US Monopoly Capitalism: an Irrational System

2. 2
Agenda
1. Globalization
2. Is US capitalism an “irrational” system?
3. The Sales Effort
4. Government Absorption of Surplus
5. Labor and Monopoly Capital
6. Conclusion
7. Questions

3. 3
Background Information
The term globalization comes forth in the 1970s and 1980s to designate a complex of processes and changing forces, that act on a
global scale and transpose national borders, moved by the evolution of international trade and the development of new technologies
along the twentieth century – the so-called “third industrial revolution”.
In this process, companies transpose national borders to produce and commercialize their products, and turn into multinational
companies, on a first stage, and transnational companies, on a second stage. They become so huge and powerful that one comes
to discuss the implications of these processes to the different national States.
“…avec la configuration globale, ce sont les États qui vont se faire concurrence pour attirer les investissements étrangers sur
leur territoire. Ce retournement de situation est le produit d´une double évolution. D´un côté, les gouvernements ont lancé à
partir du milieu des années 1980 une grande réforme libérale des codes ou lois sur les investissements étrangers. De l
´autre, les firmes ont modifié leur stratégie d´investissement à l´étranger en abandonnant progressivement la stratégie de
marché pour une stratégie globale.“ (Charles-Albert Michalet)
Before this scenery, the role of the State as government is challenged. The State-government looses its centralizing [instead of
keeping its absolute power], and comes to be one more player in the market. This does not imply, however, a decreasing of its
importance as a manager of politics and of strategic decisions, fundamental roles of the State governments.
“…states will remain the key actors in international relations, and, even if their influence is declining relative to other actors,
the patterns of interactions the major states create will still be of central importance in the years to come.” (Prof. Chris Brown,
LSE)
The term globalization designates a complex process of changing forces that
reshape the International scenario and the roles of the global players
Globalization
Source: Coutinho, Rodrigo: “Globalization and its consequences, alternatives and paths to Brazil.” (Rio de Janeiro: CEBRI, 2008)

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Background Information
On this international arena, in which globalization is an irreversible reality, and from which States may benefit, some alternative
politics [economic and / or social] can be adopted by countries for its effective insertion in the process of globalization
“…a wider agenda for international relations will be addressed, in which the traditional concerns of power politics take second
place or, at the very least, are placed in a wider context.” (Prof. Chris Brown, LSE)
“The state is being subtly deformed as an instrument of human well-being by the dynamics of globalization, which are pushing
the state by degrees and to varying extents into a subordinate relationship with global market forces. (Falk, 1996)
Globalization, thus, present states with alternatives on how to play according to
the new “rules”; being not participating in the process not an option
Globalization
Source: Coutinho, Rodrigo: “Globalization and its consequences, alternatives and paths to Brazil.” (Rio de Janeiro: CEBRI, 2008)

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• “The giant firms that dominate our economy were in a permanent war with their
employees, customers, and the entire society.”
• According to the author, Baran and Sweezy1) updated Marx’s work:
• By documenting behaviors and effects of the huge multinational firms whose
dominating power Marx saw on the horizon
• Adam Smith warned his readers in The Wealth of Nations that the “joint
stock” companies (corporations) emerging in Britain threatened the atomistic
competition he championed
• “We must recognize that competition (…) has ceased to occupy that position,
not only in Britain but everywhere else in the capitalist world. Today the typical
economic unit in the capitalist world is not the small firm producing a negligible
fraction of a homogeneous output for an anonymous market but a large-scale
enterprise producing a significant share of the output of an industry, or even
several industries, and able to control its prices, the volume of its production,
and the types and amounts of its investments. The typical economic unit, in
other words, has the attributes that were once thought to be possessed only by
monopolies.”
In their book Monopoly Capitalism, two Marxist economists, Paul Baran and Paul
Sweezy described the capitalist system in negative terms, updating Marx’s work
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Competition
The Tramp working on the giant machine in the film's
most famous scene
Charlie Chaplin, Modern Times (1936)

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• Baran and Sweezy1) observed that most industries become oligopolies after going
through a competitive phase, dominated by a few huge multinational firms
• They also argue this creates an entry barrier for smaller firms – bigger firms have
economies of scale (lower per-unit costs) – which will either fail to survive or will be
incorporated by them
• In 2007, 76 of the largest 150 economic entities in the world were corporations,
while 74 were countries
• ExxonMobil has larger total revenues than the GDP of Belgium or Egypt; Wal-Mart
is bigger than Malaysia; Royal Dutch Shell is bigger than Sweden
• More than 90% of the 200 largest transnational companies are from industrialized
countries, mostly Europe, North America and Japan
• According to the authors, “when corporations are this huge and this powerful,
governments and citizens have limited power to oppose them
• Marx saw the increasing complexity and cost of machinery that accompanied the
growth of huge corporations as the principal reason that owners of small firms
would ultimately be “hurled into the proletariat”.
Baran and Sweezy argue most industries become oligopolies after going through
a competitive phase, creating entry barriers for new entrants
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Corporations

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• Age, size and reputation confer other advantages which increase entry barriers
for new entrants:
• Brand loyalty (and marketing)
• Long-term contracts with large buyers
• Ties with government (lobbying)
• e.g.: US automakers against Japanese in the 1980s and Alcoa (aluminum) in the
1990s, whose CEO at the time was Paul O’Neill, who became U.S. Treasury
Secretary; steel in the 2000s, orange juice and food today
• Expansion of government to ensure that businesses remain profitable (and prop up
consumer demand): when companies efficiency increases, unemployment tends to
increase and wages tend to decrease or suffer pressure
• As a result, government spending is required (e.g. the social welfare state in the
1930s and 1960s, which created the social security system, minimum-wage and
unemployment-compensation laws, the Wagner Act (which required employers to
recognize and bargain with unions when workers voted to unionize), and tax laws
helping the middle and working classes to buy homes)
• An ever-growing military budget also keeps production humming at the giant firms
Brand loyalty, long-term contracts and lobbying provide companies additional
advantages, and when they gain efficiency, government has to intervene
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Corporate Advantages
Source: FY2010 "President's budget"
Historical tables
Inflation Adjusted Defense Spending
(USD billions)

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• Entry barriers tend to create “monopolies”, or a “monopoly capitalism” in the words of Baran
and Sweezy1) - term that applies to modern capitalist economies like the U.S. economy:
• U.S. society is organized to maximize profits of few corporations - “maintain scarcity in the
midst of potential plenty” and this inequality is an inevitable outcome of monopoly capital
• That is why in the US, millions live in abysmal poverty despite the vast wealth that exists
for the few; and in underdeveloped countries, hundreds of million of people suffer from
disease and starvation even though there is enough food in the world for everyone and
enough medicine to cure much existing disease
• Companies tend to reduce costs to increase profits, and declining costs imply continuously
widening profit margins (Companies pass as little of the savings as possible to consumers)
• e.g. Microsoft (lowered the price of Windows but still had gross profit margins of 90%),
Gap (uses sweatshop laborers in the Third World but keeps their prices high),
Amazon.com (buys books at 60% below list price and offer consumers a 10-30%
discount), Wal-Mart (squeezes suppliers using its vast size and market power)
• Profits are necessary to “accumulation of capital” – for
new investments, payment of dividends and CEOs
compensation through stock options
According to Baran and Sweezy, the system becomes a “monopoly capitalism”,
in which the pursue of profits is necessary to the “accumulation of capital”
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Entry Barriers
Source: The Economist, Aug, 26, 2010.

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• Mature industries with monopoly power means virtually no price
competition:
• Companies avoid price cuts to avoid price wars; and when some
increase prices, if competitors follow suit, good, if not, they
rescind the price change, but usually others follow (e.g. for three
decades prior the oil price shocks of the 1970s, GM was the
price leader in the auto industry, setting prices that were then
matched by Ford and Chrysler; and was not uncommon, during
this period for these price increases to be three times the overall
inflation level)
• Price competition occur when firms are fending off a foreign
competitor or when jockeying for market share in less mature
industries (dumping)
• According to William Sheperd, “cooperation in price setting is
extensive” in the modern era (e.g. from 1954 to 1994, Ivy League
colleges conspired to fix the scholarships offered to students to
prevent colleges from offering more generous scholarships to lure
top students away from competing schools)
And mature industries, with monopoly power means no price competition, unless
when dumping prices to fend off a competitor or gain market share
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Tacit collusion and Price Leadership

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• An even better strategy than colluding with competitors is to buy
them out or absorb them to lessen competition
• With mergers firms attempt to:
• Lessen competition (horizontal merger)
• Explore profitable new areas by buying into them
• Gain greater control over the supply chain (vertical mergers)
• Mergers that lessen competition could be prevented by
governments under anti-trust laws but the author points that US
Presidents since Reagan have favored mergers but Obama
signaled to enforce antitrust laws
• According to William Sheperd, mergers often reduce efficiency; that
most mergers are actually “empire-building” strategies where the
main goal is to gain greater control over markets
And M&A work as a tool for companies to lessen competition, explore profitable
new areas or gain control over the supply chain, and not always prove efficient
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Buyouts and Mergers

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• Big firms are supposed to have the funds to put into research and development, and a common
belief about multinational corporations is that they are innovative, constantly designing new and
better products for our consumption
• However, some believe these firms will not undertake the cost of innovating because they know
that their results will be stolen by competitors (Thorstein Veblen called it a form of “industrial
sabotage”.)
• Today, corporations manipulate patent and copyright laws to prevent the entry of new competitors,
and they repackage items as “new and improved” when the product is essentially the same (e.g.
“classic” Coke – from sugar to high fructose corn syrup)
• Baran and Sweezy observe that big corporations allow
individual entrepreneurs or small businesses to do the
vital pioneering work; when these succeed the big
corporations move in, buying out and absorbing the
smaller creators
• Meanwhile, the inventors are only too happy to cash
out, by being bought out and absorbed (e.g. the
internet boom of the 1990s and the startups)
In this system, innovation is usually neglected by large corporations, until a new
entrant proves successful – then, they move in by absorbing them
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Big Firms and Innovation

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SURPLUS = GDP – PRODUCTION COSTS
(the “surplus” is a macroeconomic approximation of Marx’s concept of surplus value, the
part of the total value of output that does not go to workers but becomes profits or is paid to
the government)
• Baran and Sweezy1) argue that under monopoly capitalism, prices tend to rise and costs to
decrease, thus surplus tends to rise
(Baran and Sweezy only consider as production costs the necessary costs, like wages and
salaries, being the surplus the rest; thus:
SURPLUS = PROFITS + INTERESTS + TAXES + ADVERTISING + MANAGEMENT COSTS
(and, as profits and interest payments are usually used to finance investment (I), and taxes
to finance government spending (G), and advertising and excess management as waste)
SURPLUS = I + G + CORPORATE WASTE
• Profits must find an outlet every year; the accumulation of capital is an imperative for
survival in capitalism: “businesses must grow or die”.
Baran and Sweezy developed the concept of “surplus” – the difference between
what society produces (GDP) and the costs of producing it
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Rising Surpluses, Crises and Waste

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• However, as Baran and Sweezy1) put it, “sooner or later, excess capacity grows so large that it discourages further investment.”
• Thus, the only way to avoid a recession would be to ensure that spending in other sectors goes up. However, new technologies
will not always be outlets for investment as companies slow their introduction when it is more profitable to do so – Companies
have no incentive to invest in new technology given low wages
• This would be one example of the irrational nature of the U.S. economic system: “corporations are desperately searching for
opportunities to invest their profits, and in new technology they have a perfect vehicle for profitable investment. But often,
companies opt instead to stick with existing, profitable methods and products, even while there are new technological advances
and new products that could be explored.”
• Baran and Sweezy also note that overseas investment by US companies does not absorb surplus in the long term as profits
from these investments are higher than new foreign investments (and that held true for most years since 1966)
• The authors argue that “the rising surplus generated by monopoly capitalism must find an outlet, but the investment
opportunities are often insufficient”; which means that “corporations must find other ways to dispose of the surplus”. And one
key way for doing that would be the sales effort. Not what has been done during the 1990s which ended with the internet bubble
in 2000 or the real estate investments since 2000 and which generated the real-estate bubble that generated the recession
started in 2007.
And, according to Baran and Sweezy, the rising surpluses have to find and outlet
for its profits in the form of investments either in the industry or somewhere else
Is US capitalism an “irrational” system?
1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy
Rising Surpluses, Crises and Waste

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The Sales Effort
• Whether or not corporations find outlets for all their profits, the total investment in capital goods, and thus in
capacity, constantly expands. Through good times and bad times, firms continue to add capacity to their
production systems.
• There is a catch to this expanded capacity, firms must find additional buyers for their expanded products.
The Sales Effort is a concentrated push by corporations in Monopoly Capital to
persuade consumers to utilize the full extent of their purchasing power (1/2)
The Sales Effort

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The Sales Effort
• Consumers buy about two-thirds of all output in U.S. capitalism, and corporations’ survival rests largely on the
maintenance and growth of consumer spending.
• For the Sales Effort to work, consumers must have enough income to buy their share of the output.
• The contradiction is that consumers purchasing power is restricted by the efforts of corporate owners to cut
workers’ wages and salaries.
• Baran and Sweezy state that the sales effort depends on the manipulative practice of branding. Because
consumers know little about most of the products they buy, they are susceptible to labels, trademarks, and
brand names which offer a sense of security in the product, where real or imagined.
• “The most important idea in advertising is new, it creates an itch. You simply put your product in there as a sort
of calamine lotion. However, there is a deeper bond which can be made with a project, nostalgia. Its delicate,
but potent…”
• In the year 2007, U.S. firms spent $280 billion selling products to consumers here and abroad.
The Sales Effort is a concentrated push by corporations in Monopoly Capital to
persuade consumers to utilize the full extent of their purchasing power (2/2)
The Sales Effort

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The Sales Effort
• One result of this explosion in advertising has been a drop in consumers’
personal savings. The U.S. savings rate, which averaged over 9 percent
between 1940 and 2000, reached a post-Depression low of 0.4 percent
in 2005.
• “In the United States the savings rate is lower, and advertising spending
as a percentage of GDP is higher, than in any other industrialized
nation” (Scherer 1990)
Results of The Sales Effort on the American consumer
The Sales Effort

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The Sales Effort
• “Price Competiton has largely receded as a means of attracting
the public’s custom, and has yielded to new ways of sales
promotion: advertising, variation of the products’ appearance
and packaging, planned obselescence, model changes, credit
schemes, and the like.” (Baran and Sweezy 1966)
• Advertising is an integral part of capitalism: it stimulates
aggregate demand by creating new desires, it stimulates
production, and it employs non productive workers in ad
agencies and the media.
• Braran and Sweezy saw it as “a massive waste of resources, a
continual drain on the consumer’s income, and a systematic
destruction of his freedom of choice between genuine
alternatives.” (Baran and Sweezy 1966)
The changing strategies of the Sales Effort
The Sales Effort

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Advertising in America
• On average, Americans now spend more than a year of
their lives watching commercials.
• By age 20, the typical American will have seen 1 million
commercial messages.
• On average, for every additional hour of television
watched in the United States, consumer spending
increases by $200.
• Parents average 6 hours per week shopping, but only 40
minutes per week playing with their children. While some
shopping is clearly necessary, shopping for recreation
now occupies a more prominent role in families than
spending quality time with children.
• Graph: United States Advertising expenditures 1920-2007
in constant 2007 dollars. (billions)
Creating the ‘itch’ to buy
Advertising

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Government Absorption of Surplus
• As monopoly capitalism has evolved, the government sector of every developed country has expanded,
absorbing more and more of the surplus.
• US Government spending as a percentage of GDP increased steadily from 10 percent in 1929 to 33 percent in
2008.
• Much of the expansion of government spending in the United States has been in the area of military spending,
benefiting corporations directly through defense contracts.
• In addition to defense contracts, the US government funnels money to corporations in the form of corporate
welfare – subsidies and tax breaks amounting to over $150 billion per year.
• While the government is a key absorber of surplus, the way that U.S. government absorbs surplus is typically
most favorable to the giant firms, frequently wasteful, and contradictory to social needs.
• In 2005, the United States ranked 26th out of 29 OECD countries in the amount of GDP devoted to social
expenditures like welfare.
Surplus capacity and who to give it to
Surplus

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Labor and Monopoly Capital
• Baran and Sweezy argued that Marx’s theory of
alienation aptly described workers’ experiences in
monopoly capitalism.
• This is explored in two books:
• Labor and Monopoly Capital: The Degradation
of Work in the Twentieth Century by Harry
Braverman.
• Fat and Mean: The Corporate Squeeze of
Working Americans and the Myth of
Managerial “Downsizing.” by David Gordon
Marxist Theory, American Labor, and US Monopoly Capital
Monopoly Capital

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Labor and Monopoly Capital
• The drive to accumulate more capital forces firms to invest in ever more productive techniques.
• One way is to increase productivity and profits is to replace a highly skilled, expensive laborer – a process
known as mechanization and deskilling.
• “Deskilling means the incessant breakdown of labor processes into simplified operations taught to workers as
tasks. The more machinery that has been developed as an aid to labor, the more labor becomes a servant of
machinery.” (Braverman 1974)
• Productivity increases, but workers are often left with mind-numbing jobs and low wages, or no jobs at all.
• In Braverman’s view, the drive for greater productivity in monopoly capitalism demands a complete disregard
for human beings, the environment, and macroeconomic well-being.
From Labor and Monopoly Capital, by Harry Braverman
Monopoly Capital

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Fat and Mean: The Stick
• David Gordon demonstrates that U.S. firms are also over managed and more bureaucratic than firms in other
developed countries.
• In the early 1970s, U.S. corporations adopted a “stick” strategy to control workers. They broke unions and
drove down wages to increase profits. They moved manufacturing operations overseas, outsourced production
to low-cost manufacturers, sped up work, and cut wages in their U.S. operations.
• In order to keep laborers working hard under these conditions, employers added numerous supervisors to
monitor employees.
From Fat and Mean: The Corporate Squeeze of Working Americans and the Myth
of Managerial ‘Downsizing’
Fat and Mean: The Stick

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Fat and Mean: The Carrot
• Germany, Japan, and Sweden employ the “carrot” method to increase
productivity: workers are given job security, wage incentives, strong union
representation, and a role in making important decisions.
• Those economies with more cooperative systems of labor relations also have
more rapid productivity growth rates. And with more rapid productivity growth,
there is room for financing more productive investments, for affording more
rapid wage growth, and for maintaining a competitive edge in the global
economy. (Gordon 1996)
• Today, U.S. companies have more than three times as many supervisors per
production worker as Germany and Japan, and five times as many as
Sweden.
• The U.S. system is efficient at generating profits, but it lags behind other
developed countries in terms of other goals, such as productivity and creating
a humane workplace.
Alternative systems: Germany, Japan and Sweden
Fat and Mean: The Stick

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Conclusions
• The US economy is dominated by huge MNCs, which do everything in their power to stifle competition.
• Stifling competition involves rigging markets through collusion, mergers, and buying protection from the government.
• The drive to accumulate capital is inherent in the system, as past profits require investment opportunities to generate the highest
possible return.
• But the very expansion caused by investment and capital accumulation contains within it the seeds of regular recessions as
investment opportunities dry up and aggregate demand proves insufficient.
• The U.S. government willingly participates in the system, shoring up firms with billions of dollars in corporate welfare and defense
contracts.
• Firms work to expand markets as much as possible, wasting hundreds of billions of dollars annually on dishonest attempts to
manipulate consumers.
• U.S. corporations relentlessly lower costs via mechanization and attacks on labor, but the cost savings are not generally passed
on to consumers.
Baran and Sweezy’s update of Marx’s theories focused on modern monopoly,
mechanization and ‘deskilling’, and the alienation of labor
Conclusion

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Questions
Questions for discussion…
Question 1 Question 2
Question 3 Question 4
Are these arguments believable? And, if they are, do they
describe an economic system that is fundamentally irrational?
Has reading this made you wonder if there might be a better
way to shape and develop the economy?
One that is less unequal – politically and in every other way? One that doesn’t systematically destroy its habitat?