resort, to a democracy that pursues a genuinely populist agenda, like the Arbenz regime in Guatemala. To prevent the latter development, the U.S. will risk a country falling to genuine Marxist-Leninists. It is obvious that the primary concern behind the typical Third World intervention was not the danger of an alliance between that country and Soviet strategic power. Had anti-communism been the U.S. government's main preoccupation, and not economic control, its policy would have been much different.

An authoritarian communist regime, like the pigs on Animal Farm, can be quite reasonable in dealing with its neighboring farmers. The Chinese "workers' paradise," a favorite haven for foreign sweatshops, is a prime example.

The chief necessity, as we saw above, is that a Third World country's economic policy be made by a domestic elite that is safely insulated from real accountability to the native population, and at the same time amenable to the policy goals and values of transnational elites in such bodies as the World Bank and IMF. In the last couple of years we have seen this to be true of the new regime in Afghanistan, headed by a man noted for his history of collaboration with the latter agencies; of the Iraqi occupation government, or Iraq Provisional Authority, of which a high priority was the adoption of new laws to enforce international copyrights.

According to Stromberg and the Austrians, the chronic problem of surplus output was not a natural result of the free market, but rather of a cartelized economy. As we saw earlier, J.A. Hobson argued that "over-saving" was caused by "rents, monopoly profits, and other unearned excessive profits," and called, in proto-Keynesian fashion, for the state to step in and remedy the problem of "mal-distribution of consuming power."⁶³ Those making such arguments are commonly dismissed, on the libertarian right, as ignorant of Say's Law.

But Say's Law applies only to a free market. As Stromberg points out, a genuine maldistribution of consuming power results from the state's intervention to transfer wealth from its real producers to a politically connected ruling class. And neo-Marxists' work on over-accumulation has shown us that the evils that Keynesianism was designed to remedy, in a state capitalist economy, are quite real. The State promotes the accumulation of capital on a scale beyond which its output can be absorbed (at its cartelized prices) by private demand; and therefore capital relies on the State to dispose of this surplus.

One of the earliest to describe the the several aspects of the phenomenon was Hilferding, in Finance Capital:

All the elements are here, in rough form: the expansion of production facilities to a scale beyond what the market will support; the need to restrict output to keep up prices, conflicting with the simultaneous need to keep output high enough to utilize full capacity and keep unit costs down; the inability of the economy to absorb the full output of cartelized industry at monopoly prices.

But as Hilferding pointed out in the same passage, the natural tendency in such a situation, in the absence of entry barriers, would be for competitors to enter the market and drive down the monopoly price: "The high prices attract outsiders, who can count on low capital and labor costs, since all other prices have fallen; thus they establish a strong competitive position and begin to undersell the cartel."⁶⁵ This, Rothbard argued, is what normally happens when cartelizing ventures are not backed up by the state: they are broken either by internal defection or by new entrants. That is, in fact, what Gabriel Kolko described as actually happening to the trust movement at the turn of the century. Therefore, organized capital depends on the state to enforce an artificial monopoly on the domestic market.

And, Hilferding continued, cartelized industry is forced to dispose of the surplus product, which will not sell domestically at the monopoly price, by dumping it on foreign markets.

Further, anticipating the various Marxist theories of imperialism, Hilferding argued that this imperative of disposing of surplus product abroad requires the activist state to seek foreign markets on favorable terms for domestic capital. One such state policy is the promotion or granting of loans abroad, either by direct state loans, or by banking policies that centralize the banking system and thus facilitate the accumulation of large sums of capital for foreign loans. Such loans could be used to increase a country's purchasing power and increase its imports; but more importantly, they could be used for building transportation and power infrastructure that Western capital requires for building production facilities in an underdeveloped country.⁶⁸ Of course, such direct foreign capital investment in a country, unlike mere trade, required more direct political influence over the country's internal affairs to protect the investments from expropriation and labor unrest.⁶⁹

The state could also intervene to create a wage-labor force in backward countries by expropriating land, thus recreating the process of primitive accumulation in the West. In addition, heavy taxation could be used to force a peasantry into the money economy, by making them work (or work more) in the capitalist job market to raise tax-money. This was a common pattern, Hilferding wrote: in the Third World as in the West earlier, " when capital's need for expansion meets obstacles that could only be overcome much too slowly and gradually by purely economic means, it has recourse to the power of the state and uses it for forcible expropriation in order to create the required free wage proletariat."⁷⁰

Generally speaking, Third World countries provide numerous advantages for capital seeking a higher rate of return:

In Imperialism, Bukharin returned repeatedly to the theme of government policy in promoting monopoly, thorough such devices as tariffs, state loans, etc. In a passage on the effects of foreign loans, Bukharin anticipated today's use of foreign aid and World Bank/IMF credit as coercive weapons on behalf of American corporations:

As Kwame Nkrumah jibed, so-called "foreign aid" under neocolonialism would have been called foreign investment in the days of old-style colonialism.⁷³

Schumpeter, the theorist upon whom Stromberg relies most heavily, described the system as "export-dependent monopoly capitalism":

This process of "dumping" illustrated "Carnegie's law of surplus": "every manufacturer preferred to lose one dollar by running full and holding markets by selling at lower prices than to lose two dollars by running less than full or close down and run the risk of losing markets...."⁷⁵

In describing the advantages of colonies for monopoly capitalism, Schumpeter essentially refuted his own Comtean argument (discussed below in this article) for imperialism's "alien" status in relation to capitalism.

Stromberg explained: "For American manufacturers to achieve available economies of scale, they had to produce far more of their products than could be sold in the U.S."⁷⁷

One point Stromberg does not adequately address here is that economy of scale, at least in terms of internal production costs, requires only thorough utilization of existing facilities. But the size of the facilities was in itself the result of state capitalist policies. The fact that domestic demand was not enough to support the output needed to reach such economies of scale reflects the fact that the scale of production was too large. And this, in turn, was the result of state policies that encouraged gigantism and overinvestment.

Productive economy of scale is "unlimited" only when the state absorbs the diseconomies of large scale production. Overall economies of scale reflect a package of costs. And those costs are themselves influenced by direct and indirect subsidies that distort price as an accurate signal of the actual cost of providing a service. If the state had not allowed big business to externalize many of its operating costs (especially long-distance shipping) on the public through subsidies (especially subsidized transportation), economy of scale would have been reached at a much lower level of production. The state's subsidies have the effect of artificially shifting the economy of scale upward to higher levels of output than a free market can support. State capitalism enables corporate interests to control elements of the total cost package through political means; but the result is new imbalances, which in turn require further state intervention.

In fairness, Schumpeter touched on this issue in passing, as did Stromberg in quoting him: "a firm which could not survive in the absence of empire was 'expanded beyond economically justifiable limits'."⁷⁸ As this quote indicates, Schumpeter dealt, though inadequately, with the extent to which corporate size was the effect of state intervention. He agreed with Rothbard that cartelization or monopoly, as such, could not exist without the state.

Still, Stromberg greatly overestimates the advantages of large-scale production in a free market. In all but a few forms of production, peak economy of scale is reached at relatively low levels of output. In agriculture, for instance, a USDA study found in 1973 that economy of scale was maximized on a fully-mechanized one-man farm.⁸⁰

Walter Adams and James Brock, two specialists in economy of scale, cited a number of studies showing that "optimum plant sizes tend to be quite small relative to the national market." According to one study, even taking into account the efficiencies of firm size, market shares of the top three firms in nine of twelve industries exceeded maximum efficiency by a factor of anywhere from two to ten. But productive economy of scale was a function primarily of plant size, not the size of multi-plant firms. Any efficiencies of bargaining power provided by large firm size were offset by increased administrative and control costs, and other diseconomies.⁸¹ In fact, Seymor Melman argued that the increased administrative costs of multi-unit and multi-product firms are astronomical. They are prone to many of the same inefficiencies--falsified data from below, and "elaborate, formal systems of control, with accompanying police systems--as state-run industry in the communist countries.⁸²

Describing the inefficiencies of large firms, Kenneth Boulding echoed Melman, but in more colorful language:

In the most capital-intensive industry, automobiles, peak economy of scale was achieved at a level of production equivalent to 3-6% of market share.⁸⁴ And even this level of output is required only because annual model changes (which arguably wouldn't pay for themselves without state capitalist subsidies) require an auto plant to wear out the dies for a run of production in a single year. Otherwise, peak economy of scale would be reached in a plant with an output of only 60,000 per year.⁸⁵

In any case, these figures relate only to productive economy of scale. Increased distribution costs begin to offset increased economies of production, according to Borsodi's law, long before peak productive economy of scale is reached. According to an F.M. Scherer study cited by Adams and Brock, a plant producing at one-third the maximum efficiency level of output would experience only a 5% increase in unit costs.⁸⁶ This is more than offset by reduced shipping costs for a smaller market.

The point of this digression is that the size of existing firms reflects the role of the state in subsidizing increased size by underwriting the inefficiencies of corporate gigantism--as Rothbard pointed out, the ways "our corporate state uses the coercive taxing power either to accumulate corporate capital or to lower corporate costs."⁸⁷ A genuine free market economy would be vastly less centralized, with production primarily for local markets.

Besides the problem of surplus output, the state capitalist economy produces a second problem: that of surplus capital. Not only does monopoly pricing limit domestic demand, and thus restrain the opportunities for expansion at home; but non-cartelized industry is seriously disadvantaged as a source of returns on capital, and therefore opportunities for profitable investment are limited outside the cartelized sectors.

According to Hilferding, "while the drive to increase production is very strong in the cartelized industries, high cartel prices preclude any growh of the domestic market, so that expansion abroad offers the best chance of meeting the need to increase output."⁸⁸ Bukharin later described the capital surplus as a direct result of cartelization, in quite similar language. In Chapter VII of Imperialism and World Economy, he wrote:

Monopoly capital theorists have made worthwhile contributions to the issue of capital and output surpluses. For example, the surplus product of cartelized industry drastically increases the importance of the "sales effort"--what Galbraith called "specific demand management" to dispose of the product.⁹⁰ This underscores the importance of the state in the problem of surplus disposal: without state intervention to create the national infrastructure of mass media and its attendant mass advertising markets, specific demand management would have been impossible.

One issue Stromberg neglects is the internal role of the state in directly disposing of the surplus. The role of the State's purchases in absorbing surplus output, through both military and domestic spending, was a key part of Baran and Sweezy's "monopoly capitalism" model. Its large "defense" and other expenditures provide a guaranteed internal market for surplus output analogous to that provided by state-guaranteed foreign markets. By providing such an internal market, the state increases the percentage of production capacity that can be used on a consistent basis.⁹¹

Paul Mattick elaborated on this theme in a 1956 article. The overbuilt corporate economy, he wrote, ran up against the problem that "[p]rivate capital formation... finds its limitation in diminishing market-demand." The State had to absorb part of the surplus output; but it had to do so without competing with corporations in the private market. Instead, "[g]overnment-induced production is channeled into non-market fields--the production of non-competitive public-works, armaments, superfluities and waste.⁹² As a necessary result of this state of affairs,

Such consumption of output, while not always directly profitable to private industry, serves a function analogous to foreign "dumping" below cost, in enabling the corporate economy to achieve economies of large-scale production at levels of output beyond the ability of private consumers to absorb.

It's interesting to consider how many segments of the economy have a guaranteed market for their output, or a "conscript clientele" in place of willing consumers. The "military-industrial complex" is well known. But how about the state's education and penal systems? How about the automobile-trucking-highway complex, or the civil aviation complex? Foreign surplus disposal ("export dependant monopoly capitalism") and domestic surplus disposal (government purchases) are different forms of the same phenomenon.

Marx described major new forms of industry as countervailing influences against the falling rate of profit. Baran and Sweezy, likewise, considered "epoch-making inventions" as partial counterbalances to the ever-increasing surplus. Their chief example of such a phenomenon was the rise of the automobile industry in the 1920s, which (along with the highway program) was to define the American economy for most of the mid-20th century.⁹⁴ The high tech boom of the 1990s was a similarly revolutionary event. It is revealing to consider the extent to which both the automobile and computer industries, far more than most industries, were direct products of state capitalism. More recently, in the Bush administration, to consider only one industry (pharmaceuticals), two major policy initiatives benefit it by providing state-funded outlets for its production: the so-called "prescription drug benefit," and the provision of AIDS drugs to destitute African countries. In another industry, Bush's R&D funding for hydrogen fuel engines is enabling the automobile companies to develop the successor technology to the gasoline engine (with patents included) at public expense; this not only subsidizes their transition to viability in a post-fossil fuel world, but gives them monopoly control over the successor technology. "Creative destruction" is our middle name.

1. William Appleman Williams, The Tragedy of American Diplomacy (New York: Dell Publishing Company, 1959, 1962) 21-2.

2. Ibid. 26.

3. J. A. Hobson, Imperialism: A Study (London: Archibald Constable & Co., Ltd, 1905) 66.

4. Ibid. 73.

5. Ibid. 74-5.

6. Ibid. 75-6.

7. Ibid. 76-7.

8. Thomas Hodgskin, The Natural and Artificial Right of Property Contrasted (London: B. Steil, 1832) 155-6.

9. Williams, Tragedy of American Diplomacy 27.

10. Ibid. 17.

11. Ibid. 17.

12. William Appleman Williams, The Contours of American History (Cleveland and New York: The World Publishing Company, 1961) 368.

13. Joseph R. Stromberg, "The Role of State Monopoly Capitalism in the American Empire" Journal of Libertarian Studies Volume 15, no. 3 (Summer 2001) 61-3 http://www.mises.org/journals/jls/15_3/15_3_3.pdf Captured October 28, 2003).

14. Williams, Contours of American History 363-4.

15. Martin Sklar, The Corporate Reconstruction of American Capitalism, 1890-1916: The Market, the Law, and Politics (Cambridge, New York and Melbourne: Cambridge University Press, 1988) 82; Karl Kautsky, "Imperialism and the War," International Socialist Review (November 1914), trans. by William E. Bohn http://www.marxists.org/archive/kautsky/works/1910s/war.html Captured September 23, 2002.

16. Williams, Tragedy of American Diplomacy 66.

17. Martin J. Sklar, "Woodrow Wilson and the Political Economy of Modern United States Liberalism," in Murray Rothbard and Ronald Radosh, eds., A New History of Leviathan: Essays on the Rise of the American Corporate State (New York: E. P. Dutton & Co., Inc., 1972) 27.

18. Ibid. 40.

19. Ibid. 62n.

20. Williams, Tragedy of American Diplomacy 179.

21. Ibid. 123.

22. Ibid. 170.

23. Robert Freeman Smith, "American Foreign Relations, 1920-1942," in Barton J. Bledstein, ed., Towards a New Past: Dissenting Essays in American History (New York: Vintage Books, 1967, 1968) 247.

24. Ibid. 247.

25. The rest of this paragraph, unless otherwise noted, is based on Laurence H. Shoup and William Minter, "Shaping a New World Order: The Council on Foreign Relations' Blueprint for World Hegemony, 1939-1945," in Holly Sklar, ed., Trilateralism: The Trilateral Commission and Elite Planning for World Management (Boston: South End Press, 1980) 135-56.

26. Robert Stinnett, Day of Deceit: The Truth About FDR and Pearl Harbor (New York: Free Press, 1999).

27. Williams, Tragedy of American Diplomacy 235-6.

28. Gabriel Kolko, Confronting the Third World: United States Foreign Policy 1945-1980 (New York: Pantheon Books, 1988) 120.

29. United States Participation in the Multilateral Development Banks in the 1980s. Department of the Treasury (Washingon, DC: 1982) 9.

30. Gabriel Kolko, The Roots of American Foreign Policy: An Analysis of Power and Purpose (Boston: Beacon Press, 1969) 72.

31. G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York: Aldine de Gruyter, 1990) 166.

32. Ibid. 271.

33. Leonard P. Liggio, "American Foreign Policy and National Security Management," in Rothbard and Radosh, eds., New History of Leviathan 249.

34. Williams, Tragedy of American Diplomacy 272.

35. George Orwell, 1984. Signet Classics reprint (New York: Harcourt Brace Jovanovich, 1949, 1981) 157.

36. Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (New York: Monthly Review Press, 1974); Walden Bello, "Structural Adjustment Programs: 'Success' for Whom?" in Jerry Mander and Edward Goldsmith, eds., The Case Against the Global Economy (San Francisco: Sierra Club Books, 1996); Bruce Franklin. "Debt Peonage: The Highest Form of Imperialism?" Monthly Review 33:10 (March 1982) 15-31.

37. Payer, Debt Trap 48-9.

38. David Korten, When Corporations Rule the World (West Hartford, Conn.: Kumarian Press, 1995; San Francisco, Calif.: Berrett-Koehler, Publishers, Inc., 1995) 166.

39. Bruce Rich, "The Cuckoo in the Nest: Fifty Years of Political Meddling by the World Bank," The Ecologist (January/February 1994) 10.

40. Holly Sklar, "Overview," in Holly Sklar, ed., Trilateralism: The Trilateral Commission and Elite Planning for World Management (Boston: South End Press, 1980) 28-9.

41. Walden Bello, Development Debacle: The World Bank in the Philippines (San Francisco: Institute for Food & Development Policy, 1982).

42. Joseph R. Stromberg, "Experimental Economics, Indeed" Ludwig von Mises Institute, January 6, 2004 http://www.mises.org/fullstory.asp?control=1409 Captured July 25, 2004.

43. Rich, "Cuckoo in the Nest" 9.

44. Ibid. 9-10.

45. Ibid. 10.

46. Sean Corrigan, "You Can't Say That!" August 6, 2002 http://www.lewrockwell.com/corrigan/corrigan13.html Captured August 6, 2002.

47. Thomas Friedman, "What the World Needs Now," New York Times, March 28, 1999.

48. Paul Baran and Paul Sweezy, Monopoly Capitalism: An Essay in the American Economic and Social Order (New York: Monthly Review Press, 1966) 201.

49. Christopher Layne and Benjamin Shwartz, "American Hegemony Without an Enemy," Foreign Policy (Fall 1993) 12-3.

50. Oliver MacDonough, "The Anti-Imperialism of Free Trade," The Economic History Review (Second Series) 14:3 (1962) .

51. Joseph R. Stromberg, "Free Trade, Mercantilism and Empire," February 28, 2000 http://www.antiwar.com/stromberg/s022800.html Captured May 1, 2002.

52. Layne and Shwartz, "American Hegemony Without an Enemy" 5, 12.

53. Domhoff, Power Elite and the State 113.

54. Noam Chomsky, Deterring Democracy (New York: Hill and Wang, 1991, 1992) 28.

55. Domhoff, Power Elite and the State 145.

56. Ibid. 160-1.

57. William Yandell Elliot, ed., The Political Economy of American Foreign Policy (Holt, Rinehart & Winston, 1955) 42.

58. Thomas Barnett, "The Pentagon's New Map," Esquire March 2003 http://www.thomaspmbarnett.com/published/pentagonsnewmap.htm Captured July 26, 2004.

59. Thomas Carothers, "The Reagan Years: The 1980s," in Abraham F. Lowenthal, ed., Exporting Democracy (Baltimore: Johns Hopkins, 1991) 117-8.

60. Ibid. 96-7.

61. William Blum. Killing Hope: U.S. Military and CIA Interventions Since World War II (Monroe, Maine: Common Courage Press, 1995).

62. Kolko, Confronting the Third World 117, 123.

63. Hobson, Imperialism 75-6.

64. Rudolf Hilferding, Finance Capital, ed. and trans. By Tom Bottomore (London and Boston: Routledge & Kegan Paul, 1910, 1981) 297.

65. Ibid. 297.

66. Ibid. 308.

67. Ibid. 309.

68. Ibid. 317-8.

69. Ibid. 321.

70. Ibid. 319-20.

71. Ibid. 328.

72. Nikolai Bukharin, Imperialism and World Economy (International Publishers, 1929 (written 1915-1917) http://www.marxists.org/archive/bukharin/works/1917/imperial/ Captured October 28, 2003 Chapter VII.

73. Kwame Nkrumah, Neo-Colonialism: The Last Stage of Imperialism (New York: International Publishers, 1965) 51.

74. Joseph Schumpeter, "Imperialism," in Imperialism, Social Classes: Two Essays by Joseph Schumpeter. Translated by Heinz Norden. Introduction by Hert Hoselitz (New York: Meridian Books, 1955) 79-80.

75. Sklar, Corporate Reconstruction of American Capitalism 58.

76. Schumpeter, "Imperialism" 82-3.

77. Stromberg, "Role of State Monopoly Capitalism" 65.

78. Ibid. 71.

79. Schumpeter, "Imperialism" 88.

80. W. R. Bailey, The One-Man Farm, qt. in L. S. Stavrianos, The Promise of the Coming Dark Age (San Francisco: W. H. Freeman and Co., 1976) 38.

81. Walter Adams and James Brock, The Bigness Complex (New York: Pantheon Books, 1986) 33-4, 45-6.

82. Seymour Melman, Profits Without Production (New York: Alfred A. Knopf, 1983) 80.

83. Qt. in Barry Stein, Size, Efficiency, and Community Enterprise (Cambridge, Mass.: Center for Community Economic Development, 1974) 5.

84. Adams and Brock, Bigness Complex 38-9.

85. Mark J. Green, et al., eds., The Closed Enterprise System. Ralph Nader’s Study Group Report on Antitrust Enforcement (New York: Grossman Publishers, 1972) 243-4.

86. Adams and Brock, The Bigness Complex 45-6.

87. Murray Rothbard, "Confessions of a Right-Wing Liberal," in Henry J. Silverman, ed., American Radical Thought: The Libertarian Tradition (Lexington, Mass.: D.C. Heath and Co., 1970) p. 305.

88. Hilferding, Finance Capital 325.

89. Bukharin, Imperialism and World Economy Chapter VII.

90. Baran and Sweezy, Monopoly Capitalism 112-41.

91. Ibid. 112, 142-77, 207-17.

92. Paul Mattick, "The Economics of War and Peace," Dissent (Fall 1956) 377.

93. Ibid. 378-9.

94. Baran and Sweezy, Monopoly Capitalism 220.