Politics: Rates, Taxes & the Working Class (1975)

From the March 1975 issue of the Socialist Standard

The swindler Horatio Bottomley, when he was a Liberal MP in 1907, proposed in Parliament measures to finance Old Age Pensions for all people over sixty-five. The chief proposals were an Employer’s Tax of a penny in the pound on all wages; super-tax on investments; Stamp Duty on share certificates; a tax on racing and betting stakes; and State appropriation of all dormant bank balances and securities.

His biographer Alan Hayman says: “It is a tribute to the acumen of Horatio Bottomley that nearly every one of his suggestions has subsequently passed on to the statute book in some form or another.” The acumen obviously came from the frauds Bottomley had already been involved in: having done down a number of wealthy individuals, he knew that if revenue on a big scale was wanted it could only be had from the capitalist class on the assumption that it was in their ultimate interests to pay.

It is a pity that more people have not understood the position so realistically. The idea that taxes are paid by the working class to upkeep institutions which belong to them is one of the myths by which the majority are misdirected towards non-issues. Of course phraseology plays a major part; the revenue from rates and taxes is always described as “public money” and “the taxpayers’ money”. As with terms like “the nation” and “the British people”, it is necessary to ask what is meant by “public” and who are the taxpayers. The case which the Socialist Party of Great Britain has put forward consistently since 1904 is that rates and taxes are a burden not on the working class but on the capitalist class; and this remains just as true in 1975.

Working Out Wages

Many workers would at first glance treat this as preposterous. They are possibly “having to pay” several pounds a week in income-tax deducted from their wages; the prices of petrol and cigarettes are high, and other prices are pushed up, by tax additions. At the present time local rates are expected to go up by fifty per cent. or even more. These are seen as inroads on the money people have to live on, and there has been talk of organized refusal to pay rates if the increases are as great as expected.

The first and most important question is: what are wages? The capitalist system is based on the ownership of the means of production and distribution by a minority, who therefore live by owning. The great majority, having no such resource, have to live by selling their labour-power — that is, working for wages. Thus, labour-power is a commodity like anything else, and its price like all prices is the expression in money of its value — what went into producing it and is needed for reproducing it. At the lowest level that can mean enough money for the food and the rent, but in practice it means meeting many requirements. If the unskilled worker’s labour-power is a cheap product sold at a low price, the professional worker’s salary (equals wage) takes account of his training and the components of his “standard of living”.

But whatever their amount, wages are obviously what is received: the actual payment, not a hypothetical one. Workers cannot help but be aware of this. No-one will be persuaded that £30 is £40 and that the latter figure is a “true” wage; the opposite is the case. The illusion created over “tax deductions” is that if only they could be evaded or reduced in some way, the worker would be so much better off. The single man with a big gap between gross and net pay sees that his colleague with a family has a smaller gap, i.e. takes home more wages, though he probably has less to spend in the end. If only some benevolent tax legislation would provide the best of both worlds!

Paring and Portions

It should be recalled that large numbers of workers were not involved with income-tax at all before the last war; like keeping a bank account, it was regarded as a sign of being well-off. In Studies in an Inflationary Economy (1966) F. W. Paish gives tables showing the percentages of total earned-income tax drawn from different income groups before and after the war. In 1938, 87 per cent. came from the first (the highest) 500,000, and all the tax was attributed to the first 5 millions or less than half of all employed persons. By 1959 the first 500,000 were responsible for only 42.3 per cent. The first 5 millions provided 72.3 per cent., and the range covered the first twenty millions.

This is part of an argument by Paish that there had been a marked equalization of incomes. In fact, the changes in the figures for earned incomes at the top and tax drawn from them reflect changes in the taxation system more than anything else. But, if one granted that the working class as a whole had become concerned in direct taxation since 1938, these figures show what a small concern it is. In 1938 more than half of earned incomes paid no tax; in 1959, with the number of employed persons doubled, roughly three- quarters paid only just over one-quarter of the tax.

What tax deductions achieve is an apportionment of income among the working class. Their introduction early in the war (linked with the post-war credits scheme, a fraud which Bottomley would have envied) had the object, besides raising money, of restricting consumption: they were reductions in wages. The workers most hit by them were, of course, the unmarried ones whose spending money was cut. This remains the case, and it means that the discontent of married workers with homes and families, which is the main strength of wage demands, is checked to some extent.

Incidentally, a report in The Observer of 16th February bears out that tax deductions are cuts in wages. Wedgwood Benn, the Secretary of State for Industry, addressed a Labour meeting at Hillingdon:

Although ostensibly attacking the Tories, Mr. Benn was evidently warning the Chancellor [Denis Healey] that he would not accept any brake on consumption. He denounced as a ‘pre-war remedy’ the idea of a wage cut.

Under Mr. Healey’s plans for bringing down inflation, the level of take-home pay after tax would have to rise less fast than prices.

Paying for What ?

Realistically, therefore, income-tax as far as the working class is concerned is a more sophisticated version of Bottomley’s proposed Employer’s Tax on wages. Not much thought is needed to see that it is paid by employers in any case. It is applied to individual wage-packets to effect varying payments according to status — single, married with no children, married with several to support, etc. — from a notional common wage. (We are not here considering national insurance contributions, which generally are returned to the workers as benefits.)

One argument is that workers do pay taxes but receive benefits in return; thus, that food and housing subsidies and public services are, as it were, purchases on an equalled-out, socially “just” basis. Certainly it is true that subsidies and services are provided by the Government out of taxation, but the beneficiaries over the costs are the capitalist class. Subsidies are an important means of keeping down the cost of living, and but for them the wages bill would be much higher.

Moreover, they are a means again of apportioning. Those chiefly affected by them are workers with families. Why should capitalists have to pay workers ail round to meet a cost, when those to whom it applies can be selected ? This is the purpose of housing subsidies, rent rebates, family allowance and so on, as well as subsidies on food.

What should always be borne in mind, nevertheless, is that the main burden of taxation is for government expenditure on the civil service, armaments, law enforcement and the rest of the general maintenance of capitalism. This is what the capitalist class must support. That is not to say they pay tax willingly. On the contrary, they try continually to have the costs of government reduced — usually by one section seeking to have part of the burden transferred to another section. The differences between the main political parties are largely differences over taxation and expenditure: hew the money shall be collected and how it shall be spent.

Taxes and Prices

Where indirect taxation is concerned, here again it is commonly assumed that the taxes on commodities are an extra charge to the purchaser. In fact price increases caused by taxes are no different from increases due to other factors. Although the introduction of Value Added Tax in Britain has made the prices of many commodities rise (though some have fallen, or risen less than they would otherwise have done), few people would think of it as a reason for continuing inflation; and even fewer would think of taxation as a reason for the difference in prices between 1914 or 1939 and now.

Government policy over indirect taxation in the past has always been to seek industries where monopoly or near-monopoly conditions ruled, demand for the products was fairly inelastic, and high profits being steadily made; and then to “cream off” some of the profit. It is by no means true that the tax must be passed on as an addition to retail prices. In Benham’s Economics (1967) F. W. Paish says:

In practice, however, a monopolist seldom charges a price high enough to maximize his profits . . . The normal response of producers is to “pass on” the tax to consumers by adding it to their selling price. They may discover after a time that their sales fall off so much that their best course is to reduce their prices somewhat, but to begin with they are likely to add on the full amount of the tax.

The position may appear slightly different with VAT, since the tax takes the form of a straight percentage addition to the retail price. The increasing practice is for prices to be stated “including VAT” instead of naming a separate price to which tax is added. In other words, the producer or seller still seeks the best price he can get, taking the tax he must pay into consideration: prices are prices, just as wages are wages.

The Rates Bill

To workers who are householders, it seems undeniable that rates are an increasingly heavy burden on them. Since there are misunderstandings over what rates are for, it may be worth explaining that they pay the running costs only of local government administration and services: staff salaries, welfare services, the maintenance of schools, roads, sewers, etc. The maintenance of Council housing is normally a separate fund which must be supported from the housing income.

Capital expenditure — the building of houses, flats and schools, the provision of roads and sewers etc. — does not come from rates. The large sums required for these are borrowed by local authorities, if and when the projects are approved by the government department involved. Local government is the branches of central government; its work implements the policies of the central government, by whom its expenditure is controlled.

Rates are a charge on property, and before rent restriction (starting in 1914) diminished private landlords the rates were paid by them from rent revenues. Since that time, house rents have divided into “inclusive” and “exclusive” of rates; in the latter case the tenant pays the rent to the landlord and the rates to the local authority. It is a matter of landlords’ book-keeping — most local authorities still offer a 10 per cent,.reduction for rates paid en bloc, but not many landlords think it worth while. The effect has been to create the impression that it is the tenant who is the ratepayer; whereas he does not own the house, and is only paying in two parts what he would have paid in total.

The position has been further complicated by the growth of owner-occupation, to the point where alternatives to the rating system are now being urgently considered. The most popular suggestion, though made vaguely, is a “local income tax”. Insofar as a great many workers have thought (encouraged by deceitful political catchphrases like “a property-owning democracy”) that acquiring their own house was a step upward, it is a tragedy that they acquire only crippling mortgage repayments and are caught in a system of charges intended for bigger fish altogether. When an alternative system is produced, it will show where the burden of supporting government correctly lies.

Socialism, not Reform

One of the hopes of working people when they vote is for reductions in rates and taxes. They hope for "tax concessions”, i.e. that their take-home pay will be increased by the deductions being lightened; and for changes in the situation over rates so that they have to pay out less. Their belief is that these changes would make them substantially better off.

A simple answer is to look at times, not so many years ago, when few workers were conscious of income-tax problems or received rate demands and prices were lower. Were they better off ? Alternatively one may ask if, supposing it were possible for a government to make tax and rate alterations which favoured the working class, the employers would readily accept the consequent jump in wages ? Hardly. Any fall in the cost of living has always been followed by the forcing down of wages, as happened in the early nineteen-twenties. The general lowering of wages was, in a short time, practically equivalent to that of the cost of living. Farm workers’ wages, which were 46s. a week in 1920, were 29s. by 1924 and remained at that level up to 1939.

Reformers exist by persuading workers that adjustments and reallocations within capitalism can change their situation. Before the war Dean Inge wrote in the Evening Standard: “Popular education is taking the bread out of our mouths.” He was voicing the belief of workers who considered themselves “middle-class” that they were being ruined by taxation; the same section of the working class now complains of being ruined by the rates instead.

The level of taxes makes no difference to the continual struggle to keep abreast of the cost of living, as the history of legislation in our lifetime shows. It is an error to think that rates, taxes and prices are an issue for the working class; the only issue is Socialism.

Robert Barltrop

The Proletariat (The Working Class). By Karl Kautsky (1907)

From the October 1907 issue of the Socialist Standard

Link to Part 1.

Specially translated for The Socialist Party of Great Britain and approved by the Author.

2.—Wages.

Wages cannot be so high as to make it impossible for the capitalist to carry on his business and to live from it. For under these circumstances it would be more advantageous for the capitalist to give up business altogether. Hence the wages of the worker can never rise high enough to equal the value of his product. They must always leave a margin, a surplus value, for only the prospect of this margin induces the capitalist to buy labour-power. Thus in capitalist society wages can never rise so high that the exploitation of the worker comes to an end.

But the margin, the surplus value, is greater than is generally supposed. It consists not only of the profit of the manufacturer, but also much that is reckoned as cost of production and sale, viz., ground rent, interest on invested capital, discount for the merchant who disposes of the goods produced by the industrialist, taxes, rates, etc. All this comes out of the surplus value which the product of the worker yields above his wages. This margin must consequently be considerable if an undertaking is to prove profitable. Wages can, therefore, never rise sufficiently high to enable the worker to receive in his wages anything approaching the value he has created. The capitalist wage system means under all circumstances exploitation of the worker. It is impossible to abolish exploitation so long as that system exists, and even where high wages are being paid the exploitation of the worker must be extensive.

But wages hardly ever reach the highest possible point, more often, however, they fall to the very lowest. That point is reached when the wages of the worker cease to purchase his very necessaries of life. If the worker not only starves but starves quickly, his work ceases altogether.

Between these two limits wages fluctuate, becoming lower as the customary wants of life of the workers decrease, as the supply of labour-power in the labour market increases, and as the power of resistance on the part of the workers decreases.

Generally wages must, of course, be high enough to keep the worker in a fit state to work, or better said, wages must be so high as to ensure to the capitalist the measure of labour-power needed by him. Wages must hence be high enough to make it possible for the worker not only to maintain himself in a fit state to work but also to reproduce children fit to work.

The economic development shows the tendency—so favourable to the capitalist—of reducing the cost of maintenance of the workers and of thereby decreasing wages.

Skill and strength were in times gone by indispensable to the worker. The period of apprenticeship of the handicraftsman was a very long one, and the cost of his maintenance was considerable. Progress in the division of labour and in machine construction caused special skill and strength in production to become superfluous. This progress makes it possible to replace skilled by unskilled—that is cheaper— labour-power; it makes it also possible to replace the labour of men by that of weak women, and even children. Even in manufacture this tendency was perceptible; but only with the introduction of machinery begins wholesale exploitation of women and of children of tender age, exploitation of the most helpless of the helpless who fall victims to revolting ill-treatment and spoliation. Here we get acquainted with a new characteristic of the machine in the hands of Capital.

The wage-worker who did not belong to the family of the employer had originally to receive in his wages not only the cost of his own maintenance but also that of his family if he were to be in a position to reproduce his species, to regenerate his labour-power. Without this reproduction of labour-power the heirs of the capitalist would find no proletariat to exploit. But if the wife, and, from early childhood, also the children of the worker are in a position to provide for themselves, the wages of the male worker can almost entirely he reduced to the cost of maintenance of his own person without the slightest danger to the reproduction of labour-power. And the labour of women and children has the further advantage of their being less capable of resistance than men. Moreover, through their entering the ranks of labour the supply of labour-power in the labour market is tremendously increased.

The labour of women and children does not only lower the cost of maintaining the worker, it reduces also his power of resistance and increases the supply of labour-power—in short, it has the effect under any of these circumstances of causing the wages of the worker to fall.

3.—The Dissolution of the Proletarian Family. 

The industrial labour of woman in capitalist society means the entire destruction of the worker’s family life without substituting a higher form of family. The capitalist mode of production, in most cases, does not dissolve the individual working-class household, but it deprives it of all its brightness, leaving only its dark side with the waste of woman’s energy and her exclusion from public life. The industrial labour of woman to-day does not mean her relief from household duties, it means adding a fresh burden to those she already bears. But one cannot serve two masters. The household of the worker goes to wreck and ruin if his wife has to assist in earning subsistence for the family ; but what present society puts in place of the individual household and the individual family is miserable refuse: the soup-kitchen and the day-nursery in which the leavings of the physical and mental nourishment of the rich are thrown to the lower classes.

Socialism is accused of aiming at the destruction of the family. Well, we know that each particular mode of production has its particular form of household to which corresponds a particular form of family. We do not consider the present form of family to be the last, and expect that a new form of Society will also develop a new form of family. But such expectation is something altogether different to an endeavour to dissolve all family ties. Those who destroy the family —who not merely want to do, but actually DO destroy it before our eyes—are not the Socialists but the capitalists. Many a slave-owner in the past has torn husband from wife, parents from children able to work : but capitalist methods surpass the abominations of slavery ; they tear the suckling from the mother, forcing her to entrust her infant to the care of strangers. And a society in which that occurs daily in hundreds and thousands of cases, a society that has specially founded “charitable institutions patronised by the ‘nobility'” for the purpose of making it easier for the mother to part from her child—such a society has the audacity to reproach us with intending to dissolve the family, because we are convinced that household-work will develop into a special branch of industry, thereby transforming the character of the household and of family life.

4. Prostitution.

Besides being reproached with the intention of dissolving the family we are accused of aiming at community of women. This reproach is as void of foundation as the other. We assert on the contrary that the very opposite of community of women, of sexual compulsion and immorality, namely, ideal love, will form the basis of all marital relations in the Socialist Commonwealth, and such love can generally prevail only in such a state of Society. But what do we see to-day ? The want of resistance on the part of women who have hitherto been confined to their households and have mostly but a faint conception of public life and the power of organisation—is so great, that the capitalist employer dare pay them wages which do not suffice for their sustenance, and incite them to prostitution as a means of augmenting their wages. An increase in the industrial employment of women has everywhere the tendency of causing au increase in prostitution. In the modern state of the fear of God and pious morals there exist entire “flourishing” branches of industry in which the women workers are so badly paid that they would have to starve to death were they not to stoop to prostitution. And the employers declare that just upon these low wages depends the possibility of their successful competition, and that higher wages would rain them.

Prostitution is as old as the contradiction between poverty and riches. But in ages gone by prostitutes occupied in the social scale a position falling between those of beggars and scamps, constituting a luxury in which Society could afford to indulge, and the loss of which would by no means have endangered the very existence of that society. To-day it is not only the women of the loafing proletariat but working women, who are compelled to sell their bodies for money. This selling of their bodies is no longer only a matter of luxury, no, it has become the basis of industrial development. In the capitalist system of production prostitution becomes one of the pillars of Society. The defenders of this society themselves practise community of women, the vice of which they accuse us; of course, community with women of the Proletariat. And this method of community of women has taken root so deeply in present society that its representatives declare prostitution to be a necessity. They cannot conceive that the abolition of the Proletariat must mean the abolition of prostitution, because they cannot possibly conceive a society without community of women.

The community of women of to-day is an invention of the “higher” grades of Society, not of the Proletariat. This community of women is one of the ways of exploiting the Proletariat. It is not Socialism, but its very opposite.

Blogger's Note:

It was the German SPGBer, Hans Neumann, who translated Kautsky's writings from the German into English for the Socialist Standard.

Prohibition. (1925)

From the December 1925 issue of the Socialist Standard

We are not opposed to the Prohibition— of swipes and adulterated water. Nor do we, like the brewer and his friends, pretend that Prohibition is a matter of vital concern to the workers. There is a Socialist view on this matter, but, like our views on all questions, it is in conflict with those of the reformer. The brewer endeavours to convince us that drinking is a noble and commendable act, for the same reason that the Nonconformist cocoa manufacturer boasts of the food value of his product and supports the Temperance movement. Profit greed determines what they think good for the dear worker, and the Temperance reformer with the anti-Prohibitionist reflect their interests. “Drink causes poverty! ” says the former, in his inverted reasoning. The fact is that the workers are born poor and must remain poor within the capitalist system because wages never provide more than a bare existence even to the life abstainer. “Without drink,” the reformer tells you, "money formerly so spent could be used to purchase things more necessary.” He incidentally plays upon a weak spot by the glad news that such alternative expenditure will mean more wor-r-r-k. In face of the ever-increasing army of unemployed, willing to accept a job at the lowest possible price, the idea that the workers would continue to receive the same wage after a lowered cost of living—is a joke. The sum spent on drink is an item in the average wage; if it should become no longer necessary, the abstainers’ previous advantage will disappear. As a result of Prohibition, those engaged in the brewing industry, including auxiliary workers, publicans, barmen, maids, cork and glass makers, sign writers, carmen, etc., would lose their employment. In actual practice this is the fate of the present unemployed whose numbers are in excess of the requirements of capitalistically produced wealth. Some claim that drink causes wretchedness, but the pathologist could prove quite the reverse. We know by experience that poverty surroundings cause depression. Drink is merely an attempt to counter its effects. In a city like Glasgow, where poverty and slumdom stalk naked and unashamed, the craving for stimulants almost becomes a disease with some of the very poor. Unable to afford ordinary spirits, they resort to methylated spirits as. a substitute. It is vile living conditions that cause people to become hopeless sots; it drives them to the glamour of the tavern. Whilst capitalism persists, most moderate drinkers will continue by habit to take to the present method as the line of easiest resistance to obtain a makeshift social intercourse and infuse a little colour into a grey world. As to the need in the future for alcoholic beverages, that can be safely left to a generation wise enough to realise that this earth provides the only opportunity that they will have to enjoy paradise. Those who produce the best will have the best, for with the coming of a sane system of society the cheap and nasty pleasures reserved the workers will be laid to rest with all the sordidness of the present system. 

W. E. MacHaffie

Must wages come down? (1931)

From the January 1931 issue of the Socialist Standard

A most deadly weapon in the armoury of the politicians who defend the interests of the employing class is the assertion that wages must come down because the present rates of pay are “more than industry will bear.” It is put forward by Liberals and Tories, and has been supported by the expert advisers called in to help the Labour Government. It is accepted by large numbers of workers, and is more than half-believed by the Labour leaders themselves. It is not true.

The Capitalist class are not poor, nor are they becoming poor. The powers of wealth production are not declining, but increasing. The Seventy-second Report of Inland-Revenue (Table 47) tells us that the gross income assessed to income tax (excluding weekly wage-earners) amounted, in the year ended March, 1929, to an estimated total of £2,765,000,000. That figure is the largest amount in any year since the War. It is £41 million more than the highest preceding year, and is £650 million more than the first complete year after the War (1919-1920). Sir Herbert Samuel, in a letter to The Times, published on December 1st, stated, on the authority of Professor A. L. Bowley, that in spite of the so-called depression the total national income in 1930 would probably be £100 millions more than the national income in 1924, the year when the last comprehensive calculation was made by Professor Bowley and Sir Josiah Stamp. This will put 1930 only slightly below 1928 and about on a level with 1927.

The vast surplus wealth of the rich minority, at a time when about two and a quarter million workers are jobless and dependent on unemployment pay or relief, is well illustrated by the huge sums of money seeking investment. The Daily Express on December 11th drew attention to the fact that “bank deposits are very considerably higher than they were this time a year ago. People are hoarding instead of investing. Money is so cheap as to be almost unlendable.” The Financial Times on November 10th gave details of one recent loan after another which had been heavily over-subscribed. A typical example is the London Electric Railway issue. The company wanted to raise about £3,500,000. They received offers totalling nearly £140 millions, or forty times as much as they wanted. It is true that some applicants would apply for more than they expected to receive, but they would do this only because they were aware of the superabundance of money seeking investment. This is nowhere denied. Mr. Snowden, in the House of Commons on October 30th, stated categorically, in reply to a question, “There is no shortage of credit.” The Evening Standard's City Editor (November 25th) estimated that about £1,000 millions had been offered for investment in response to invitations to invest less than a quarter of that amount. This had all happened in the first ten months of 1930, the year of “depression.” In Australia, another “depressed” country, a £28 million Government loan in December was promptly over-subscribed.

What, then, is this “ trade depression ”?

It is a condition which arises normally and inevitably out of Capitalism. It is a crisis of over-production. Millions of the world’s workers are suffering want because the world is glutted with goods which no one will buy. In spite of what was described by the Observer on June 22nd as ”frantic efforts to limit production,” the competing combines which struggle for control of production are faced with bursting grain elevators, overflowing oil tanks, over-stocked warehouses, and shops filled with unsaleable goods. Ships lie idle, farmers are burning wheat in Manitoba, and South America is convulsed with political upheavals owing to the suffering caused by vast quantities of unsaleable coffee, grain, nitrates, etc.

The owners of industry have allowed the workers they employ to produce more food, more fuel, more ships, more raw material, more machinery and more of everything than they can sell. Not that there are no people in need—far from it. Three-quarters of the population have never known the pleasure of satisfying their modest desires to the full. It has been estimated by American Trade Unions that this winter will see one-sixth of the men, women and children of the U.S.A. on the verge of starvation. Contrast that with the American Standard Oil Companies’ estimated record profit in 1930 of £57 millions.

Those who are in need lack money to buy. Those who have surplus money have no more needs left unsatisfied. That is the key to the depression. That is why prices are forced down and workers are thrown out of work by the hundred thousand. There they will stay until the accumulations of goods are slowly disposed of. Then the anarchic system of producing faster than the market can absorb will begin again.

Lower wages will not remedy this evil. Lower wages aggravate it. With less money to spend, the working class buy less than before of the goods offered for sale. The employers increase their incomes as a result of the reduced wages bill, but much of the increase merely goes to swell the fund of money which is surplus to their requirements. They seek to invest it, but find fields for investment limited. Nobody will extend plant and factories at a time when the existing ones are shut down because the owners cannot find buyers for their goods.

Since 1921 the total annual wages of the workers have been reduced by over £550 million. That has not solved the unemployment problem. It has merely served to make the rich richer than before.

There is, then, no economic necessity for lower wages, but is it possible in the existing situation for the workers to resist demands made by the employers for wage reductions?

Let us first make clear what wages are. The owners of the means of production (the land, factories, and so on) are the owners of all the wealth which the workers produce. They give to the workers wages which cover their cost of living. Nevertheless, there is, for most workers, a margin between the standard of living and the cost of providing the bare physical necessities of life. The  employers seek constantly to reduce the level of wages in keeping with any fall in the cost of living, and to press wages down still further towards the bare physical minimum. If there were no resistance, they would do this. The workers’ economic organisations, their Unions, can be centres of resistance. They may, as happened in Germany only a month or two ago, play the humiliating role of inviting wage reductions. On the other hand, they may put up a stiff resistance. If they do this, the employers will pause and count the cost before embarking on an attempt to force acceptance of their terms. It is true that the employers have behind them their wealth and the forces of the State to starve the workers into submission, but it is also true under certain conditions that they will hesitate to launch out on this costly and provocative course. It is admitted that increases of wages give the employers added inducement to employ more labour-saving machinery. But here, again, it is worth noticing that the vast accumulations of capital which to-day are sunk in plant and machinery make a factory re-organisation scheme more expensive than it was when the amounts of capital so invested were less.

The first essential is that the workers should clear their minds of the employers’ propaganda which harps continually on the so-called depression. The Capitalist class as a whole are not depressed. They are richer than they have ever been.

Ever since 1920 we have had it drummed into our ears that industry is depressed. But the Economist newspaper’s index of the rate of dividend on ordinary shares shows a remarkable stability at about 10 per cent. The average rate in 1919 was 10.7 per cent. Since then it has never risen above 11.1 per cent, or fallen below 8.4 per cent. In 1929 it was 10.5 per cent., in spite of falling prices. We have been solemnly warned that the unfortunate Capitalists were living on their capital. But Sir Josiah Stamp (Times, November 20th, 1930) estimates the total national wealth in 1928 as being over £18,000 millions, as compared with only £14,310 millions in 1914. He has deducted from his 1928 figure the National Debt of £6,400 millions,: the gross total being £24,445 millions.

Again, the workers must not be deceived by the specious argument that if they refuse to accept lower wages they will lose their employment altogether. If the Capitalist class have need to preserve any industry or branch of industry which is in financial difficulties, they will themselves find excuses for protecting it with tariffs or for giving it subsidies. They will keep it on its feet, whatever the level of wages. Thus we see the Capitalist class prepared to give State grants to air service companies and (in Australia) to gold-mining companies. In 1926 we saw the Conservative Government heavily subsidise the mines. And we have seen the inland telegraphs maintained permanently at a big annual loss because the Capitalist class have need of that service. Millions of pounds were paid as subsidies to overseas cable companies.

On the other hand, if the Capitalist class have no need to maintain a particular branch of industry, they will let it close down in spite of lower wages. Where combination is far advanced, it is now quite common for the federated employers to buy out particular units simply in order to close them down. “National Shipbuilders’ Security, Ltd.,” is a company formed for the express purpose of buying and dismantling redundant shipyards on behalf of the shipbuilders in general.

The arguments referred to. above are used by the employers to make their wage reduction policy easier of attainment. The arguments need only to be examined for their purpose to be understood.

But something more is required of the workers. Even the most effective action on the economic field, i.e., that action which is based on an appreciation of the common interests of the workers as a class, cannot solve the fundamental problem. Only Socialism can do that.

And if the workers would turn their attention to Socialism, the whole form of the struggle with the employing class would change. So far, despite heroic fights by Trade Unionists against wage reductions, the employing class have never had reason to fear that the working class were turning away from their belief in the Capitalist system. But when a considerable body of workers learn the lesson that no reformist policy or party is of any use, and begin to understand and support the demand for Socialism, we can confidently anticipate a less aggressive and less cheese-paring attitude on the part of employers. They will, when that time comes, be anxious to surrender part of their wealth in the hope that by so doing they may stave off the day when they must yield it all. We shall then be well on the way to the acquisition by society of the means of wealth production now privately owned by a privileged class.

Edgar Hardcastle

How Capitalism Works (5) (1979)

From the May 1979 issue of the Socialist Standard

How Capitalism Works (5): Keynes and Capitalism

An enterprise's rate of profit is the ratio of the amount of profits it makes, say in a year, to the money-value of its assets at the beginning of that year. The average rate of profit of the whole economy is the ratio of total profit to total capital. The rate of profit would tend to fall if over time the amount of the total capital tended to increase at a faster rate than the total amount of profits.

This fall tends to happen as a result of the increasing amount of old wealth that must be used as fixed equipment in producing new wealth (or, what amounts to more or less the same thing, to the increasing size of the means of production in relation to the amount of human labour needed to operate them). Because there are so many offsetting factors, this tendency for the average rate of profit to fall only becomes evident in the very long run and so could not explain the onset of a much shorter term occurrence like a slump.

What else, then, could cause the rate of profit to fall? The ratio would also be reduced if for some reason the amount of profits made on the same amount of capital were to fall. Since profits are what is left after part of the newly created wealth has been allocated for consumption by wage-earners, then they would fall if wages were to rise.

The law of wages tends to keep wages down to what the workforce must consume to reproduce itself and keep fit for work, but wages are a price and so subject to the influence of supply and demand. Wages are the price of the skills wage-earners sell to enterprises so the market demand for these skills depends on the amount and kind of work enterprises want done. As the economy expands and as more and more workers are employed, then the level of more or less full employment of the workforce will be reached. At this point the market demand for workers' skills will begin to exceed the market supply: wages will tend to rise, eating into profits. The rate of profit would then tend to fall.

Rising wages eating into profits is only one possible cause. Another would be a miscalculation by a group of enterprises about the size of the market they supplied. The resulting oversupply in that particular market, and the resulting cutback in production for it would have a cumulative effect on the profits of other groups of enterprises and so on the economy as a whole. The particular market oversupply would then, through affecting general profit prospects, have become a general market oversupply and lead to idle productive capacity.

Despite the regular occurrence of slumps the general trend has been for the amount of wealth in the world, especially means of production, to increase. This means that in practice enterprises have been able to find profitable investments. These they have found in two main areas. First, in meeting the market demand for new equipment which is continually being created as the competitive struggle for profits forces enterprises to innovate in order to reduce costs. Second. in meeting the market demand created by the extension of exchange relationships into more and more parts of the world.

Slumps, in this light, appear as temporary setbacks to economic growth from which the system always recovers. Slumps (during which total market demand falls short of existing productive capacity) are the opposite of booms (during which total market demand exceeds existing productive capacity). Booms and slumps are in fact two sides of the same coin: they are complementary phases of the business cycle and the course which long-term growth follows.

But can there not be steady growth? Although the decision-making structure of the exchange economy is chaotic, the structure of production itself is extremely systematic with each workplace being an inter-dependent part of a world-wide system. This is why decisions made by enterprises controlling one part of this system are bound to affect the profit prospects of enterprises controlling other, especially closely related parts. It is also why a miscalculation in one sector can have a cumulative effect on the whole economy.

Leaving aside any instability introduced by changes in the rate of profit, in order to avoid booms and slumps there would have to be balanced growth of all the sectors of the economy. Each sector would have to expand at a given rate determined by its place in the productive system. This would require a degree of central co-ordination quite impossible so long as control over the parts of the system is scattered among thousands and thousands of profit-seeking enterprises. The anarchy which results from this makes balanced growth quite impossible.

SAVING CAPITALISM?

The man generally credited with having "saved capitalism" is the English economist John Maynard Keynes whose main work appeared in i936, Writing in the middle of the great slump of that period, he could see that Say's Law, as the dogma that total market demand would always be equal to existing productive capacity, was wrong. He showed how, due to what amounted to hoarding of profits (which he called "liquidity preference"), there could be a lack of market demand. He went on to claim, however, that this could be permanent, that even in the long run existing productive capacity would not necessarily be fully used. This places Keynes in the camp of the lack-of-market-demand school of economists.

Keynes was saying in effect that there was no reason to believe that the system would always recover from a slump: the lack of market demand might be permanent and lead to a permanent slump, to state of stagnation. He believed that the tendency of the economic system was towards such a state of stagnation. As the amount of capital in the world increased, he argued, so the rate of profit would tend to fall, thereby discouraging investment. At the same time people would be choosing to spend a smaller and smaller part of their rising incomes on consumer goods, thereby discouraging consumption. But this would mean, he went on, a falling market demand since market demand is composed of investment (purchase of producer goods) and consumption (purchase of consumer goods).

Keynes' solution was for the State to intervene and take steps to encourage investment and consumption. Investment could be increased by the State increasing its spending, while consumption could be raised by taxing the incomes of the rich and giving some of it to the poor (on the principle that many poor people will spend more on consumer goods than a few rich people).

A theory of permanent slump was obviously attractive in the 1930s. But even then it was wrong. One way or another — by the planned physical destruction of "excess" productive capacity on a massive scale, if need be — capitalism can in time always recover from a slump. It was the war and then repairing the damage the war caused — not Keynesian policies — which ended the slump of the 1930s. Since then the world exchange economy has resumed its growth, still punctuated by booms and slumps, misleadingly called "stop-go" to give the illusion that these fluctuations are the result of deliberate government policies rather than the normal working of the unplannable exchange economy. The Keynesians have the cheek to claim that the very event which proved their stagnation thesis wrong — the post-war re-expansion of capitalism — was the result of the adoption of their policies. Keynes did not "save capitalism" since, in the absence of a successful movement to abolish it, the system was capable of "saving" itself.

That the profit-motivated exchange economy tends towards a permanent slump brought about by a chronic lack of market demand has long been a view popular among reformers of the system. Keynes seemed to have confirmed their views: they in turn, have tacitly accepted his views. For in explaining, as many of them do, capitalism's survival by State spending on armaments they are in effect conceding Keynes' claim that States can engineer the "full employment" of the workforce within their frontiers.

That States do in fact possess such a power is very much open to question. They do not intervene in the capitalist economy from outside but rather are themselves essential parts of it, and have to rely for every item of wealth they consume on what they can obtain from enterprises, non-State as well as State. This means that State spending is ultimately limited by the amount of profits made by enterprises, or rather by the amount of profits it can take from enterprises without thereby reducing their incentive to invest or damaging their competitive standing in the world market. For, as explained in a previous article, State spending is a charge on profits, a cost enterprises have to bear and one which, like all costs, they want kept to a minimum.

STATE SPENDING

It is true that over the years State spending, as a proportion of total market demand, has tended to increase. But this has not been the result of a conscious policy aimed at saving capitalism from collapse. Rather has it been due to enterprises handing over to the State the responsibility for carrying out certain and increasingly costly non-productive services like health and education and to the increasing cost of maintaining and equipping the armed forces (another essential service as far as enterprises are concerned).

A growing number of people directly employed by the State in non-productive work will have some effect on the working of the exchange economy because the kind of work the State employs these people to do is not so dependent on market conditions as work done for enterprises. So will the growing demand of the State for buildings and equipment (schools and hospitals as well as armaments) to carry out this work. But these developments would mean that a slump, insofar as it affects employment, might tend not to spread as far as it would if wage-earners were employed by enterprises rather than the State. On the other hand, States do have to cut their spending when enterprises are suffering from lowered profits and are curtailing production, precisely because profits are the ultimate source of the money which States spend. This happens even though, in Keynesian theory, they should rather be increasing their spending.

The idea behind the State spending during a slump is that the State should take over and spend the profits enterprises are hoarding. If States were to do this, then it is possible they might help to speed recovery by closing the gap between market demand and existing productive capacity. But States do not act in this way because to tax away the hoarded profits of enterprises during a slump would only make matters worse. Enterprises would be discouraged from investing even that part of their profits they had continued to. The increased State spending would then be offset by the decreased investment of enterprises.

States prefer to get the money to spend during a slump by printing it themselves. Actually they do not usually do it as directly as that. What they do is to increase the National Debt by borrowing more and then repaying part of the debt and the interest in newly-printed money (or rather money-tokens). This of course is a policy of currency depreciation or inflation. Keynes believed that the rise in prices caused by depreciating the currency in this way would encourage enterprises to invest rather than hoard their profits. Whether or not he was right, one result of Keynesian doctrines has been permanent inflation, it is no accident that prices have been rising in Britain since 1940, the year of the first Keynesian budget. For, although States have not adjusted their spending in accordance with Keynes' theories, they have chosen to finance some of it by a policy of inflation. This has certain internal political advantages (Keynes himself pointed out that it is easier to keep wage-earners' living standards down by raising prices more than money wages than by reducing money wages in line with falling prices), but has definite external disadvantages. Rising prices at home means increasing costs in relation to the world market, a fact which places another limit on the extent of State spending.

Even if the State were itself to take over direct responsibility for all investment by establishing a state capitalist economy within its frontiers, it could still not escape the dictates of the world market. The State enterprises set up in place of the old non-State ones would still have to take part in the world-wide competitive struggle for profits. State spending would still be limited by how successful these enterprises were in that struggle. And the State would still be compelled to keep the consumption of its wage-earners to a minimum, as the experience of States like Russia which have tried this policy has shown.

Rather than States being able to control the capitalist economy as Keynes taught, it is the other way round. States have to trim their policies to the changing conditions brought about by the world capitalist economy as it expands and contracts.

The world economy needs to keep millions of people, some permanently and some for shortish periods, out of non-productive as well as productive work. A pool of unemployed is needed for two reasons. First, so that competition among wage-earners for jobs will prevent wages from rising and eating into profits. Where unemployment has been relatively low, as it was until recently in some of the industrialised parts of the world, the States there have implicitly recognised this by adopting policies of planned wage restraint as a substitute. Secondly, enterprises need a reserve of unemployed workers they can call on to work for them during the periods when they are expanding production. The bulk (but by no means all of the world's unemployed) are located in the industrially backward parts of the world which have supplied large numbers of extra workers for enterprises in the industrially advanced parts. Hence the migration of the unemployed to Europe and North America.

THE CASE AGAINST CAPITALISM

The full charge sheet against the world exchange economy with regard to the way it forces people to use the world's resources can now be drawn up. It reads:

(1) That, although there has been a long-term expansion of productive capacity and oil output, this has been only a fraction as fast and as extensive and as safe as technology has made possible.
(2) That, although in the long run the existing capacity has been more or less fully used, this has been broken by regular periods of under-use.
(3) That, in agriculture and in industries faced with declining markets, there has been deliberate destruction of productive capacity and regular destruction of wealth.
(4) That millions and millions of human beings who could have contributed to producing useful things have been prevented from working at all.
(5) That millions and millions more human beings have been allowed to work but only to engage in wasteful exchange and coercive activities.
(6) That the existing productive capacity has been used to produce considerable amounts of waste.

These are all serious charges and all of them are proved. They point to the need for the world's people to recover control over the productive system by abolishing the exchange economy altogether and replace it by a society that will allow them to plan the production of wealth in their own interests and to allocate the products for their own individual and collective use.

Adam Buick