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Permanent War Economy

T.N. Vance

The Permanent War Economy

Part III – Increasing State Intervention
[Section A]

From New International, Vol. XVII No. 3, May–June 1951, pp. 131–159.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

“When we are sick we do not let nature take its course, but send for a doctor or surgeon ... As in the physical world, so in the economic world.” Thus spoke R.C. Leffingwell of J.P. Morgan & Co. in a speech reported in the New York Times of March 22, 1934, making it amply clear that the doctor in the economic world is the Federal government, i.e., the state. Not all sections of the American bourgeoisie supported state intervention as the remedy for the depression, but decisive support was forthcoming for the essential features of Roosevelt’s “Dr. New Deal.” Capitalism was seriously ill, to the point of prostration. Traditional methods of recovery, relying upon the “automatic” forces of the market had been tried and failed. Only state intervention could pump blood (profits) into the arteriosclerotic veins of a desperately sick economy.

The depression has been succeeded by the Permanent War Economy, but state intervention in the economy remains. In fact, it has increased until state monopoly capitalism provides an alternative description for the new stage of capitalism. Inasmuch as some degree of state intervention has obtained ever since the existence of national states, the nature, purposes and consequences of state intervention require somewhat detailed analysis to reveal precisely what is new in the situation.

The growing state intervention in the capitalist economy, which distinguishes it from the traditional or laissez-faire phase of capitalism, is an outgrowth of financial imperialism. This was clearly perceived by Lenin (Imperialism: The Highest Stage of Capitalism, p. 25) when he wrote:

“Capitalism in its imperialist stage arrives at the threshold of the most complete socialization of production. In spite of themselves, the capitalists are dragged, as it were, into a new social order, a transitional social order from complete free competition to complete socialization. Production becomes social, but appropriation remains private. The social means of production remain the private property of a few. The general framework of formally recognized free competition remains, but the yoke of a few monopolists on the rest of the population becomes a hundred times heavier, more burdensome and intolerable.”

The intercorporate arrangements that caused production to become social at the turn of the twentieth century have first been regularized and then controlled by the state as the twentieth century has unfolded. The preservation of “the yoke of a few monopolists” is now inconceivable without the direct and indirect support of the state, whose ubiquitous interference in daily life manifests itself in a thousand and one ways. At first, as Lenin indicates, “... state monopoly in capitalist society is nothing more than a means of increasing and guaranteeing the income of millionaires on the verge of bankruptcy in one branch of industry or another.” (Imperialism, p. 39) State intervention in the Great Depression of the 1930’s was characterized exclusively by the objective of restoring the profits of the millionaires, and in this it was largely successful.

Events have a logic of their own. The restoration of the rate of profit could not be followed by an abandonment of state intervention. On the contrary, like a patient who has recovered from an almost fatal illness solely through taking medicine containing habit-forming drugs, the enduring “health” of capitalism demands the continuation of the “habit-forming drug” of state intervention. This becomes obvious as the economy of depression is followed by the Permanent War Economy. There are differences, however. Not only is state intervention more extensive, but it is no longer confined to restoring the profitability of “sick” industries. The most decisive sections of capital are subjected to state control and direction, but the reward is the virtual guarantee of the profits of the bourgeoisie as a class.
 

THE GROWTH OF THE STATE BUREAUCRACY and the increasing consumption of surplus value by the state in the form of increasing taxes are both evidence of increasing state intervention and we shall examine the facts below. Increasing domination of the apparatus of state control by representatives of monopoly capital is an even more impressive feature of the new capitalism. Lenin, with his remarkable insight into the function of capitalism in its imperialist stage, also anticipated this development. Referring to finance capital as the “personal union” between banking and industrial capital, he states (Imperialism, p. 42): “The ‘personal union’ between the banks and industry is completed by the ‘personal union’ between both and the state.” (Italics mine – T.N.V.) And the union between finance capital and its state is of the most personal nature possible through the appointment of outstanding representatives of “big business” to positions of authority in the administration of virtually all state controls affecting production, distribution and prices – and therefore profits.

The rationalization for state intervention in the depression was provided by John Maynard Keynes, who showed why traditional wage-cutting methods could not restore effective demand and the rate of profit. According to Keynes, restoration of effective demand could not be left to private control of investment decisions. “I conclude,” says Keynes in The General Theory of Employment, Interest, and Money (p. 320), “that the duty of ordering the current volume of investment cannot safely be left in private hands.” Thus, the role of the state is a steadily increasing one: “I expect to see the State ... taking an ever greater responsibility for directly organizing investment.” (The General Theory, p. 164)

Despite certain of his critics, especially the unreconstructed advocates of laissez-faire, the purpose of state intervention in the Keynesian system is to preserve capitalism. A perfectly fair and thoroughly valid appraisal of Keynes is provided by the American Keynesian, Seymour E. Harris, in his introduction to The New Economics: Keynes’ Influence on Theory and Public Policy (p. 5):

“... it may be well to insist that Keynes was essentially a defender of capitalism. Only the stupidity of those whom he supports can account for any other interpretation. Keynes indeed offers government a larger degree of control over the economic process and a larger degree of operation than the old-fashioned classical economist; but his motive is to save capitalism, not destroy it ... Keynes wanted government to assume responsibility for demand, because otherwise the system would not survive. [My Italics – T.N.V.] It was possible to have both more government activity and more private activity – if unemployment could only be excluded. And above all, Keynes would not remove the foundations of capitalism: free choice, the driving force of the quest for profits, the allocation of resources in response to the price incentive.”

Keynes’ own appraisal of his role accords quite closely with that of Harris. In the concluding notes to The General Theory (pp. 380–381), he writes:

“Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative. [Italics mine – T.N.V.]

“For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

“The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated – and, in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.” [Italics mine – T.N.V.]

The passage is remarkable, both for its typical expression of Keynes’ fundamental thesis that only state intervention can save capitalism from destroying itself through mass unemployment and, for an otherwise first-rate economist, his complete inability to understand the origin and nature of profits. Why “effective demand” periodically is “deficient” requires an insight into the inner workings of capitalism impossible to attain without such basic Marxian tools as the labor theory of value, the laws of capital accumulation and the falling average rate of profit. Of this Keynes is incapable for, with all his emancipation from the fetishism of Marshallian economics, he still attributes the ability of capital to increase its magnitude (profits) to its “scarcity.” Thus (The General Theory, p. 213), “the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money.”

While Keynes’ “theory” of profits is, of course, sheer nonsense, it does not detract from his role as chief theoretician justifying state intervention. To quote the leading American Keynesian, Alvin H. Hansen, in an essay entitled, The General Theory, contained in Harris’ book previously cited

“David McCord Wright, in a recent article on the Future of Keynesian Economies (American Economic Review, June 1945), put his finger quite accurately on the basic change in outlook effected by the ‘Keynesian Revolution.’ We cannot follow, he says, the main lines of Keynes’ argument and say that the capitalist system, left to itself, will automatically bring forth sufficient effective demand. Keynes’ ideas ‘derive much of their unpopularity because they form the most widely known arguments for intervention even though such intervention may be quite capitalist in nature.’ It is the analysis of the problem of aggregate demand, together with the implications of this analysis for practical policy, which challenges the old orthodoxy.”

Under the Permanent War Economy, state intervention in the capitalist economy not only expands, but also takes on added functions. The problem is no longer one of buttressing effective demand to eliminate unemployment. From an economy being undermined by deflationary forces, there has occurred a complete shift to one in which inflationary forces predominate. State intervention must therefore, in the first instance, now be concerned with controlling production and prices. Demand has become too effective and must be curbed; the state must also take such measures as are necessary to allocate supplies so as to achieve the desired balance between the war and civilian sectors of the economy.

The increase in state functions, accompanied by a loss in the effectiveness of the capitalist market, has meant a colossal expansion in government expenditures, which, in turn, has necessitated a phenomenal increase in taxes. The relationship of government income to current production and surplus value from 1939 to 1950 is shown in Table I.

In 1939, at the beginning of the Permanent War Economy, total government receipts were $15.4 billion, with Federal government receipts two billion dollars less than State and local government receipts. Starting in 1941, Federal government receipts rise sharply, dwarfing the relatively modest increase in State and local government receipts. By 1950, while the latter had more than doubled compared with 1939, the former had increased more than six times, with the result that total government receipts had more than quadrupled.

Even after government receipts of social insurance contributions, which have virtually tripled since 1939, are subtracted from total government receipts, total government receipts of taxes of all forms, including certain fees and related payments, have increased from $13.3 billion in 1939 to an estimated $56.5 billion in 1950. In other words, the cessation of hostilities, aside from minor declines in 1946 and 1949, has not been accompanied by any diminution in the state’s appetite for surplus value. This becomes crystal clear when we examine columns seven and nine in Table I, portraying the share of government income in both total production and surplus value.

In 1939, one-sixth of current production and one-third of surplus value went to the state (all branches). This represented, so to speak, the fruits of state intervention in the depression. Under the impetus of the rapid increase in war outlays and increasing government controls, these proportions rose rapidly until in 1943 almost one-fourth of current production and nearly one-half of surplus value went to the state. In spite of steady declines from 1943 to 1949, there has been no question of restoring pre-war relationships. Even in 1949, the state consumed 21.4 per cent of current output and 38.6 per cent of surplus value. In 1950, these percentages increased to an estimated 22 and almost 40 per cent, respectively. With the present rapid increase in war outlays and Federal tax rates, it is obvious that these ratios will climb rapidly toward their wartime peaks.
 

ALTHOUGH IT IS TRUE, as shown in the last article on Declining Standards of Living, that a sizable portion of taxes comes from the working classes, the bourgeoisie contribute the major share to the upkeep of the state. Hence, the loud hue and cry from the all sections of the capitalist press for “elimination of government waste.” This is quite understandable when roughly two out of every five dollars accruing to the bourgeoisie go to support its state. Admittedly, there is considerable room for numerous savings in government operations without in any way impairing the functions of the state. Yet, before we shed tears for the “plight” of the American bourgeoisie, we would do well to examine its profits position. For, despite the huge overhead cost of the capitalist state, the bourgeoisie has never been so well off financially as it is today.

Naturally, when state expenditures exceed state receipts, i.e., income derived from current production, the difference must be covered by state borrowing, representing essentially income derived from past production. The periodic rapid increase in the government debt becomes a potent source of inflationary pressure on the economy. In fact, state income and expenditures, or fiscal policy, are by far the most powerful single factor in determining the level at which the economy operates. Besides exerting great influence on the size of the national product, the nature of state fiscal policies in large measure ordains the composition of the national product among the various classes. To a significant extent, therefore, the personnel of the state bureaucracy becomes, as it were, an arena for the conduct of the class struggle. This is obviously the case where class pressures are exerted on Congress and State and local legislatures. It is equally true and, in certain cases, more so, when policy can be influenced or modified by administrative action, within the Executive branch of government. The recent attack of the United Labor Policy Committee on “big business domination of the Defense Program,” and particularly on Defense Mobilizer Charles E. Wilson is a perfect illustration of the corroding impact of the Permanent War Economy on the functioning of capitalism, as well as the inordinate power that is concentrated in the hands of a single individual who is merely an appointee.

Controlling supply and prices, to mention only the obvious, requires a far larger state bureaucracy than the relatively simple function of buttressing effective demand, which was the chief rôle of the state during the depression. The war economy also demands a permanent increase in the military bureaucracy, aside from the periodic need to assure an adequate supply of cannon fodder. As a consequence, omitting from consideration the period of World War II itself, the state’s claim on the employable labor force has increased markedly, as can be seen from Table II.

The total employed labor force, including the armed forces, has in creased from 46,120,000 in 1939 to 61,457,000 in 1950, an increase exceeding fifteen million, or approximately one-third. This is without reference to the fact that the total employed labor force reached a peak of 65,220,000 in 1944 at the height of the war. In part, this was accomplished by a sharp reduction in the amount of unemployment and, in even larger part, by absorbing new entrants into the labor force arising from the growth in population.

Meanwhile, total State and local government employment increased from 3,287,000 in 1939 to 4,000,000 in 1950 (despite a slight decline during the war) – an increase of close to 25 per cent. This, however, is less than the increase in the total employed labor force. The growth in the state bureaucracy, as is only natural, is largely accounted for by the increase in total Federal government employment, which rose from 1,286,000 in 1939 to 3,730,000 in 1950 – an increase of almost 200 per cent. Thus, total Federal government employment, which was two million less than total State and local government employment in 1939, almost equalled the latter in 1950. The result is that total government employment has increased from 4,573,000 in 1939 to 7,730,000 in 1950 – a rise of 69 per cent during the first eleven years of the Permanent War Economy.

The government employment ratio, set forth in column seven of Table II, tells the story so far as the over-all growth in the state bureaucracy and its relationship to total employment is concerned. From a ratio of less than ten per cent in 1939, meaning that only one employed person out of ten was on a government payroll, there occurred a steady rise to 12.2 per cent in 1941 and then a phenomenal increase during the war to a peak of 27.1 per cent in 1945. In other words, during the height of World War II, more than one employed person in every four was being supported by the state! Following the end of the war, there was, naturally, a rapid decline in the government employment ratio, until it reached a low of 11.9 per cent in 1948, with an increase since then to 12.6 per cent in 1950.

Again, the highly significant fact is that there is no return to the prewar relationship, even in the case of the government employment ratio. Instead of one out of ten belonging to one or another segment of the state bureaucracy, as was the case in 1939, we now have one out of every eight employed persons in this category. We have already exceeded the government ratio that prevailed in 1941 and are moving rapidly toward the relationship that existed in 1942. For the government employment ratio to increase beyond this level, approaching the fantastic heights of 1943–1945, would undoubtedly require participation by American imperialism in an all-out war effort. Nevertheless, the warnings are apparent on every hand that manpower, even more than strategic materials, will be the limiting factor in the current effort of American imperialism to contain and then to destroy Stalinist imperialism. Parenthetically, this is the decisive reason why American imperialism must seek and maintain allies, and why ‘the MacArthur policy, to the extent that it would jeopardize this fundamental strategic aim, is suicidal.

The composition of government employment, as shown in Table II-A, reveals the crucial importance of manpower and demonstrates that not even American imperialism can maintain an economy of “guns and butter, too” if we assume that all-out war is in the offing.

Let us suppose, for example, that an all-out war effort against Stalinist imperialism will compel about the same manpower utilization by the military and Federal civilian bureaucracies as took place in 1944, and that it is desired at the same time to sustain the civilian economy at current high levels. An increase of almost eleven million in Federal employment over 1950 would be needed. Even allowing for full absorption of the unemployed, and the normal increase of several hundred thousand a year in those seeking work for the first time, there would still be a shortage of between seven and eight million. Even reducing State and local government employment to the 1944 level would save less than 900,000. Thus, private civilian employment would have to be reduced by six to seven million, or an equivalent amount of married women, retired workers and others not presently considered part of the labor force would have to be induced to seek and to accept employment. In either case, the impact on civilian output, aside from any shortages in materials or productive capacity, would be substantial.

Abstracting from the war situation itself, however, there has been approximately a tripling in the size of the Federal civilian bureaucracy, which rose from 571,000 in 1939 to an estimated 1,568,000 in 1950. Even more dramatic has been the increase in the military bureaucracy, which increased from 342,000 in 1939 to an estimated 1,500,000 in 1950 – a growth of well over 300 per cent. As a permanent feature, the size of the military forces (without regard for the current build-up in connection with the Korean war) exceeds the number employed in public education. What a sad and fitting commentary on the moral bankruptcy of capitalism! Of at least passing interest is the sizable increase in the number of State and local government non-school employees, which declined from 1,877,000 in 1939 to 1,700,000 in 1944 and then rose to an estimated 2,342,000 in 1950 – representing a growth of more than 25 per cent from 1939 to 1950. Even the cost of local police and bureaucratic functions increases!

Although the figures are still relatively small, the increase in employment in government enterprises, from a combined total of 516,000 in 1939 to an estimated 863,000 in 1950, is noteworthy – not only because this is an increase of almost 70 per cent, and nearly 80 per cent for Federal government enterprises alone, but because of the steadily rising trend. The sphere of nationalized production is gradually being enlarged, and this is not just a question of the post office, but rather of public utilities and atomic energy and, to some extent, transportation. It is no longer solely a question of nationalizing those industries that are incapable of operating at a profit. A new element has been injected and it has arisen only because of the dual aims of the war economy. Private capitalists either lack the resources or cannot be entrusted with such vital war tasks as development of synthetic rubber and atomic energy. Profitability is not the decisive consideration, but survival. The state, as the executive committee of the bourgeoisie, can do what no single capitalist or group of capitalists can do. Unlimited sums can be poured into any project which is deemed essential, whether it is profitable or not.

More than eleven per cent of government employment is currently to be found in nationalized enterprises. The process of erosion has begun, even in America, the stronghold of capitalist private property. While some of the more class-conscious capitalists are prone to question where it will all end, they are all consoled by the actuality of profits exceeding anyone’s imagination.
 

HAND IN HAND WITH THE INCREASE in taxes and the permanent growth in the state bureaucracy go an enormous increase in business and a fantastic increase in profits. This can readily be seen from an examination of the data for corporate sales, profits and taxes, shown in Table III.

We have shown the data for corporate sales, profits and taxes from 1929 to 1950, in order to demonstrate conclusively how the Permanent War Economy, with all its increasing state intervention, has paid off handsomely lor the bourgeoisie. Although corporate tax liability for the decade 1929–1938 was negligible, totaling $9.2 billion for the entire ten years, corporate profits could not reach 1929 levels by a very sizable amount. Even corporate sales remained below 1929 despite state intervention during the depression. For the first ten years of the Permanent War Economy, however, corporate sales went up by leaps and bounds, reaching a level of $381.3 billion in 1948 and by 1950 were almost three times the level of 1929! Even when allowance is made for the depreciation of the dollar, the absolute increase in physical sales is fairly impressive. At the same time, corporate taxes totalled $97.5 billion for the first decade of the Permanent War Economy – a burden ten times that of the previous decade. Nevertheless, corporate profits after taxes increased from $20.3 billion in the decade 1929–1938 to $113.5 billion in the decade 1939–1948, an increase in the mass of net profit amounting to 459 per cent!

The superiority of war and war economy over the New Deal and public works, so far as the capitalist class is concerned, is unmistakably clear. As a matter of fact, the inclusion of 1929 profits distorts our comparison of the depression era with the Permanent War Economy. Proper procedure would begin the comparison with the year 1930. For the nine-year period, 1930–1938, corporate profits after taxes equalled $11.9 billion, while corporate sales minus gross profits totalled $881.8 billion, yielding a rate of profit of 1.3 per cent. Take any nine years of the first twelve years of the Permanent War Economy, and what a difference! From 1939 to 1917, for example, corporate profits after taxes equalled $92.6 billion, while corporate sales minus gross profits totalled $1,762.3 billion, yielding a rate of profit of 5.3 per cent.

The pump primer of increasing war outlays produced a doubling of sales and, even with the gigantic increase in taxes, a 678 per cent increase in the mass of net profits and a 308 per cent increase in the rate of profit! Increasing state intervention does, after all, have some good points. The Permanent War Economy has yielded a profit bonanza that is without precedent in a highly developed capitalist nation and is almost embarrassing to the bourgeoisie. And, in complete confirmation of the trends previously developed in the rate of surplus value and relative class standards of living, the picture improves from the point of view of the bourgeoisie. A new peak of $33.9 billion before taxes and $20.9 billion after taxes was reached by American corporations in 1948. Even the slight decline of 1949 left profits above the already swollen wartime levels. It remained, however, for 1950, aided in no small measure by the outbreak of the Korean war, to reach new historic profits and sales peaks. For the first time in history, corporate sales exceeded $400 billion. Corporate profits before taxes are estimated at $39.8 billion, with corporate profits after taxes likewise reaching a new high of $22.1 billion. Compare these figures with the increase in wages, even after allowance for rising personal income taxes, and it is clear that state intervention under the Permanent War Economy has restored both the mass and rate of profit. Capitalism has revived, at least so far as the bourgeoisie are concerned. If only it can be sustained indefinitely, ponder the theoreticians of the bourgeoisie!

Despite the “inventory recession” of the first half of 1951, the heavy industries, the “war babies,” are not worried. “Current profits in some industries continue to be terrific,” states Carlton A. Shively, stock market commentator of the New York World-Telegram and Sun, in his column of May 1, 1951.

“That is true of oil, copper, steel, motor, rubber and the and chemical industries. Many units in those industries are reporting for first quarter far higher net profits as compared with the same quarter of last year, and the net profits as compared with fourth quarter, even after excess profits taxes, show little or no decline. Without the excess profits taxes the net profits for many corporations would be so large they would cause anxiety on many counts.” (Italics mine – T.N.V.)

There can be no doubt that the wasting of resources, both human and natural, in war and preparation for war is a profitable business (so far) for the American bourgeoisie. The manner in which the war economy is run, with negotiated contracts (between big business and its own representatives in the government) and huge tax concessions through rapid amortization, means that profits are, in effect, guaranteed by the state. How the bourgeoisie and their apologists have the effrontery to complain about those unions that have cost-of-living escalator clauses in their contracts is virtually beyond comprehension. Yet, it is only when we examine what has happened to the rate of corporate profit that the real skullduggery of the bourgeoisie and the immense profitability of the Permanent War Economy become apparent.
 

RATES ARE FAR MORE SUSCEPTIBLE OF juggling than absolute figures, although we can be reasonably certain that the mass of corporate profit has not been overstated. What this mass of profit is divided by determines the rate of profit. Four different methods of computing the “rate of corporate profit” are shown in Table IV.

There is first the concept of the National Association of Manufacturers, the super trade association of certain segments of the big bourgeoisie. Not content with computing the rate of profit on sales, the NAM adjusts net profits after taxes for changes in inventory valuation, on the theory that increases in inventory due to price changes are fortuitous and really not part of the profits of the bourgeoisie, especially when prices are going up. This approach is rationalized by emphasizing that low-cost inventory must be replaced at current high costs. Which is well and good, but the corporation that stocked inventory at relatively low costs still obtains a windfall profit, on which it has to pay income taxes, whether a compensating future loss is anticipated or not. And in an inflationary period, inventory losses due to price declines are not very likely.

A more important fallacy in the NAM method of computing the rate of profit is that when the mass of profit is divided by sales, the effect is to count profit itself as a cost of production. This is necessarily so since the sales price includes the profit. Despite widespread profiteering and cries that the Office of Price Stabilization is attempting to control prices through control of profits, profits are a result and not a cost of production. To treat profits as a cost of production is equivalent of demanding a perpetual pyramiding of profits, for the larger the profit the larger the increase in profit that is required to maintain the former rate of profit. Nevertheless, even the NAM figures cannot conceal the fact that the Permanent War Economy has done a pretty good job of restoring the rate of profit. Still, a rate of four or five per cent is less than the 6.4 per cent of 1929 and sounds sufficiently small to be inconsequential in its effect. The prevalence of figures, especially in press releases, calculating the rate of profit on sales is a tribute to the propaganda of the bourgeoisie and to its ability to promote its own self-interests, but is hardly conducive to scientific accuracy.

The mass of profit must therefore be divided by sales minus profit in order to begin to arrive at the rate of profit. This is done, without any changes for inventory valuation, in both the middle columns of Table IV. In both cases, the mass of profit is measured as the net profit after taxes. In the first case, however, corporate sales minus net profits are used as the denominator; in the second case, corporate sales minus gross profits are taken as the proper base on which to calculate the rate of profit. A rate of profit of six per cent is almost equal to the performance of 1929, and considerably better than the five per cent or less shown by the NAM. The difference, percentagewise, is substantial, especially if we take the figures for 1950, which we have already shown is the peak profit year in the history of American capitalism. The NAM approach yields a rate of profit of but 4.4 per cent. Under our first method, we obtain a rate of corporate profit of 5.7 per cent, which is almost 30 per cent higher than the NAM would show. Under our alternative method, the rate of profit becomes six per cent, which is more than 36 per cent higher than the NAM’s figure!

The difference between our two methods, of course, is that in the former taxes are, in effect, treated as a cost of production, while in the latter the base on which profits are calculated is without reference to taxes. A moment’s reflection will show that it is no more proper to consider taxes as a cost of production than profits. It is true that one of the great weaknesses of the present corporate tax structure is that most corporations are able to pass on higher taxes in the form of higher prices, thereby contributing to the inflation and maintaining the same mass of profit and, in some cases, the same rate of profit as existed before any given increase in corporation taxes. This, again, is hardly a justification for treating a result of production, for taxes (on corporations) are merely taking a portion of profit or surplus value, as a cost of production.

Arriving at a true official rate of corporate profit therefore requires subtraction of both profits and taxes from sales before the rate of profit is computed. The rate of profit, in terms of obtaining a true picture of what is actually happening in the economy, therefore ought to be calculated before taxes, both with reference to the mass of profit and to volume of capital employed to obtain a given profit. This is done in the last column of Table IV. The picture that emerges is considerably different from any previously discussed. Since 1941 the rate of corporate profit has exceeded 1929! For the war years and for 1950, the rate of profit runs in the neighborhood of eleven to twelve per cent – a level about 50 per cent higher than in 1929. The rate of profit in actuality is thus two and almost three times the modest picture shown by the NAM. That the bourgeoisie have had to disgorge half or almost half of their profits to their own state for the conduct of their war and preparations for their future war has precisely nothing to do with the degree to which the working classes are exploited in the process of production.
 

IT IS ONLY THE RATE OF PROFIT before taxes that gives us an inkling of what a life-saver the Permanent War Economy has been to the bourgeoisie. Even this is far from the whole picture, for the simple reason that profits are only one form of surplus value. The capitalist who makes profits must share his cut of surplus values created by the workers with the capitalist who obtains interest, with those who obtain rent and royalties, with those whom he pays huge salaries to manage his wealth, and with the state which demands taxes to protect him and his system. The true rate of profit for all industry can thus be obtained only by dividing the mass of surplus value by the total amount of capital, both constant and variable, employed in production.

To arrive at meaningful figures for the Marxian formula for the rate of profit, s divided by (c plus v), is not easy, but it can be approximated through the following technique. Having already derived the mass of surplus value in the last article, together with the mass of variable capital, it is only necessary to obtain the magnitude of constant capital. We know of no method whereby this can be done directly, as there would be far too many gaps in building up the total mass of constant capital on an industry-by-industry basis. Even if reliable and comprehensive capital investment figures could be obtained, we would still lack information on the turnover of capital – a factor of critical importance in developing the rate of profit.

Accordingly, it is necessary to start with sales data, and to try to build up total sales or receipts for all industry. Inasmuch as the market price of a commodity represents its value, the proceeds from sales necessarily embody the values transferred by the employment of constant capital in production and the values created by the employment of variable capital or labor power in production. This approach conceptually yields a true gross national product for all industry. It may be objected that in many industries the market price of a commodity deviates from both its production price and value. This is of no consequence for we are seeking the rate of profit for all industry. The deviations of market price from value must cancel out; otherwise, there would be no profit or surplus value for the capitalist class as a whole. This, incidentally, is the pitfall on which all non-Marxian theories of profit collapse, for on top of their faulty theoretical approach they are immersed in the analysis of the single entrepreneur or firm. While marginal utility, scarcity, speculation, or risk-taking may on occasion explain the fortuitous profits of an individual firm, such theories cannot begin to explain how it is possible for the entire capitalist class to start with a given quantity of capital and to emerge from the process of production and circulation with an amount of capital exceeding the starting sum by a definite and measurable increment.

The data on corporate sales are readily available and were presented in Table III. Our problem therefore resolves itself into one of estimating the sales or receipts of unincorporated enterprises. Here we can begin with a Commerce series on “Total Business Sales,” which covers only retail and wholesale trade and manufacturing. These data, with a breakdown shown between corporate and noncorporate sales, are presented in Table V.

The data themselves are of more than passing interest. As one would expect, unincorporated enterprises play only a negligible role in the volume of manufacturing sales, but are fairly significant in wholesale trade, accounting for thirty per cent or thereabouts of total volume. In retail trade, however, noncorporate sales are as important as corporate sales, actually accounting for more than half of total retail sales in every year under consideration except 1950. In other words, it is primarily in retail trade that the bulk of the middle classes exists, a testimonial to the survival qualities of the corner grocery store and gasoline station.

The most interesting fact about these figures is the tendency for the importance of manufacturing to increase as war outlays (and controls) increase. Thus, while total manufacturing sales were less than the combined total of retail and wholesale trade sales in 1939, accounting for 46 per cent of total business sales, they increased steadily as war outlays and controls gathered momentum, reaching a peak of 57 per cent of total business sales in 1943 and 1944. Then, there was a rapid decline until in 1946 the prewar rate of 46 per cent prevailed again. The basic tendency for wasteful distribution to diminish in importance, and for manufacturers to sell directly to the government as well as to exert a squeeze on middlemen, reasserted itself following 1946, with the result that in 1950 manufacturing: sales were 49 per cent of total business sales.

In a small way, these trends are corroborative evidence of the loss of effectiveness of the capitalist market as an allocator of resources. Looked at another way, while total wholesale trade sales increased 232 per cent from 1939 to 1950, and total retail trade sales augmented by 234 per cent during the same period, total manufacturing sales grew by 284 per cent. This is merely another way of saying that under the Permanent War Economy, aside from periods of all-out war, when the increase is even more striking, manufacturing has grown at a rate 20 per cent faster than distribution. The propensity of capitalism to dig its own grave through increasing industrialization and greater proletarianization of the labor force is thus strengthened under the Permanent War Economy.

To noncorporate sales for manufacturing, retail and wholesale trade, it was necessary to add sales or receipts for the remainder of unincorporated business activity, such as gross farm income, unincorporated construction activity, and the like. While there may be some duplication in the figures, and even some omissions, the gross figure for unincorporated business shown in column two of Table VI appears to be reasonable both as to level and trend.

 
Part III   B

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Permanent War Economy

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