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The Demand for the Supply Side

Supply-side economics has taken Washington by storm. Both a diagnosis and a prescription, supply-side economics comprises ideas about what is wrong with the economy and remedies to put it right. As its name would indicate, both diagnosis and prescription emphasize the actual production of goods and services rather than the buying of them. From this vantage point, supply-siders see our fundamental difficulties as constraints, mainly caused by taxes that deter productive effort, rather than as problems deriving from a lack of purchasing power. We catch a vision of the economy as a coiled spring held down by the weight of government. Remove the weight and the spring will reveal its inherent force.

Most of the heated discussions about supply-side economics are concerned with how much tension the spring really has and how vigorously it will respond to the removal of various tax disincentives. I shall come back to these matters later. But it seems foolish to begin an appraisal of supply-side economics with debates about how far we must cut income taxes to achieve renewed growth, or how quickly inflation will be overcome by increased output. At the root of all supply-side remedies lie profoundly held if sometimes implicit convictions about the nature of the capitalist system itself. Since I am convinced that these views are wrong, I cannot get much exercised about the particular prescription on supply-side medicines. The task, rather, is to examine the patient.

I do not know of any formal definition or description of capitalism that has been provided by supply-side economics. But a coherent image of the system arises nonetheless from the writings of its proponents. I would sum it up as follows:

  1. Capitalism is a “natural” economic system, in that it accords in some deep way with human nature. It is the manner of organizing production and distribution to which mankind will spontaneously drift, once impediments of various kinds (including ignorance) are taken away.

  2. Capitalism is an evolutionary system. Its evolutionary tendencies are described by the term growth. Growth means an increase in real per capita income. This increase in real income, reasonably distributed among the population, is perceived as bringing welcome social and political consequences: higher individual morale, less political disaffection.

  3. Growth arises naturally within capitalism from the interplay of two elemental constituents of the system. One of these is the profit motive, embodied in both individual and institutional agencies, acting as a force for innovative and expansionary economic activity. The other is the restraining mechanism of competition. The two forces together comprise the thrust and feedback of the market.

  4. The capitalist economy contains two sectors, one public, one private. The private sector is mainly responsible for growth. The public sector’s main responsibility is the provision of defense, law and order, and necessary public goods. Beyond these functions, whose boundaries are admittedly not always clear-cut, government is deemed to weigh on, and to diminish the vigor of, the private sector.

  5. Capitalism is an international system, in that its constituent nation-states are bound together by market forces. There is therefore a world economy which exerts a restraining, and ultimately commanding, influence over the movements of its national capitalist members.

This is certainly not a complete list of the identifying elements of capitalism as seen from the supply side, but I think the vision that emerges is not untrue to its intentions. At any rate, it should serve as a contrast with my own view, which I outline below. I shall make no attempt to compare the two positions point by point or to refute the supply-side view. No such attempt is possible because the two conceptions are so fundamentally different as to be beyond comparison. 1

  1. Capitalism, in my view, is quintessentially a means of organizing labor to produce a social surplus. By a surplus I mean the production of material wealth over and above whatever is needed to maintain ordinary life at its existing level. The line between surplus and mere replenishment is always blurred, as are most social distinctions, but in the large there is no difficulty in distinguishing the form and extent of surplus in all surplus-producing systems.

  2. Capitalism is not the only such system. Indeed, all social orders above the most primitive produce surpluses. This is true of ancient Egypt, European feudalism, and the contemporary USSR. What is distinctive about capitalism is the form that its surplus takes. Other social orders use surplus for war, public adornment, religious observances, and for the maintenance of privileged classes. Capitalism also uses its surplus in part for these purposes, and indeed distributes increments in consumption more widely than any previous system. But its distinctive use is something else: surplus is employed to create the means to gather additional surplus. That is, “wealth” under capitalism takes the form of machines, equipment, plants, factories. No such systematic use of surplus existed in any prior society. Its persistence in the USSR and in other industrial socialist societies testifies to their incomplete separation from capitalism.

  3. A second distinguishing characteristic of capitalism is the manner in which surplus is gathered. Unlike other systems, it is not extracted by naked force, or by tradition backed by latent force. Surplus under capitalism accumulates as a consequence of the institution of wage labor as the arrangement by which production is carried on. Wage labor has the historically unique attribute of legally denying the worker the ownership of his labor-product, which belongs instead to the owner of the physical equipment with which he works.

In this regard it is always enlightening to reflect on who owns the cars that roll off GM’s assembly line. The workers? No. The technicians? The management? No. The stockholders? No. (Try going into a GM factory and claiming a car, waving your stock certificate as justification.) Who, then? The company, the fictional person who owns the assembly line itself and the products that emerge from it. This is the unique capitalist wage-labor relation to which John Locke referred when he wrote, “The grass that my horse has bit, the turfs my servant has cut, and the ore I have digged in any place…become my property without the assignation or consent of anybody.” What a host of assumptions and mystifications lie in that italicized phrase, which goes to the core of the surplus-gathering process in its wage-labor form!

Peasants, for example, own what they produce, however much of it they must hand over to landlords. Even feudal serfs owned the output from their own strips of land, although not from the lord’s strips that they were forced to cultivate. Only the slave could be said not to own his product. Hence the expression: “wage slavery.”

  1. The separation of work from the right to claim the product of work establishes the rationale for the organization of the work process typical of capitalism. This is an organization in which the volume of output per hour takes precedence over most other considerations, such as fatigue, interest, creativity, etc. The hallmark of this mode of organization is the “division” of labor not just by occupational variety but by fragmentation of physical and mental tasks into their simplest components. This division of labor is not a “natural” tendency of mankind, and is not found in other societies to anything like the degree we find it in capitalism. The division of labor endows capitalism with its immense superiority with respect to productivity, but also saddles it with the need to maintain the strictest supervision over, and discipline within, the labor process.

  2. The productive activities of capitalism are coordinated by market exchange among individuals and firms. This is its vaunted market mechanism, the source of its remarkable adaptability and its self-regulating properties. There are, however, two vital areas into which the buying and selling mechanism does not enter. The first is the allocation of work within the office or factory. Although the hand of the manager is restrained by union bargaining and government regulation, essentially he is a commander of troops, a boss, not a buyer of labor services. Employees in a plant or office do not offer the amount of work that they happen to feel like at that moment, nor are they free to dicker on the spot, the way a butcher can take advantage of an opportune situation. The market relations that regulate the economy outside the factory or office do not penetrate within.

Second, the market does not make crucial macro allocations. Government often determines the direction in which the economy will go, as well as braking or accelerating it. For example, the government builds the road network without which the auto industry could not function. So, too, government provides the research and development on which the agricultural sector depends, the schools from which its trained work force emerges. In these ways government provides an indispensable, although usually overlooked, foundation for the accumulation process.

  1. The wage labor system in which workers are hired for a given length of time and then released from their “servant” status effectively creates an “economy” distinct from a “society.” This separation of an economic sphere from its social matrix creates two pathologies for capitalism. The first is the generation of problems that arise because we systematically exclude consideration of the social consequences of economic behavior. Thus the agricultural enclosures of the peasant “commons,” undertaken for economic reasons, bring unanticipated social distress; the creation of the factory brings the undesired mill town; the free workings of competition plunge regions into social decline or thrust them into the disorders of sudden affluence; the extension of the wage labor system destroys the extended family; the development of advertising corrodes moral virtue (on which, more later). It is characteristic of capitalism that it perceives no connection between these “problems” and its underlying mode of production.

The second, more familiar pathology is the continuing difficulty in accumulating surplus successfully. There are potential disruptions and mismatches at every stage of the process, from engaging a labor force, through assuring its disciplined performance, to selling its output. These difficulties are also recognized by conventional economists, but a radical view stresses the self-generated nature of these problems, largely rooted in the wage-labor relationship. Capital is thus seen as the source of its own economic crises, rather than as the victim of crises thrust upon it from outside forces, such as government “intrusions.”

  1. Finally, capitalism, as I see it, is a world system, but not merely because it is linked by market forces. The unifying process of the world system of capitalism is the extension of the wage-labor system from the developed center to the “underdeveloped” periphery, for the purpose of gathering surplus on a global scale. On the whole, this international surplus is gathered as “naturally” as is the case within national systems, although resort may be had to military intervention from time to time, as has also been the case within national capitalism when troops have been used to put down strikes or to maintain vital services.

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    A word about pedigrees. The supply-side vision (which is only marginally different from that of conventional neo-classical economics) derives from Marshall, via Hayek and Friedman. My own vision comes from Adam Smith, Marx, Weber, Schumpeter. I am aware that mine has a “radical” flavor. If that word means a penetration to the roots I welcome it. If it means “extreme,” I reject it, maintaining that the supply-side vision is far more skewed than my own. Certainly its most influential recent popular statements, such as Jude Wanniski’s The Way the World Works and George Gilder’s Wealth and Poverty seem to me far more remote from Adam Smith, the great tutelary figure of conservative thought, than my own.

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