Inflation Its Structure and Politics

By Philip Eden
First Edition
Copyright © 2013 Marilyn Jackler
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Contents

Chapter 1 History
1. Prices: Historical Picture
1800 to 1900: A Century of Deflation
1900 to Present: The Century of Inflation
2. The Structural Basis of Deflation in the 19th Century
Chapter 2 Structures
1. The Growth of Megacorporations
A Different Structure
The Historical Background
The Beginnings of Anti-Trust Legislation
1900-1916: The Triumph of Conservatism
The Failure of Anti-Trust Legislation
The Conglomerate Movement
Evaluating the Conglomerate Movement
Expansion Abroad
2. Corporate Governments
3. The Movement Towards “Social Responsibility” of Corporations
4. Labor and the Growth of Unions
5. Farmers and the Growth of Agribusiness
Competitive Structure of Agriculture
Technological Advances
Growth of Agribusiness
Reasons for Growth of Agribusiness
6. The Changing Role of Government
The Biggest Employer in The Country
Government As an Inflationary Force
Corroborative Evidence
Taxation and the Public Debt As Forces of Inflation
Is The Government an Independent Power?
Failure of Antitrust Laws and Of Government Regulation
Corporate Control of the Media
On Countervailing Powers
Monetary and Credit Control: The Failure of a Structure
Chapter 3 Issues
1. The Military-Industrial Complex
2. The Energy Crisis
The Technical Problem is Solvable
The Political Problem Is More Difficult
Conflicting Group Interests
The Ultimate Issue: Private Versus Public Interest
3. The Medical Care Crisis
4. The Housing Crisis
Chapter 4 Politics of Inflation
1. Inflation: A World-Wide Phenomenon
We Are Part of a Global Economy
The Danger
The Soviet Bloc Experience
2. Debasement
Debasement of the Quality of Life
Opposition to Debasement
3. Illusion and Reality
The Corporate Image
The Reality of Government
The Reality of Military Power
Emancipation from Illusions
4. The Politics of Inflation
At the Cross-Roads
Chapter 5: Modifying the Structures that Generate Inflation
1. Prerequisites of a Program: Emancipation of the Electoral Process and Emancipation of the Government
Emancipation of the Electoral Process
Emancipation of the Government
2. Government as a True Countervailing Force
Equalizing Power between Corporate and Competitive Sectors of the Economy
Restricting and Modifying the Corporate Sector
Socializing Indispensable Functions Where Private Industry Has Failed
Socializing Military Industrial Firms
Reducing Military Expenditures
6. The Changing Role of Government
The Biggest Employer in The Country
Government As an Inflationary Force
Corroborative Evidence
Taxation and the Public Debt As Forces of Inflation
Is the Government an Independent Power?
Failure of Antitrust Laws and Of Government Regulation
Corporate Control of the Media
On Countervailing Powers
Monetary and Credit Control: The Failure of a Structure

2. Government as a True Countervailing Force
Equalizing Power between Corporate and Competitive Sectors of the Economy
Restricting and Modifying the Corporate Sector
Socializing Indispensable Functions Where Private Industry Has Failed
Socializing Military Industrial Firms
Reducing Military Expenditures

Preface

This book is the result of eighteen years work as a forensic economist in legal proceedings. If we lived in a world of stable earnings and prices, economists might not be needed in the courts very often. In a world of inflation, economists enter the courtroom to help make reasonable assumptions about the future trends of prices and wages. So beginning in 1962 I started to examine data and to make reasonable assumptions about the future of Inflation. Since legal cases required that I determine the losses up to the end of a person’s life expectancy, I often had to make projections for many years into the future. Such projections caused a great furor. Opposing counsel would thunder that this testimony was speculative, uncertain, and even inflammatory, and would object strenuously to admitting it into evidence. When I look back at that early period, I am impressed by the calm of most judges in the face of such vehement objections. The usual ruling was that the objections went to the weight and not to the admissibility of the testimony.

The attack then shifted to less legalistic grounds and cross-examination became very searching. How did I know that prices and wages would not start going down tomorrow? How did I know that prices would continue to rise? How did I know that there would not be another depression starting tomorrow? It was in response to such questions that I began to talk about the “structural character” of inflation, to explain how the present institutions and structures of society generate inflation. I talked about government spending and the role of government in the economy under the Full Employment Act of 1946, of price subsidies to farmers, and of the institutionalization of collective bargaining.

As inflation continued upwards at an ever-accelerating pace, cross-examination gradually ceased. The nature of the adversary process in the courts gave me added assurance that my explanation was sound. If an expert has erroneous beliefs and opinions, he can be impeached. Another expert is brought in to expose the fallacious opinion. When the expert is impeached, he ceases to exist as an expert. Since this never happened to me, I had to assume that the opposition never succeeded in finding a reputable economist who would be willing to take the stand to oppose these opinions.

When I started talking about the structural bases of inflation in 1962, prices were increasing at the rate of one percent per year. When the rate of increase reached one percent per month in 1979, I felt it was high time to write this book.

Inflation is a serious matter. We cannot hope to cope with the problem unless we are willing to cope with the structures of our economic system that produce inflation. Inflation forces us to confront the fundamental problems of our society: the problems of power, of the nature of the political process, of the laws, and of the process of social change.

It is quite natural for readers of a book on inflation to be looking for answers.  They want to know how they can protect themselves from inflation. Or they want to learn the cure for the problem. This book does not provide easy answers. Indeed, one of its purposes is to explain why there are no easy answers. This book attempts to make a diagnosis which is the prerequisite for any intelligent search for answers that may have a chance of working. Inflation is not a temporary aberration of an otherwise healthy economic system. Inflation is based on the structural characteristics of the system; and no modification of inflation is likely to succeed unless the underlying structures which produce the inflation are themselves modified. The diagnosis reveals that the structures and institutions which produce inflation, and which benefit from it, are among the most powerful economic and political power groups in our society. As long as they continue to have unrestricted power, we will suffer from continued inflation. The problem of inflation is that of monopoly control and power. It is this indissoluble relationship between inflation and power that makes it impossible to find easy solutions for it.

It took courage to write this book because it compelled me to confront very basic beliefs about myself, about my place in society, about my understanding of how our economic structures function or malfunction, and to confront my personal role and responsibility in this process of social change. You will have to confront the same issues as a reader that I did as a writer. It will compel you to define your role also.

 Since the first step toward understanding is to get a true picture of the world we live in, the bulk of this book is an effort to describe reality. This isn’t easy because historic cause and effect relationships cannot be measured with precision or under controlled conditions.

This book is a new approach to the field of economics, not merely a book specifically addressed to the problem of inflation.

Consider for a moment the current state of the profession of economics. Neo-classical Keynesian is essentially bankrupt on the issue of stagflation (the combination of high inflation and high unemployment). They flounder because their “cures” for unemployment have helped to produce ever increasing inflation, but without curing the problem of unemployment. Most Keynesian economists have been so persistently wrong in their predictions and their proposals on inflation that the profession is now in sad dis­repute. Galbraith and Lekachman have written widely on the details. There is widespread recognition that something is drastically wrong with the accepted doctrine and the work methods of its practitioners. Economics is now the fool of the social sciences.

This bankruptcy has thus far resulted in three major splits from the main body of Keynesian thought. The Association for Evolutionary Economics calls for a return to a more historical approach and more careful analysis of social institutions, along the lines of Veblen and Barry R. Commons. The Union of Radical Political Economists has gone in the direction of Marxist political economy. The third split off is the development of a Post-Keynesian Economics based on certain ideas of Keynes, Kalecki and Sraffa whose major expositor is Joan Robinson.

This book was not written from any single doctrinaire approach, although it contains in it elements of all three of the above departures from the accepted
Neo-Classical Keynesian doctrine. The emphasis on detailed examination of institutions and how they have emerged historically is clearly in line with the concerns of the Association for Evolutionary Economics, but also with the stress on historical materialism in Marxist thought. The emphasis on corporations, the partnership role of the state, and the central role of politics, are also common ingredients of Marxist thought. The book also contains elements stressed by the Post-Keynesian school. They would be pleased by the emphasis on the tendency toward disequilibrium as a norm, rather than equilibrium, of the dominance of monopoly over prices, rather than supply and demand; that markets in the traditional sense do not work, and that more, not less, intervention by the state is required. This book contains elements of all of these departures from the accepted Keynesian doctrine.

The profession of economics is now in a process of ferment and change. Many are now groping for new approaches. This book is a part of that process. We cannot explain inflation by building a mathematical model because the most important parts of the explanation; history, institutions, laws, politics, monopoly, the role of the state, and foreign influences, cannot be reduced to mathematics. The matter is too complex and we must therefore restore economics to what it was originally, political economy with a broad tradition of scholarship, with no separation of economics from politics and government, with a willingness to observe the present in historical terms, and with a moral vision of historical direction. Adam Smith, Marx, Veblen and Keynes were all in this mainstream of classical political economy. Were they alive today, these men would most likely be spending their time examining the major structures and institutions of our society in this broad way.

None of us yet know the answers to the complex problem of inflation, but this is the direction in which an answer is to be sought.

Some readers may be surprised that I have not mentioned Milton Friedman.  He is omitted because he is not a part of this serious ferment and quest.  Rather, he has already found, the answer – in the nineteenth century. Dr. Friedman’s world and the world described in this book have very little in common. He would dearly like to restore the free markets of the last century, the competition, the world of supply and demand and of equilibrium which then existed without government inter­ference and waste. This nostalgia however, is not a serious economic theory for the twentieth century. It must be viewed as part of a political program, of a very conservative cast, a new cult of selfishness led by Jarvis, Gan and Friedman. Jarvis and Gan led the successful campaign to cut property taxes in California which deprived government of the revenues needed to perform social services. This is a brand of conservatism which combines selfishness with social irresponsibility.

Two levels of documentation are provided in the effort to perceive this reality. The primary sources are the statistics issued by the United States government. These are documents which a court would usually take under “judicial notice”. These are usually provided in the form of charts which parallel the text. Then there are secondary sources, which are the interpretations of other experts as well as my own. This distinction between primary and secondary evidence is common to all branches of scholarship. The careful reader will always give first attention to the primary evidence and will test whether the secondary evidence and interpretations flow logically and clearly from the primary evidence. In the social sciences derivation is not always clear and in such cases, we are compelled to draw inferences. These will always be clearly designated as such and the reader must always judge whether such inferences are reasonable or not.

A word should be said about the form of this book. Economists have a succinct and precise language of their own which requires advanced mathematical training to be understood. I decided not to write a technical book because everybody needs to know about inflation. Therefore this book is written in plain English.

I have written this book in the form of a personal essay which is not encumbered by too many figures and can be read independently of the charts and footnotes.   Those who want the detailed facts and figures and their sources will find them in the charts and footnotes provided.

I wish to express my gratitude to those who have helped me in the development of this book.
Berkeley, California
June, 1980
Philip Eden

“If you do not specify and confront real issues, what you say will surely obscure them.  If you do not alarm anyone morally, you will yourself remain morally asleep.  If you do not embody controversy, what you say will be an acceptance of the drift to the coming human hell.”

C. Wright Mills – The Politics of Truth

Chapter 1 History

1. Prices: The Historical Picture

We are fortunate to have data on price trends in the United States going back to the year 1800.  The data was collected by the United States Bureau of Labor Statistics and is based on actual price surveys since 1913. Before that time the figures are estimated by the bureau from a variety of sources. There are unusual difficulties in measuring price trends over such long periods of time because there are endless changes in buying patterns and in products purchased over the years. The development of this price index for such a long period of time is one of the great achievements of the Bureau of Labor Statistics.

1800 to 1900: A Century of Deflation

It may come as a shock to most readers that during the entire span of the nineteenth century there was a long-term decline in prices, of about seven-tenths of one percent per year. The price levels at the end of the nineteenth century were half of the level at its beginning. The long-term drop, however, was not a steady one; prices surged upwards in the War of 1812, and then again during the Civil War. But after each wartime upsurge, prices resumed their long-term trend downwards.

If we eliminate the inflationary upsurges during war periods and seek to establish the underlying long-term trends, it appears that the long-term deflationary trend was sharpest in the first half of the nineteenth century, and that the latter half was more stable. The price levels in 1850 and 1900 were about the same. Only economists have the temerity to eliminate such factors as the enormous effects of the Civi1 War which dominated the economic history of the last half of that century. There are several alternative interpretations of the data. The first is that the latter half was more stable. The second is that the basic deflationary forces reasserted themselves after the Civil War. A third is that the development of enterprises large enough to control prices at the end of the century had the net effect of slowing down the general rate of deflation. The competitive areas of the economy continued to produce price cuts throughout the century, while the controlled areas stabilized and began to raise their prices towards the end of the century. The net result of the two movements might have been a slowing down of the rate of deflation. We will probably never know the true explanation with any certainty, but there is no doubt that the nineteenth century was a period of general deflation.

A price index is an abstraction; a measure of relative prices over time.  In order to breathe some life into these dull statistics, I looked at the Chicago Tribune for June of the year 1900, when prices reached the lowest level in our country’s history.

Chas. H. Slack Grocer advertised Swift’s Premium Cured Ham for 11.5 cents a pound, and Swift’s Bacon at 12.5 cents per pound; sugar at 5.5 cents a pound; rice at 5 cents a pound; Virginia Sweet Pancake Flour at 9 cents for a two pound package; and Proctor and Gamble’s Lenox Soap at $2.70 for a box of 100 bars, or 2.7 cents per bar.

Siegel Cooper and Co., a general store, advertised Old Crow Bourbon eight-year old Whiskey for $3 a gallon; White Lead for paint in kegs for 2.75 cents a pound; and a solid oak five-drawer chiffonier (worth $7.50 they said) for $4.89.

People’s Outfitting Co. offered solid quarter-sawed oak round dining room, tables (worth $15 they claimed) for $6.75; and cast-iron kitchen ranges with nickel trim for $5.55.

Marshall Field and Co. offered a solid maple rocking chair for $2.85; and men’s summer shirts for $1.00 to $2.50. Walk-Over men’s leather shoes were advertised at $3.50 per pair for American made shoes and $4.00 for imported shoes.

A full line of men’s wool suits were offered by Fred Greisheimer for $7 up to $15.  Mandrel Bros advertised handsome men’s negligee shirts with pleated bosoms and separate cuffs for $1 and women’s high-top leather shoes for $2.25 to $2.75 a pair.

These prices of the year 1900 look ridiculously low to us, but they were not low for ordinary working people who, in 1900, earned an average of about 15 cent an hour. This little survey of prices and earnings provides some of the reality and flavor of the living conditions at the end of this long century of deflation, and at the beginning of the twentieth century.

From 1900 to 1980 there was a long period of price inflation. The price level in 1980 was about eight times that in 1900. World War I and II caused upsurges in prices, but after each upsurge the general upward trend was resumed. From 1900 to 1935, prices increased by 1.4 percent per year; from 1935 to 1965, by 2.8 percent per year; and from 1965 to 1980 by about 5.6 percent per year. In each successive period, the rate of increase doubled. In 1979 the rate again doubled to about 12 percent per year. If we compare the price experience of the nineteenth and twentieth centuries, we can only be astonished at the differences in the behavior of prices. It is as if we were looking at two entirely different worlds.

1900 to Present: The Century of Inflation

It is the central thesis of this book that they are two different worlds. The United States that produced downward price trends during the nineteenth century was structurally different from the United States of the twentieth century, which produced inflation at an ever increasing rate. We propose to examine the structural basis of price behavior in both periods. Why did the former structure produce deflation while the latter produced inflation? How and when did the change occur? Our hypothesis is that the deflation of the nineteenth century was based on the then existing structure of the economic system. Similarly, that the inflation of the twentieth century was also structural in character and that both trends can be best understood by examining the underlying structures.

If our present problem is inflation, why must we go back to study a previous era which did not have this problem?

Comparing both periods will help to explain present price behavior. Moreover, the economic structure that dominates our present inflationary era had its origins in and grew out of the previous deflationary era. Therefore understanding it is essential to understanding the present.

A major obstacle to understanding the present situation is that the modes of thought and theoretical models of many present day economists and others are based on the economic structure of the previous century rather than those of the present.

If the structure produces a given result, it follows that the result can be changed only by changing or modifying the structure. Therefore it is better to use the phrase “structural inflation”, to denote inflation that is firmly entrenched in the very structure and institutions of a system. Inflation is the way the current structure of our economic system functions. Heilbroner recently put his finger on the point by saying: “Inflation is not a malady, therefore there is no cure.”¹ If inflation is structural and functional, it is not a temporary aberration, or an illness, of an otherwise healthy system. There is no pill and no easy cure.

2. The Structural Basis of Deflation in the 19th Century

Any short description of this remarkable century is bound to be inadequate. Consider for a moment what the United States was like in 1800, and then in 1900. In 1800 the country consisted of thirteen states on the east coast that had only recently won their independence. It was still a colonial country in many ways, with a population of about five million, most who were small independent farmers. Urban life was just beginning, towns were small, and local production by artisans for local consumption was not much different from that in medieval towns. Muddy roads were only one step better than foot trails, making shipment of goods overland slow and expensive. The bulk of all transport was, therefore, by boat along the coast and up the rivers. Slavery was the economic basis of the plantation south.

By 1900 the country stretched to the Pacific, and its land area was about three times larger. The populated area was about six times larger because in 1800 the populated area was essentially east of the Alleghenies. The population was about 76 million, over fifteen times larger, a result of natural increase during a period when large families were considered to be an economic asset, augmented by massive immigration from Europe. The bulk of this population consisted of independent small farmers, but by 1900 about thirty million people were urban dwellers. Behind the protection of tariff walls, an Industrial Revolution had occurred. The small artisans of colonial America had been supplanted by a new working class, which had been recruited primarily from the farming population and from European immigrants. These mill hands, including women and children, were herded into factories organized by a developing class of capitalists, operating machinery driven by water power and later by steam engines. All of this development was spread across a great continent by an immense outward thrust of human energy that had few equals in history. By 1900 the country was tied together by a railroad network from border to border, and unified politically. For some products, the entire nation was one unified market; for many others, markets consisted of major regions of the country.  By the end of the century, a process of concentration of smaller enterprises into larger and larger ones was well under way.

It was an incredibly dynamic century of tempestuous growth, expansion, technological development, and economic change. This dynamism makes it difficult to summarize. The structure of the economy was itself in the process of change.

What generalizations can we reasonably make about this structure which is applicable for the first half, and for most of the second half of the nineteenth century? It is fair to say that the major incentive for the establishment of the new factories was the use of the new technology to supplant hand production, and to produce new and better products more efficiently and cheaply. The capital requirements for entry into business were not great if a business was profitable, it would attract new entrants. Many artisans expanded their shops into factories with ease. No single producer had enough control over supply to be able to influence price levels. There was fierce competition, expressed primarily in the form of price cutting. All producers were subject to so-called “the tyranny of the market”.

This was the structure of the economic world in which all of the classical economists including Adam Smith, Ricardo, Marx, Malthus, Marshall, and Senior lived, and which they tried to explain. It was also the period of Charles Darwin.  His principles of “natural selection” and the “survival of the fittest” might well have convinced the economists of the era that they were describing an undeniable, perpetual and scientific natural order.

The cost of the factors of production was also dropping during the nineteenth century. Labor was plentiful and cheap, and kept so by the competition of slavery in the South and the mass importation of mill hands from the surplus population of Europe. Labor was unorganized and collective bargaining was rare and ineffectual. Long hours, low pay, child labor, an almost total absence of safety and health measures, and the harsh discipline of the workplace all contributed to low labor costs.

Raw materials were also plentiful and cheap. The country was a vast cornucopia of natural resources pouring forth seemingly inexhaustible supplies of the produce of forests, mines and farms. Cheap cotton poured into the new textile mills.

Interest rates dropped from ten percent in 1857 to four percent by 1900. This data is available for railroad bonds only, but it is fair to infer from this limited information that the cost of borrowing money for business dropped over the century as a whole.

All of these factors combined during a century of general and sustained expansion and growth, and of increasing demand. This structure of capitalism, in the context of nineteenth century America, produced precisely what would be expected; a general and consistent decline in prices.

There were exceptions to this general picture. This structure contained within it the seeds of its own destruction, a fact which became increasingly apparent as the century drew to its end. The “tyranny of the market”, that is the basic overwhelming force of free and untrammeled competition, is a terrible taskmaster, one that appeared as a blind, implacable enemy. “Cut costs, or go bankrupt” was the grim choice confronting every factory owner. The reality of the nineteenth century was brutal and harsh. The mystique and adventure of “Winning the West”, and of the “American Dream” nurtured by schools, books, films, and television, must always be placed against this reality. Infant mortality throughout the nineteenth century was about ten times greater than in 1976. The average male born in 1850 could expect to live to about age 38, and in 1900 to age 46. By 1976, it was to age 69.Data on life expectancy and infant mortality is from United States Department of Commerce, Historical Statistics of the United States, Series B 116, 126, 148.² I have always been struck by the fact that Colonial furniture is smaller because people then were smaller, a result of less adequate diets and harsh life conditions. These figures are indications of levels of medical care, diets, and conditions of farm and factory life. The fact that prices were low and falling during the nineteenth century does not mean that life was good. Life was far from good. Is it any wonder that every capitalist sought desperately to free himself from this tyranny of the forces of competition and from the endless insecurity of his existence?

Businessmen of the nineteenth century were all too familiar with the workings of monopoly. They knew about natural monopolies and envied those who had them. Grants of monopoly by the king were common in Colonial America. Many merchants supported the American Revolution because they needed freedom from these feudal and mercantilist restrictions imposed on them by Britain. The railroads and canals were based primarily on state grants of monopoly, and so they were preferred investments. The patent system offered a temporary monopoly in order to encourage invention.

Neither were businessmen unfamiliar with the idea of product differentiation. Whenever and wherever it was possible, they would try to convince the buyer that their product was unique in some respect and would therefore justify a higher price.

Those businessmen who most vehemently extolled the virtues of competition, considered these activities to escape from its toils to be perfectly natural, indeed, just another expression of competition. The basic goal of competition was to bankrupt your competitor. As a matter of fact, it would never have occurred to them to consider that competition was “good”. It was, rather, a condition of life which they were compelled to accept. Perhaps the earliest reaction against the tyranny of the market was to eliminate competitors by buying them out or merging with them, thereby increasing the advantages of scale, and making entry of new competitors more difficult.

It was not until after the Civil War that this merger movement assumed importance. The enormous expansion of the railroads with government assistance on a monopolistic or quasi-monopolistic basis was a forerunner and example of the relative profitability of this development to its promoters and investors. The merger movement soon spread to steel, oil, tobacco, and farm equipment. The fears and the consternation aroused by the threat of these trusts were profound. The farmers organized into a Populist movement to resist monopolistic railroad rates and high farm machinery prices. For the first time in American history, individual unions joined into national federations to find greater strength to match that of their employers. Small businessmen threatened by extinction flocked into the Democratic Party for assistance against a Republican Party popularly identified with big business. The end of the nineteenth century was marked by unprecedented bitter struggles in industry, on the farms, and in politics as the country split along class lines. The passage of the Sherman Anti-Trust Act in 1890 indicates how far these antagonisms had grown.

In the election of 1896 all of the hostility and discontent of farmers, labor, Green backers, Single Taxers, and Socialists united behind the Democratic Party led by William Jennings Bryan, whose cry that the toiling masses were not to be crucified upon a cross of gold, electrified his followers. Behind McKinley, the Republican Party also united almost every conservative element in the business community against this upsurge of what they deemed to be sheer anarchy. The style of that election was to set a new pattern for politics in the twentieth century. The Republicans won but by a very narrow majority. It was this precarious margin that they used as a mandate for the expansion of business that was to come under Republican rule.

The free, competitive structure of the period 1800 to 1875 or thereabouts can best be understood as a counter-movement against the monopolistic and mercantilist restrictions of Colonial America under British rule. The movement toward trusts and monopoly control was then the counter-movement against the tyranny of the market under free competition.

Movement and counter-movement, ebb and flow in the affairs of men, and each historic period brings with it changes in the economy.  Each structure carries within it the seeds for ultimate change into something often quite the opposite. These seeds may sometimes lie dormant and may not emerge and mature for a century or longer. The seeds of labor organization and collective bargaining were planted early in the 1800s, but their time did not come until much later. Similarly, the discontents of farmers did not finally lead to any concrete efforts at amelioration until the 1930s. We will now follow these changes in structure into the twentieth century. In each case we will see that the seed for the changes was planted during the preceding period.

Chapter 2: Structures

1 The Growth of Megacorporations

“By raising their prices above what they naturally would be (monopolists) levy for their own benefit an absurd tax upon the rest of their fellow citizens.” ³

Imagine, if you can, the utter amazement of a businessman of the year 1850 if he were to be suddenly transported into the United States of the year 1980! I imagine that at first he would be astonished by the vast technological changes; the tall skyscrapers, the planes and autos, the huge industrial complexes, and the teeming cities. But after he got over his first amazement and began to probe into the way these operated, he would be even more flabbergasted.

A Different Structure

He would discover that a certain form of business, “corporations,” which in his day were virtually unknown except for those operating certain public services such as canals toll roads and railroads, were now privately owned and run for private profit; and that these private corporations carried on about 95 percent of all economic activity in the country. Where he was accustomed to a world of many small producers, he would now find that a relatively small number of these corporations had grown to enormous size. He would find that five hundred of the largest industrial corporations accounted for over four-fifths of the sales of all manufacturing corporations; and that 200 of them accounted for half the sales. He would find that control had somehow passed into the hands of a relatively few, very large, corporations.

As our businessman continued to probe, he would find that the operators of these large corporations behaved quite differently than the businessmen of his day, who accepted the market price as a given fact of life, much as they accepted the weather. The corporate managers of the 1980s would be found to be a different breed entirely, who had officers, or committees or boards of directors which fixed their prices, and established quotas for the volume of production. It would perhaps strike him that he had always been a “price taker”, while these men were “price makers”.

It would cause him no end of wonderment that these men appeared to be in control of prices and output and that they exercised their control in a variety of active ways strange to him. In his day, a businessman was one who assumed risks. These men had reduced the element of risk to a minimum. They had an assurance which he envied.

He would discover that these large corporations were intertwined and interdependent in many ways, and that these interconnections had a powerful influence on the manner in which they fixed their prices. He would find the same men sitting on the boards of many different corporations; and that the bigger the corporation, the greater the frequency of such interlocking directorates; and that such interlocks were more frequent when the corporations produced related products.

He would see that these large corporations frequently worked together through jointly owned subsidiaries, commonly called joint ventures. Many of these joint ventures linked the 200 largest corporations together; and many were producing the same or related goods.

These interlocking directorates and joint ventures with their many intercorporate ties were merely the outward manifestations of a deeper tendency. When there were only a few large firms, they tended to behave interdependently. Each took into account the direct and indirect consequences of its price, output, and other market factors. Each recognized that a price cut might lead its rivals to cut prices which would result in a reduction of prices for all, with no change in market shares. They therefore were more inclined to price as monopolists, rather than as competitors, and it was to their mutual advantage to sell at prices which maximized their joint profits. They had developed a high sense of mutual forbearance in making price decisions, and they accorded special treatment to one another because of this community of interests.

One expression of this mutuality of interests was the widespread practice of reciprocity; giving your business to those who gave their business to you. In a truly competitive world, there would be very little incentive to do this as price alone would govern sales and purchases. But in markets of relatively few firms, sellers recognized their interdependence and engaged in reciprocity when doing so permitted them to make a sale they otherwise could not make, or could make only at greater cost. These firms tended to avoid price competition, which would reduce profits for all, preferring to engage in an assortment of non-price strategies to promote sales, such as advertising, promotion, and reciprocity.

This practice had become so prevalent that most large corporations had Trade Relations Directors who sought out and exploited “reciprocal deals”, and hundreds of these corporation officers were members of Trades Relations Associations. The job of the trade relations department was to increase sales by using their corporate buying power as a quid pro quo. They beat competition and were virtually closed to outsiders.

While these large corporations rarely competed, they sometimes cut prices fiercely in order to destroy small competitors and to increase their control over the market. This would be done only in certain selected areas, and only for as long as necessary. Because of their size, these corporations had the ability to offset losses in one area by gains in another. Once the competition was eliminated, they would, of course, raise their prices once again. ⁴ Our imaginary businessman from the year 1850 might very well wonder how any small competitor could possibly survive against such a large corporation. This kind of corporate market power dominated most of the economic activity of the country, and competition as he knew it was relegated to areas that the corporations did not yet consider worth entering such as small business, service trades, and small industries which relied on individual skill. Apparently, there was not one economy, but two.⁵ In the center was the dominant and decisive one of the mega corporations. On the outside was a peripheral economy of small competitive businesses. He would also realize that if and when the corporations or conglomerates wished to enter these peripheral areas, they could; that they could take over anything they wished.

These conglomerates puzzled him at first, because he couldn’t understand why anyone would want to unite such a grab-bag of unrelated businesses spread far and wide. He could not understand the rationale for such acquisition, or how it could be managed from one office.

And finally, he would be utterly astonished going through the World Headquarters of the International Telephone and Telegraph Corporation (ITT) on Park Avenue in New York City, seeing the Organization Chart of their vertical, horizontal, conglomerate and multinational subsidiaries in the United States and throughout the world, with their thousands of plants and almost 380,000 employees. Here was a citadel of high technology run by super-managers using the most advanced communication and computer techniques! How vast was the change from his day, when he alone performed all of these functions for his small factory!

In this huge skyscraper were hundreds of managerial elite whose tools were computer bookkeeping, who exercised financial control by handling paper, primarily computer printouts, and who were almost completely divorced from the physical production or engineering aspects of these disparate plants. In his day a business might die with the death of the owner. But this corporate form could outlive the life span of any one individual, no matter how important. By diversification and conglomeration, they could outlive the lifecycle of particular products and the life span of any one industry. And by expanding into many countries, by becoming global corporations, they could now outlive the ups and downs and the life span of any one country! ⁶

In all of these ways, our businessman from the mid-1800s would suffer a bad case of “future shock”.  He would have found that the structure of the economy was altogether different from that with which he was familiar, the behavior of the business managers quite different, and their control over prices and production quite beyond his ken.

In this chapter we will describe the structure of what Galbraith calls “the original power”.⁷ It is our thesis that corporate market power is our single most inflationary force. We will, in later chapters, turn our attention to other inflationary forces, but this is the dominant one.

The Historical Background

How did this corporate-dominated structure come into existence?  If inflation is a functional characteristic of the economic structure of corporations, if it is the normal price behavior of the modern corporation, it follows that this structure must be changed or modified if inflation is ever to be curbed.  The history of the evolution of the corporate-dominated structure may give us clues to help figure out what, if anything can be done to modify inflation.

There is a school of thought that holds that the development of large corporations was natural and inevitable. If that is true, if the present-day structure of corporate market control is primarily the product of natural forces such as the growth of technology and the advantages of large-scale operations, then there is little that anyone can do about it. The obvious trouble with this explanation is that growth in technology and the advantages of scale should lead to ever-decreasing prices. Growing efficiency should lead to lower prices. The fact that it has not should cast grave doubt on this explanation of corporate development. A second school of thought holds that the development was engineered by certain groups to further their own self interest.

The study of history should reveal what actually happened. If something was made by man, then we can hope to change it.

In the forefront of the industrial expansion of the end of the nineteenth century stood a relatively small handful of towering figures, men like Andrew Carnegie in iron and steel, Gustavus Swift in meatpacking, John D. Rockefeller in oil, James J. Hill in railroads, and J.P. Morgan in investment banking.  These men, who started their careers as individual proprietors or in partnerships, ended up dominating their generation.  Who can now doubt the motivation and purpose of these men?  They sought individual power and wealth and they attained their goals by establishing monopolistic control.⁸

These men did more than gain personal power and wealth. They rode the crest of a double wave: the growth of technology and of the scale of enterprise, and the emergence of the modern corporation. Corporate growth was spurred by the United States Supreme Court decision in the case of Santa Clara County vs. Southern Pacific Railroad in 1886.⁹ This ruling held that the word “person” in the Fourteenth Amendment included corporations in some instances. The Fourteenth Amendment stated that no person” might be deprived of life, liberty or property without “due process of law”. This and subsequent decisions protected corporations. As a result, innumerable laws and decrees by state, municipal and county legislatures and officials were declared null and void. Everywhere state authorities were told, in effect, that they could no longer pursue ‘populist’ or ‘communistic’ policies in dealing with business enterprises.

During the period of falling prices, from the Civil War until the end of the nineteenth century, the economy of the United States became a competitive jungle in which many failed to survive.  The larger firms had advantages, but it was almost inevitable that their desperate search for ways out would lead them to new combinations.  In “horizontal combination”, manufacturers in the same stage of production or distribution, joined forces.  In “vertical combination”, the successive stages of production, from raw material to end product, were brought together in a single business entity.

The earliest form of combinations was “gentlemen’s agreements”, usually oral agreements to set and maintain prices.  Sometimes there were written contracts known as “pools”, which operated to pool the use of new patents, or to restrict and allocate output, or to pool profits.  Both of these were relatively loose forms of collusion and difficult to maintain or enforce.  If they were successful in raising prices and producing a monopoly profit, they encouraged new firms to enter the field.  If they were unsuccessful and prices continued to fall, the temptation to violate the agreement was great.  If a firm violated a pool agreement by producing more than its quota or by selling outside of its assigned territory, there was no legal way of stopping it.

These empire-builders needed a way to maintain better control.  The first was the trust.  Rockefeller and his associates had, by ruthless competitive practices, succeeded in gaining control of over 90 percent of the country’s oil-refining capacity.  In the early 1800s they established the Standard Oil Trust under the laws of Ohio, and induced the stockholders of some 40 oil companies to turn over their shares to nine trustees.  In place of the stock, the stockholders received trust certificates which entitled them to dividends, and the trustees acquired control over the 40 companies.  The device was so successful that it was soon copied by other industries.

But these trusts and their agreements were a matter of public record.  Under common law, conspiracies in restraint of trade, and attempts to gain a monopoly, were illegal.  Suits were instituted and the Supreme Court of Ohio finally ordered the Standard Oil Company to withdraw from the trust.  Another way had to be found.

The way that proved successful first appeared in the New Jersey Holding Company Act of 1888-89, which permitted corporations to purchase and hold the securities of subsidiary corporations. This act made it easy to bring many firms under unified control. New Jersey’s fees from such incorporations were so large that other states rushed in with similar laws to benefit from this source of revenue. Thus the modern corporation as we know it was born and legalized.¹⁰ Here at last was an enforceable legal form by which horizontal and vertical combination could be established and maintained: Andrew Carnegie founded the United States Steel Corporation; Gustavus Swift established Swift and Company; Rockefeller, the Standard Oil Company, and so on.

Thus the corporation, which first appeared in the railroad industry in the 1850s came to the fore in consumer goods industries such as tobacco, sugar, and whiskey in the 1880s, and then in the basic heavy industries in the 1890s. The competitive advantages that large corporations enjoyed against smaller companies were overwhelming and they tended to quickly dominate the markets.

The Beginnings of Antitrust Legislation

These monopolistic developments could not escape public notice. The most bitter opposition and resentment against the trusts came from small businessmen who were being driven into bankruptcy and from farmers squeezed by high freight and grain storage rates, high interest rates, and high prices for the goods they bought. The same political forces that later rallied behind the candidacy of William Jennings Bryan succeeded in enacting the Sherman Anti-Trust Act of 1890. The key provision of this law was: “Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade among the several states, or with foreign nations” was illegal. “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce …shall be deemed guilty of a misdemeanor…”¹¹

Senator Sherman himself almost immediately made a distinction between “lawful combinations in aid of production and unlawful combination to prevent competition and in restraint of trade.”¹² He said only the latter was the object of his bill. Congress did not vote sufficient appropriations to enforce it, and one Attorney General, Richard Olney (1893-95) frankly stated he took the authority upon himself to refuse to prosecute because he believed the act was “no good.”¹³ Then in 1895 the United States Supreme Court made the act a dead letter. It ruled in the E.C. Knight case that the act did not apply to manufacturing on the grounds that it was antecedent to commerce and only incidental to it. Then the Republican Party, widely called the Party of Big Business, won the Presidential election in 1896. Almost as an immediate response came the first big wave of acquisitions and mergers from 1895 to 1899. By the end of that wave, corporations such as United States Steel, American Tobacco Company, International Harvester Company, the Du Pont Company, and other corporate giants, had become rooted in our economic structure.¹⁴

1900-1916: The Triumph of Conservatism

One widely held idea is that large corporations were much more efficient and therefore their growth necessary and inevitable. The job of the economic historian is to examine what really happened and to question such beliefs. Fortunately, Gabriel Kolko has surveyed the period of 1900 to 1916. His book The Triumph of Conservatism¹⁵ is well-documented from primary source data. His conclusions are that the first wave of mergers was gerrymandered financial structures created by stock manipulation, stock watering, promoters’ profits, and huge debts that made the resulting companies relatively inefficient.

Apparently, the desire for profits from sales of stocks in a rising market and for promotional profits by investment banks had more to do with producing the first big merger wave than any advantage such as the economies of scale. The prominence of investment bankers and the New York Stock Exchange in these mergers is difficult to explain in any other way. Stock-market profiteering and the desire to destroy competition and dominate the market were apparently the primary forces driving the wave of mergers, and Kolko contends that they thereafter would not have survived given economic competition with independents.¹⁶ They were only able to survive, he maintains, by political means. They used the power of the federal government to entrench themselves by demanding federal economic regulation in forms that would help them to achieve their own purposes and to thwart state regulation. By such means they obtained favorable tariffs, direct subsidies in some instances, access to government-owned resources, or monopolistic privileges in certain federal charters and regulations. To all of this, Kolko gives the name “political capitalism”. The reality was big business control of politics erected behind a facade of “progressive” political regulation of the economy.

Investment banking was sufficiently important in this period to label the era as one of “finance capitalism” and led finally to the ban on interlocking directorates in the Clayton Act in 1914. The dominance of investment banking began to wane as the large corporations became sufficiently profitable to accumulate their own capital assets and reduce their dependency on the investment bankers.

After the first wave of mergers ebbed, the United States Supreme Court ruled in the 1904 Northern Securities Case that the acquisition of stock control of competing carriers by the Northern Securities Company, a holding company, was an illegal monopoly. In 1911, the court adopted its famous “rule of reason”. Standard Oil and American Tobacco were ordered dissolved because their behavior was found to be “unreasonable”. Under this rule, bigness as such was not deemed to be illegal; but monopolistic intent, as evidenced by “unreasonable practices”, was. The dissatisfaction of many with these kinds of distinctions and the failure to prosecute many of the large companies was fanned by muckrakers, and anti-trust policy again became a major political issue in the election of 1912.

Under President Wilson, Congress passed two new laws in 1914, in an effort to strengthen and clarify the Sherman Anti-Trust Act. The Federal Trade Commission (FTC) Act declared that “unfair methods of competition in commerce” were illegal and set up the Federal Trade Commission to investigate corporations in interstate commerce and to assist in the enforcement of the Clayton Act. The Clayton Act outlawed specific business practices which would substantially lessen competition or tend to create a monopoly, declared price discrimination to be illegal, and prohibited large firms from bankrupting small ones by selling below costs. It outlawed interlocking directorates among competing firms, and forbade firms buying stock in other companies that would result in a reduction of competition.

The Failure of Antitrust Legislation

One might think that laws as specific as these, with an ongoing agency to administer them, would have been adequate.  But it didn’t work out that way.  The courts still had to decide whether any given practice reduced competition. It is difficult to agree on a definition of competition and of the relevant market in any specific case. Working on this problem has assuredly provided a great deal of employment to economists. We cannot say with equal assurance that it has been a great protection to smaller businesses. Although the Clayton Act banned the purchase of stock in competing corporations, purchase of their assets was still legal. This loophole was not plugged until the Celler-Kefauver Amendment passed in 1950. In 1920, the Supreme Court reaffirmed the “rule of reason” in the United States Steel case. Mere size, or the existence of unexerted power, was not an offense. A merger, regardless of its size in relation to the market, was legal if its actions were “reasonable”.

The first big wave of mergers at the turn of the century tended to establish true monopolies, single firms which dominated an industry. A second wave of mergers from the end of World War I up to 1929 was encouraged by this judicial doctrine and by lax enforcement. This second wave established oligopolies¹⁷ in steel, oil, automobiles, and agricultural equipment, and dominated substantial portions of the market. This movement is significant because the same end result, that is market control over prices and output, can be substantially achieved by an oligopoly as well as by a monopoly. Moreover, the appearance of competition is maintained; a great advantage for public relations. Previously competitive sectors of the economy such as dairy products and packaged foods had become oligopolistic by the end of the 1920s. By that time, the two hundred largest non-financial corporations had about one-half of total corporate assets and income. With the depression of the 1930s the merger movement ended.

“The New Deal and its aftermath saw a rebirth of anti-trust political activity.  The Roosevelt administration responded with a program of vigorous enforcement of the antitrust laws under Thurman Arnold starting in 1937.  The Robinson-Patman Act was passed in 1936 to eliminate certain unfair and discriminatory practices not prohibited by the Clayton Act. Essentially, price discrimination which lessened competition was prohibited. The Roosevelt administration also conducted the most massive investigation in our history of the concentration of economic power. The Temporary National Economic Committee conducted hearings beginning in 1938, and in its final report in 1941 produced forty three monographs on various aspects of concentration.

There is little doubt that this renewal of anti-trust activity kept mergers at low levels during these years. It is symptomatic, however, that while the government won most of the major cases, the courts as a rule imposed only mild penalties and did not order any drastic dissolutions. Alcoa for example, produced nine-tenths of the virgin aluminum in the United States and yet the court would not order dissolution or divestiture of assets.

The Conglomerate Movement

The Celler-Kefauver Amendment to the Clayton Act passed in 1950, as already mentioned, and strengthened the ban on horizontal and vertical combinations.  Fusions of related industries were made more difficult, but there was no ban on mergers and acquisition in unrelated fields in the United States, or on any form of expansion abroad. The result was the third wave of domestic acquisitions and mergers; this time in the form of conglomerate expansion. If one looks at numbers of acquisitions, this wave, which was greater than either of the two preceding waves, started in the early 1950s and reached its peak in 1968. However, if one looks at the value of assets acquired by these larger concerns, the wave continued to rise afterwards.

There are some who dismiss conglomerate acquisitions because they represent diversification which is the opposite of concentration. How, they say, can the mere centralized ownership and control of diverse firms, none of which are large enough to dominate their separate markets, succeed in raising prices, or restricting output, or restraining competition? Let us see if a closer look at the history of the conglomeration movement answers these questions.

Conglomerates tend to follow a typical growth pattern. A conglomerate first creates an image of growth by buying up other companies. As each company is acquired, its sales figures are added to the existing sales of the conglomerate. As a result, and because the stock market does not discriminate between real growth and apparent growth by acquisition, the price of the conglomerate stock rises.

The image of growth is the key ingredient in the process. A conglomerate with stock priced at fifty times its earnings because of this image as a growth company, has an extraordinary advantage in buying up firms with lower price earnings ratios. Each such purchase produces instant gains for the conglomerate. It can easily buy lower-priced stock with its high-priced stock, inflated by this image.

During the 1960s, such takeovers were daily news in the business press. Details differed from case to case but in the first stage of the typical scenario, the target firm would be selected. This would be a firm that was profitable, or that had large reserves, or large unused tax losses, or had other virtues which made it attractive either for seduction or rape. Once selected, the insiders in the conglomerate, as well as the banks, if they were privy to the plan, could personally buy up the stock of the target firm as quietly as possible at its current price for their own individual speculation. They would then approach the management of the target and make an offer that literally could not be refused. They would offer to buy fifty one percent of the outstanding common stock at a price substantially above the current market price and often offer key officers a three- or five-year contract to continue in their jobs at a much higher salary. They would also mention that they planned to make a public tender offer on a certain date. This gave the insiders in the target firm an opportunity to buy up the target company’s stock at its current price for their own private speculative gain. In most cases the target company’s management could not resist these temptations and they would recommend the sale to the stockholders. In other cases, the pay-offs assured their neutrality. As an added inducement, the offer was often in the form of a stock exchange which made the payment nontaxable as a capital gain to the seller, or in the form of subordinated debentures, convertible bonds, or warrants of the conglomerate in exchange for the common stock of the target company. As soon as the tender offer was made public the price of the target company’s stock would immediately tend to rise to the offered price. The insiders could cash in their stockholdings at any time, whether the takeover failed or succeeded, taking their speculative gains. If it succeeded, as it usually did, the conglomerate took control.

Typically, the conglomerate would recover the cost of its new acquisition as soon as possible and repeat the process again and again without having to go to the capital markets to finance its ventures. This could be done by issuing bonds for this purpose in its own name, or by shifting the cost of acquisition to the target company which, as a subsidiary, could float bonds to reimburse its new owner for the cost of acquisition. Either the conglomerate or its subsidiary would emerge from the acquisition with a heavy load of new debt. The cost of servicing that debt and the cost of the new layers of management would ultimately be passed on to the consumer in the form of higher prices.

23,705 firms were acquired by conglomerates in this way, or with variations, between the years of 1950 and 1977. The public was not familiar with this take-over method when it started.  The general impression was that bigger and wealthier companies were buying up small and poor companies. Some conglomerates may have started that way. For example, ITT (International Telephone and Telegraph) was a powerful monopoly in 1950, but if did not have the wealth needed to acquire the $14 billion in assets that it had acquired by 1978. LTV and Gulf and Western Industries started with virtually nothing. These were predominantly bootstrap operations which parlayed acquisitions, one upon the other, using the devices described above.

Evaluating the Conglomerate Movement

The Federal Trade Commission Staff Economic Report on Corporate Mergers in 1969 arrived at a number of general conclusions, which are quoted here with only a few additional comments.

We must distinguish at the outset between the Federal Trade Commission and its staff.  The document mentioned above is the Staff Report to the Federal Trade Commission, although it is also called the Staff Report of the Federal Trade Commission. It is not endorsed by the commission as a whole, and two commissioners attached disclaimers. Commissioner Elman said a more massive study should be made, and Commissioner Jones claimed that the conclusions drawn were premature and insufficiently supported. This phenomenon, of staff and commission seeming to pull in opposite directions, is not as strange as it may first appear. Federal Trade Commission members have a long history of being business-oriented and somewhat less than enthusiastic in their enforcement of antitrust laws.

Following are the FTC staff conclusions:

(1)…The share of manufacturing assets held by the 100 largest corporations in 1968 was greater than the share of manufacturing assets held by the 200 largest corporations in 1950, the year Congress enacted the Celler-Kefauver amendment to Section 7 of the Clayton Act. The 200 largest manufacturing corporations in 1968 controlled a share of assets equal to that held by the 1,000 largest in 1941, when the Temporary National Economic Committee submitted to Congress its Final Report and Recommendations on an Investigation of Concentration of Economic Power.

(2)  These figures significantly understate the level of concentration in the economy, however, inasmuch as many large corporations do not fully consolidate their assets in their corporate reports and are engaged in joint ventures and management interlocks with other large corporations, increasing the actual level of centralization of corporate decision-making in ways that may prevent or discourage independent behavior.

(3)…About 80 percent of the manufacturing assets acquired by the 200 largest firms during 1948-68 were in the same broad industry group as the acquiring firm.  Increasingly, leading firms in related industries are becoming subject to centralized decision-making, reducing the effectiveness of potential competition as a market force in the economy. When viewed in broad perspective, the vast numbers of product-related mergers tend to eliminate firms that are potential competitors of one another.

(4) A conglomerate firm derives its power not so much from the structure of the market as from its own internal structure. Power is inherent in the firm’s anatomy. The use of conglomerate power may weaken or repress rivals, induce them to make defensive modifications in their behavior, and discourage entry. Business conglomeration may contribute to industrial concentration; in a direct manner by drawing together hitherto independent business firms and indirectly by establishing the basis for enhancing the growth of the combination at the expense of smaller rivals.

(5)…Conglomeration…enlarges two lines of conduct unavailable to single-market firms – the practice of reciprocity and of cross-subsidization. (Both of these are characteristic practices of monopolies. By the first, the conglomerate uses its huge purchasing power as a weapon in making sales; by the second, it offsets losses in one place by gains in another.) The exercise of reciprocity…induces sales by converting purchasing power into a sales-generating force, lower price, or superior product. By using monopoly profits in one area to subsidize operations in a competitive area, a firm may force competing companies to choose between bankruptcy and consolidation.

(6)…It appears on balance that conglomeration is enhancing the level of concentration…when industry concentration ratios are high; rivals behave more like monopolists than competitors.  Conglomerate interdependence and forbearance, as in concentrated industries with few firms, can arise because
a) the same or related decision-makers have simultaneous access to both firms, or b) the firms share contact points in input or output markets that create a mutual awareness of common interests. Interlocking directorates, intercorporate stockholding, joint ventures, and the more general community of interests…facilitate coordinate relationships among firms.

(7) The present study…provides voluminous evidence that the existing law on interlocking directorates is inadequate and that interlocks among our great corporations are especially inimical to competition because the economy has become increasingly concentrated among a few hundred corporations.

(8)  Conglomerates have an enormous potential for seeming to improve the performance of firms they acquire. Current merger accounting provides a hot house environment for acquirers. Even if mergers do not turn out well from an operating standpoint, acquiring firms can often show higher profits through accounting manipulations which can show an acquired company’s earnings doubled in a year.

(9) Recent experience indicates that accounting can glamorize the performance of merging firms and those special opportunities for tax avoidance or postponement, in effect, commit the present tax system to subsidizing merger transactions. We therefore recommend that necessary administrative action be taken, and if necessary, legislation be enacted (1) to require fuller public disclosure of the financial operations of major corporations, and (2) to reform the tax laws, to eliminate the incentives for mergers.

(10) Tax exemption of corporate reorganizations has the most pervasive impact of all tax provisions favoring mergers. In an overwhelming majority of cases, large mergers have been accorded tax-free treatment…no capital gains taxes had to be paid.

(11)…The published financial statements of the conglomerate enterprise mask both high profits and losses of its various operations, and its public financial reports become decreasingly useful …

(12) Available knowledge does not support the thesis that the current merger movement is being propelled by technical imperatives requiring large firm size. Nor is there persuasive evidence that diversification per se, or the conglomerate form of organization, is conducive to more active research. (They cite examples of management failures among conglomerates and conclude)…This experience lends force to the observation of the president of Du Pont that ‘Running a conglomerate is a job for management geniuses, not for ordinary mortals like us at Du Pont.’ To view the current merger movement as a simple manifestation of entrepreneurial effort to restructure the economy in order to meet the requirements of organization efficiency is nonsense.

(13)  The development of conglomerates carries with it a potential for serious economic and social disruption for the communities involved and reflects and erosion in the fundamental design of the antitrust laws to foster a wide diffusion of corporate control in the American economy.

This last finding is profoundly important.

Senator Kefauver warned in 1947 that: “The control of American business is steadily being transferred from local communities to a few large cities in which central managers decide the policies and the fate of the far-flung enterprises they control. Millions of people depend helplessly on their judgment. Through monopolistic mergers the people are losing the power to direct their economic welfare. When they lose the power to direct their economic welfare, they also lose the means to direct their political future.”

Beyond the major findings of the Federal Trade Commission Staff Report on Conglomerate Mergers, some other conclusions can be drawn:

The conglomerate movement was inflationary in its process and in its final product. The process was rooted in inflation and speculation in rising stock prices, and it contributed substantially to the speculative fever of the 1960s. The disillusionment with conglomerates at the end of the sixties contributed to the general depression of stock prices thereafter. The product was inflationary because the conglomerate has many monopolistic characteristics. In addition, the basic costs of all the products of conglomerates must include the expense of the new administrative bureaucracies that have been created at the division and headquarters levels. The costs of the new debt structures must also be added to these prices.

In this history, we have been observing the development of a new and uniquely expansive form of capitalism. The new trusts and holding companies that emerged at the end of the nineteenth century had an enormous advantage over their competitors. They had at their command a large and growing pool of surplus capital as a result of their monopolistic controls. This surplus, in the hands of this class of restless, ambitious, and energetic entrepreneurs, became an expansionist force of unprecedented power. It might be likened to a stream which gets bigger and faster on its way to the sea. If one way is blocked, it will find another. If the stream is dammed, the water will build up behind the dam until it overflows and again it will flow to the sea. A good deal of the history of corporations can be described by this analogy. The diversions and the dams have been the upsurges of political opposition, the laws enacted by Congress, the degree of enforcement, and the interpretation of these laws by the courts in specific cases. When such obstructions have closed off certain directions, the stream has flown in any other direction that was still open, or through any opening it could create. The legal impediments sometimes changed the character of the flow. As we have seen, the first wave was monopolist in character and the second, oligopolist. This change from monopoly to oligopoly was primarily cosmetic. The reality of market control continued. The third wave was conglomerate in character and did not fit neatly into our traditional ideas of monopoly control. As the FTC study shows, conglomerates have some of the characteristics of monopoly price behavior, and perhaps they should be viewed historically as an initial and transitional stage leading toward full monopoly control.

As we can see from the earlier history of mergers that there were successive waves of acquisitions, each followed by periods of consolidation and entrenchment. The wave of conglomeration will undoubtedly require a similar period for such consolidation, for digestion or, in some cases, for indigestion. Time has already shown that some of the conglomerate acquisitions were unmanageable or simply unprofitable mistakes; therefore some divestment has already begun. It is only reasonable that conglomerates should begin to re-evaluate their acquisitions in the light of their own accumulating experience, to begin trading companies, and to rationalize their holdings. This kind of rationalization will undoubtedly be in the direction of concentrating on similar product lines and the ultimate achievement of oligopoly to the extent that the anti-trust laws permit. In this sense, the conglomerate movement may be viewed as a massive evasion of the antitrust laws.

This history forces the conclusion that the corporate structure has reached its present size and market power despite all of the political opposition, all of the antitrust laws, all of the enforcement efforts of the Federal Trade Commission, and all of the suits in the courts. One of the ironies of this history is that each enactment of anti-trust law has been followed by a massive wave of mergers and acquisitions.

Not once, but repeatedly in this history, we have gone through a depressing cycle of political movements leading to the passage of a law which has loopholes, or is not enforced, or is weakened subsequently by the interpretations of the courts. There are many American families who have witnessed this cycle for three generations. The first generation started with the political movement for the Sherman Act and lived to see the first wave of corporate mergers. The second generation saw the movement that culminated in the passage of the Federal Trade Commission and the Clayton Acts, and then lived to see the second wave of mergers in the 1920s. The third generation witnessed the New Deal movements which ended with the passage of the Celler-Kefauver amendments to the Clayton Act in 1950, and then saw the third wave of conglomerate mergers.

This historical experience raises disturbing questions about the nature of our political, legislative, and judicial systems. Under our political system and our laws, we have not thus far succeeded in developing any way to effect any substantial and fundamental modification of this growth of corporate power. It is a deeply frustrating history. All we can claim is that we may have succeeded in some minor ways in deflecting the direction and form of the corporate movement, or in altering somewhat its rate of growth, but we cannot claim that we have changed the content, or the power.

Expansion Abroad

The conglomerate expansion of the large corporations within the United States has been matched by an equally massive acquisition of foreign subsidiaries. Before World War II the typical United States corporation was a domestic corporation; now it is global. The character and significance of this change is still not adequately appreciated, but the book, Global Reach, by Richard L. Barnet and Ronald E. Muller¹⁸ has helped to increase public awareness. The material that follows is based upon this book.¹⁹

What was the typical combination of factors that persuaded a United States corporation to create a subsidiary abroad, or to acquire one?

(1) The expansion usually represented an extension of advanced technology in which the corporation possessed a leading position in control of patents and in trained technical personnel.

(2) An existing market for the product in the new country or in neighboring countries favored the establishment of a plant there to save transportation costs.
(3) The corporation had highly developed marketing divisions and could, at relatively low cost, extend its marketing practices to the new area. Often, existing television, radio, and advertising programs could be adapted and re-run.
(4) The corporation had the managerial know-how, not merely to run a factory, but also to take advantage of differences in foreign exchange, of differences in tax laws, of tariffs, and of regulations on repatriation of profits.
(5) The corporation had adequate capital, or preferred access to it, through the United States global banks, with which it already enjoyed connections in others parts of the world.
(6) The corporation had the cooperation of the United States Government in several ways:
(i) It was permitted to do abroad those things which were expressly illegal in the United States. The bans on horizontal and vertical integration under the antitrust laws did not apply to foreign acquisitions.
(ii) It was able to retain more of its earnings abroad. The government specifically gave tax advantages to such foreign operations, and foreign countries generally had much lower tax rates.
(iii) It could count on the help of the United States State Department, the U.S. Consular services, and even the Central Intelligence Agency for assistance in getting information about local economic and political conditions and about the activities of foreign competitors.
(iv) The State Department, Department of Defense and the Central Intelligence Agency often had relations with the government and the military of the host country.
(7) Wage levels in the host country were usually a small fraction of those in the United States for comparable work, sometimes as little as one tenth.
(8) Local military and repressive governments often assured that the labor force would be docile and would not strike, and that there would be no restriction on hours of work or conditions of employment.
(9) For all of these reasons, the foreign subsidiary would be far more profitable than similar operations in the United States.
(10) For all of these reasons, local competition in the host country could easily be overcome.

No outline gives an adequate picture of the complex real world. Each foreign acquisition had its own unique features with advantages and disadvantages, but the description given above provides a general explanation for the expansion abroad.

Corporate global expansion suggests several major conclusions:

(1) The relative power of global corporations is much greater than it was before their expansion. In many ways they have become sovereign entities with their own governments. Often their financial power is greater than that of the host countries.

(2) By arranging “transfer prices” or charges for services or licenses between subsidiaries in an arbitrary fashion, these companies can show losses wherever they wish, and profits wherever they wish, in such a way as to maximize net global profits after taxes. As many as five sets of books may be kept to accomplish this end result. This power to alter their internal pricing, as well as their monopoly power to fix the price of the final product and to sell it wherever the price is highest and exchange rates are most favorable, has two results:

(i) Financial reports become tightly guarded proprietary secrets, and control by any government, either United States or foreign, is extremely difficult.

(ii) The statistical reports of operations become a shambles. The profit figures are spectacularly understated. The vast bulk of all foreign subsidiaries are purchased and expanded by the reinvestment of foreign profits.

(3) The relative power of United States unions has declined dramatically. The fact that a global corporation can shift production to Taiwan, Singapore, or Brazil changes the relative bargaining position fundamentally. The adoption by global corporations of the policy of “multiple sources,” of manufacturing identical components in several countries, gives the global corporation the whip hand in strikes. Unions in such a weak position can hardly be considered to be a very strong “countervailing power.”

(4) The global corporation is often a defense contractor and part of the military industrial complex. Examples are ITT, Litton and Rockwell.

What is the significance of this global expansion in the structure of corporations for inflation at home and abroad? It is clear that the market power of the global corporation is greater than before, that their monopolistic power has increased. It is also clear that the global expansion is a product of the political and military expansion of the United States in the post World War II era.

Large corporations are now, and for the last eighty years, have been the single most powerful inflationary force in our society. The rate of increase in corporate profits after taxes since 1940 has been over double the increase in the consumer price index. Corporate profit after taxes is a residual figure, after subtracting executive salaries, benefits, and expenses, and therefore understates the extent of corporate gains.

If what we have described thus far is true, if large corporations can exercise their market power so as to maximize their profits, then the logical result should be a redistribution of income.

The actual data shows that the top five percent of all families have had a relatively stable proportion of the aggregate income of all families from 1950 to 1977, about one-sixth. Is there an explanation for this apparently illogical result? If one looks more closely at the manner in which the highest-income groups receive their rewards, the answer becomes clear. Top-salaried personnel receive major portions of their rewards in the form of accruals that are not considered reportable income, such as company contributions to pension systems, profit-sharing programs, or “keyman” insurance. They also receive other benefits in the form of expense accounts, or the use of automobiles, or other “perquisites”. Similarly, self employed professionals can now establish so called “Professional Corporations” under which substantial portions of their current incomes are placed in tax-deferred pension systems. All of these methods minimize current income, primarily for tax advantages, but they also lead to a distortion of the reported changes in distribution of income among income classes.²⁰

We must recognize and confront the fact that the fueling of inflation through corporate policy is a reality. Corporations strive to block our recognition by projecting quite a different image. Later we will examine the difference between the image and the reality.

“Big Business” is the “original power” which generates inflation. There are others, which Galbraith has called “countervailing powers”. In his view, “big labor”, “big government”, and “big farmers” have developed as a response to, and in order to cope with “big business”. We will turn next to these other power structures and try to determine whether they exist, and if they do, to see if they are inflationary forces.

2. Corporate Governments

We are accustomed to the concept of public government; but not of private government. The former is visible and is subject to public control by use of a formal, political process. As citizens we can participate in the decisions of public governments; and we can hope to try to control their excesses and their bureaucracies. No similar avenue exists now for the control of private governments.

In sheer size, the governments of corporations are often larger than those of most cities and of many states. Senator O’Mahoney presented an interesting comparison in his Final Temporary National Economic Committee Report on Investigation of Concentration of Economic Power. He listed, in order of size, the assessed valuation of the 48 states in 1937 and the total assets of the 30 largest corporations.²¹ The comparison is not very accurate because “assessed valuation” and “total assets” are not quite comparable. By this measure, however, two corporations, the Metropolitan Life Insurance Company and the American Telephone and Telegraph Company, were richer than 38 states. And 13 states were poorer than the smallest of these 30 corporations.

Corporations are large entities and they are governed. Corporate governments are not hidden; they fill some of our largest buildings. They are, however, private governments which are not subject to control by any external political process. These governments make private decisions for private ends. For example, when the Board of Directors of Exxon Corporation fixes the price of its gasoline, it has, in effect, taxed the public. Yet the public has no representative in this process. Its power is limited; to pay the tax, or to do without the gas.

We are accustomed to complain about the size of government bureaucracies and their expense and inefficiency. It is difficult to make accurate measurements, but rough approximations of relative size can be made. The estimated size of the bureaucracy of the 200 largest manufacturing corporations in 1970 was larger than that in all public government, federal, state, and local, combined. Included as part of this private bureaucracy are three major categories of employment: managers and administrators; professional, technical, and kindred workers; and clerical and kindred workers.

This, of course, is only a partial measure of the total bureaucracy in the large corporations. If we add those in other major industries, such as transportation, communication, utilities, insurance, and finance, the total bureaucracy in the corporate sector is far larger.

We should expect private government to be larger because it performs many vital and complex functions which touch our lives and welfare far more directly than the operations of most public agencies. It is also likely that the relative expense of operating this private corporate government is substantially greater because corporate salary levels are generally higher than civil service salary levels.

Chandler traces the development of the organizational structures of large modern corporations as a tool for carrying out their strategic goals. He points out that very rarely did the empire builder, the founder of these giant corporations, become the organization builder.²² That function, apparently, calls for a different set of skills, and the creative innovators in this field were men like Pierre du Pont and Alfred P. Sloan. By 1925, Sloan had created the present-day organizational structure of the General Motors Corporation. He had placed the various divisions in a logical relationship to each other and had established a large overall administrative office manned by general executives assisted by staff specialists, all of whom coordinated, appraised, and set the policies for a number of multi-function, autonomous operating divisions. Lines of authority and communication between the general office and these operating divisions were carefully defined. Flowing through these channels of communication was a mass of data on internal performance and external conditions. Almost all activities were geared to predicted market demand and estimated economic and financial conditions.²³

The organization chart of a corporation like General Motors is complex to manage the exceptionally complex tasks performed. This organizational structure is credited, to a great extent, for GM’s early capture and maintenance of a leading place in the auto industry. Many United States corporations have followed Du Pont and General Motor’s organizational pattern, which has been quite successful in handling the production and marketing problems attendant upon diversification.

One of the distinguishing features of the modern corporate structure is the emphasis on marketing. In the earlier stages, selling was done primarily through commission agents or wholesalers, and the volume of demand was outside the control of the producer. The modern corporation has removed a great deal of this uncertainty and lack of control over distribution by establishing large marketing divisions whose primary function, in the words of Veblen, is a “quantity production of customers”, essentially to manufacture customers just as the operating divisions manufacture products.²⁴

A word might be added on the relative efficiency of the public and private government. Both are bureaucracies and have the hierarchical features described by Max Weber, but they have different objectives and functions. The corporation has a simple, primary objective: to make a profit by producing and marketing goods or services. This objective is clear, and performance can be clearly measured. Rarely, if ever, do public agencies have such clear-cut standards of success or failure. What is the measure of better public health, or safety, or pollution control? It is therefore inherently difficult to compare the relative efficiency of a private versus a public bureaucracy. The former fulfils a private responsibility, the latter, a social responsibility. The first is easily measurable, the second is not. We are dealing with large, well-entrenched, and complex bureaucracies. Private corporate governments have all of the tendencies and rigidities of Weber’s hierarchies, and any attempt to modify and alter them is necessarily slow and difficult.

Takaki calls the existing situation “the corporate iron cage”²⁵ by which he means a structure that governs us, dictates our mode of existence and even our mental outlook, but that also imprisons us, and from which it is very difficult to escape.

Galbraith also recognizes this reality: “When the modern corporation acquires power over markets, power in the community, power over the state, and power over belief, it is a political instrument, different in form and degree but not in kind from the state itself.”²⁶ Corporations have governments, and these governments are political powers. Later we will discuss the extent to which these corporate governments have penetrated public government.

3. The Movement Towards “Social Responsibility” of Corporations

As a result of several developments beginning in the 1950s, new problems have emerged. We have become more aware of a series of environmental problems: population growth; pollution of air, water, and earth; disposal of sewage, industrial, and nuclear waste; and the effects of pesticides and other chemicals in foods and in the food chain.

We have also become more aware of the hazards we have been exposing ourselves to as a result of commercial and drug consumption, and while using available services. The legal process and the law have played a crucial role in the development of this consciousness. A long series of successful damage suits have gradually brought “product liability law” into being, making producers accountable for damages incurred by users of hazardous products. The cost of such damage suits and the threat of others have had an enormous and salutary effect in directing the attention of manufacturers to the safety of their products, and to the side effects of certain drugs and food additives.

For simplicity, let us combine these under the general heading of “social responsibility”. They are all related to safeguarding the environment, or the health, welfare, and safety of society as a whole. If our society owned and controlled its resources and its productive enterprises, there would be less of a problem. Social responsibility would then be the first consideration in making all decisions.

There is a problem in our society, however, because the ownership and control of the economy is largely in the hands of the corporate governments which we have just described. I attended the 1974 Harvard commencement exercises, where the graduating class of the School of Business was given their diplomas with the cryptic admonition that “they now had the opportunity to exercise social responsibility”.
I wondered how many such opportunities these budding young business executives would get. How does the modern corporation devoted to its goal of profit become “socially responsible”?

Vast private governments of corporations make decisions every day regarding what, where, and how our resources are used and products are made, and do so with only one private objective: to make a profit. They have little regard for social responsibility; for conserving resources, protecting water, air, and the public’s health, and for looking after its safety. What happens when “social responsibility” raises the costs of production and reduces profits?

No man can serve two masters. Nevertheless, the need for the introduction of social responsibility into corporate governments and decision making is obvious to all who make any pretense to be civilized. Where can we find an educated person who will publicly proclaim or advocate social irresponsibility? Therefore, the movement has grown.

The extent to which such social considerations have changed the actual practices of corporate governments has yet to be determined. They have undoubtedly influenced the public relations programs and corporate images projected in their advertisements. Our problem is distinguishing the image from the reality.

For the narrow purpose of this book, assessing the sources of inflation, it is sufficient to say that prices must inevitably go up to the extent that social costs are incorporated into the costs of production, and these costs are passed on in higher prices to the consumer. To the extent that they are not passed on, it is not inflationary and may represent real redistribution of income.

Society as a whole must pay the true costs of production. If, for example, we pay only the costs of paper pulp production, but not the costs of cleaning up the resulting pollution of the rivers, we are merely deferring a part of the true costs. Our real choice then is between paying the true total costs at the start in the price of the paper, and paying some of them later at public expense. If the public pays, it is being forced to subsidize paper production. The public could choose to subsidize any industry by a vote. As it is now, however, they pay costs which they didn’t agree to pay, and which should have been rightfully borne by the consumers of the paper. Add to this the consideration that it is generally more expensive to clean up than to prevent damage, and that some injuries, such as pollution-caused lung cancer, cannot be cured at any cost.

Environmental and social considerations are inflationary in one sense. An automobile with anti-smog and safety features has to cost more than cars without those features. We may reduce this inflationary aspect by conservation and by changing our consumption patterns. To the extent, however, that social responsibility is paid for directly, its cost will exert inflationary pressure in the foreseeable future. Where investments in social responsibility reduce the total cost to society, they may indeed be anti-inflationary.

4. Labor and the Growth of Unions

This section seeks to answer the following questions: Is organized labor in the United States an inflationary force? Do the structure of unionism and the institution of collective bargaining constitute a countervailing power to that of the corporations? Is there a relationship between the inflationary force of corporate market power and unions?

Traditional theory holds that two major forms of inflation exist: a cost-push form, and a demand-pull form. The cost-push type of inflation results from the action of wage increases to cause price increases. An examination of the history of the development of unionism in the United States may give us some clues to the true relation of organized labor to inflation.

In the previous chapter we examined the conduct of the developing corporations in their relations to the consumer, the courts, and the government. We are now going to look at their behavior and their motivations in their relations to their work forces. Corporate leaders who were rampant lions in the outside world did not suddenly become mild lambs within the four walls of their own factories.

The history of unionism can be understood as a response to the development of capitalism and its “original” power. At the beginning of the industrial revolution, men, women, and children were introduced to the brutal discipline of the factories. The “tyranny of the market” forced employers to lengthen hours, speed up work, and cut wages and other costs to the bone, or to go out of business. This inescapable pressure is what made the early struggles between capital and labor so bitter and so uncompromising.

The formation of the corporations increased the relative power of the employers tremendously. The terms of the struggle were inherently unequal. Workers were close to the border line of starvation and were therefore more vulnerable. A major portion of the workforce was recent immigrants from Europe and the combination of their impoverished backgrounds, old prejudices, their unfamiliarity with American life, widespread illiteracy, and differences in language, ethnic backgrounds, and values, all served to hamper their organization into unions. These groups were often permeated with fears and paralyzed by terrors which we, who look back from our safe distance, find difficult to understand and appreciate.

Habituation to the work ethic of mass production is difficult enough in any country, but in the United States it was compounded by the fact that the workers were often immigrants, either first or second generation. These new arrivals at the factory gates were subjected to a series of traumatic shocks. First was the degradation of the work; the subdivision of the work into its simplest, least-skilled, and lowest-paid components, which were performed for long hours and at ever greater speeds. Factory workers were deprived of the normal joy in work and of the meaningfulness of work performed as a social process.²⁷ The second shock was the dehumanization of their subjugation to the machine. They did not work the machine; the machine worked them. The third shock was the loss of the security of their traditional roles in an extended family with treasured rituals as part of a social work process. They now had three masters: the foreman, the machine, and hunger.

It was no wonder that factory conditions accompanied by such traumatic individual and social ruptures should produce workers who were deeply suspicious and distrustful, and yet desperate in their need to find a way out and up. One of the greatest appeals of unionism was its promise to restore their human dignity.

When workers joined unions, they quickly discovered that the law and the police power were on the side of the employer. Employers could easily get injunctions to break strikes, and the police or troops were readily available to enforce these injunctions. Yellow dog contracts were widely used, and a worker’s signature on that contract was ample warning that he could be immediately dismissed if he joined a union, and that the courts would enforce the contract. They knew from firsthand experience about “industrial militarism”, the practice of some employers who maintained standing armies of police guards and arsenals of weapons, and about labor espionage as a way of preventing the workers from organizing. They knew about these things for fifty years before the La Follette hearings in the late 1930s brought to light the extensive use of such brutal anti union methods in the United States. After World War I there was widespread use of “company unionism”, that is, forms of employee representation which were easily dominated by the company, and which were usually associated with various forms of company paternalism.

For all of these reasons, labor unions were often organized in the beginning as secret societies. As corporations grew in power, it was also natural for the unions to respond by merging local unions into city and regional councils, into national unions, and then into labor federations.

It was an unequal struggle and it was no wonder that independent unions did not succeed in establishing important footholds, and that they resented the unfairness of the combination of forces arrayed against them. At the turn of the century there were less than a million workers in unions, and most of these were native white workers in craft unions affiliated with the American Federation of Labor. Their resentment turned to fury when the Sherman Antitrust Act, which they had supported and which was intended to destroy the trusts, was converted into a measure to destroy unions. The “combinations in the form of trust or otherwise, or conspiracies in restraint of trade” in the Sherman Act was interpreted to apply to unions, at the same time as it was being interpreted not to apply to trusts. There is no recorded instance of any officer of any large corporation, such as the railroads, United States Steel, Standard Oil, or Alcoa, ever spending a single day in jail in the first fifty years of the antitrust laws. Yet over 100 union officers were convicted and sent for prison terms of up to two years in the same period of time.²⁸

Of the twenty-six cases ending in imprisonment during that period, only one case involved a business; but twelve involved unions. Eleven were against business racketeering.

The single event that changed this unequal relationship of forces was the Great Depression of the 1930s. Militant union and political activity rose up against widespread unemployment, wage cuts, and hunger. These forces rallied behind Roosevelt and were a key factor in his election. The major element for labor in the New Deal was the passage of Sec. 7(a) of the National Industrial Recovery Act of 1933. This act gave employees the “right to organize and bargain collectively through representatives of their own choosing” and to be free in organizing and bargaining “from the interference, restraint or coercion by employers of labor”. The Morris-LaGuardia Act outlawed the use of federal injunctions in labor disputes in 1932. When the Supreme Court held the NIRA to be unconstitutional, Congress, in 1935, enacted the Wagner Act. This act listed certain unfair labor practices that were prohibited. A National Labor Relations Board was established to adjudicate charges of unfair labor practices, and to hold elections to determine which union should represent the employees.

Employers were convinced that the Wagner Act would be judged unconstitutional and the law was held in virtual suspension until the Supreme Court passed on it. But by 1937, Roosevelt had changed the composition of the court by several appointments and the Act was validated for employment in interstate commerce. Agricultural workers, and about two-fifths of all non-agricultural workers, who were held not to be in interstate commerce, were excluded. To protect some of these excluded workers, several states adopted their own labor relations acts.

This enormous opportunity to expand trade unionism came at a time when the union movement was not ready for it. At the time, the conservative American Federation of Labor was dominated by craft unions that were most interested in preserving their traditional craft jurisdictional rights. A major split rapidly developed between these old line craft unions and those who believed in organizing the mass production industries. After the American Federation of Labor Union convention defeated an industrial union resolution in 1935, eight American Federation of Labor Unions formed a Committee for Industrial Organization. Still refusing to compromise, the Executive Council of the American Federation of Labor Unions ordered the committee dissolved, and when they refused, finally expelled ten unions, which then formed an independent Congress of Industrial Organizations. The underlying force behind this rift was massive organizing drives by the CIO in steel and the auto industry in 1937, followed by other powerful drives in other mass production industries thereafter. The American Federation of Labor also joined in this organizing drive and, as a consequence, union membership more than doubled from 1936 to 1940.

This upsurge of union organization continued into the war years when a no strike pledge by labor was combined with price control and wage stabilization. Unions contended that the wage stabilization was more stringent than the price control. As soon as the war ended, they conducted large scale strikes to make gains and to win union recognition from reluctant employers. The immediate response was a determined effort on the part of employers to weaken the legal status of unions. They succeeded in part with the passage of the Taft-Hartley Act in 1947, which placed many union activities under government surveillance and defined certain union activities as unfair labor practices. Despite these difficulties, unions generally succeeded in continuing to organize, but the growth reached its peak in 1970 and has since declined.

If one looks at union membership as a proportion of the labor force, the peak was reached in 1947 when it represented less than one quarter of the total. It has since declined and is now about one fifth of the total. If one excludes agricultural work, which is largely unorganized, union members constituted about one third of the total non agricultural labor force in 1947, and less than one quarter in 1976. If one looks at the numbers alone, it is obvious that unionization, as a mass phenomenon, is relatively too weak in this country to constitute an overall inflationary force. Most, workers are not members of unions. This is not surprising when one considers that during the entire history of this country, unions had only ten years, from 1937 to 1947, during which they had clear legal status to organize. Before the passage of the Wagner Act and after the passage of the Taft-Hartley law, they did not.

C. Wright Mills concurred with this finding in The Power Elite written in 1956.²⁹ He thought unions might become a countervailing force in the prior decade, but it hadn’t happened, as unions had suffered a rapid decline in power and had had little part in major national decisions, and there was no effective countervailing force against the power of business.

Unions represent a minority of the total work force, but their influence on wage levels is greater than their proportionate numbers. They set the pace for all workers and the natural drive for increased benefits extends down to many unorganized groups. In addition, employers, particularly large ones, tend to pay their non union employees as much or more than the union workers in order to encourage loyalty to the company rather than to the union. Therefore, although each union bargains only for its own members, the results may spread, albeit with some lag, to other groups.

In discussing the relationship of wage increases to price increases we should consider changes in productivity as well. In the period from 1913 to 1967, money earnings increased by about 5 percent per year; real earnings increased by about 2.5 percent per year, and productivity also increased by about the same rate, 2.5 percent per year. Thus, about half of the long-term increase in money earnings could be explained by increases in real wages, and the other half by increases in real output per man hour, or productivity. Increases in real earnings were matched by equal increases in productivity. Between 1967 and 1979, total compensation per man hour in manufacturing increased by 7.3 percent per year while prices increased by 6.0 percent per year, making the increase in real compensation per man hour 1.2 percent per year. In the same period, productivity increased by 2.2 percent per year. So the increase in productivity was greater than the increase in real compensation. As a result there was a relative decline in real compensation per unit of output.

A similar picture can be shown for all private business in the U.S. where, from 1967 to 1979, real compensation increased by 1.3 percent per year while real compensation per unit of output dropped by 0.1 percent per year.

Another way to judge the question of whether general wage levels are inflationary is to compare family incomes with budget costs. For example, the costs of an intermediate budget of the United States Department of Labor for a family of four persons were $12,909 in 1973. The median family income for production and non-supervisory workers at that time was $11,224 where the wife was not working and $13,723 where both husband and wife were employed. The figures in 1977, five years later, were all higher, but the relationships were the same.

The relationship can also be shown by comparing the money incomes of males only with the costs of various family budgets. About half of all males had incomes below the cost of the lower budget; and over three quarters were below the cost of the intermediate budget. These budgets of the United States Department of Labor are not intended to represent a minimum or subsistence standard of living, but rather a level of “decency”, a somewhat ambiguous idea.

The significance is that both husband and wife had to work to maintain their families satisfactorily. This is why more and more married women have entered the labor force. In 1940 only one out of seven married women worked while by 1978 almost half of them did. Another way to gage whether wage increases of the average worker were inflationary is to examine the recent trend of real spendable earnings. A typical married worker with three dependents reached a peak of real earnings in 1965, and thereafter the trend was downwards. The only exception was in 1972, due to a smaller than average price increase in that year. The same picture was true of workers with no dependents. Workers whose real spendable earnings are dropping could not logically constitute a substantial inflationary force.

After World War II, there developed a clear tendency toward long-term contracts. This development was quite natural as both employers and workers desired the stability that longer term contracts provided. Often, such contracts included periodic wage increases. When prices began to rise more sharply after 1965, “cost of living escalator clauses” became more common. By 1978 approximately 5.8 million workers were covered by such provisions, representing about 7 percent of the nonagricultural labor force.³⁰ Indeed, it would hardly be possible to have long-term contracts during periods of inflation without some provision for it. Therefore such clauses are now common in a wide variety of longterm contracts, such as pension systems, property leases, and construction projects. Such escalator clauses are not causes of inflation, but are rather responses to and a protection against inflation after it occurs.

Thus far we have been discussing workers and unions as a whole. If we separate workers into groups, quite a different picture emerges.

There is a group which we may call an elite who work for powerful corporations. Members of this elite, both union and nonunion, are relatively higher paid, receive more substantial wage supplements and fringe benefits, and tend to work more steadily. They are found in the auto industry and in other industries such as oil, primary metals, mining, public utilities, and chemicals. When compared to the average earnings of all industrial workers, this elite is relatively well paid. Since they also enjoy better fringe benefits and work more steadily, it is fair to say that their total compensation is about double that of the workers at the lower end of the spectrum. Of the 86 million employed workers in 1978, about 10 million were in this group. They constitute a small fraction of the total, even if we include elite workers in monopolized sectors of the economy. They also do not go on strike very often. In machinery, excluding electrical, there was no significant time loss due to strikes in the 30 years between 1947 and 1976. In the transportation equipment industry, there was only one year between 1950 and 1976 when time lost due to work stoppages was significant. In mining, there was no significant strike activity for the 26 years between 1950 and 1976.

It would be misleading to infer from this picture of a stable and relatively peaceful collective bargaining relationship, that the lion and the lamb had decided to lie down together in peace and harmony. It is reasonable to assume, however, that the corporations realized it was easier and more efficient to make compromise settlements with the unions, and to pass increased costs on to the customer. This policy helped the corporation attract and maintain a loyal and skilled labor force.

So corporations would settle on wage increases and immediately increase their prices, often exceeding wage increases, creating the illusion that the blame for inflation was the unions. Public belief in wage cost push inflation is a result of these corporation policies, and one cannot but admire the corporations for their tactical adroitness.

Let us return to the question raised at the beginning of this chapter: Is organized labor in the United States an inflationary force? The evidence indicates not. There are some unions that exercise monopolistic powers over their wages, and therefore over price levels, but they are the exception. By and large, unions can’t even establish their own wage levels, let alone price levels. They are only a minor force that has developed as a means of self-protection against the power of employers.

There is one aspect of unions that may constitute an inflationary force. Because the vast bulk of laborers are not paid enough to provide a desirable standard of living for their families, unions will continue to try to raise these substandard wage levels. To the extent that such efforts are successful, the cost of production will go up, and unless employers are willing to absorb these costs out of their profits, prices will go up.

In some of the industries dominated by large corporations, unions have succeeded in winning a share of the surplus monopoly profits. However, the unions do not determine the price levels. That still remains the prerogative of the corporation.

The building trades unions, because they are organizing skilled professionals who command higher wages, have managed to protect themselves from inflation. Because building trade wage rates are a major component of construction costs, they do have an inflationary effect on new construction costs.They are, however, only one of several associated inflationary influences. By and large, unions provide a stabilizing force in industries where there is competition among many small employers.

Our economic system has never succeeded in supplying housing to lower-income people at prices they could afford. This has been one of our perennial failures, and such housing has always required governmental subsidies. Interest rates, a shortage of housing, and real-estate speculation (described in Chapter 3) have all played a role in the sharp rise of prices of new housing.

I have dwelt on the history of unions because the vast majority of them emerged due to legitimate human needs, and they have been widely discredited.

In 1929, half of the nations farms produced crops and livestock valued at under $1,000, and most others didn’t surpass a value of $2,500. The average farm at that time in the United States was less than 155 acres and represented a total investment in land and buildings of less than $5,000. During the Great Depression wholesale prices dropped by half of the 1929 levels. These were truly grim years for farmers, when prices were often below the cost of production and farmers were literally working for nothing. Such were the hard times which spawned songs like “leven cent cotton, forty cent meat, how in the world can a poor man eat?”, and Steinbeck’s The Grapes of Wrath. It was a period of profound wounding of the spirit and of demoralizing economic despair that left lasting scars on American farmers in particular.

Competitive Structure of Agriculture

The cause of the disastrous drop in farm income can be found in the structure of agriculture in the United States at that time. It happened primarily because farming had been an almost perfect example of true competition. In 1934 and 1935 there were about seven million farms. The typical unit was small, and the degree of concentration was low. Corn was grown on almost five million of these farms, wheat on over one million, cotton on almost two million, hogs on almost four million, and cattle on almost five million. Moreover, the number of farms could be easily increased. There was little difficulty in entering farming; the knowledge of the practices was widespread and easily accessible; plenty of land was available that was suitable for cultivation; and the capital required for entry was low. Large-scale farms, defined at the time as those with products valued at $30,000 or more, numbered less than 6,000 in 1929. They represented only one-tenth of one percent of all farms and 4.5 percent of the value of all farm products. At that time the eight largest producers accounted for one-quarter of one percent or less of the output of cotton, wheat, and hogs.³¹

Up until 1935 the producers of most agricultural products were powerless to fix the prices at which they sold their products. Not one of them could control enough of the supply to enable him, by reducing output, to affect the price appreciably. No group of them acting together could control a large enough part of the supply to influence the market price. If they succeeded temporarily, outsiders would rush in to expand production and benefit by the higher price. Often, the size of a crop was affected more by the weather than by the conscious choice of the farmers, who usually had to sell their output when it was ripe at whatever it would bring. As a result, prices of agricultural products fluctuated more frequently and more widely than those of most other goods. Whether the prices rose or fell the farmer had to continue to produce. The interest, rent, and taxes still had to be paid. This situation was quite different from the behavior of monopolies. During depressions, monopolies tended to maintain price levels while cutting their production because they had the power and control to do so.The farmers did the opposite because they lacked the power and control to do otherwise.

Two additional factors placed farmers in further jeopardy. The railroad lines, on which they were largely dependent if they were to reach their market, constituted a natural monopoly that could and often did charge them “what the traffic will bear”. In addition, many of the things they bought were the products of monopolized sectors of the economy. Agricultural machinery, trucks, gasoline, fertilizers, chemicals and feeds, were often available to them only at relatively high and non-competitive price levels.³² The United States Department of Agriculture has published figures since 1910 on what they call “the parity ratio”, that is, the relationship between the prices farmers receive and pay.Significantly, the prices farmers receive have almost always been substantially lower than the prices they must pay. The only exceptions in this long period of time were years of war or their aftermath. In the depth of the Great Depression, farmers received 58 cents for every dollar they paid. In the bulk of all the years since 1920, with the exception of the war periods, farmers have received an average of about 83 cents for every dollar they paid.

Moreover, despite the improvement of the farmers’ conditions since 1935, their basically disadvantaged position has not improved.

As a group, farmers have, in essence, been in a colonial relationship to the monopolized sectors of the economy. They have suffered from the same fundamental malaise; of having to sell cheap and buy dear. Another indication of this disadvantaged position can be found in the catastrophic drop in the relative earnings of farm labor. In 1933 the real earnings of farm laborers was lower than in 1880. Still another indication is the drop in the farmer’s share of the retail costs of food products by 1935. The food processors and distributors were more monopolized and processing and packaging was becoming more complex. They were getting a greater share of the cost of the final retail product. As the folk song put it: “No use talkin, any man’s beat, with l’even cent cotton and forty cent meat.”

In many ways the year 1935 marked a great watershed for farmers, the end of the era of total and unbridled competition. Out of the despair of the depression grew an upsurge of political power of farmers that was one of the major pillars of Roosevelt’s election and the inauguration of a New Deal for farmers. Under the New Deal unrestrained competition was no longer acceptable, the federal government put a floor on farm prices. Government limited and controlled farm production, farm prices were stabilized by buying and storing excesses, and farmers were given credit. Since then, farmers have been subsidized by the federal government on a massive scale.

The seeds for the New Deal changes had been sown long before. It had its roots in the struggles of farmers in the 1880s. The establishment of the farm credit agencies was the product of thousands of bank foreclosures and of refusal of credit except at exorbitant interest rates.

About half of all farm output since 1935 has been covered by government price support programs. Before World War II the emphasis was on restricting output. When the restrictions were lifted to meet war demands as well as post war foreign demands, the total output as well as the supported output increased. By 1977, output was ten times the 1935 levels. The need for direct payments by the government depended on prices; smaller payments were needed during periods of high prices and high demand. The Commodity Credit Corporation, which was responsible, might have loans in any given year of up to $4 billion outstanding, own up to $6 billion worth of farm commodities, acquire up to $4 billion worth, and have a budget for cost of sales, donations, and other expenses of as much as an additional $4 billion. Although these amounts varied from year to year in accordance with price, production, and the need for supports, it was clearly a major, continuing commitment of government moneys and accomplished its intended purpose for the farmers.

The effect of subsidies can be shown by a comparison of the farming experience before and after the programs. From 1920 to 1932, the wholesale prices of farm products dropped by about two thirds; during the same period, the Consumer Price Index for all items declined by one third. So, during a period of unrestrained competition, farm prices fell catastrophically and at a rate about double the fall in the general price level. Since 1935, the wholesale prices of farm products and the retail prices of food have increased more sharply than the Consumer Price Index up through the World War II years. Since then, they have been increasing at a rate at least equal to the general rise in prices.

The farmer’s share of the retail cost of farm foods did not continue to drop as it had before 1935, but stabilized. The average value of land and buildings on farms, which had fallen to under $5,000 by 1935, began a sharp ascent and by 1978 reached the $240,000 level, some 48 times higher. As we will see in a moment, a great part of this increase was due to changes in the structure of farming and the growth of large scale farming operations. But despite this, even small farmers have enjoyed a substantial increase in property values since 1935.

Technological Advances

It would be misleading to imply that all of these changes were the result of governmental subsidy programs only. Technological advances made a major contribution. To produce a bale of cotton in 1900 required the expenditure of 284 man hours of work. By 1970 this time had been reduced to 26 hours. One hundred bushels of wheat required 108 man hours in 1900, but only nine in 1970. And the time to produce 100 bushels of corn had dropped from 147 hours down to seven. In other words, for each hour required in 1900, by 1970 it took only six minutes to produce cotton, five minutes to produce wheat, and three minutes to produce corn.

Each farm worker produced enough to feed seven persons in 1900; and by 1930, ten persons. This was the increase in farm productivity during the period of unhindered competition. By 1960 each farm worker fed 26 persons; by 1970, 47 persons; and by 1977, an estimated 63 persons.

The government subsidy programs undoubtedly helped to make capital investment in agriculture more attractive, and the investment, in turn, had remarkable results in increasing productivity in agriculture. As a result there was a mass exodus from the farms to the cities. Employment on the farms dropped from almost 12 million in 1900 to less than three million by 1977.

Growth of Agribusiness

Farmers are not one homogenous group. They were not before 1935, and they are even less so now. There have always been attempts to establish large scale farms, but up to World War II most of these efforts were failures. There were some successful large scale fruit and vegetable farms in California, sugar and pineapple ranches in Hawaii, and some big-farm operations in the Western and Gulf States. But before World War II, they were the exception.

We will be using the term “agribusiness” to describe large scale farming. The term “corporate farming” is not adequate, because some of the largest farm operations are not incorporated and because thousands of incorporated farms involve only the members of a single family. “Contract farming”, a form of vertical integration in which the farm production is carried out under contracts between the farmers and other business firms, is another recent development. These other firms are usually of two types. One supplies farm inputs; feed, fertilizer, or seed; the other processes the output: vegetable or fruit canning or freeze packaging, sugar beet refining, or cattle or poultry slaughter. The farmer involved in these contracts may be an individual, or a partnership or a corporation. All of these forms of large scale farming operations are included here under the general heading of agribusiness. It should be noted, however, that the biggest farms are usually controlled by corporations. The term “corporate farming” is sometimes also used to refer to the entrance of large non farming corporations into agriculture.

While exact data is lacking, one excellent study by Dr. Philip M. Raup, Professor of agricultural economics at the University of Minnesota, indicates that in 1975 about one hundred conglomerate corporations were involved in agricultural production in the United States, and that corporations that held 10,000 acres or more in 1968 constituted only 8 percent of all farming corporations but held 71 percent of all corporate farm land.³³ There has clearly been a massive growth of large scale farming operations in the United States. Almost three fifths of all farm land in 1976 was in farms of 1,000 acres or over in size. Before 1920, such farms held less than one quarter of all farm land.

In 1900, over three quarters of all farms were small, most of them under 260 acres. By 1974, less than one sixth of the farm land was in small farms of under 260 acres, and the bulk of the farmland had shifted into the control of large

scale farms of 1,000 acres or more.

In 1974, corporate farms constituted less than 2 percent of the number of farms, but held 11 percent of all land in farms, and produced 18 percent of the value of all farm products sold.

We can compare the average individual or family farm with the average parent corporate farm, that is, a farm owned by a corporation that has a non farm business, for the year 1974. At that time the average parent corporate farm was 14 times more valuable in terms of land and buildings, it cultivated 18 times the acreage, and its farm products were 52 times greater in value.

We have detailed data on contract farming and vertical integration for the year 1970, at which time it accounted for almost 22 percent of all United States farm production. Some farm products like sugar are produced entirely under such forward contracts. Milk, broiler hens, processing vegetables, citrus foods, and seed crops are mostly produced in this way; eggs, fresh vegetables, turkeys, potatoes, and livestock, are all heavily involved in contract production. On the other hand, contract farming is not involved in most field crops. In view of what we know about the trends, all the figures are now probably much higher than in 1970.

Some of these contract farmers are a far cry from the traditional concept of the farmer.  The chicken broiler producer generally does not own the chickens he feeds, is obligated by his contract to buy feed supplies from a specified supplier, and to sell the broiler only to a designated processor.

Reasons for Growth of Agribusiness

What was responsible for this rapid growth after 1950? Agribusiness may be considered as a belated and special variation on what happened in the industrial sector of the economy during the latter half of the nineteenth century. There, monopoly developed as a way to eliminate competitors. In agriculture, however, the prospects of successful monopoly development were not promising with so many farmers with such diverse products spread far and wide geographically. And although the capital and technology for large scale farming were available before World War II, farm prices were low, their future uncertain, and there were difficulties involved in supervising and maintaining a farm labor force. Due to the government support programs, it became clear by the early 1950s that there was not going to be another farm price disaster like the one that had occurred after World War I. Investors were becoming attracted to agriculture with its exciting new developments in farm technology and its offered rewards in the form of large capital gains, taxed at relatively low rates compared to ordinary income. Cash payments and advantageous taxing and accounting procedures were also inducements.³⁴ All these were essentially government subsidies for farm investors which especially benefited taxpayers in the higher income brackets.

Especially after 1960, the desire for tax shelters was a decisive factor in encouraging a massive influx of nonfarm capital into agriculture. From 1960 to 1972, the number of individuals with taxable incomes of $50,000 and over increased fourfold, from 125,000 to 597,000. The demand for tax shelter investments was growing sharply and it is not at all surprising that a large share of this capital found its way into agribusiness operations.

“SubChapter S Corporation” which is taxed as if it were a partnership, is one form of tax shelter. Under it, profits, and capital gains or losses, can be passed through the corporation to the individual stockholders. SubChapter S Corporation was intended to give small businessmen the advantages of incorporation while still being taxed as individuals, but is widely used, in practice, to create tax shelters and is often used in livestock feeding and breeding operations.

Another tax shelter is the “limited partnership”. In it, the affairs of the partnership are managed by a general partner for a group of limited partners who pool their capital. The limited partners retain their status as individual taxpayers for any profit, capital gain, or loss, which they share in proportion to their relative investment. The general partner is often a corporation that is structured to provide management services to the limited partners, usually for high fees. Limited partnerships are widely used to provide tax shelters in fruit orchards, vineyards, and poultry operations.

Farmers are permitted to use different accounting rules than other businesses. This has also served as an inducement to bring big business into agriculture. Most corporations are required to practice accrual accounting. That is, they are permitted to deduct expenses only as they are used in the business. Farmers, however, are allowed to use a “cash basis” of accounting. They can deduct all of an expense at the time it is spent. The underlying rationale for this exception is that accrual accounting is too complex for farming operations and the bookkeeping skills of the average farmer. This freedom to time business expenditures enables farmers to reduce their tax liabilities in years of high income.

How does cash basis accounting works for a high income investor? A SubChapter S Corporation or a limited partnership goes into cattle feeding. It borrows about three quarters of the money needed to buy the feeder cattle from a bank. It then prepays the entire feed bill. It also pays the general partner for organization and management services. This structuring of the investment is highly advantageous to an upper income taxpayer. If he is in the 60 percent tax bracket, he would have retained only forty cents on each dollar after taxes. Therefore, in effect he is spending forty cent dollars for the investment. He receives the benefit of “leverage because they put up only one quarter of the capital investment. All of the initial interest payment, the prepaid feed bill, and the organizational and management costs for the first year are deductible expenses, which are passed through to the investor as an individual taxpayer. The IRS rulings that permit expenses in one business to be commingled with income from another business can thus be used to reduce taxes.

Some of the largest farm corporations decided that the rate of return on ownership of farm land per se was not as high as in the areas of food processing and marketing and moved into meatpacking, canning, and milling. Tenneco, one of the largest of the United States conglomerates, for example, sold much of its California land starting in the early 1970s, making contractual arrangements with the new owners under which they sell to Tenneco processing or marketing subsidiaries.

A large influx of capital to exploit tax loopholes can easily lead to overexpansion and threats of overproduction and depressed prices. Closing or altering them can successfully change the flow of capital. Owners of citrus and almond groves supported changes in IRS rulings that required “starting up” expenses to be capitalized, that is, depreciated over the useful life of the orchard. Since then, it has been impossible to deduct these large capital costs as a first year expense in citrus and almond groves, although it is still possible for other tree and vine crops.

Agriculture has changed greatly since 1935. Areas and pockets of small scale farms and competition still exist, but the ever growing areas of agribusiness with their increasing control over prices, combined with the effect of government subsidies, have changed the overall price behavior of farm products from a net deflationary force, as it was before 1935, to one that is inflationary.

6. The Changing Role of Government

The Biggest Employer in The Country

In 1850 there were about 26,000 federal civilian employees; the total now in the United States is about 2,900,000.

In 1850 there was one federal civilian employee for each thousand persons in the population; in 1976 there were thirteen. Obviously, there has been a massive increase in government personnel. But there was more than a mere change in quantity. The names on the entrances of the government buildings would indicate that there has been a massive qualitative change as well. For some names, one might guess functions: such as Departments of State, Agriculture, Commerce and Labor. Others would be strange to anyone from the last century: Department of Energy, Federal Reserve System, Farm Credit Administration, Federal Mediation and Conciliation Service, National Aeronautics and Space Administration, and Securities and Exchange Commission. The federal government has expanded the number and the nature of its functions enormously. In 1850 most people believed “the less government the better”. A laissez faire policy toward business was the prevailing wisdom of the day, and government was simple and small. Today’s government is deeply involved with business and the economy. It is very complex, and very, very big.

It is now the largest single employer in the nation, and in one basic respect it resembles any other monopolistic corporation or utility company. It finds it easier to pass on cost increases to the consumer in the form of higher taxes, than to practice economy and efficiency.

The growth of government since 1850 has been steady and inexorable, with additional spurts during wars. Under Roosevelt, and as a result of the Great Depression of the 1930s, government’s role became even bigger.

Government As an Inflationary Force

This chapter attempts to answer several questions: Is government, as it has been since Roosevelt, a force for or against inflation? Can government help in the fight against inflation? What role has it played, and what can we expect of it in the future?

Robert L. Heilbroner, in a perceptive article entitled “Inflationary Capitalism”³⁵, views capitalism as a vital, dynamic, restless, expansionist system, but with an innate tendency to malfunction. The earliest malfunction was the production of terrible poverty and degradation among the poor during the Industrial Revolution; another was the tendency toward cyclical crises, finally culminating in the Great Depression of the 1930s. He considers that depression to be the way in which the “endemic instability of capitalism” worked itself out under the then existing structure of the system, when we had no way to cope with the disaster. We had no policy or machinery by which government could step in to reverse the decline of the economy such as insurance for the unemployed, social security for the old, or support prices for farmers.

Heilbroner maintains that the cause of inflation is the changed role of government since the New Deal period under Roosevelt. He suggests that a key ingredient is an inflationary “state of mind,” a psychological mindset which anticipates continued inflation, makes all decisions upon that anticipation, and so tends to produce more inflation. The mindset in earlier eras was far more cautious because it anticipated that what goes up may come down. He contends that the changes in the structure of government reinforce this inflationary state of mind, not only in the United States, but in many capitalist nations throughout the world.

What are these changes that gave rise to an inflationary state of mind? Heilbroner points to one overriding factor: that Government supplies about one third of the spending power that can be used as a balancing force to prevent recessions from becoming dragging depressions. What goes up is prevented from coming down. Recessions no longer frighten corporations. Similarly, unemployment compensation cushions the impact on workers and being laid off is not as frightening as it once was. Business and individuals feel that recessions will be relatively mild and temporary. He contends, therefore, that the governmental measures that limit the downward movements of the economy have made people more secure and altered expectations in ways that increase the upward instability of the system.

Corroborative Evidence

Charles Schultze, Director of the United States Bureau of the Budget in the late 1960s and later a Senior Fellow at the Brookings Institute, held that if there were enough controls to impede downward movement of prices, while there were no impediments to upward movement, the net effect would be upward. This is known as the “ratchet effect” and can take the form of a corporate price policy, a wage contract, or an agricultural price support. The net effect is similar. In 1959 Schultze made a study entitled “Recent Inflation in the United States” for the Joint Economic Committee of Congress in which he analyzed the mild inflation of 1955 to 1957 and said: “It (inflation at that time) is, in effect, a feature of the dynamics of resource allocation where prices and wages tend to be riid downward. Moreover, these rigidities give a secular upward bias to the price level so long as the major depressions which ‘broke’ the ratchets in the past are avoided in the future…There is an upward bias imparted to the price level by the nature of our price and wage setting mechanisms.”³⁶

Government purchases of goods and services are massive enough to serve as a counter balancing force. Direct government purchases have increased dramatically, both in absolute amounts and in proportion to the gross national product: from 10 percent of total GNP In 1930 to 21 percent in 1977. The actual effect on the economy is considerably greater because of the so called “multiplier effect”. To illustrate, a defense contract may employ workers in a given plant, but subcontracts and orders for materials and related services may spread the effect more widely. In addition, there are other workers who provide the goods and services for those who are directly employed in the defense plant. Heilbroner’s estimate that government supplies about one-third of total spending power is, therefore, probably an understatement.

These figures are for all government: federal, state, and local combined.  The federal government accounted for 36 percent of this total.  If we look within the federal total, defense purchases amounted to over $100 billion, or about two thirds of all federal purchases. The actual extent to which the government can time its purchases so that they truly serve as a counter balance to the private economy must be limited. It is obviously difficult to do this as an administrative matter. The power to time purchases, however, is always latent – even though the need may be infrequent. The actual counterbalancing function is more easily accomplished by deficit financing and by influencing the use of credit, which we will discuss later. Government purchases of goods and services may more properly be considered as a stable, on-going prop of the economy as a whole.

Taxation and the Public Debt As Forces of Inflation

The government takes a portion of our incomes, both personal and business, in the form of taxes and spends this money for projects and purposes it deems to be in the public interest. Therefore, let us look at the tax collecting mechanism and then the spending mechanism, in order to determine whether these contribute to inflation.

These mechanisms have been used very energetically. The rate of increase in both federal tax collections and in outlays is over double the rate of increase in prices since 1950.

For many years the government spent more than it collected. Whenever it operated at a deficit, the government could sell bonds to make up the difference. This policy led to small increases in the public debt until 1930. Beginning with the New Deal, the federal government deliberately began financing its programs by large-scale deficit-financing. It did this as a matter of public policy, as a way of putting people to work and increasing incomes of the lower-income groups. New Deal policy makers were not overly concerned with the problem of inflation. Prices were widely considered to be too low, and they felt it was better to risk a little inflation in order to reduce unemployment and prime the pump of economic recovery. World War II was also financed, to a considerable degree, with floating war bonds.

It is not widely known that deficit financing, increased the public debt from $383 billion in 1970 to $840 billion by 1978, and that in the same year the federal government guaranteed another $248 billion in loans.³⁷

Credit is inflationary. It increases demand above what it would otherwise be. Though it may have a rationale for other purposes, it is still inflationary.

Inflation is the single most important economic problem in the U.S, and credit is the first candidate for control.

There are other reasons why the growing public debt is important. The interest paid on the United States public debt was $43 billion in 1979.³⁸ Consider for a moment the tax and public debt structures as mechanisms for redistributing income. Taxes collected by the government are, in part, distributed to bondholders in the form of interest payments. If the taxpayers and the bondholders were one and the same, there would be no problem. If, however, they are different groups, then bond funding is a mechanism for redistributing income from one group to another. Since only one percent of all persons hold three fifths of all bonds and over one half of all debt instruments, bondholders are a different group. The net effect of bond-funding is therefore redistribution of income. Still another aspect of the huge public debt is that it gives the government a financial interest in continuing inflation. All debtors benefit from inflation because they pay off both interest and principal in depreciated dollars. The government itself, as the single largest debtor in the nation, is therefore in a conflict of interest.

Now let us look at the collection side of government operations. The burden is shifting away from the corporation income tax to the individual income tax. From 1940 to 1978, the individual tax almost tripled in relative importance, while the corporation tax remained essentially stable. By 1978, the individual income tax had become the single largest source of federal revenue.

There is a substantial difference between nominal and effective individual income tax rates. Nominal rates are the rates shown on the tax schedule. Effective rates are what people actually pay after using all of the various provisions which enable them to reduce their taxes. Studies of this difference are difficult to make and therefore infrequent, but we do have one that was made by Joseph A. Pechman for the 1964 Tax Revenue Act.³⁹ This study showed that nominal rates were steeply progressive, from 22 percent at the $10,000 income level up to 68 percent at the $1,000,000 income level. Pechman’s study used a file of 100,000 actual cases to find effective tax rates. These varied from 10 percent at the $10,000 income level up to 28 percent for the $1,000,000 level. In other words, there were enough legal ways to reduce income taxes to cut the nominal rate of 68 percent for the wealthy taxpayer down to 28 percent. Such a taxpayer saved $400,000, primarily by using the lesser tax rates on capital gains. Equally significant, the effective tax rate of the $1,000,000 income taxpayer was about the same as that for the $100,000 income person, a taxpayer with only one-tenth the income. The effective individual income tax is only mildly progressive up to the $100,000 level, but thereafter remains essentially constant.

In periods of inflation, federal taxes on individuals tend to become an inflationary force.

Martin J. Bailey’s study for The Brookings Institution summarized it this way: If the government does nothing to change the tax laws, its tax income increases sharply as a direct result of inflation.⁴⁰

All income levels suffer this increase, but the relative impact is greatest on the lower and middle income levels. So 100 percent accumulated inflation over a ten year period starting in 1975 would raise the effective tax rate for a family in the $20,000-25,000 income level by over half. For a family with an income of $1,000,000, the tax increase is only about one third. These figures are for individual income, sales, and excise taxes combined.

Though corporation income tax yields substantial government income, individual income tax yields much more. Corporation income tax laws provide legal avenues to avoid payment in the form of tax loopholes, benefits, and subsidies, known as “revenue losses”. Such losses amounted to $28 billion in 1977 when actual collections from corporations were $55 billion. Which is to say the government’s “revenue losses” were about half of the actual amounts collected. Among the most substantial “revenue losses” were investment credits, corporation surtax exemptions, and more favorable tax allowances for depreciation.

Is The Government an Independent Power?

We have been discussing the role of the federal government as if it were an independent power.  We all tend to share this assumption and it has been implicit in this discussion thus far.  Is the government an independent power, as it is legally constituted and as it appears to be, or is it, in reality, a partner in a form of state monopoly capitalism? The appearance and the legal form have not changed; but has the substance?

This is not a new question; it has been an accepted part of Marxist theory since Lenin wrote State and Revolution in 1917. In Monopoly Capital, Baran and Sweezy do not use the phrase “state monopoly capitalism” only because they believe that the state has played a key role as a partner in the development of capitalism from its very inception. They believe that the phrase carries a false connotation that the state is “an independent social force”, while it is, in fact, coordinating with private business, and that “the functioning of the system is determined not only by the cooperation of these forces but also by their antagonisms and conflicts”.⁴¹ They view the state as a partner which shares the surplus with monopoly capital and performs certain vital services for it.

If the state is an independent power which can impose its will upon private corporations, it can, with legislation, regulations, and other mechanisms, control inflation.

If, however, the state is a partner of the corporate government, if the two are in reality one, the state is a part of the problem, and not a part of the solution. Legislation, regulation, and control mechanisms adopted by a state in partnership with corporate government are likely to be only a facade.

To what extent has corporate government penetrated the government? Up to now, we have been able to find fairly solid evidence on which statistical data is available. From here we must draw inferences from the bits and pieces of information that are available.

The tax relationship between corporate government and public government appear to be a combination of interdependence and distrust. The government depends upon corporations for a substantial portion of its income. To the extent that the corporations flourish and obtain ever greater profits, the tax income of the government increases. Corporations also collect withholding taxes for the government. And the corporations need the help of government which comes in the form of tax loopholes, benefits, subsidies, and attractive government contracts. Good relationships with regulatory agencies are always important. It is desirable that the regulatory agency be sympathetic to the company’s viewpoint and familiar with its difficulties. It is reassuring if some of the corporation’s former and future personnel work in the regulatory agency. It is only good business to have your corporation well-represented on all of the government advisory committees. When a corporation wants to proceed with an acquisition, it is nice to know beforehand that the Federal Trade Commission and the Department of Justice will not oppose it, or that, if they do a call from this law firm or that legislator or cabinet officer or the White House, will neutralize the opposition. It is good business to have contributed to the election campaign of whoever is in office; since you helped them when they needed you; they are likely to return the favor. If the President is willing to make a call indicating that a disputed acquisition is important to national security, it can be helpful. It is also reassuring to know that the State Department will pave the way in the establishment of your foreign subsidiaries, help you to meet foreign competition, overcome local opposition, and, in the worst scenario, to know that the government might bail you out.

Although we can infer an increasingly close community of interest between public and private government, we have not yet gone as far as Japan. Japanese corporations have become formidable competitors. Japan’s background, however, is different from that of the United States. Japan proceeded directly from feudalism to state monopoly capitalism. We have traditions of political democracy that emerged from a struggle against feudalism and monarchy. In our country, those who cherish these political traditions of public government responsive to democratic control and devoted in the public interest, look with dismay at the growth of corporate government. The hard fact faced by every politician and every aspirant to public office who believes in these traditions is that the winners of the 1975-76 congressional elections spent almost twice as much money in their campaigns as the losers and that the expenditures for political broadcasts on television and radio increased over three fold from 1960 to 1972.⁴²

The main point of Gabriel Kolko’s book, The Triumph of Conservatism, which evaluated the penetration of government by the large corporations in the period 1900-1915, was that the large corporations were not economically competitive in that period. To survive against resurgent competition from independents, they adopted a policy, which he called “political capitalism”; of enlisting the support of the federal government. Corporations demanded “progressive” federal regulation of industries in their own interest and not in the public interest, as a way of thwarting state regulation and of securing government assistance and benefits.

Kolko cited many examples of “political capitalism”: the railroads’ demand for, support of, and use of the Interstate Commerce Commission (which ended rate wars)

• the big meat packers’ demand for the Meat Inspection Act
• the major food interests’ support for the Pure Food and Drug Act (to control smaller competitors)
• the major food interests’ support for the Pure Food and Drug Act (to control smaller competitors)
• bankers’ support of the Federal Reserve Act
• business support of the Federal Trade Commission Act (The commission was formed of business leaders and reflected business viewpoints)

In general, Kolko describes a virtual unity of interests between business and federal government, a synthesis of politics and economics, which dominates the early twentieth century. He scoffs at the idea that the federal government is a neutral intermediary as the “rhetoric of reform” and “mythology”.⁴³ He believes government is not a neutral intermediary, and certainly not a “countervailing force” in Galbraith’s sense.

Do Kolko’s findings for the period of 1900 to 1915 apply to America today? He suggests that they do. He mentions that Roosevelt’s programs in the New Deal were based upon the same ideas of using the federal government to stabilize the economy.

But no one really knows the true extent of the infiltration of government by corporate government since the end of World War II.

In C. Wright Mills The Power Elite, which examined the executive decisions of government in 1956, a chapter is devoted to what he called “the political directorate”, the corporate elite which dominates the government. It was made up of 53 men, including the President, Vice President, members of the cabinet, heads of the major departments and bureaus, agencies, and commissions, the members of the Executive Office of the President, and the White House staff. About one-quarter of these had been professionals in government administration or party politics. Of the remaining three-quarters, three-quarters of those were political outsiders,”legal, managerial and financial members of the corporate rich”, who were closely linked, financially and/or professionally to the corporate world.⁴⁴

Failure of Antitrust Laws and Of Government Regulation

The failure of the antitrust laws and the failure of the Federal Trade Commission have allowed the massive growth of monopoly at the expense of competition since 1890.

Gabriel Kolko’s The Triumph of Conservatism provides documentation for the period between 1900 and 1915.

A series of studies made by various Ralph Nader Study Groups gives us the later history. The investigators in one study of antitrust enforcement sum it up by saying that they have taken a hard look at antitrust and concluded “that it is time to state that the emperor has no clothes”.⁴⁵

There are studies of the Federal Trade Commission going back to 1924.⁴⁶ One of them contains the following excerpt from a typical speech made by the FTC Chairman, Paul Rand Dixon, to a business audience. “I’ve come here with the high hope that I can persuade you that the FTC is not a socialistic, bureaucratic, damn yankee, tool of the devil that may have been pictured to you. Instead, I’d like to convince you that you’ve got a friend in the FTC – a real friend.”⁴⁷

Data shows four major failures of the FTC to be:

• detecting violations
• setting priorities
• enforcement
• seeking sufficient statutory authority to make its work effective

In another report, Richard Posner comments: “The Commission is rudderless, poorly managed and poorly staffed; obsessed with trivia; politicized; all in all inefficient and incompetent. And the persistence of these criticisms would seem to indicate, largely impervious to criticism.”⁴⁸ Other studies by the Food and Drug Administration and the Interstate Commerce Commission and on agribusiness are available.

The last book we shall cite was written by Senator William Proxmire, a true defender of economic competition and neutral government representing the national interest, who scoffs at the notion that the government is a neutral and independent intermediary. In his opinion it is a truism demonstrated by hundreds of cases, that the departments of government act on behalf of the major economic interests under their jurisdiction rather than in the public interest; and that when the two interests are in conflict, they promote the interests of the few; that the advisory groups in almost all departments represent the industrial and financial interests; and that the Executive Branch of the government and the party leadership routinely serve as whips to force passage of private interest legislation.⁴⁹

Corporate influence on public government is a dominant problem of our political system. Watergate was a shocking experience for the American people, not just for what it revealed about Nixon as president, but for what it revealed about the source of his election funds and the extent of corporate influence.

Although it was illegal for corporations to contribute corporate funds to federal election campaigns, thirteen corporations made such contributions to Nixon’s Committee to ReElect the President totaling $780,000⁵⁰ , for which offense they paid only nominal fines. The most commonly used method to launder contributions was through foreign subsidiaries.⁵¹ Far more was raised by using corporate bonuses and expense accounts to reimburse corporate executives for their contributions. One solicitor for the committee, Herbert W. Kalmbach, collected $10.7 million from such “individuals”, the average contribution being about $150,000. These “individuals” were affiliated with such companies as United Airlines, Firestone Tire and Rubber Co., Ford Motor Co., General Motors Co., Getty Oil Co., H. J. Heinz Co., Northrop Corp., Pennzoil, National Airlines, Standard Oil of California, Esso., Rockefeller Foundation, Mellon Banking – Gulf Oil, Music Corp. of America, and IBM.

Watergate also demonstrated the extent of centralization of power in the executive branch of our government. The executive branch has been gathering the reins of power during this entire century, but especially since the New Deal period. A study should be made of the relationship between the growth of executive power in public government and the analogous growth of executive power in corporate governments. The growth of both types of power represents a basic political problem in a democracy.

The political process slowly but finally corrected the abuse of executive power by Mr. Nixon.

But what political process is available to correct the power of a Harold Geneen, President of ITT, who offered Nixon’s Committee to Reelect the President $400,000 not to oppose ITT’s acquisition of Hartford Insurance Co.? And what political process is available to deal with Mr. Geneen’s role in helping to overthrow the Allende government which expropriated ITT properties in Chile?

Corporate Control of the Media

No discussion of the role of government would be complete without some consideration of the electoral process. Do we have a political process in which the people can debate issues and arrive at political decisions? Do corporations influence this process?

Equal opportunity to reach the voters is of top priority in the political process. This access is overwhelmingly weighted on the side of the large corporations. Television, the most influential of all the media, is controlled by three corporate networks. In 1978 the networks received 44 percent of a national total of $6 billion of sales to advertisers, most of which came from large corporations. Prime television time has become so expensive that huge amounts of money are now required to mount a successful political campaign. The main sources of these funds are the corporations themselves, and the winners in political contests are usually those with the largest campaign budgets. The political process is therefore subverted at the initial step of waging a political campaign.

Control of communications is perhaps the most serious potential threat to a democratic political process. The Federal Trade Commission has looked the other way while this concentration of media control has proceeded to its present dangerous state. The forces that form public opinion are now largely in the hands of private interests.⁵²

Money is at the root of the corruption of the political process. The politician must have money to get into and to remain in office. The largest sources of money are the corporations or wealthy individuals, and politicians cannot afford to offend them.

On Countervailing Powers

We have spoken before of Galbraith’s theory of countervailing powers: of government, farmers, and labor as a balance against the power of corporations. In view of what we have just described, can we consider the government to be a “countervailing power”? I believe the answer is clearly that it is not. This does not mean that it cannot become a countervailing force, or that it should not be changed to become one. But presently, in practice, government is more a partner than an opponent of corporations.

What about the government’s role in helping to build other countervailing powers? Has it assisted in establishing and maintaining other forces to offset the power of corporations? We have discussed this in preceding chapters. It is not surprising that a public government in a political democracy should reflect the different interests of diverse groups. For many years we have had departments of Commerce, Agriculture, and Labor, each of which is supposed to promote the interests of its constituency. The principle of representation for all groups in government is not at issue; what is, is the substance of that representation, or rather, the relative power accorded to these groups.

The character of the government is subject to continuing change at every election, at every session of Congress, and at every session of the Supreme Court. It is subject to the changing economic power of cohesive interest groups in a dynamic society. The “countervailing powers” are, in Galbraith’s view, a result of a deliberate effort by the government. The New Deal was an example of such an effort. However its support of the farming sector, made agriculture attractive to agribusiness and corporate power.

The power won by unions in the New Deal was substantially weakened by the passage of the Taft Hartley Act in 1947. Most union members came to have little power and got little government assistance.

Government, for itself and for various power groups, has had a direct bearing on inflation.

We can summarize as follows:

1. Government policies since the New Deal have tended to be inflationary.
2. To the extent that there has developed a symbiotic relationship between corporate and public government, the result has been inflationary.
3. The basic financial structure of the government benefits from continued inflation.
4. The government’s agricultural support and subsidy programs along with the development of agribusiness have produced a net inflationary force.
5. By and large, since the passage of the Taft Hartley Act, the government has not supported labor as a countervailing force. Unions have their own power which may be, to a minor degree, inflationary.

The Carter Administration’s role in fighting inflation is political rhetoric without any real substance. The Wall Street Journal carried an article saying that, although Mr. Carter had declared inflation to be public enemy No. 1, Mr. Alfred Kahn, who he appointed to be czar of inflation,”…never received either the staff or the power to bump heads with other officials or interest groups. His proposals, ranging from selective credit controls down to sugar price subsidies, have gone nowhere.”⁵³ He is, in short, a czar without power.

Monetary and Credit Control: The Failure of a Structure

The test of any structure is its performance. We have a structure which is supposed to control the supply of money and credit in order to promote relatively full employment and price stability. If that is what it is supposed to do, it has failed. If we judge the structure solely by the criterion of controlling inflation, it is impossible to avoid the conclusion that it has been one of the major causes of inflation. How did a structure ostensibly designed to prevent inflation actually help to cause it?

One of the concepts of monetary theory is that control over the money supply can be used to control the overall level of activity of the economic system. Restricting the money supply can slow the expansion of the system, and expanding the money supply can mitigate recessions. Moreover, it is thought that the laws of supply and demand for money can be used to smooth out ups and downs in prices. An increase of the money stock with static output tends to raise prices, while a decrease tends to lower them.

This concept has been utilized by the Board of Governors of the Federal Reserve System to promote a mystique of control of the economic system as a whole. This group of bankers is pictured as engaged in the fine tuning of a very complex machine. The tuning is accomplished by using devices which influence the supply of money and credit. The general instruments of control are the discount rate, open market operations, and changes in reserve requirements. There are, in addition, specific instruments of control which are designed to influence the use of money and credit in particular areas, such as the stock market, installment sales, real estate, and inventories.

There is no need to go into the details of how these controls work. The Federal Reserve Board is not an agency of government. It is an independent agency of bankers. It has been granted certain powers, is independent of the executive branch of the government, and is ultimately responsible to Congress. It was designed by bankers to be independent, and to be removed from political influence. It would be wholly unrealistic, however, to believe that it is independent of the basic wishes and interests of the business establishment; or that it is independent of political pressure brought to bear by a strong president or Congress. It can be assumed that the Federal Reserve Board exercises its regulatory power of the money and credit supply in the interest of the banking and the business community.

All other things being equal, increasing the money supply should increase prices. In order to maintain price stability the money supply should be kept equal to the changes in real output. The control the Federal Reserve Board exercises increases the money stack far in excess of the increase in real output; and far in excess of the increase in prices. From 1950 to 1977 the money supply was increased 7.4 times while real Gross National Product increased 2.5 times and Gross National Product in current inflated prices increased 6.6 times. In other words, the money supply was increased by more than enough to buy total production at the inflated prices. The money supply was increased to feed inflation, and not to prevent it. It is therefore no wonder that prices increased during that period by 2.5 times. The Federal Reserve Board’s exercise of control over the money supply was sharply inflationary.

What about control over the volume of credit? In order to combat inflation, the classical position of the monetarists is that the amount of credit available must be reduced. The less credit, the less demand, and a dampening of the tendency of prices increasing should result. Instead, the actual practice was to allow credit to expand at an unprecedented rate. From 1950 to 1977, outstanding consumer credit increased 12 times. This did not cure the problem of unemployment, which about doubled during the same period. Nor did it help stabilize prices, which increased by about 2 and a half times. Rather, the credit increase undoubtedly helped to produce inflation during that period.

This unusual increase in credit stoked the forces of demand by transferring a portion of future income to the present. Credit borrows from the future and thereby accelerates the upsurge of the business cycle. By the same token however, it can accelerate and worsen any subsequent downturn of the cycle, because future income has already been mortgaged. Thus, the credit mechanism increases the instability of the system.

In all fairness, the Federal Reserve Board should not bear the sole blame for failing to control inflation. us attribute it, rather, to the broad pressures of the corporate establishment, the political establishment, and the banking community, on the board. Historically, in the name of combating recessions, inflation has been accepted as the lesser of the evils. But the policies that were followed increased both unemployment and inflation.

Chapter 3: Issues

1. The Military Industrial Complex

“The Military Industrial Political Complex” is a well integrated form of political partnership. The struggle for defense contracts in the United States is a political struggle. Of the total of about 5 million employees on the federal payroll in 1978, almost two-thirds, were in the armed forces or in defense-related industries. About two-thirds of government employment is part of the military-industrial complex.

This partnership has turned out to have a particularly strong effect on inflation. About two thirds of the goods and services purchased by the federal government, or about $100 billion, are for defense. The diversion of these billions from the normal channels of peacetime civilian needs leads toward inflation, just as inexorably as all wars lead toward inflation.⁵⁴

A major component of inflation has been the continued high level of defense expenditures since World War II, further aggravated by the increase in war expenditures during the Korean and Vietnam wars.

The growth of the military-industrial complex in the United States is perhaps the clearest evidence supporting the Marxist position that the state and capitalism are in partnership.  Let us assume, for the limited purposes of this book, that we do not have to prove the existence of this mutually supporting relationship.  It has been established to the extent that President Eisenhower warned of it in his Farewell Address.

C. Wright Mills saw the developments clearly as early as 1956 when he wrote The Power Elite. There he described the emergence of the military industrial complex during the World War II years, its consolidation during the Cold War period thereafter, and it becoming a permanent institution. He described the mutuality of interests, the interrelation between corporate and military hierarchies, the concentration of the economy into great hierarchies, and how military men and policies have increasingly penetrated the corporate economy turning it into a permanent war economy.⁵⁵

Another study was made by Leon S. Reed for the Council on Economic Priorities in 1975, entitled “Military Maneuvers, an Analysis of the Interchange of Personnel between Defense Contractors and the Department of Defense”, which summed up the picture as follows:

As of March, 1969, 2,072 retired officers of the rank of colonel or higher were reemployed by the 100 top military contractors. Over half of them were employed by the top ten companies. As a result of an amendment proposed by Senator Proxmire in 1969, which required reports on such transfers, 1,785 reports of such transfers between 1969 and 1973 were available to be analyzed. Reed found that 1,406 former Department of Defense officials had transferred into the employ of defense contractors. Of these transfers, 378, or 27 percent, presented a potential conflict of interest. Reed considered such conflicts of interest existed when the new employment was formerly in the jurisdiction of the officer, the new employment was formerly evaluated by the officer, the officer was a former Department of Defense systems project director now working for the producer of the same system, or the officer had high official or management responsibilities for systems, and was now working for a company that produced those systems.

In the same period, 379 executives moved from employment with defense contractors into the Department of Defense. Reed found that the continual staffing of Department of Defense positions with defense contractor executives, and the return of a number of them to their former employers “…raises questions of propriety”.⁵⁶ David Packard, Nixon’s Deputy Secretary of Defense, was one example. In 1970, over one-third of the members of the four advisory committees of the Department of Defense came from industry.

Perhaps the most revealing evidence can be found in the Hearings before the Subcommittee on Economy in Government. At issue during these hearings were substantial cost over runs on the F-111 program by North American Rockwell 1 Autogenic Division, which had been investigated by Mr. Tyrrell. The investigators discovered that five retired Air Force officials had been hired by Rockwell and that three of them had directly hampered the investigation:

Question (Senator Proxmire)…Is it your conviction that (the desire for post retirement employment with contractors) is one of the reasons why there is a soft attitude toward cost overruns and why there isn’t the kind of strict surveillance and discipline which you recommend?

Answer (Mr. Tyrrell)…I think it probably relates to that. I am not sure whether it is the sole cause. I think that one of the things that tends to create the softness, as you phrase it is the team concept that I brought out, in my statement, wherever they consider themselves all members of the same team. And it becomes rather difficult then, for them to disassociate themselves. And I don’t think it is conscious collusion as was pointed out by the Senator, it is something that has just evolved.

Another recent study by John Gorgol analyzes the end product of this interpenetration in a book titled The Military Industrial Firm. Dr. Gorgol, was chairman of the Management Department at Rutgers University and was an expert in the field of management science. His book is an attempt to build an economic model of this new kind of firm in order to better understand its behavior.

According to him, economic theorists have not adequately described the significance of the new military industrial firm which, he says, operates in many ways that are fundamentally different from ordinary firms.

(1)They “sell” only to one customer, the Department of Defense.

(2) The winners of defense contracts are usually corporations that employ many former personnel of the Department of Defense, and have many ongoing contacts in the department; and also usually have great political influence through politicians from their areas, or through unions and workers employed by them.

(3)Contract prices are determined by negotiations with the department, and this negotiation continues until the contract is completed; additional payments for changes and additions are the rule rather than the exception.

(4) The military industrial firm has the opportunity to acquire the equivalent of free capital in the form of plant equipment and research results. This is very lucrative and warrants a great deal of effort.

(5) The main function of the top management of the firm is to win the advantage in the selection process, warranted usually due to technical considerations.

(6) The decision maker granting the contracts is vulnerable to political influence, so gaining such political influence may be the determining factor in achieving success.

(7) The military industrial firm expands the revenue from contracts by increasing the complexity of the products and thus justifying additional costs, additional payments, and additional budget requests.

“Cost minimization” has no place in this model of behavior. In view of these objective differences, Gorgol suggests that we recognize these firms for what they actually are and do; as “satellite firms” of the government. He further recommends that private ownership be eliminated and that the firms be re-structured to conform to the realities of their function.⁵⁷

The average United States citizen is faced by an excruciating dilemma.  He would like security in a troubled world, but he realizes that the military industrial complex makes uncontrolled private profits from defense contracts. He wants to control inflation, but he knows it is impossible as long as existing military policies continue. Which is the greater danger; reduced war preparations or continued high inflation?

2. The Energy Crisis

In real life, nothing is separate and apart. What is commonly called “the energy crisis” is sometimes presented as an inevitable product of natural growth and development. It is also sometimes considered to be the result of outside forces like the greed of the OPEC bloc. There are some who believe that control over the world’s energy sources is the ultimate goal of world power; even worth the risk of World War III and nuclear annihilation. Others hold that the villain is the greed of the energy corporations. Still others see the energy crisis as a technical problem and ask which is better: continued reliance on the present sources of energy, or development of alternate sources? To some environmentalists, the main issues are pollution, survival, and the quality of life on our planet.

While all these various views contain elements of truth, is there an overriding central truth which encompasses all of them? This chapter attempts to find that common ground. Again, we are fortunate that Barry Commoner, a Professor of Environmental Science and Director of the Center for the Biology of Natural Systems at Washington University in St. Louis, and Chairman of the Executive Committee of the Scientists Institute for Public Information, has already undertaken this task. Much of this chapter is a summary of his study, The Politics of Energy.⁵⁸

Roots of the Energy Crises

Dr. Commoner establishes that we are deeply committed to the continued use of nonrenewable forms of energy whose costs of extraction, by their very nature, have an inherent tendency to rise exponentially. The reservoirs of oil and gas within the crust of the earth are a finite resource; they do not grow. As we use them, we must seek deeper and further, and the cost of extraction increases as the price of the fuel rises. But do oil and gas prices have to rise as much as they do?

Other sources provide us with information on this question.⁵⁹ Most oil and gas reserves are privately owned by a small number of global oil companies and individual nations. There are marked degrees of both horizontal and vertical integration of all aspects of oil exploration, the production of crude, the transportation of the crude, and the refining and retail marketing by “The Seven Sisters”: British Petroleum, Gulf, Mobil, Shell, Texaco, Exxon, and Chevron. Five of the seven are United States corporations. One Federal Trade Commission summary for 1949 indicated that the seven controlled 65 percent of the world’s crude reserves, 88 percent of the crude production outside the U.S. and USSR, 77 percent of the refining capacity outside the U.S. and USSR, two-thirds of the tanker fleet, and all of the major pipelines outside the U. S. and USSR. They also dominate the field within the United States. They have unusually favorable oil concessions throughout the world backed by the United States Government in the name of national security. They have the unique tax advantage of the oil depletion allowance. They have a “national security” tax subsidy by which their royalty payments to foreign governments are taken as a tax credit against their United States taxes. They also have virtual immunity from antitrust prosecution, usually justified on the grounds of “national security” because they are part of the military industrial complex. The degree of control they wield is most probably greater now than it was in 1949.

We will most likely never know precisely how much of the price increases of gas and oil were natural and how much were created by monopoly control. We have had monopoly control for so long, it is so pervasive, and all of the sources of information are so firmly held as trade secrets in the hands of the monopolies, that it is impossible to disentangle the two sources of price increase. Commoner believes that the price increases did not originate with the greed and hostility of the Arab sheiks, but were the result of the depletion of oil in the U.S. plus the monopoly control over prices by the oil companies.⁶⁰

Others believe that the global oil companies have cooperated with the OPEC countries, been mere tax collectors for the sheiks, and have used their monopoly power to pass on the increased costs to the ultimate consumers on a cost plus basis all over the world.

As a result, and aggravated by monopoly control, the prices of all forms of energy have skyrocketed and are a major cause of inflation. Increased energy costs are far more significant than simply the direct effect they have on the consumer who must channel more of his purchasing power to buying energy for his personal use at the expense of other needs, such as food and clothing. Since energy is essential to industry, price rises of energy and petrochemical products help force up prices of all goods and services. Furthermore, the impact is greater on the poor than on the rich, because the poor spend a much larger share of their budget on these items.⁶¹

There are two fundamental causes of inflation of energy prices. The first is our dependence on nonrenewable sources which must continue to rise in price. The second is the control of those nonrenewable sources of energy by a handful of energy corporations, whose profits depend upon a continuance of this dependence for as long as possible.

The Technical Problem is Solvable

The first cause of the growth of energy prices can be eliminated. We must make an orderly transition from nonrenewable energy sources to renewable ones. The means are technically and economically feasible and desirable. The basic renewable source of energy which has been used for as long as man has inhabited the earth is the sun. Solar energy has been the basis of all agricultural production, of all forest product production, of water power and of wind power, which are products of the sun’s interaction with the surface of the earth and with the oceans, of direct heat, of liquid fuel (alcohol made from grain), and of gaseous fuel (methane made from plant residue and waste). Solar power can be converted into electric power by photovoltaic cells, or by wind- or water-powered generators. All of these forms of solar energy are renewable and do not increase in cost, unlike nonrenewable sources. They may even tend to decrease in cost with technical progress and increased efficiency of scale.

Commoner’s great contribution to the resolution of the energy controversy is the extensive detail with which he documents his basic proposal: how it would work in different regions of the country, how it could gradually be integrated into the operation of various industries, and how it could be dovetailed into existing utility power and gas transmission networks. Solar methane, for example, can easily be carried by natural gas pipelines and can be stored in the underground formations which previously held natural gas. The main flammable constituent of natural gas is methane, and the two sources are interchangeable.⁶²

The conservation side of the solar energy strategy includes the development of cogeneration, which is simply the use of any combustible fuel to produce energy simultaneously in two useful forms: heat and electricity. By matching the production of heat for industrial processes with electrical generation, cogeneration can use up to nine tenths of the energy in the fuel.⁶³ Most of our present systems utilize only 30 to 40 percent of the fuel’s energy and produce only electricity, or they produce only heat (as in air conditioning, or electric heaters).

Methane fueled cogenerators, already working in many parts of our country and throughout the world, can produce all the electricity needed in a large building, cool it in summer and heat it in winter. Such cogeneration units conserve energy and eliminate much of the environmental pollution associated with conventional energy sources.

The transition to a solar energy economy would be difficult, but possibly we could obtain one fifth of our energy from the sun within twenty five years, and 90 to 95 percent within fifty years.⁶⁴

According to Dr. Commoner, the path to solar energy is open and technically and economically feasible. The end result, after perhaps half a century of intelligent effort, could be cheap, sustainable energy.

So there is a long term solution to the problem of our dependence on nonrenewable and inherently inflationary energy sources.

If the transition to renewable energy sources were an engineering problem alone, engineers could solve it and create a more benign and safer world. Solar energy is widely distributed and decentralized; quite the opposite of huge centralized, possibly militarized, nuclear plants. If a solar pump fails, no one is endangered by radioactivity; parts of solar systems cannot be used to make bombs or as instruments of terror; and there is no problem of disposal of lethal wastes.⁶⁵

The Political Problem Is More Difficult

We must look, then, at the energy policies of the global oil companies and the utility companies. It is one of Commoner’s particular achievements that he confronts this issue squarely.

For the purpose of analysis Commoner distinguishes consumers, farmers, laborers, businesses that use energy, and businesses that produce and distribute energy. He reserves for the government the role of neutral mediator among these competing groups and particularly between the latter two. He recognizes that the energy producing industries enjoy a monopoly in their relation to the energy using industries and that in order to constrain this power, government regulation of the energy industry is necessary. We will return to this question of the role of government later, but at this time let us present Commoner’s evaluation.

Conflicting Group Interests

The choice Commoner presents is between orderly transition to solar power and continuation of the present trend toward nuclear power, with a shift toward breeder reactors.⁶⁶ From the consumer’s point of view, orderly transition to solar power is clearly preferable. It would ultimately provide safe, healthy power at a stable cost. Breeder reactors are initially more costly, are dependent on electricity, and are both dangerous and hazardous. Moreover, since the solar system can be put into operation more economically and quickly than a breeder system, the saving in capital could be used to maintain standards of living.⁶⁷

Farmers would enjoy immediate benefits in lower and stable energy costs, which they could largely produce themselves, and they would soon become sellers of solar fuels which they could produce in excess of their own requirements. Therefore they would shift from a position of dependence on ever escalating energy costs imposed by utilities and oil companies, to a position of independence, bolstered by a diversification of their market products.⁶⁸

Workers are overwhelmingly consumers, and as consumers they would have every logical reason to support the road of orderly transition to renewable sources. But as we have already described, labor unions are also partners in production of major corporations and of the energy corporations as well. As such, they will tend to identify with their jobs as producers. I would expect that the oil and electric utility workers would tend to support positions taken by their employers, who, as we have shown, have paid them relatively well. Commoner provides a generalized argument that it is better for workers, for job maintenance and development, to avoid the capital-intensive route of breeder reactor development.⁶⁹

There are good reasons why energy using businesses should prefer the route of transition to solar power. They are at the mercy of the energy producers. Once they have committed their capital equipment to a given form of energy, which comes from one monopoly source of supply, they cannot very well shop around for alternatives when the prices of the energy escalate or when there are brownouts. Transition to breeder power would be very costly to them, because it too would be monopolized and because breeders can supply only electric power. Those now using gas or oil would have to bear the cost of expensive conversion of their basic equipment.⁷⁰ These arguments are strong, but I suspect that energy-using corporations and energy-producing corporations are intertwined and interlocked by so many historical and financial bonds and mutuality of interests, that it is not likely that they will take opposite stands on this issue.

What of the interests of the energy producers?  Let us break them down into three subgroups: the electric utilities, the gas utilities, and the oil industry.

The electric utilities, among which we must include the nuclear power industry, would undoubtedly choose the breeder reactors, supported by massive government assistance. The utilities could hardly expect to survive competition with solar power. Their generating capacity is well in excess of present demand. As utility rates rise (and they must because they are based on the use of nonrenewable sources in great part), more and more solar-powered substitutes will become economic and will be installed. If solar alternatives increase faster than demand, they will displace more expensive, utility-supplied energy. Utility excess generating capacity will increase and, under existing rate structures, their total operating expenses will have to be spread among ever fewer customers—leading inevitably to even higher rates. This process can only end with very high rates and very few customers. A massive commitment to solar transition would almost guarantee the end of the dominance of electric utilities.⁷¹ A genuine need would remain for their power plants and electric transmission systems in a balanced energy system. There is a big question, however, as to whether they would be satisfied with this role. For all of these reasons, electric utilities can be counted as opposed to solar transition.

On the other hand, the gas utilities have every reason to favor the transition to solar sources. If we went to breeder reactors, they would gradually be fazed out of existence. Under a breeder system, the presumably stable price of the system’s renewable electricity would compete more and more successfully with natural gas, which would become increasingly more expensive. In contrast, if we had a solar transition, the gas utilities would flourish because they would provide natural gas as an essential bridging fuel. Methane would gradually be added to the pipelines and solar sources would be distributed by them. As natural gas sources were depleted, the empty gas formations would become storage facilities for solar methane. Because of this secure and bright future, one would expect gas utilities to favor the solar transition. But again, the actual position they take may be dominated by their financial ties to electric utilities and the oil industry. In some cases, such as Pacific Gas and Electric Company, both gas and electric are under single ownership. Moreover, oil companies have massive gas holdings and their influence might be decisive.

Oil companies can be expected to oppose a solar transition. They have large uranium holdings, and the early elimination of nuclear power would reduce their value. Oil companies have bought up large coal holdings, and the solar transition would gradually reduce the need for coal. A substantial portion of electric power production is from steam plants fired by coal, oil, or natural gas. These plants will not be able to compete with solar power in the long run. The transition to solar fuels, alcohol, gasohol, and the development of cogeneration from solar fuels all point to a reduced dependence on oil.⁷²

As Commoner sums it up, the solar route would favor every interest except the electric utilities and oil companies; and with them he predicts a head on clash. On one side he sees the public interest, firmly committed to the solar route; on the other, the private interests of the most powerful global corporations on earth. If the solar transition is adopted, they will lose their dominance. Solar power will end the prospect of escalating energy prices, the super profits of which enable corporate business to buy up ever-larger sectors of the economy.

If we went the breeder route, they would continue to flourish while the rest of the economy would decline.

The Ultimate Issue: Private Versus Public Interest

To Commoner, the energy crisis is straightforward. It is a conflict between social justice and the private governance of the economic system; a struggle between the private interests of the oil companies and the national interest. The solution that he proposes is that the oil companies be accorded the same treatment as other essential public services that tend to be natural monopolies, like telephone, electric, and gas services. He recommends that the oil companies be granted a monopoly and the right to charge prices that give them a guaranteed rate of profit on their investment. He does not think that the corporations will be enamored of this tame and docile existence, after the swashbuckling role they have enjoyed in the past, and may prefer to move their assets into other areas of private investment instead. Oil companies have been diversifying their investments on an ever-widening scale since the end of World War II, both within the United States as part of the conglomerate movement and abroad as global corporations.

A similar clash has already begun with the electric utilities. They have been in deep trouble partly because of gross overcapacity based on inaccurate estimates of demand and partly because of costly errors in the building of nuclear power plants. Their attempts to pass the costs of these errors on to their customers in the form of higher rates have contributed heavily to inflation. Commoner labels these attempts a clash between social justice and the private interests of the energy industry. He believes that society cannot leave these decisions to be made by private interests who will be guided by only one narrow consideration; that of private profitability. The electric utilities will ignore grave social consequences, like inevitable inflation, as being “externalities”, that is, factors which are irrelevant to private transactions. The principle which serves private interests damages the social ones.⁷³ Commoner prefers to rely on social interest as the main determinant, and to use public funds to hasten the process. He thus counter poses social welfare against private profit as the proper basis for making this basic decision.

Commoner sees energy policy as the key political issue of our era. He reviews the history of President Carter’s Energy Plan and condemns it as the “politics of evasion”. Commoner compares Carter’s performance to the trivia and the banalities of that line of presidents in the 1840s and 1850s that were deadly afraid to come to grips with the basic issue of their era; the problem of slavery. He considers Carter’s policies as creating an unnecessary austerity, imposed on us by the failure of the political system to allow the real issues to be debated.⁷⁴

Commoner’s book was written in an attempt to force the issue into the political process of our two party system. This attempt apparently failed, and as a last resort, Commoner undertook the difficult task of forming a third political party, the Citizen’s Party, and running as a presidential candidate. For Commoner, the central issue of our era is the energy crisis. And the energy crisis is a key part of the crisis of inflation.

3. The Medical Care Crisis

A semi private hospital room that cost $200 a day in 1980 will cost, at the present rates of inflation, about $530 a day by 1990 and $1,400 a day by the year 2000.⁷⁵

Since 1950, the rate of increase in per capita total health expenditures in the United States has been over double that of prices in general. The trend is clear. And a growing proportion of our population is finding it difficult to meet these rising costs, which strike unexpectedly and cannot be avoided.

Our hypothesis is that this inflation can be explained by the structure of medical care delivery in the United States. We propose to reveal this structural basis by comparing our system with that of the United Kingdom. The two countries resemble each other in that both are capitalist countries, have similar traditions of democratic liberties, are advanced industrial nations, have quite similar levels of education and literacy, and have similar value structures. Even more important for the purpose of this comparison: the general health of the two peoples is quite similar; their life expectancy is the same; the U.K. infant mortality rate is a bit lower than in the U.S. Even though the medical care delivery systems are quite different, they work well enough to maintain their respective populations in similar states of health.

No system of healthcare delivery is perfect. Many criticisms can be leveled at both systems. We cannot judge either by some abstract standard of perfection. If perfect health care were the standard, we could spend our entire incomes on health care and still fall short. But we can consider food, shelter, clothing, and our necessities, and, after proper consideration, devote an affordable sum to health care.

The immediately apparent difference between our structure and that of the British is that the British devote a certain proportion of their resources to health care and attempt to stay within a planned budget. In the United States we have no mechanism for arriving at such a budget. We have no cost controls, and our costs are out of control. Or rather, that costs are controlled by the providers of healthcare in our country; and by the recipients of health care in the United Kingdom.

Both systems are well established. The British system has been in existence since 1948 and can hardly be considered an experiment. They consider it permanent. And, as we have shown, both systems keep the populations in about the same state of health. But what are the relative costs? In 1977 we spent about $700 per capita on total health expenditures. The British spent $210 per capita in U.S. dollar equivalents. For each dollar we spent on health, they spent 30 cents.

Comparing the proportion of respective gross national product spent on health care in 1977, the United States spent 8.8 percent on health; while Great Britain spent 5.4 percent. The difference of 3.4 percent, or the excess cost of American medical care as compared to that of the United Kingdom; came to about $92 billion.

What are the major differences between the two systems? Where did the $92 billion go? Most of the excess went to doctors in the form of higher incomes; to large drug companies in the form of higher drug prices; and to insurance carriers in the form of profits, administrative and malpractice insurance costs. Let us discuss each of these in turn.

In the United States, medicine is conducted primarily on a fee for service basis. Hospitals charge similarly. Doctors in the U.S. ordinarily treat people when they fall sick. A sick patient is inherently unable to shop around for the most reasonable price. The doctors all belong to a very strong association and generally charge alike. In this, they follow the pricing habits of oligopolists, which were described earlier. In the United Kingdom, hospitals are run by the government and all of the personnel are salaried employees. Out-of-hospital medical and dental care is provided by private doctors under a contract with the government, paid on a capitation fee basis.

In the United States, doctors fix their own fees and their incomes are much higher; about double that of doctors in Britain. And British doctors, on the average, see about one third more patients.

The earnings of doctors in the United States are very high by almost any standard.  If we take the highest educated and highest trained professional men in the prime of life in our country and compare their earnings, we find that physicians earn almost double the average of that top group.⁷⁶

We cannot measure with any precision the influence of the basic structural difference between U.K. and U.S. medical care, but it must be substantial. And it goes far beyond the mere difference in prices. In the U.S., the doctor, who is the captain of a team, decides on the course of medical treatment, laboratory tests, and drugs to be prescribed, hospitalization and follow-up. In making these decisions, U.S. doctors determine the total size of the medical bill. Yet, in the United States, most doctors are not cost conscious. By always trying to work by the very highest standards, they seek out what they believe to be the best care, regardless of cost. Since they charge on a fee for service basis, they benefit by providing extensive service. In the U.K., on the other hand, doctors have a list of patients, and every incentive to keep them well with the least expenditure of time and effort.

In a very real sense, American doctors are in an impossible moral position. Society gives almost all professions clear guidelines for their work. Judges and lawyers receive guidance from a body of law. Accountants and engineers, along with almost all other professionals, know what they can do and cannot do. But doctors have no equivalent guidelines. They are forced to make moral judgments and life and death decisions which should be made for them by society. It is not the doctor’s fault that extraordinarily expensive medical procedures are sometimes devoted to incurables, or terminal illnesses. Doctors have the mandate to preserve the last spark of life until it is completely extinguished. Religious groups insist on this, and the custodians of the public purse are guided by politicians who are afraid to question this. Doctors are blamed for skyrocketing medical care costs when they are merely the residual legatees of the failure of others to confront the moral issues involved. In the present situation it is not possible for American society to allocate its resources in a rational way.

Another drain on the medical dollar is higher drug prices. Large American drug companies are outstanding examples of monopolies ranking second only to the large oil companies in terms of profits per dollar of sales. The 500 largest American corporations averaged 4.8 cents profit per dollar of sales in 1978, while the pharmaceutical companies in that group averaged 8.7 cents, almost double the average. They employ a large staff of salesmen whose job it is to visit doctors and push their company’s products, stressing the unique value of their brand names (which cost far more than their generic equivalents). Collectively, pharmaceutical houses spend about $4,000 per year on each practicing physician in the United States.⁷⁷

The British have little patience with this kind of waste. They tend to restrict their prescriptions to generic products, and their patients seem to be just as healthy.

Still another drain is health insurance. For each dollar of premiums paid to insurance companies for health insurance in the United States in 1977, 69 cents was paid out in benefits. In the same year almost $9 billion was retained by insurance carriers in profit and administration. Part of the reason for this drain was the large administrative staff required to apply complex benefit schedules to specific cases. In contrast, 6.5 cents of each dollar goes for administration in the United Kingdom, and 93.5 cents is paid out in benefits.⁷⁸

A damaging inflationary force in the structure of health care in the U.S. is third party payment of bills. Neither the doctor, the hospital, nor the patient has much incentive to worry about high bills if someone else is paying them; as when an insurance company pays all or a portion of the bill or a government agency pays it under one of its programs such as Medicare. In 1978, two thirds of each dollar billed by doctors and hospitals was paid by such third parties. The patient pays in indirect forms, such as taxes or health insurance premiums, but at the time of illness, he is shielded from the impact of a large bill. There is nothing like this in the British system. Malpractice insurance is presently a major overhead expense for American doctors in private practice, but is almost non-existent in Great Britain. Doctors, as all human beings, are fallible, and errors occur, so it is reasonably certain that there is some malpractice in both countries. But an increasing number of malpractice suits against doctors and hospitals is a purely American phenomenon, and is related to the fee-for-service relationship, where there is a contract between buyer and seller, and breach of contract is grounds for suit. Malpractice suits involve the element of “getting even”. High fees are expected to produce cures. When they produce harm instead, the patient has no recourse other than to sue to “get even”. In Great Britain there is no private contract; the patient is free to go to the doctor of his choice. The system tries to correct its errors and there are few malpractice suits. Inflation, which is higher in Britain, is taken into account. The British overwhelmingly approve and support of the National Health Service, although they are critical of it. Neither of the political parties would dare abolish the National Health Service the system where the recipient of health care is firmly in the saddle.

In the United States, on the other hand, health care providers are the ones who are firmly in the saddle, and the combined political power of the American Medical Association, the insurance industry, and the drug industry will do everything they can to keep it that way.

Comprehensive health insurance, which does not disturb the doctor’s control of his fees and services, the role of the private insurance companies, or monopoly control over drug prices, camouflages the structure, but does not change it.  It may even serve to perpetuate and increase inflation rather than confront it.

This does not mean that there is not real sentiment for basic change.  For the last 40 years people have been seriously struggling with the problem of medical costs.  The outcome so far has been the development of health maintenance organizations, Medicare, the development of prepaid medical service cooperatives, and group medical coverage plans negotiated by unions through collective bargaining. All these point clearly in the direction of the increasing socialization of medical care delivery in the United States.

Understanding the British system can give us a new vantage point from which to examine our own. If we adopt the same objective and scientific attitude toward medical care delivery that we do to evaluate any ecosystem in our environment, we will realize it must perpetually change and adapt. The British experience can help us to meaningfully make those changes.

4. The Housing Crisis

Housing costs are inflationary. They have increased more rapidly than prices in general, partly because land ownership is a natural monopoly, and partly because the costs of new construction have risen sharply.⁷⁹ The structure of the ownership and control of housing investment also contributes to inflation. There has been a massive shift of “tax-shelter capital” into housing since the end of World War II based on the anticipation of inflation, which has contributed greatly to it.⁸⁰

Earlier we described the use of limited partnerships in connection with tax sheltered investments in agribusiness operations. The application of this tax shelter device to real estate operations has been widespread. Let us examine a typical scenario in order to illustrate the principal features of such operations. The affairs of the partnership are managed by a general partner for a group of limited partners. The limited partners pool their capital but they retain their status as individual taxpayers for any profit, capital gain, or loss which they share in proportion to their relative investment. Gains and losses are “passed through” to them and each partner can combine the results with personal income.

The general partner often employs a staff of managers, property evaluators, accountants, and lawyers, who carry out the project from beginning to end. First they find “suitable” rental properties, meaning that their price is as low a multiple of the rent as possible, that have low down payments, whose rents can be raised either without further improvement or after relatively small additional investment, where local property values are rising and will, in all probability, continue to do so, and finally, that can be converted into condominiums.

Next, the partnership is formed.  It can be structured so that there are two classes of limited partners: one that needs maximum tax shelter but not income, the other that wants maximum income but not tax shelter. It is not uncommon to be able to provide the first group with up to 50 percent tax shelter in the first year, and 25 percent in the second year. This is accomplished by using the high, first year depreciation allowances, and the costs of acquisition, management, and improvement. This class of partners, of course, is persons with high ordinary income who are in the high tax brackets. Such persons can literally buy tax exemption by merely moving their assets from one such investment to another. In effect, they are investing money which they would otherwise pay to the tax collector. The second class of partner would appeal to retired persons who do not need tax shelter but are more interested in high cash returns. By combining both classes of partners in one partnership, the tax shelter for the first class is increased, and the high cash flow for the second class is also increased.

The next step is an assault on rents. These are pushed up as rapidly as possible, sometimes by making improvements. A little arithmetic will show why this strategy is extremely profitable. Assume a property is bought at a price which is ten times the gross rent. If the rent is then raised by $1, the value of the property will be increased by $10. So there is a spectacular financial reward to the partnership for raising the rent. Add to this the effect of leverage. If a property is acquired for 20 percent down, the increase in the equity resulting from the increase in the rent, will also be spectacular when compared to the small investment of the partners.

The next step in the scenario is to sell the property within three to five years. Depreciation allowances and the tax shelter advantages are greatest in the early years. Therefore, the name of the game is rapid turnover of properties.

Conversion of the property to a condominium, when possible, adds enormously to the profits. The partnership, in effect, purchases the property at wholesale and then subdivides it and sells it at retail prices, which may be about double what it paid.

What we have described is the big shark in the real estate waters; and many owners are not that predatory. But these sharks set the tone, and tend to become the models to be emulated by the others. Large corporations and life insurance companies that are active in real estate operations follow suit.

We have described this structure because it is based on inflation; it capitalizes on inflation and, by its mode of operation, contributes enormously to inflation. It is a structure which is at least partly responsible for the speculative rise in real estate values far in excess of the rise of prices in general. The result is also a substantial increase in the proportion of the total consumption budget that goes into housing.

Chapter 4: Politics of Inflation

1. Inflation: A WorldWide Phenomenon

Figures on inflation throughout the world are only rough approximations. There are great differences in the quality and reliability of such statistics collected by various nations. The United Nations publishes collected information, but it cannot overcome the basic weakness of the data. Nevertheless, this information clearly reveals that inflation is endemic throughout the Western World.

For the purposes of this book, we need only sketch briefly the major features of world inflation that may influence inflation in the United States.

We Are Part of a Global Economy

The United States is part of a global economic system. We are a major world trader; we import large quantities of raw materials and manufactured products, often from our own foreign subsidiaries, and export large quantities as well. Inflation abroad raises the costs of our imports. Developing countries that suffer from mass poverty are bound to demand ever higher prices for their labor and products. Our products will tend to flow to the markets where the prices are highest. Inflation abroad raises the cost of our exports.

Military expenditures are a substantial cause of inflation worldwide. In 1976, these came to about $400 billion worldwide included the maintaining of approximately 26 million military personnel.

We have only very limited control over worldwide inflation. Many countries have inflation rates higher than ours and world inflationary pressure is rising.

The Danger

Inflation is out of control in a number of countries. The five worst are military dictatorships in South America: Chile, Argentina, Uruguay, Brazil, and Peru. Why is this so? Rampant inflation is a massive engine for the debasement of the living standards of the masses for the benefit of the few. It is incompatible with any democratic process. It cannot be maintained, except by military dictatorship. Such countries have given up any pretense of stability. Inflation and political instability go hand in hand.

In any course of action, one must weigh the social cost of alternatives. The social cost of doing nothing about inflation is so great as to be unacceptable to the vast majority of Americans. The prospect of persistent high inflation causing mass debasement and leading inevitably to military dictatorship and explosive social instability is one that no prudent and responsible person can accept. The cost is simply too great. Such inflation would be the road to calamity and catastrophe for us as a people and as a nation.

If that road is unacceptable because the cost is too great, it follows that almost any other course is preferable, no matter how difficult and onerous. We will discuss this later, but the lessons of world history are spread out before us. If we do not learn from them, we are bound to repeat their mistakes.

The Soviet Bloc Experience

The United Nations statistics for the Soviet bloc show the official figures for prices of staples in the State stores, rents, public transportation, education, and medical care. Let us assume for purposes of discussion that these figures are accurate and that they are relatively stable. We know that the countries in the Soviet bloc also exist in an inflationary world, just as we do. To the extent that they buy grain from abroad, for example, they pay world prices, which have gone up with worldwide inflation. In order to maintain stable prices for bread in the USSR, they must subsidize these imports. To the extent that they export goods, they will receive the higher world prices and they will benefit from world-wide inflation. They pay for wheat imports by exporting gold, for example. To the extent that there is any net dependence on the outside world, they are therefore not immune from world-wide inflation.

Within the USSR, inflation is restricted to their black markets or their “free markets,” mostly trading in things which are not available in the State stores.  We cannot measure the net effect of inflation in the USSR because we do not know what proportion of the average person’s income is spent on the official market and how much on the “free market,” nor do we know the extent of inflation on the “free market.” So we are probably never going to be able to make the kind of objective measurements of the relative changes in real living standards necessary for determining which social system works better for the bulk of its people. Even when objective measurements are made, and people may look as well fed, housed, and clothed, how does one measure security, opportunity, and freedom?

Despite the problems and difficulties, it appears desirable to discuss two issues which emerge from the Soviet experience. Their people have some shelter from inflation and more stability in the cost of basic necessities. Can we learn from this? Can we adopt selective price controls for basic elements of common essentials? Is it possible to have a dual economy such as Russia’s where basic costs of necessities are stabilized, while the cost of luxuries are permitted to inflate? Under which system are ordinary people better protected?

The two systems are in competition.

Let us assume for purposes of discussion that the net result of the Soviet system is greater stabilization of prices than in the rest of the world. Inflation will work to their advantage as time passes. Such competition will improve people’s wellbeing and is far preferable to war preparation and endless war.

Controlling inflation is essential to the well being of the individual and governments need to do their part.

2. Debasement

Statistics tend to underestimate the true extent of inflation, because they measure only the changes in prices of a commodity over a period of time. Unfortunately, prices can also be increased by debasing the product; by altering its quality, its durability, or the expense of maintenance and repair over its useful life. A case in point is the cost of maintenance and repair of new cars which is far greater than that of older models. Between 1947 and 1979 the cost of a new car more than doubled, while the cost of repair and maintenance quadrupled. Present day cars are not designed to be repaired easily and inexpensively. Major components are now engineered to be replaced as units rather than being repaired.⁸¹ Once the car is purchased, the owner is a captive and is able to purchase needed components from only one source and at the price fixed by them. This “after-market” is highly profitable because it is uniquely monopolistic. Thus, a small auto accident is transformed into a large repair bill. Once the car is purchased, the owner has only one supplier of needed components, which are sold at fixed prices. This “after-market” is highly profitable because it is uniquely monopolistic. Thus, a small auto accident is transformed into a large repair bill.

There is a sizable literature on debasement. Various publications and periodicals help the consumer compare product quality. Consumers are becoming aware of the need to check weight and contents, particularly food additives, coloring, pesticide residue, and preservatives which may be harmful or carcinogenic. Changes in products to improve their shelf life, make them look better or taste better or sell better, may be deleterious to the health of the consumer.⁸² As a result natural foods have experienced a recent revival.

While there is widespread debasement, there are also many examples of product improvement. An outstanding recent example is in computers, which have increased in quality and dropped in price.

Debasement and inflation result in shifts in consumption patterns as prices rise.  

When the prices of basic necessities such as housing, household utilities, medical care, and transportation go up, the consumer has little choice but to pay whatever the cost may be.

The proportion of our income that we pay for these items has risen. At the same time, the proportional amount spent on food and clothing has dropped substantially. The rise of the former group, which is dominated by monopoly suppliers, is about matched by the drop in the second category. The net result is that Americans are eating cheaper foods and dressing more shabbily.⁸³

Debasement of services is also a widespread phenomenon. An example is when the government terminates or restricts a public service, or charges fees for services which were formerly without charge. Increased taxes alone do not adequately measure the true extent of inflation in the cost of government services.

When the government debases the coinage, it profits just as clearly as when a corporation debases a product. In both cases, the consumer receives less than he previously did.

Another form of debasement is when professionals substitute their services for those of lesser trained personnel, a practice which is now common in many professions and service organizations.

People can no longer get the kind of service that was once available.

So we see that debasement of goods and services is an integral part of the process of inflation, and inflation cannot be fully measured unless debasement is considered.

Debasement of the Quality of Life

The term “debasement” can also be applied to the quality of life and the quality of the environment.

Consider for a moment the debasement of commercial TV programming, largely dictated by the needs of corporate advertising. Programs that sell products to large masses of consumers receive large corporate advertising support. Such programs may be filled with violence, sex, or insipidly imitative interplanetary space adventures, and may present a very sorry picture of our real world, but people are entertained by these programs and watch them. Other programs that may be of interest are then relegated to off-hours. Mass protests against some commercial TV programs, as a debasement of the public mind and as a harmful influence on children, have formed the basis for the development of public-service broadcasting in this country.

The cost of homes, which has skyrocketed due to inflation, has debased the quality of life of young families expecting to settle and start families. As recently as the 1960’s a family with one steadily employed worker could afford to buy a single family home. By 1978 only young couples who both work at relatively well paid jobs could afford to purchase homes.

Middle age and older couples, experience another form of debasement. Their homes may be appreciating in value (and in the cost of maintenance as well), so that to some extent they have a hedge against inflation. But this asset is illiquid, that is to say, it cannot be converted into cash readily. Moreover, it cannot be sold because they need continued shelter. So though it is a hedge against inflation, it cannot readily be used.

How do their other assets, usually savings in the form of bank deposits, bonds or stocks, fare in periods of inflation?

Savings in the form of bank deposits have clearly eroded in value. The interest rate before taxes has been in the 5 percent level, after taxes in the 4 percent level, for those in the lower tax brackets. This has been less than the rate of inflation. With real negative interest rates, such bank deposits have suffered steady erosion in value.

The same is true of savings invested in bonds. If they had invested $10,000 in 20-year government bonds in 1965, they would have received 3-1/4 percent interest before taxes. If they sold it in 1980 they would receive $7,000 in cash, or the equivalent in purchasing power of $2,800 in 1965 dollars which he lent to the government.⁸⁴

It is little wonder that as inflation and interest rates have risen, long term bondholders have tried to get out of such poor investments. Many have taken their losses and switched to short-term bonds. But here too, it is impossible to avoid erosion of capital as long as net interest rates continue to be lower than the rate of inflation. These are negative interest rates, which must inevitably lead to erosion of capital.

What if they had invested in stocks?  They would have received dividends ranging from 3 percent in 1965 to 5.3 percent in 1978, before taxes; again less that the rate of inflation. $10,000 invested in the average of 500 common stocks in 1965 would have fallen in value to $6,376 in 1980, and this had a purchasing power of $2,550 in the 1965 dollars which they invested originally.

This too represents a debasement for many in the lower and middle income bracket. Inflation is eroding their capital, their security, and their peace of mind. Only the relatively few among them who successfully speculated in real estate, gold, diamonds, antiques or art works, have managed to escape this erosion.

Another measure of the debasement of life values, particularly for the poor and especially for the minority poor, is the number of people in prisons. The prison population goes up in bad times and down in good times. This was true during the Great Depression in the 1930s and during World War II. Since then, however, prison population has risen with inflation, and the correlation is fairly consistent since 1945. The property crime rate, which includes burglary, larceny, and theft, has been about 2.5 times greater than the rate of inflation since 1957. No direct causal relationship can be proven, but it is reasonable to infer that one exists. Inflation is an engine for increasing the misdistribution of wealth and income; and crime is unfortunately the road some take in an attempt to compensate.

There is still another form of debasement; the debasement of the political process. The basic essentials of any democratic political process are freedom of speech, of the press (which now includes television), and of assembly, guaranteed by the First Amendment. The concentration of corporate control over newspapers and television has made a hollow shell of these basic rights. The populace does not have free access to the real issues of our times, or any way of debating them. Too often, we have instead the politics of evasion, of banalities and trivia, and of candidates who cover themselves with ambiguities and clichés. It is no wonder then that about half of all voters did not bother to vote during the 1970s.

Another result of corporate concentration for profit is pollution and degradation of the environment. We no longer have the same quality of environment, and therefore the same quality of life that we once did. We have suffered a decline in our real standard of life, but any correction and amelioration of this is bound to add to inflation. There are costs associated with cleaning an environment and with cleaning up our production and living practices. These costs will be reflected either in the prices of products or in taxes we pay the government to finance clean-up programs, or both. We may also pay in the form of increased medical costs.

Opposition to Debasement

There have been some unusual recent developments opposing debasement.  Parents, nutritionists, and schools are banding together in the struggle against “junk foods”. They are often opposed by corporations who use massive advertising programs which pit the children against their parents. Vast as is the influence of parents and teachers combined, they often lose in the struggle. The harm to the children is not just the decline in their physical health; the advertising and television programs are often junk food for the mind, stifling growth and education. Sometimes the programs are positively harmful. This accelerated the development of public-service TV programs which have become a powerful tool in educating and improving health habits.

The world is full of people who do not intend to be debased. There has been an enormous proliferation of self help efforts working to this end. The conservation movement has become a powerful political force in the struggle against degradation of the environment. The consumer movement is growing rapidly in the struggle against the debasement of products. The development of product liability law since the end of World War II has made an enormous contribution to our health, safety, and security. The legal process and the courts have made a large contribution. Unions are beginning to become involved in the issue of the debasement and degradation of the work process, as well as environmental safety in the workplace. Many organizations have come into existence to fight against the debasement of the political process and the struggle for independent government responsive to the public interest. The counterculture movements since the 1960s have been primarily a massive rejection of the debased quality of life offered to our youth by the corporate establishment and culture. The popularity of books like Charles Reich’s Greening of America can only be understood in these terms. E.F. Schumacher’s book, Small Is Beautiful, started a movement against corporate bigness and its high technology expressing people’s fundamental need to work in places that are small enough to provide a meaningful social work process.

Senior citizens are now organizing into a political force primarily to protect themselves against inflation.  Since so many pension systems have fixed benefits, they are one of the groups most vulnerable to inflation. Moreover they are doubly vulnerable because their need for medical care increases markedly with advanced age, the costs of which have risen so sharply. Perhaps the greatest fear and anxiety among the elderly is that they can be wiped out financially by the cost of any major illness. Inflation has eroded the value of all of our social security programs, so that many of our elderly are now again ill fed, ill clothed, and ill housed.

Add to this the recent emergence of the initiative movement. Jarvis and Gann led a successful tax revolt for property owners against the property tax in California in Proposition 13, and the movement is spreading rapidly to other states. Other initiatives are designed to limit government expenditures by various formulas. One California initiative would tax excess oil company profits in order to pay for mass transportation. These initiatives represent more intensive use of direct political action that bypass the normal political channels, which many people feel are useless. An enormous political power is latent in all of these movements. Later we will explore the possible avenues by which this power might be exercised.

3. Illusion and Reality

How do we think about large corporations? What information do we get through newspapers, advertisements, TV commercials, radio commentators and politicians, analyses in magazines and business commentaries?

The Corporate Image

The typical corporate image depicts a group of innovative scientists who are engaged endlessly in research and in the development of new and improved products to promote the progress and happiness of all people; they are “problem solvers”; their employees are our friendly neighbors whose main job is to serve us with a smile; they are truly anxious to conserve energy and to protect our environment; they are the technical and production support of our armed forces and we can depend upon them to safeguard our freedom and the highest standard of living in the world; they are a happy and harmonious family working as a close knit team in factories, mines, in outer space, and at the bottom of the sea; they are ambassadors of goodwill and peaceful trade in countries all over the world; they care for us; our health, safety, and happiness are their constant concern; their bigness is good because they are able to serve us wherever we may go, even to the farthest corners of the earth; they are patrons of the arts who sponsor programs to educate and entertain; they provide scholarships and endow chairs and research grants for higher education.

Many corporations do many of these things. The principal error in this picture is one of omission. These corporations are mostly working to achieve monopoly market control which fixes high prices.

Corporate image making a new art form developed by advertising agencies. It is impossible to escape the endless repetitive exposure and its cumulative effect on the mind. Over the years the images begin to assume the quality of reality. We grow to like the images they portray.

Therefore, when we are faced with facts that are grossly inconsistent with the corporate image, we reject them, preferring to keep our image untarnished. The corporation may have polluted a stream, but you are assured that they will be the first to clean it up. Yes, their product did kill some people, but they paid their million dollar court award and promptly recalled it. Whatever happens to tarnish the image is soon glossed over and the image continues to shine as brightly as ever.

This is part of the problem. We have already supplied a body of factual information about large corporations; how they exercise their market control, and that they constitute a major structural base to inflation. The data is reliable. Corporations do not challenge these facts; they ignore them in their public image. The reality is corporate price fixing; the image is of a benign, public benefactor.

How we see large corporations, and whether we approve of them or not, is conditioned by our beliefs.

The Reality of Government

Similarly, whether we approve of the role of the government or not depends largely on how we see it.  Those raised and educated in America were taught that it is a government independent of, and above, the narrow interest of any private group; responsive to the will of the majority; mediating fairly in disputes between interest groups and regulating in the public interest. Though much had happened to tarnish this image, it is one worth striving for, and without truly independent government equally responsible to all the people, we cannot possibly build true countervailing powers to those of large corporations, or any meaningful program to counter inflation.

High and persistent inflation is leading America to ruin. Honest and responsive government must be created to head off disaster.  This is the duty of all citizens.  Many are angry and frustrated with their government and want to deprive it of strength and funds.  But if citizens destroy the power of government, there will remain only the unopposed power of large corporations.

The Reality of Military Power

Military power and the actions performed in the name of national defense are the biggest challenge. Must we accept the existing military industrial complex with its great inflationary pressure caused by military spending? Must we continue these policies when we know that military spending is one of the factors leading our country to ruin?

Should the United States be providing a costly military umbrella to shelter multinational corporations all over the world when they are reducing employment opportunities in our own country and contributing heavily to inflation throughout the world? And should the United States extend military assistance to countries dominated by military dictatorships which compel their people to accept rampant inflation?

To contain inflation, choices must be made, and priorities changed. Military solutions feed inflation. It is not possible both to continue supporting military expenditures and solutions, and, at the same time, to contain inflation.

Emancipation from Illusions

Corporations create images of us too. The corporate system needs a public which accepts corporate beliefs, purposes, and images. Creating and maintaining such a public is a long and arduous task. It starts with our early brainwashing and is reinforced throughout our lives. As we accept these images, we try to copy them, to become them. Men learn that Gucci suits, Camels, and Mercedes are “manly”. Women wear designer clothes with high heels, and diet to fit the “sexy” images of women. We are taught that high paying jobs and expensive homes say “success”.

Galbraith explains it historically.⁸⁵

In the early 1900’s, the public was aware that everything that the large corporations, banks, the most reputable newspapers, and politicians said, was suspect. It was assumed that they were enriching themselves at our expense. During the New Deal period the public knew that most corporate, bank, press, and “reputable” opinion opposed Roosevelt. But since 1940, massive public relations expenditures of the corporate establishment have succeeded in altering and modifying public suspicion. The majority of our population under the age of 50 has lived their entire conscious lives under a constant barrage of corporate propaganda. But people are beginning to recognize that they are being manipulated, are rejecting what they have been taught, and are becoming emancipated.

We cannot deal with inflation unless we understand it. Widespread public awareness is needed to provide the political energy needed to fuel the process of social change.

4. The Politics of Inflation

We can now sum up the historical relationship between the exponential rise in prices since the beginning of the nineteenth century, and the various structural bases of inflation which we have described.

Large corporations, one major source of rising inflation, have been with us since the very beginning of the1900’s, during which time they have grown enormously in market power and economic dominance.

During the mid 1930’s New Deal period, growing involvement by the government, growth of agricultural price supports, the growth of unions, and rising wages, also contributed to increased inflation.

The pre WWII growth of the military industrial complex, growth of military expenditures, growth in the use of credit, and the growth of worldwide inflation, also contributed to the raising rate of inflation in the United States.

The growth of agribusiness and the energy crisis in the mid sixties also fueled inflation.

As additional factors have come into play and grown in potency, they have contributed, and most likely will continue to increase the rate of inflation.

At the Crossroads

There are things about our economic system and how it works that we do not understand. Inflation in particular, is especially difficult to understand, as it cannot be separated from the underlying structure, politics, and problems of our society as a whole.

There will be no solution to inflation except as part of an overall solution to our societal problems, mainly those of private interest versus public welfare.

There is no blueprint panacea. Those looking for solutions will have to work out the details as they go. But we do have some ideas regarding what will not help, and what will not work, and we can identify the general direction in which answers can be found.

1. Doing nothing, or the equivalent of nothing, will not work. President Carter’s energy program, for example, is the equivalent of nothing. His program on inflation is the equivalent of nothing. Doing nothing will only perpetuate exponential rises in inflation. This road to disaster will ultimately end either in a right wing military dictatorship or a left wing social revolution, or with one followed by the other.

2.  We cannot turn back the clock of history. Some people, when confronted with today’s problems, would like to turn back the clock to a period before these problems existed. But we cannot wish away population growth or scientific and technical advances. Going back to the horse and plough will not feed our people. We cannot restore a previous economic system, such as the competition of the 1800s. We must take what we have and move ahead, and try to preserve that which is worthwhile.

3. The only way out is to move forward.

4. History should temper our ideas of the time required for fundamental social change. The last such change in our country was the New Deal. The forces leading to it started many years before the mid thirties, and the effects have been with us ever since. That experiment in restructuring our system stretched over about half a century. If an era of restructuring capitalism is to happen, it is bound to take a long time. We know that the pace of history has quickened and perhaps that will hasten the process, but nevertheless, the pace of historical change is slow. The decision making stage may be short, as it was during the New Deal. The basic decisions and commitments were then made during the period of 1932-1937, but the practical working out of these policies and their establishment as institutions took much longer.⁸⁶ We are now entering the period of awakening to the need for new policies. Inflation has forced the issue into the forefront of the national consciousness. Large numbers of people have begun to understand that something is fundamentally wrong and are ready to begin this process, but we must recognize that basic and massive social change takes time.

5. We should be sobered by the fact that it took a shattering cataclysm to bring the New Deal into existence. The array of forces in power slowly shifted as mass unemployment grew and became chronic. In order to survive, farmers, workers, and small businessmen were forced into an upsurge of political activity which brought the New Deal Democratic Party into power. At the same time, this cataclysm weakened the old guard capitalism and the Republican Party. In disarray, they could not resist these new forces.

6.  History confronts us with still another dilemma.  In the years after the mid-thirties and the New Deal, mild inflation was accepted as a fair price to pay to avoid large-scale unemployment. From 1950 to 1965 prices increased by one percent per year, and unemployment hovered at the three to four million level, (between 3 and 5 percent of the labor force).⁸⁷ But since 1965 we have had the combination of much higher rates of inflation and much higher rates of unemployment; in the six to eight million range (between 6 and 8-1/2 percent of the labor force). These are official unemployment figures⁸⁸ and are widely considered to be understated but, for the purpose of showing the trend, will suffice. This combination of much higher rates of inflation and much higher rates of unemployment, known as “stagflation”, has become chronic. It provides neither full employment nor price stability.

7. The relatively few who benefit from these structures, as they stand presently, will be hurt when they are changed. If they are not hurt, the change will not be substantive or effective. There are about eight basic structures that need changing. They represent power, wealth, and income, and will not be given up without a struggle.

8. In a deeper sense, any more-or-less peaceful restructuring of this system will, in all likelihood, have some of the quality of the New Deal. That restructuring was done against the bitter opposition of the corporate establishment, and yet the verdict of history is that Roosevelt saved the system for them. He did not destroy it; he merely tinkered with it and made compromises. It was World War II, of course, that really solved the problem of unemployment, but the lesson of the war and the New Deal was that massive governmental intervention could help the system work better.

9. We need a government strong enough to change the structure and tinker with it, to improvise, to compromise with powerful groups, to intervene massively to make it work better without floundering between inflation and unemployment. We do not have such a government now and our political problem is to create it.

10.  We can continue to drift, but at some point the road will fork: one way leading to the right, to fascist military dictatorship; the other leading to the left, to social revolution.

11.  Or we can stop drifting and restructure.

12. Any serious political effort to reconstruct must recognize that The New Deal succeeded only through the combined pressure of an unusually broad coalition of farmers, small business, labor, and minorities. Such a broad coalition is again required. This time, however, the farmers are split into agribusiness and others. Only the small farmers can be expected to join the new coalition. Labor is also split between elite and others. There is no objective reason, however, why almost all of labor cannot be a part of this coalition. Small business in the competitive sector is certainly a natural part, as are minorities.

13. The coalition could be much broader. It could include the consumer movement, the conservation movement, antiwar groups, senior citizens, and all of those who are to organizing against debasement in all of its forms.

14. All of the elements of an extraordinarily broad coalition are in place. We must next consider a broad political program to fight inflation that such a coalition would agree upon, accepting as a basic premise that the program is limited to modifying the structures of our present society in order to correct its malfunctions.

As the system is currently structured, we are poised between mass unemployment and high and persistent inflation.

Unless checked, it is presently in the power of the corporate establishment to precipitate mass unemployment as a political weapon. Historically, downturns in prices, as seen in the depressions starting in 1921 and in 1930, have been accompanied by sharp rises in unemployment. There is little question that, under the present system, a depression and sharp downturn in prices would again lead to a calamitous rise in unemployment. Considering that during the depression of the 1930s unemployment started at one and a half million and increased to twelve and one half million, what would unemployment rise to now if were to start at six to eight million unemployed?

Is another cataclysm like the Great Depression needed to spark another restructuring of our system? Out of the Great Depression came the political mandate to change the structure to provide full employment. Out of our present experience with inflation, must emerge an additional mandate providing price stability as well.

Something dramatic is surely needed to change powerful relationships and break the inflationary mind-set. As long as people expect inflation and conduct their economic affairs accordingly, it will continue.

Although we are focused on the problem of inflation in this book, it is only one standard by which we may judge the performance of the economic system. Any real restructuring must confront both unemployment and price stability, or we will make the same mistake which was made during the New Deal, which was that of accepting inflation in an attempt to solve the problem of unemployment.

Chapter 5: Modifying the Structures that Generate Inflation

What would the general nature of a new public policy be? Our problem is not just inflation, but a collection of problems led by inflation.

Galbraith offers the most thorough exposition of a new policy⁸⁹ 89, and others also have ideas to contribute. Following is a synthesis of these ideas as they relate to economic malfunctioning and inflation.

1. Prerequisites of a Program: Emancipation of the Electoral Process and Emancipation of the Government

Emancipation of the Electoral Process

First, the electoral process must be emancipated. We cannot begin to emancipate the government from its present position as a partner of the corporate system unless a new breed of political candidates can successfully campaign for office. The electoral process is now poisoned at its source by corporate campaign funding and control of the media. This power must be shattered. People, not dollars, must elect candidates. All candidates must have equal access to the public. No candidate should have the right to buy campaign literature, pay for phone calls, advertisements, or, in any other way purchase access to the public.

The media must provide equal space, time, and access to all candidates, including the incumbents. The people must have a democratic process for choosing representatives who will represent them and not be beholding to corporate and media power. Freedom of speech, assembly, and the press, means equal freedom for all candidates.

Emancipation of the Government

We must have a government which is independent of corporate and media power; which can adopt policies and regulate in the public interest.  Because such a government does not exist, it must be created.

The symbiotic relationship between the regulatory agencies and their bureaucracies, between corporations and the incumbent politicians, must be changed. The power of many politicians is based on the Congressional seniority system and committee structure, and their rise to political power is based on this seniority relationship with these committees and bureaucracies. We need a flood of new politicians in Congress, dedicated to ending the seniority system. We need them to secure broad bases in their districts, and to undertake this massive task of cleaning up government corruption. The general rule should be to vote against the incumbent, and against candidates with ample sources of money. All of these are prerequisites to a program of reform. The first part of the program is to reconstruct the government into a true countervailing force operating in the public interest.

It is to this task that we now turn our attention.

2. Government as a True Countervailing Force

The first essential is that the basic determination of public policy should become an open governmental function.

Senator Promise has proposed ending all secret and ex parte meetings, opening all governmental processes to public participation, and giving the representatives of the public sufficient information at each stage to judge intelligently. He would require public hearings on the president’s budget proposals, on all appropriations, on the activities of all regulatory agencies, opening all public functions up to public scrutiny. At each stage he would require that there be adequate cost benefit analyses, consideration of alternative programs, and five year projections of future costs.

The second essential is that the government expend moneys only for public purposes. It may seem obvious, but consider how far we have strayed from this basic idea. The hand of government is present everywhere in the form of subsidies, tax benefits, grants, regulation for the regulated, tariff protection, research and development programs, government contracts, and bail-outs. All of these practices need to be re-examined in the light of new public objectives. Termination or a change in government involvement can have enormous effects in modifying and altering these structures.

Moreover, the government must undertake the overall planning for society. Each corporation plans within its own walls. No one, however, has the responsibility for overall planning. The absence of such planning is perpetuating the energy crisis, our environmental problems, and inflation. One agency must take on the responsibility. It must be an organ of government that acts only in the public interest. Expenditures and priorities must be arrived at through public process under a government which is truly an independent, countervailing force.

Equalizing Power between Corporate and Competitive Sectors of the Economy

We have a dual economy, but the corporate sector dominates and exploits the competitive sector, and the government has systematically helped it to do so. The first sector is inflationary; the second is not. Political support of the higher-paid workers in the corporate sector is essential, so we cannot reduce their wages. The only politically feasible alternative is to raise the incomes in the competitive sector. This will provide mass political support from the relatively underprivileged groups, including small businessmen, the low-paid, minorities, and the bulk of the unemployed, all of whom are indispensable to the success of this political coalition. This, then, is the route that must be chosen, even though at first glance, it may be an inflationary program. It is the only way that will enable us to build another true countervailing power to that of the corporations.

The competitive sector should be given help developing market power.

Concretely, government should help small business by giving it the same advantages which the  corporate sector now enjoys either as a result of its market power, or due to the government help it has been given.

The competitive sector should have a general exemption from anti-trust laws when it acts to stabilize prices and output, and should be encouraged and helped to do just that.

Government help for the competitive sector should approximate that given to agriculture.

Union organization in the competitive sector should be strong encouraged. A high minimum wage should be established in order to put a floor under collective bargaining in the competitive sector. The weakest members of society should be given the greatest help. The very lowest-paid workers should have the support of the National Labor Relations Act. Those who cannot find employment should have a guaranteed annual minimum income set below the levels in the corporate sector, but high enough to effectively eliminate the most menial employment in the competitive sector. Alternatively, the government could become the employer of last resort. And the competitive sector should be protected by tariffs from foreign competition, because global corporations have already achieved this protection for themselves.

The goal is that government help build a new countervailing social force.  In turn, that force would supply the political muscle and support needed to help the government itself become a true countervailing force.

Restricting and Modifying the Corporate Sector

The corporate sector is contributing the most to inflation.  It is a vast engine for redistributing income and wealth into the hands of the few.  Public policy must reverse this trend.  Fortunately, the concentration of market power in the hands of a relatively few, very large corporations, makes control of them administratively feasible; controlling the head offices of about a thousand corporations would suffice.

The main source of inflation is private control over prices exercised for private profit. Since corporations have destroyed the competitive market, the only force that controls prices automatically, the public must intervene to provide substitute controls to protect itself.  These controls must be real rather than voluntary controls or vague guidelines which don’t work and benefit non-compliers greatly.  The controls must be as permanent as the corporate institution itself because inflation is not a temporary aberration, but a permanent malfunction.

Moreover, the function of control cannot be placed in the hands of the corporation itself, or of persons identified with corporate interests.  The responsibility must be in neutral hands, with only the public interest in mind.

Price controls could be achieved through broad regulation of the weighted average prices of product lines, and could apply only to the corporation selling price.  Retail price control might not be necessary because retailing is largely in the competitive sector.  Large retailers might be controlled by directives against widening of margins.

Wage controls in monopoly corporations are unavoidable. It would be impossible to impose price controls on them without wage controls.  Wage controls on unions in the corporate sector should not mean, however, that wages are frozen.  Wage increases could be granted in accordance with productivity gains without affecting prices.  The present extraordinary gap between salaries of executives and workers should be greatly narrowed and greater increases should be granted to the lower-paid.  Executive gains should be taxed at progressive rates, and the loophole of the capital gains tax eliminated.  Wage levels among various corporations should also be narrowed.

Unions have traditionally viewed government price and wage controls with skepticism, and justifiably so because they have too often been more wage controls than price controls.  Unions must be convinced that the new price controls are real and are in the public interest before they can reasonably be expected to accept wage control.  Such a system of price and wage control of the corporate sector must have a mechanism for handling unforeseen developments. Therefore, creeping price and wage levels can be expected, rather than a freeze.  This kind of slow, upward movement is clearly preferable to the inflation of today.

Socializing Indispensable Functions Where Private Industry Has Failed

Our national paranoia and our obsessive opposition to the word “socialism” must be re-examined.  We can no longer blind ourselves to the fact that our private enterprise system has failed miserably in four major areas: housing, surface transportation, health care, and the arts and cultural services.  Neither the corporate nor the competitive sectors have succeeded in providing these needs at reasonable cost and there is no prospect that they will. Moreover, the trend throughout the advanced capitalist world is for these services to be socialized, and we are among the most backward nations in this regard.

Socializing Military-Industrial Firms

In this case we are merely recognizing the reality that military-industrial firms already are socialized in everything except name and private profitability.  The largest of such firms do all of their business with the government, their working capital is supplied by the government, much of their capital is owned by the government, losses are absorbed by the government, the firms are rescued by the government if they go under, their personnel and the government personnel are difficult to distinguish and switch back and forth with apparent ease. These firms are in reality “satellite” government corporations and they should be reorganized as public corporations to avoid waste.  The government could acquire their stock at the current market value, appoint their boards of directors and senior officers, and fix their salaries.  Thereafter profits and losses would accrue to the government.

Reducing Military Expenditures

Any coalition which emerges to struggle against inflation must somehow choose between military expenditures and control of inflation.  If we, as a nation, choose to reduce armaments and promote world peace, we can hope to cope with inflation.  If we choose the path of continued high war expenditures, we must give up all hope.

This is an all-too-brief sketch of the basic elements of the politics of inflation.  No one should attempt more, because the details must be developed by the real actors on the stage of history, out of their own experience.  At the very least it provides a standard by which to judge other proposals.  It also explains why some politicians are paralyzed by this issue.  Our times demand leaders who are not.

“If you do not specify and confront real issues, what you say will surely obscure them.  If you do not alarm anyone morally, you will yourself remain morally asleep.  If you do not embody controversy, what you say will be an acceptance of the drift to the coming human hell.”

C. Wright Mills

Footnotes

1. Heilbroner Robert, Inflationary Capitalism”, the New Yorker, Oct. 8, 1979. ↩︎
2. Data on life expectancy and infant mortality is from United States Department of Commerce, Historical Statistics of the United States, Series B 116, 126, 148. ↩︎
3. Adam Smith, “The Wealth of Nations, “N.Y. Modern Library Edition, 1937, p. 256 ↩︎
4. Scitovsky, Tibor, “Welfare and Competition; the Economics of a Fully-Employed Economy”, Chicago, 1951, pp. 18-20. ↩︎
5. I am indebted to Robert T. Averitt for the concept of the dual economy, which is described more fully in The Dual Economy, W.W. Norton and Co., N.Y. 1968, pp. 6-10. ↩︎
6. Information on interconnections of large corporations from Federal Trade Commission, Staff Economic Report on Corporate Mergers, 1969, pp. 200, 205-212, 458-461 ↩︎
7. Discussion of “the original power” is from Galbraith, John Kenneth, American Capitalism, Houghton Mifflin Co., pp. 19-52. ↩︎
8. The historical discussion derives from two sources; the article on corporations in the Encyclopedia Britannica by Professor Stuart Burchey of Michigan State University, Encyclopedia Britannica, 1966, Vol. 6, and the Federal Trade Commission Economic Report on Corporate Mergers, published in 1969. Most of the older history is from the former and I have taken only minor liberties in summarizing it. Most of the more recent history is from the latter. ↩︎
9. For the effect of the Santa Clara County v. Southern Pacific Railroad Decision, I am indebted to Beard and Beard, Basic History of the United States, Doubleday and Co., 1952, p. 318. ↩︎
10. For more details on the genesis of corporations also see Chandler, Alfred D. Jr., Strategy and Structure, M.I.T. Press, 1962, p. 37. ↩︎
11. Federal Trade Commission, op. cit., p. 150. ↩︎
12. Federal Trade Commission, op. cit., p.3. ↩︎
13. Federal Trade Commission, op. cit., p. 212.
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14. Federal Trade Commission, op.cit., p.71-2, 246, 321-2, 350, 401, 230, 459, 27, 126, 129, 119, 143, 21, 5, 75, 141, 497. ↩︎
15. Kolko, Gabriel, The Triumph of Conservatism, MacMillan Co., N.Y., 1963 ↩︎
16. Kolko, op. cit., p. 61. ↩︎
17. an economic condition in which there are so few suppliers of a product that one supplier’s actions can have a significant impact on prices and on its competitors ↩︎
18. Barnet, Richard L .and Muller, Ronald E., Global Reach, Simon and Shuster, N.Y., 1975. ↩︎
19. ibid. p.127, 279-280, 252-253. ↩︎
20. Data on distribution of income from United States Department of Commerce, Statistical Abstract of the United States, 1978, Table 734. ↩︎
21. Senator 0’Mahoney’s comparison may be found in Temporary National Economic Committee, Final Report and Recommendations, 1941, pp. 676-7. ↩︎
22. Data on the development of corporate organization is from Chandler, Alfred D., Jr., Strategy and Structure, MIT. Press, 1962, pp. 158-159, also see Braverman, Harry, Labor and Monopoly Capitalism, Monthly Review Press, Chapter 12. ↩︎
23. Braverman, op. cit. Ch. 12. ↩︎
24. Chandler, op. cit., pp. 322. ↩︎
25. More complete discussion of the corporate iron cage maybe found in Takaki, Ronald T., Iron Cages, Knopf 1979, pp. 254-7. ↩︎
26. The quotation is from Galbraith, John Kenneth, American Economic Review, vol. LXIII, no. 1 (March, 1973); 6 ↩︎
27. For a more detailed picture of the degradation of the work process see Braverman, Harry, op. cit. ↩︎
28. Data on convictions under the antitrust laws are 16, Antitrust in Action, 1940, Appendix A ↩︎
29. The relative importance of labor is from C. Wright Mills, The Power Elite, Oxford University Press, N.Y 1956, p. 262. ↩︎
30. Data on workers covered by cost of living escalator clauses are from United States Dept. of Labor, Monthly Labor Review, 11/78, p. 3-8. ↩︎
31. Data on size and output of farms in 1929 and 1935 are from TNEC Monograph 21, p. 20-21. ↩︎
32. Data on conglomerate corporation agricultural operations are from Raup, Philip M., Nature and Extent of the Expansion of Corporations in American Agriculture, Department of Agriculture and Applied Economics, University of Minnesota, Staff Paper, p. 75-8. April 1975, p. 3. Much of the data used in this section is from this study. ↩︎
33. Engelmann, Gerald, “The Changing Structure of American Agriculture,” quoted in Raup, Philip M., ibid., p. 6. ↩︎
34. The study of effective income tax rates are from Pechman, Joseph A., The Brookings Institution, Individual Income Tax Provisions of the Revenue Act of 1964, 1965, p. 203.35. Robert L. Heilbroner, “Inflationary Capitalism”, New Yorker October 8, 1979. ↩︎
35. Robert L. Heilbroner, “Inflationary Capitalism”, New Yorker October 8, 1979. ↩︎
36. Charles L. Schultz’s study may be found in 86th Congress, First Session, Joint Committee Print, Study Paper No. 1, p. 133. ↩︎
37. Data on public debt is from Statistical Abstract, 1979, Table 423, 435. ↩︎
38. Data on interest paid on the public debt is from United States Department of Commerce, Statistical Abstract of the United States, 1979, Table 424. ↩︎
39. The study of effective income tax rates are from Pechman, Joseph A., The Brookings Institution, Individual Income Tax Provisions of the Revenue Act of 1964, 1965, p. 203. ↩︎
40. The study of the effect of inflation on income tax rates is from Bailey, Martin J., “Inflationary Distortions and Taxes,” in Aaron, Henry J., Editor, Inflation and the Income Tax, The Brookings Institution, 1976, Table 11-5. ↩︎
41. Baran, Paul A. and Sweezy, Paul M., Monopoly Capital, Monthly Review Press, N.Y., 1966, p. 67. ↩︎
42. The data on election campaign and TV and radio expenditures are from United States Department of Commerce, Statistical Abstract of the United States, 1978, Table 844 and 847. ↩︎
43. Kolko, Ibid. p. 271. ibid, pp. 278-301. Ibid, p. 287-302. ↩︎
44. Mills, C. W. op. cit. p. 235 ↩︎
45. The study on antitrust enforcement alluded to is Green, J. Mark, et al, The Closed Enterprise Systems, Ralph Nader’s Study Group Report on AntiTrust Enforcement, Grossman Publishers, p. XXII, N.Y., 1972. ↩︎
46. Among the leading books and articles and studies of the Federal Trade Commission are the following, in historical order: T. Blaisdell, The FTC: An Experiment in the Control of Business (1924); G. Henderson, The Federal Trade Commission (1924); Herring, “Politics, Personalities and the Federal Trade Commission,” Am. Pol. Sci. Rev. (1934); The Federal Trade Commission Silver Anniversary Issue,” George Wash. L. Rev. (1940) Simon, “The Case Against the Federal Trade Commission,” U. Chic. L. Rev. (1952); Kintner, “The Revitalized Federal Trade Commission’s A Two Year Evaluation,” 30 N.Y.U. L. Rev. (1955); Comment, “The Mew Federal Trade Commission and the Enforcement of the Antitrust Laws,” Yale L. J. (1955); Auerbach, “The Federal Trade Commission,” Minn. L. Rev. 1393 (1964); “The Fiftieth Anniversary of the Federal Trade Commission,” Colum. L. Rev. (1964); Blair, “Planning for Competition,” Colum. L. Rev. (1964); Posner “The Federal Trade Commission,” Chic. L. Rev. (1969); E. Cox, R. Fellmeth, J. Schultze, The Nader Report on the Federal Trade Commission (1969). ↩︎
47. Address before joint meeting of the Better Business Bureau and Advertising Club, Winston-Salem, North Carolina, Jan. 8, 1968, quoted in Cox, Edward F., et al, The Nader Report on the FTC, Richard W. Baron, N.Y. 1969, p. 38-39. ↩︎
48. Posner, Richard, “The Federal Trade Commission,” 37 U. Chicago Law Review 47 (1969). ↩︎
49. This information is from Proxmire, William, Uncle Sam The Last of the Big Time Spenders, Simon and Schuster, N.Y., 1972., p. 219-220 p. 238-240, p. 242-246. ↩︎
50. Details may be found in the Final Report of the Select Committee on Presidential Campaign Activities, U.S. Senate, 93rd Congress, 2nd Session, Senate Report No. 93-98, June 1974, Chapter 4.
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51. Senate Subcommittee on Multinational Corporations Investigation into ITT’s activities in Chile alluded to in Barnet, op. cit., pp. 23, 110. ↩︎
52. A fascinating account of the enormous political power of the media, especially in television, since the 1920’s may be found in Halberstam, David, The Powers That Be, Knopf, 1979. ↩︎
53. Wall Street Journal, January 10, 1980, p. 1., Heilbronner, Pechman, Bailey, Kolko, Mills, Galbraith, Posner, Proxmire, various Nader reports., Baran, Sweezy, Schultze. United States Department of Commerce Stat. Abstract, 1979, Table 601. ↩︎
54. Wright Mills, The Power Elite, Oxford University Press, N.Y., p. 215. ↩︎
55. Senator Proxmire in the Congressional Record, April 15, 1969, p. 9123, quoted on p. 53 of Reed’s study. ↩︎
56. Gorgol, John Francis, The Military Industrial Firm, Praeger Publishers, N.Y., 1972, pp. 100-111. ↩︎
57. Alfred A. Knopf, N.Y., 1979 ↩︎
58. Federal Trade Commission (FTC), The International Petroleum Cartel, Washington, D.C., 1952. The FTC report can be found in Governmental Intervention in the Market Mechanism, Antitrust and Monopoly Subcommittee of the Senate Judiciary Committee, Washington, D.C. 1989. The information from the FTC Report well presented in Middle East Oil and the Energy Crisis, Part I (No. 20) by the Middle East Research and Information Project (MERIP), Washington, D.C, 1973, written by Joe Stork. For statistics on control of world production see Fuad Rohani, A History of OPEC, New York: Praeger, 1971, p. 105. For an extended analysis of the U.S. oil situation to 1985 see Richard C. Barnett, “Domestic Energy Outlook,” study prepared for Graduate Seminar in the Political Economics of International Trade, Department of Economics, American University. 1973. This section as a whole is from Barnet et al, Global Reach, 1974, p. 219. ↩︎
59. Commoner, op. cit., p. 28.
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60. Barnett et al, Global Reach, op. cit., p. 224 ↩︎
61. Commoner, op. cit., p. 56-60. ↩︎
62. Ibid., p. 71. ↩︎
63. Ibid., p. 71-72. ↩︎
64. Ibid., p. 63-64. ↩︎
65. Ibid., p. 66. ↩︎
66. Ibid., p. 68. ↩︎
67. Ibid., p. 68-69. ↩︎
68. Ibid., p. 69. ↩︎
69. Ibid., p. 69. ↩︎
70. Ibid., p. 70. ↩︎
71. Ibid, p. 74-75. ↩︎
72. Ibid, p. 76–77. ↩︎
73. Ibid, p. 76-77. ↩︎
74. Ibid, p. 76-77. ↩︎
75. The rates of increase are from the United States Department of Commerce, Statistical Abstract of the United States, 1979, Table 151. The actual rates in Berkeley, California were well in excess of $200 per day in January 1980. ↩︎
76. Data on work schedules of surgeons available in Fuchs, Victor R, Who Shall Live? Basic Books, 1974, p. 71. ↩︎
77. More details on monopoly practices of drug companies may be found in Fuchs, ibid., Chapter 5. ↩︎
78. John Walsh provides a recent summary in “Britain’s National Health Service: Work They Like it, But” Science, vol. 201, July 21, 1978, p. 239-242, and “Britain’s National Health Service: The Doctor’s Dilemmas,” July 28, 1978, p. 325-329. ↩︎
79. In 1965 the average price of a new single-family house was $20,000, and the typical full-time worker then earned $5,812 a year. By 1978, the same house cost $56,000 and the earnings figure was $13,272. (United States Department of Commerce, Statistical Abstract of the United States, 1979, Tables 701 and 1398) The disparity is growing greater. ↩︎
80. U.S. Department of Commerce, Statistical Abstract of the United States, 1978, Tables 1574 and 1575. ↩︎
81. Consumer Reports, 156 Washington Street, Mt. Vernon, N.Y., Consumers Research, Washington, N.J. ↩︎
82. Verrett, Jacqueline and Darper, Jean “Eating May be Hazardous to your Health; How the Government Fails to Protect You from the Dangers in Your Food”, Simon and Shuster, N.Y. 1974 ↩︎
83. Halberstam, David The Powers That Be. op. cit., describes how and why this happens. ↩︎
84. The figures on government bonds maturing in May, 1985 and the cash values are as of March 25, 1980, as shown in the Wall St. Journal. ↩︎
85. Galbraith, John K., Economics and the Public Purpose, Houghton and Mifflin Co. N.Y., 1973, p. 215-313. ↩︎
86. Proxmire, William, Uncle Sam: The Last of the Big Time Spenders, Simon and Schuster, N.Y., 1972, p. 260-274. ↩︎
87. In 1965 the average price of a new single family house was $20,000, and the typical full time worker then earned $5,812 a year. By 1978, the same house cost $56,000 and the earnings figure was $13,272. (United States Department of Commerce, Statistical Abstract of the United States, 1979, Tables 701 and 1398). The disparity is growing greater. ↩︎
88. U.S. Bureau of Labor Statistics ↩︎
89. Galbraith, John K., Economics and the Public Purpose, Houghton and Mifflin Co., N.Y., 1973, pp. 215-313. ↩︎