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TWO

The Concept of the Economic Surplus

THE concept of economic surplus is undoubtedly somewhat tricky, and in clarifying and employing it for the understanding of the process of economic development neither simple definitions nor refined measurements can be substituted for analytical effort and rational judgment. Yet it would certainly seem desirable to break with the time-honored tradition of academic economics of sacrificing the relevance of subject matter to the elegance of analytical method; it is better to deal imperfectly with what is important than to attain virtuoso skill in the treatment of what does not matter.

In order to facilitate the discussion as much as possible, I shall be speaking now in terms of “comparative statics”: that is, I shall ignore the paths of transition from one economic situation to another, and shall consider these situations, as it were, ex post. Proceeding in this way, we can distinguish three variants of the concept of economic surplus.

Actual economic surplus, i.e. the difference between society’s actual current output and its actual current consumption.¹ It is thus identical with current saving or accumulation, and finds its embodiment in assets of various kinds added to society’s wealth during the period in question: productive facilities and equipment, inventories, foreign balances, and gold hoards. It would seem to be merely a matter of definition whether durable consumer goods (residential dwellings, automobiles, etc.) should be treated as representing saving rather than consumption, and it is undoubtedly quite arbitrary to treat houses as investment while treating, say, grand pianos as consumption. If the length of useful life be the criterion, where should one place the benchmark? In actual fact, it is essential for the comprehension of the economic process to make the distinction not on the basis of the physical properties of the assets involved, but in the light of their economic function, i.e. depending on whether they enter consumption as “final goods” or serve as means of production contributing thus to an increase of output in the subsequent period. Hence an automobile purchased for pleasure is an object of consumption, while an identical car added to a taxi-fleet is an investment good.²

Actual economic surplus has been generated in all socioeconomic formations, and while its size and structure have markedly differed from one phase of development to another, its existence has characterized nearly all of recorded history. The magnitude of the actual economic surplus—saving or capital formation—is at least conceptually readily established, and today is regularly estimated by statistical agencies in most countries. Such difficulties as are encountered in its measurement are technical, and caused by the absence or inadequacy of statistical information.

Potential economic surplus, i.e. the difference between the output that could be produced in a given natural and technological environment with the help of employable productive resources, and what might be regarded as essential consumption.³ Its realization presupposes a more or less drastic reorganization of the production and distribution of social output, and implies far-reaching changes in the structure of society. It appears under four headings. One is society’s excess consumption (predominantly on the part of the upper income groups, but in some countries such as the United States also on the part of the so-called middle classes), the second is the output lost to society through the existence of unproductive workers, the third is the output lost because of the irrational and wasteful organization of the existing productive apparatus, and the fourth is the output foregone owing to the existence of unemployment caused primarily by the anarchy of capitalist production and the deficiency of effective demand.

The identification and measurement of these four forms of the potential economic surplus runs into some obstacles. These are essentially reducible to the fact that the category of the potential economic surplus itself transcends the horizon of the existing social order, relating as it does not merely to the easily observable performance of the given socioeconomic organization, but also to the less readily visualized image of a more rationally ordered society.

II

This requires a short digression. Indeed, if looked at from the vantage point of feudalism, essential, productive, and rational was all that was compatible with and conducive to the continuity and stability of the feudal system. Nonessential, unproductive, and wasteful was all that interfered with or was unnecessary for the preservation and the normal functioning of the prevailing social order. Accordingly Malthus staunchly defended the excess consumption of the landed aristocracy, pointing to the employment-stimulating effects of such outlays. On the other hand, the economists of the rising bourgeoisie had no compunctions about castigating the ancien régime for the wastefulness of its socioeconomic organization, and about pointing out the parasitic character of many of its most cherished functionaries and institutions.⁴

But as soon as the critique of pre-capitalist society lost its urgency, and the agenda of economics became dominated by the task of rationalizing and justifying the victorious capitalist order, the mere question as to the productivity or essentiality of any type of activity taking place in capitalist society was ruled out of court. By elevating the dictum of the market to the role of the sole criterion of rationality and efficiency, economics denies even all “respectability” to the distinction between essential and nonessential consumption, between productive and unproductive labor, between actual and potential surplus. Nonessential consumption is justified as providing indispensable incentives, unproductive labor is glorified as indirectly contributing to production, depressions and unemployment are defended as the costs of progress, and waste is condoned as a prerequisite of freedom. In the words of Marx, “as the dominion of capital extended, and in fact even those spheres of production not directly related to the production of material wealth became more and more dependent on it, and especially the positive sciences (natural sciences) were subordinated to it as means towards material production—second rate sycophants of political economy thought it their duty to glorify and justify every sphere of activity by demonstrating that it was ‘linked’ with the production of material wealth, that it was a means towards it; and they honoured everyone by making him a ‘productive worker’ in the ‘narrowest’ sense—that is a worker who works in the service of capital, is useful in one way or another to its increase.”⁵

Yet “capitalism creates a critical frame of mind which after having destroyed the moral authority of so many other institutions, in the end turns against its own: the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole system of bourgeois values.”⁶ Thus from a standpoint located outside and beyond the capitalist frame of reference, from the standpoint of a socialist society, much of what appears to be essential, productive, rational to bourgeois economic and social thought turns out to be nonessential, unproductive, and wasteful. It may be said in general that it is only the standpoint which is intellectually outside the prevailing social order, which is unencumbered by its “values,” its “practical intelligence,” and its “self-evident truths,” that permits critical insight into that social order’s contradictions and hidden potentialities. The exercise of self-criticism is just as onerous to a ruling class as it is to a single individual.

As can be readily seen, the decision on what constitutes potential economic surplus, on the nature of nonessential consumption, waste, and unproductive labor, relates to the very foundations of bourgeois economics and in particular to what has come to be called the economics of welfare. Indeed, the purpose of this—perhaps most ideological and apologetic—branch of economic theorizing is to organize our knowledge of the conditions that determine the economic welfare of people. Needless to say, the first and foremost prerequisite for such an effort to be meaningful is a clear notion of what is meant by economic welfare and of the criteria by which states of economic welfare may be distinguished. The welfare economists meet the issue (or, rather, believe they meet it) by referring to the utility or satisfaction experienced by individuals. The individual himself, with his habits, tastes, and preferences, is taken as given. Yet it should be obvious that such a view of the individual is altogether metaphysical, in fact misses the most essential aspect of human history. As Marx remarked in a passage devoted to Bentham: “To know what is useful for a dog, we must study dog nature. This nature itself is not to be deduced from the principle of utility. Applying this to man, he that would criticize all human acts, movements, relations, etc. by the principle of utility, must first deal with human nature in general, and then with human nature as modified in each historical epoch. Bentham makes short work of it. With the driest naiveté he takes the modern shopkeeper, especially the English shopkeeper, as the normal man. What is useful to this queer normal man and to his world is absolutely useful. This yard-measure then he applies to past, present and future.”⁷

Indeed, in the course of history the individual with his physical and psychic requirements, with his values and his aspirations, has been changing with the society of which he is a part. Changes in the structure of society have changed him, changes in his nature have changed society. How are we then to employ the utility or satisfaction accruing to an individual at any given time as a criterion by which the conduciveness to welfare of economic institutions and relationships is to be judged? If we refer to the observable behavior of an individual, we are obviously moving in a circle. His behavior is determined by the social order in which he lives, in which he was brought up, which has molded and determined his character structure, his categories of thought, his hopes and his fears. In fact, it is this ability of a social constellation to produce the mechanism of such personality-molding, to provide the material and psychic framework for a specific type of human existence, that makes this social constellation a social order.

Economists, nevertheless, try to appraise that social order, its so-called efficiency, its contribution to human welfare, by criteria that it has itself evolved.⁸ What would we think of judging the welfare contribution of homicide by the code of behavior established in a cannibalistic society? The best that can be attained in that way is a judgment on the consistency of the cannibals’ behavior with their own cannibalistic rules and regulations. This kind of inquiry may be useful to an effort to devise arrangements needed for the preservation and better functioning of the cannibalistic society—but what is there to be deduced from such an investigation in terms of human welfare? Assuming, indeed, that the life of the cannibals fully conforms to the precepts of their society, that their headman gets exactly as many scalps a year as are called for by his wealth, his status, and his connections, and that all the other cannibals consume exactly the number of foreigners that corresponds to their marginal productivity and never in any other way but through a free purchase in a free market: do we then have a state of an optimum, can we then say that the cannibals’ welfare is well looked after? It should be obvious that nothing of the sort follows. All we have established is that the practice of the cannibalistic society corresponds more or less fully to the principles evolved by that society. We have said nothing at all about the validity or rationality of those principles themselves or about their relation to human welfare.

Thus welfare economics engages in what comes very close to compulsive brooding on the extent to which the existing economic organization satisfies the rules of the game laid down by the existing economic organization, on the degree to which the productive apparatus of a capitalist society is “efficiently” organized for the production of an output the size and composition of which are determined by the structure of that productive apparatus. Furthermore, it laboriously inquires into the degree to which the existing socioeconomic organization allocates resources in such a manner as to correspond to consumers’ demand which in turn is determined by the distribution of wealth and income, by the tastes and values of people which are themselves shaped by the existing socioeconomic organization. All this has absolutely nothing to do with the exploration of the conditions that are conducive to welfare or with the study of the measure to which the economic and social institutions and relationships of capitalist society further or impede the well-being of people.

But a conventional practitioner of welfare economics will stop us here, and ask what other criteria of welfare do we have.⁹ If the actual, observable performance of the individual in the market is not to be accepted as the ultimate test of what constitutes his welfare, what other test are we to use?

The mere fact that this question is raised indicates how far we have traveled along the road to irrationality and obscurantism since the days of classical philosophy and classical economics. In truth, the answer to this question is simpler than one may think—at once simpler and more complicated. The answer is that the sole criterion by which it is possible to judge the nature of a socioeconomic organization, its ability to contribute to the general unfolding and growth of human potentialities, is objective reason. It was objective reason that underlay the criticism of the then existing society undertaken by men like Machiavelli and Hobbes, and it was objective reason that inspired Smith and Ricardo to call feudal lords, courtiers, and the established clergy of their time parasites because they not only did not contribute to the advancement of their societies, but drained them of all possibilities of growth.

Not that the substance of objective reason is fixed immutably in time and space. On the contrary, objective reason itself is embedded in the never-resting flow of history, and its contours and contents are no less subject to the dynamics of the historical process than nature and society in general. “One cannot step twice into the same stream,” and what is objective reason on one historical stage is unreason, reaction on another. This dialectic of objective reason has nothing in common with the relativistic cynicism of pragmatism or with the opportunistic indeterminateness of the sundry philosophies of the élan vital; it is firmly anchored in man’s expanding and deepening scientific understanding of both nature and society, in the concrete exploration and practical exploitation of the natural and social conditions of progress.

The historically shifting and ambivalent attitude toward progress and objective reason that has been characteristic of bourgeois thought ever since the bourgeoisie began to be continuously torn between opposition to feudalism and fear of nascent socialism accounts for the fact that the socialist critique of prevailing social and economic institutions used occasionally to find a relatively sympathetic reception on the part of bourgeois economics as long as it was directed at the residues of the feudal order. The squandering of wealth by the landlords in backward countries was no less an admissible target of attack than their prodigality under the ancien régime in the more advanced countries. There has always been much less tolerance when it came to the critique of capitalist institutions sensu stricto. And at the present imperialist stage of capitalist development, to emphasize for instance the sociopolitical structure of backward countries as the main obstacle to their progress is considered almost as suspect as to insist on the role of imperialism in the advanced capitalist countries in retarding development at home and in perpetuating stagnation in underdeveloped areas.

Similarly economists socially and mentally anchored in the competitive, petty-bourgeois phase (and stratum) of capitalist society have developed a certain degree of clairvoyance with respect to the irrationality, wastefulness, and cultural consequences of monopoly capitalism. Oblivious of the fact that it is liberal, competitive capitalism that inescapably breeds monopoly, they recognize some of the economic, social, and human costs of capitalism’s monopolistic phase, discern some of the most obvious manifestations of excess consumption, unproductive activities, the irrationality and brutality of “economic royalism.” At the same time the writers who have either liberated themselves from the shackles of an earlier age, or who have grown directly into the “new era,” are at times impressively perspicacious when debunking the competitive order of the past—the sacrosanct virtues of capitalism’s competitive adolescence.

While this tension within bourgeois thought accords a certain amount of insight (and information) that permits at least a proximate assessment of the nature (and magnitude) of potential economic surplus, the always latent and sporadically erupting conflict between the interests of the capitalist class as a whole and those of its individual members offers another opportunity for the comprehension of the issues involved. Thus in times of war, when victory becomes the dominant interest of the dominant class, what under the circumstances constitutes objective reason is permitted to ride roughshod over particular interests and subjective utilities. Whether it is compulsory service in the armed forces, war economic controls, or requisition and confiscation of necessary supplies, objective needs become recognized as fully ascertainable and are assigned a significance vastly superior to that of individual preferences revealed by market behavior. Yet as soon as the emergency passes, and further admission of the existence and identifiability of objective reason threatens to become a source of dangerous social criticism, bourgeois thought hastily retreats from whatever advanced positions it may have temporarily reached and lapses once more into its customary state of agnosticism and “practical intelligence.”

What constitutes “excess consumption” in a society could be readily established if this question received but a fraction of the attention that is accorded to problems as urgent and as important as for instance the measurability of marginal utility. With regard not only to underdeveloped countries but to advanced ones as well, what represents “essential consumption” is far from being a mystery. Where living standards are in general low, and the basket of goods available to people little variegated, essential consumption can be circumscribed in terms of calories, other nutrients, quantities of clothing, fuel, dwelling space, and the like. Even where the level of consumption is relatively high, and involves a large variety of consumer goods and services, a judgment on the amount and composition of real income necessary for what is socially considered to be “decent livelihood” can be made.¹⁰

As mentioned before, this is precisely what has been done in all countries in emergency situations such as war, postwar distress, and the like. What an agnostic apologist of the status quo and the worshipper of “consumers’ sovereignty” treat as an unsurmountable obstacle, or as a manifestation of reprehensible arbitrariness, is wholly accessible to scientific inquiry and to rational judgment.

III

More complicated and quantitatively less easily encompassed is the identification of unproductive workers. As pointed out earlier, the mere distinction between productive and unproductive labor encounters a determined opposition on the part of bourgeois economics. From the experience of its own youth it knows this distinction to be a powerful tool of social critique, easily turned against the capitalist order itself. Attempting to do away with it altogether, it seeks to quench the entire issue by judging the productivity, essentiality, usefulness of any performance in terms of its ability to fetch a price in the market. In this way, indeed, all differences between various types of labor disappear—all except one: the magnitude of the remuneration that any given activity commands. As long as a performance rates any monetary reward, it is treated as useful and productive by definition.¹¹

From the preceding discussion it should be clear, however, that market valuation cannot be considered a rational test for the appraisal of the “adequacy” or “efficiency” of a socioeconomic organization. Indeed, as stressed above, the acceptance of this test would involve circular reasoning: judging a given socioeconomic structure by a yardstick that itself represents an important aspect of that very socioeconomic structure. Thus what is productive and what is unproductive labor in a capitalist society cannot be decided by reference to the daily practice of capitalism. Here again, the decision has to be made concretely, from the standpoint of the requirements and potentialities of the historical process, in the light of objective reason.

Considered in this way a not insignificant part of the output of goods and services marketed and therefore accounted for in the national income statistics of capitalist countries represents unproductive labor. To be clear about it: all of it is altogether productive or useful within the framework of the capitalist order, indeed may be indispensable for its existence. And needless to say, the individuals engaged in this type of labor may be, and in most cases are, “upstanding citizens,” hardworking, conscientious men doing a day’s work for a day’s wage. Therefore their classification as “unproductive laborers” involves neither moral opprobrium nor any other stigmatization. As very frequently, men of good will may not only not achieve what they strive to achieve but may accomplish its very opposite if constrained to live and to work within a system the direction of movement of which is beyond their control.

As can be easily seen, the isolation and measurement of this unproductive share of a nation’s total economic effort cannot be undertaken by the application of a simple formula. Most generally speaking, it consists of all labor resulting in the output of goods and services the demand for which is attributable to the specific conditions and relationships of the capitalist system, and which would be absent in a rationally ordered society. Thus a good many of these unproductive workers are engaged in manufacturing armaments, luxury articles of all kinds, objects of conspicuous display and marks of social distinction. Others are government officials, members of the military establishment, clergymen, lawyers, tax evasion specialists, public relations experts, and so forth. Still further groups of unproductive workers are advertising agents, brokers, merchants, speculators, and the like. A particularly good example is given by Schumpeter—one of the very few contemporary economists who was not content to dwell on the level of “practical intelligence” but attempted to rise to some understanding of the historical process:

A considerable part of the total work done by lawyers goes into the struggle of business with the state and its organs … in socialist society there would be neither need nor room for this part of legal activity. The resulting saving is not satisfactorily measured by the fees of the lawyers who are thus engaged. That is inconsiderable. But not inconsiderable is the social loss from such unproductive employment of many of the best brains. Considering how terribly rare good brains are, their shifting to other employment might be of more than infinitesimal importance.¹²

What is crucial to remember is that unproductive labor as just defined is not directly related to the process of essential production and is maintained by a part of society’s economic surplus. This characteristic it shares, however, with another group of workers that would not fall under our definition of unproductive labor. Scientists, physicians, artists, teachers, and similarly occupied people live off the economic surplus but engage in labor the demand for which in a rationally ordered society, far from disappearing, would become multiplied and intensified to an unprecedented degree. Thus while it is perfectly appropriate from the standpoint of the measurement of the total surplus currently generated by society to include these workers in the class of individuals supported by the economic surplus, it would seem advisable to treat them separately if what is at issue is the assessment of the magnitude of the surplus potentially available for rational utilization. “Labor may be necessary without being productive.”¹³

This distinction becomes particularly useful when not only the possibilities of economic growth but also the transition from capitalism to socialism is considered. For what is defined above as unproductive labor is bound gradually to disappear as a socialist society advances in the direction of communism. In fact, certain classes of unproductive workers are immediately eliminated with the introduction of a planned economy, while others remain for considerable periods of time in systems transitional from capitalism to communism such as, for instance, the USSR. It may well be said that the degree to which unproductive labor in our definition has been abolished, and institutions such as the army, the church, and the like have been dispensed with, and the human and material resources thus freed have been directed to the advancement of human welfare, represents the most important single index of a socialist society’s progress towards communism.

The group of workers, on the other hand, that is supported by the economic surplus and that is not covered by our definition of unproductive labor expands greatly with the development of a socialist society. As Marx predicted, the part of the total product “… which is destined for the communal satisfaction of needs such as schools, health services, etc.… is … from the outset … considerably increased in comparison with present-day society and it increases in proportion as the new society develops … [while] the general costs of administration not belonging to production … will from the outset, be very considerably restricted in comparison with present-day society and it diminishes in proportion as the new society develops.”¹⁴ Thus the resources used for the maintenance of the individuals who draw on society’s economic surplus, but are not included in unproductive labor as I defined it, cannot be considered to represent a fund potentially available for purposes of economic growth.

Once more: regardless of the difficulties that may be encountered in attempting to gauge accurately the volume of unproductive work performed in a capitalist economy, in times of emergency the nature of this task is no less clear than the need for curtailment, if not elimination, of nonessential consumption. Unproductive workers are drafted into the army while productive workers are deferred. Labor exchanges try to move people from unproductive to productive employment. Rationing boards issue different ration cards to individuals in different occupations, with productive workers receiving preferential treatment.

Conceptually no more complex, although perhaps still more difficult to measure, is the third form in which potential economic surplus is hidden in the capitalist economy. The waste and irrationality in the productive organization that fall under this category can be observed in a great number of instances, and result in a reduction of output markedly below what could be obtained with the same input of human and material resources. There is first the existence (and continuous reproduction) of excess capacity unproductively absorbing a significant share of current investment. We do not refer here to manpower, plant, and equipment that are reduced to idleness in times of depressions. To that we shall come later. What we have in mind now is the physical capacity that remains unused even in years of prosperity, and not merely in declining but also in expanding industries.¹⁵

An investigation of excess capacity in the United States in 1925-1929 was made by the Brookings Institution.¹⁶ “Capacity” of an industry is there defined as the output which it would turn out with the length of the working day and number of shifts ordinarily in use in the industry, and with a proper standard of plant maintenance (i.e. taking account of necessary shutdowns for repairs, etc.). Plants which are shut down have been excluded, so that they do not count as excess capacity. The capacity so (conservatively) defined is thus lower than the “rated capacity” usually given by trade statistics and based on technical estimates. The Brookings Institution found that “in general … in the years from 1925 to 1929 available plant was used between 80 and 83 percent of capacity.”¹⁷ The study cautions that “probably not all the additional productivity indicated as possible by the above figures could have been realized, for there were striking differences in the potential capacity of the different branches of industry, and if each industry would run to its full capacity, huge surpluses of some goods would no doubt soon pile up.”¹⁸ Yet as the authors of the study realize, “if new productive effort were directed toward coordinating the various industries,” this disproportionality could be markedly reduced, if not altogether eliminated. They do not estimate the volume of output that could have been produced given such coordination. Even in its absence, however, “an output of 19 percent greater than was realized would have been possible. Stated in terms of money, this increased productivity would have approximated 15 billion dollars”—i.e. nearly 20 percent of the national income in 1929.

No excess capacity studies of a similar scope have been undertaken during the postwar period. From such scattered data as are available it would seem, however, that even in the unprecedentedly prosperous years following the end of the Second World War excess capacity in American industry assumed tremendous proportions. Calculations by one investigator suggest that merely 55 percent of capacity (conservatively estimated) was in use in the boom year 1952.¹⁹ This does not include the prodigious quantities of food, the production of which is prevented by various control schemes, or which is allowed to spoil, to be destroyed, or fed to animals.

All estimates of capacity (and excess capacity) are highly tenuous. Apart from suffering from the inadequacy of the underlying statistical information, they depend on what definition of capacity is adopted, on the degree of utilization that is assumed as “normal,” and on the extent to which market, demand, and profit considerations are taken into account in deciding on the magnitude of the excess. Yet difficulties encountered in the measurement of a phenomenon should not be permitted to obscure the existence of the phenomenon itself; in any case, they do not matter in the present context where our purpose is not to assess the magnitude of the potential economic surplus in any particular country at any particular time, but merely to outline the forms in which it exists.

Equally clearly discernible is the waste of resources caused by various aspects of monopoly and monopolistic competition. The potential economic surplus under this heading has never been analyzed in its entirety, although its components have been frequently referred to in the literature. There is first and probably foremost the output foregone in view of underutilization of economies of scale stemming from irrational product differentiation. No one, to my knowledge, has undertaken to calculate the aggregate saving that would be realized if a great number of purely nominally different articles were to be standardized, and if their production were concentrated in technically the most efficient and economic plants. Whether we look at automobiles and other consumers’ durable goods such as refrigerators, stoves, electrical appliances, and the like, or whether we think of products such as soaps, toothpastes, textiles, shoes, or breakfast foods, there can be little doubt that standardization and mass production could appreciably lower the unit costs of output. To be sure, instances can be found where even under monopolistic conditions firms are operating technologically optimal-size plants, where, in other words, no further economies of scale can be realized in the present state of technology. There is ample reason to believe, however, that such cases are relatively rare, and that limitations of the market for individual trademarks, and of capital available to individual firms, account for plant sizes that are less (and frequently considerably less) than what would be rational. The continuous existence and proliferation of small, inefficient, and redundant firms—not merely in industry but in particular in agriculture, distribution, and service trades—result in an amount of waste of human and material resources the magnitude of which can hardly be fully assessed.²⁰

The multiplication of facilities and the squandering of resources called forth by irrational smallness of enterprises have their counterpart in the waste on the part of monopolistic giants who, shielded by their monopolistic positions, need not bother with minimizing costs or with maximizing efficiency. We have to consider in this connection the large so-called overhead costs of corporate business with their skyrocketing expense accounts, their exorbitant salaries paid to executives making no contribution to the firms’ output but drawing revenues on the strength of their financial connections, personal influence, or character traits making them particularly adapted to corporate politics.

Nor should one overlook the imponderable but perhaps most valuable potential asset that is being systematically despoiled by monopolistic business: the human material ground up in the degrading, corrupting, and stultifying mill of vast corporate empires, and the ordinary man and woman whose entire upbringing and development are being warped and crippled by continuous exposure to the output, the propaganda, and the sales efforts of big business.²¹

Even more elusive is the benefit to society that could be derived from scientific research if its conduct and exploitation were not subject to profit-oriented business control or armaments-oriented government control.²²

This kind of support and administration of scientific work heavily influences its general outlook, its choice of subjects, and the methods that it employs. Demoralizing and disorienting scientists, depriving them of genuine stimuli for creative work, it hampers and distorts the development of science. Determining at the same time the mode of utilization of scientific achievements, it limits severely the benefits resulting from scientific progress. Whether in reference to atomic energy and to public utilities, to substitutions among materials or to manufacturing processes, evidence abounds that the productive employment of technical possibilities is frequently and seriously stymied by the interests of the sponsors of technological research.

This myriad of more or less readily identifiable forms in which the potential economic surplus hides in the complex spiderweb of the capitalist economy has never been subjected to a systematic investigation, let alone a statistical assessment. Not that economists have not in the past attempted to expose the waste and irrationality permeating the capitalist order. They treated them, however, as imperfections and frictions of the system that could be overcome by suitable reforms, or as anachronistic residues from pre-capitalist times that could be expected to disappear in the course of capitalist development. Lately, as it has grown increasingly obvious that waste and irrationality, far from being fortuitous blemishes of capitalism, relate to its very essence, it has become fashionable to minimize the importance of the entire problem, to refer to it as a “minor matter” which is of no concern to our age of plenty.²³

The last but by no means least important is the fourth heading in our catalogue of the forms in which potential economic surplus is hidden in the capitalist economy. This is the output lost to society through unemployment of human and material resources caused partly by the inadequacy of coordination of productive facilities, but mainly by insufficiency of effective demand. Although it is very difficult, if not impossible, to disentangle those two causes of unemployment, imputing to each the share for which it is responsible, it is most useful for analytical purposes to keep them clearly apart. The former, usually referred to in economics as “frictional” unemployment, was alluded to above. It appears as displacement of workers occasioned either by shifts in the composition of market demand or by the introduction of labor-saving devices of various kinds, accompanied by discarding of productive plant and equipment. While both the manpower and the facilities involved are capable of being converted to useful employment and thus of being reintegrated into the productive process, in the capitalist economy such conversion, if it takes place at all, proceeds even under the most favorable circumstances with a great deal of delay and waste. Under conditions of rational planning such losses may not be entirely avoidable; they could, however, be greatly reduced.

More important still, in fact next to military spending the most important single cause for the continuous existence of a large gap between potential and actual surplus, is the unemployment resulting from insufficiency of effective demand. It affects both fully employable manpower and fully usable productive facilities, and, while varying in intensity from period to period, immobilizes a large proportion of the available human and material resources. The impact of this continuously present unemployment of productive potentialities is not adequately gauged by assessing and aggregating the differences between output in times of prosperity and times of depression. This procedure overlooks in the first place that even in most periods of so-called full employment there is not inconsiderable unemployment of labor and productive capacity, and secondly that even boom outputs are lower than what they could be if businesses were not constrained to reckon with bad years as well as with good years and to adjust accordingly their plans for production and investment. Thus calculations based merely on comparisons between outputs in different phases of the business cycle necessarily understate the volume of output lost through fluctuations in the level of employment.

Yet even such calculations, conservative as they are, present a picture sufficiently illustrative of the volume of potential economic surplus attributable to mass unemployment. For instance, Isador Lubin, then Commissioner of Labor Statistics, United States Department of Labor, stated in his testimony at the Hearings of the Temporary National Economic Committee (December 1, 1938) : “Assuming a working population of the size of 1929, you will note that if you add the employment lost in ’30, ’31, ’32, up to 1938, the total number of man-years lost during that period of time was 43,435,000. Or, to put it in other words, if everybody who had worked in 1929 continued their employment during the past 9 years, all of us who were working could take a vacation for a year and 2 months and the loss in national income would be no greater than it has actually been.”²⁴ In terms of national income valued in 1929 prices the total loss amounted to $133 billion (as compared with the national income in 1929 of $81 billion).²⁵ This unemployment of manpower was accompanied by surplus capacity of productive facilities amounting in the aggregate to about 20 percent “at the peak,” that is, in 1929, and to “more than a third” at the time of the hearings, that is, in 1938.²⁶

It should be remembered that Lubin’s calculations were based on the assumptions that the working population remained constant from 1929 to 1938 and that its productivity also stayed unchanged during the entire period. In actual fact, as he himself realized, the working population had grown by 6 million, and output per capita would have grown at usual rates given more or less prosperous economic conditions. Taking this increase of employable manpower into account, and considering the rates of growth of productivity that were observed in the ’20s and that could have been expected to prevail in the ’30s, “Dr. L. H. Bean of the Department of Agriculture has estimated that the loss in national income has been $293 billion since 1929.”²⁷

These calculations were carried to 1938 because that was the time the hearings were held. The conditions of underemployment there depicted prevailed until the outbreak of the Second World War. The war mobilization demonstrated even more convincingly than all statistical computations how large a productive potential had been dormant in the American economy. As is well known, in the years of the war the United States was not merely able to raise a military establishment comprising over 12 million people, to produce a prodigious quantity of armaments, to supply its allies with large quantities of food and other goods, but to increase simultaneously the consumption of its civilian population. The entire war, in other words—the largest and most costly war in its history—was supported by the United States by the mobilization of a part of its potential economic surplus.

It hardly needs stressing that the waste resulting from unemployment is neither an exclusively American phenomenon nor of merely historical interest. It can be readily observed at the present time, and it has been characteristic of the entire history of capitalism everywhere. While its magnitude has been different in different countries at different times, it always depressed total output considerably below what it could have been in a rationally organized society. Nor is the impact of unemployment adequately expressed in any measure of output foregone. No one can estimate the benefits to society that might have been realized, if the energy, the ability to work, the creative genius of the millions of unemployed had been harnessed for productive ends.

IV

If the potential economic surplus is a category of considerable scientific interest for the understanding of the irrationality of the capitalist order, and of major practical significance to a capitalist society under emergency conditions or facing the necessity of economic development, the planned economic surplus is relevant only to comprehensive economic planning under socialism. It is the difference between society’s “optimum” output attainable in a historically given natural and technological environment under conditions of planned “optimal” utilization of all available productive resources, and some chosen “optimal” volume of consumption. The meaning and contents of the “optimum” involved are essentially different from those attached to this notion in bourgeois economics. They do not reflect a configuration of production and consumption determined by profit considerations of individual firms, by the income distribution, tastes, and social pressures of a capitalist order; they represent a considered judgment of a socialist community guided by reason and science. Thus as far as resource utilization is concerned, it implies a far-reaching rationalization of society’s productive apparatus (liquidation of inefficient units of production, maximal economies of scale, etc.), elimination of redundant product differentiation, abolition of unproductive labor (as previously defined), a scientific policy of conservation of human and natural resources, and the like.

Nor does this “optimum” presuppose the maximization of output that might be attainable in a country at any given time. It may well be associated with a less than maximum output in view of a voluntarily shortened labor day, of an increase in the amount of time devoted to education, or of conscious discarding of certain noxious types of production (coal mining, for example). What is crucial is that the volume of output would not be determined by the fortuitous outcome of a number of uncoordinated decisions on the part of individual businessmen and corporations, but by a rational plan expressing what society would wish to produce, to consume, to save, and to invest at any given time.²⁸

Furthermore the “optimum” husbandry of resources in a socialist economy does not call by any means for reduction of consumption to merely what is essential. It can and will go together with a level of consumption that is considerably higher than what the criterion of essentiality might suggest. Again, what is decisive is that the level of consumption and therefore also the volume of the actually generated surplus would not be determined by the mechanism of profit maximization but by a rational plan reflecting the society’s preference as to current consumption versus future consumption. Therefore the economic surplus under socialism may be smaller or larger than the actual economic surplus under capitalism, or may even be equal to zero if society should choose to refrain from net investment. It would depend on the stage that has been reached in the historical process, on the degree of development of productive resources, on the structure and growth of human needs.

So much about our primitive tools. Now let us try to use them on some historical material.

¹ It comprises obviously a lesser share of total output than that encompassed by Marx’s notion of surplus value. The latter, it will be recalled, consists of the entire difference between aggregate net output and the real income of labor. The “actual economic surplus” as defined above is merely that part of surplus value that is being accumulated; it does not include, in other words, the consumption of the capitalist class, the government’s spending on administration, military establishment, and the like.

² While it need not detain us at this point, it is worth bearing in mind that from the standpoint of economic development it is most important whether the actual economic surplus assumes the form of capital goods increasing productivity, or appears as additions to inventories or gold hoards only tenuously, if at all, related to the “strengthening of society’s technical arm.”

³ This also refers to a different quantity of output than what would represent surplus value in Marx’s sense. On one hand, it excludes such elements of surplus value as what was called above essential consumption of capitalists, what could be considered essential outlays on government administration and the like; on the other hand, it comprises what is not covered by the concept of surplus value—the output lost in view of underemployment or misemployment of productive resources.

⁴ The labor of some of the most respectable orders in the society, is like that of menial servants, unproductive of any value.… The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive laborers. They are the servants of the public, and are maintained by a part Of the annual produce of the industry of other people.… In the same class must be ranked … churchmen, lawyers, physicians, men of letters of all kinds: players, musicians, opera singers, opera dancers, etc.…” Adam Smith, Wealth of Nations (Modern Library ed.), p. 295.

“When the annual productions of a country more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital. Capital may, therefore, be increased by an increased production or by a diminished unproductive consumption.” Ricardo, Principles of Political Economy and Taxation (Everyman’s Library ed.), p. 150.

⁵ Marx, Theories of Surplus Value (London, 1951), p. 177.

⁶ J. A. Schumpeter, Capitalism, Socialism and Democracy (New York, 1950), p. 143.

⁷ Capital (Kerr ed.), Vol. I, p. 668.

⁸ “The function of economic institutions is to organize economic life in conformity with the community’s wishes … the efficiency of economic organization will … be judged by its conformity to the community’s preferences.” T. Scitovsky, Welfare and Competition (Chicago, 1951), p. 5.

⁹ For instance Professor Scitovsky—one of the most authoritative writers in the field—observes: … if we begin questioning the consumer’s ability to decide what is good for him, we embark on a road on which it is difficult to stop, and we may end up by throwing overboard the whole concept of consumers’ sovereignty.” Op. cit., p. 184. In actual fact, what is at issue is not the “concept of consumers’ sovereignty” but merely the unhistorical, apologetic version of that concept that underlies bourgeois economics.

¹⁰ The Bureau of Labor Statistics of the United States Department of Labor works with some notion of “essential consumption” in compiling its cost of living index. The Heller Committee for Research in Social Economics at the University of California employs similar concepts. Food, housing, and medical requirements for various countries have been studied by the United Nations, by the Food and Agriculture Organization and other agencies, and represent a most important field for further investigations. Cf. Food and Agriculture Organization, FAO Nutritional Studies No. 5, Caloric Requirements (Washington, June 1950); National Research Council, Reprint and Circular Series, Recommended Dietary Allowances (Washington, 1948); United Nations, Housing and Town and Country Planning (1949–1950), as well as the material referred to in these sources.

¹¹ It may be interesting to note that this drive to glorify the capitalist order by eliminating the distinction between productive and unproductive labor has seriously contributed to the self-emasculation of modern economics. Committing its protagonists to treat as productive all activities in capitalist society that earn a monetary reward, the criterion of market approval and market valuation that might have at least a claim to consistency under conditions of pure capitalism becomes a source of serious troubles when what has to be dealt with is a society permeated with feudal remnants. Adherence to the market valuation principle under such circumstances forces economists either into the somewhat ludicrous position of having to criticize the existing state of affairs from the unhistorical and unrealistic standpoint of Mises, Hayek, Knight, and others of that school, or into the uncomfortable necessity to twist and bend the “principle” by claiming usefulness and essentiality for various non marketed activities in view of their “indirect” contribution to marketable output or in view of their essentiality for the preservation and functioning of the capitalist system as a whole.

¹² J. A. Schumpeter, Capitalism, Socialism and Democracy (New York, 1950), p. 198.

¹³ Marx, Grundrisse der Kritik der Politischen Ökonomie (Rohentwurf) (Berlin, 1953), p. 432.

¹⁴ Marx, Critique of the Gotha Program, in Marx and Engels, Selected Works (Moscow, 1949–1950), Vol. II. pp. 20 ff.

¹⁵ Incidentally, in a rationally planned economy there is no need for excess capacity to exist for any length of time even in declining industries, that is, in industries facing a shrinkage of demand for their products. Timely conversions of such capacities to the production of other outputs could reduce such excess capacity to a minimum.

¹⁶ America’s Capacity to Produce and America’s Capacity to Consume (Washington, 1934). For an excellent summary of this study, cf. J. Steindl, Maturity and Stagnation in American Capitalism (Oxford, 1952), pp. 4 ff., from which some sentences in the text above have been borrowed.

¹⁷ America’s Capacity to Produce and America’s Capacity to Consume (Washington, 1934), p. 31.

¹⁸ Ibid.

¹⁹ Lewis H. Robb, “Industrial Capacity and Its Utilization,” Science & Society (Fall 1953), pp. 318–325.

²⁰ “While even under emergency conditions only a relatively small part of this type of potential economic surplus is actually tapped, what has been accomplished on occasions suffices to indicate at least the dimensions of the problem involved. The wartime increase in output that resulted merely from concentration of production in large-scale plants, from the elimination of the most flagrant cases of duplication, cross-hauling, and inefficiency, was most impressive in the United States as well as in Great Britain and Germany.

²¹ Not that Babbitt—the fittest participant in the “rugged” competitive struggle for survival—who is idolized by some liberal economists and some old-fashioned Chambers of Commerce is a more attractive human specimen than the “modern” man described in David Riesman’s The Lonely Crowd, in C. Wright Mills’ White Collar: The American Middle Classes, in T. K. Quinn’s Giant Business. There indeed would be little room for confidence in the future of the human race if these two types were the only ones to choose from.

²² “We know that under international cartel agreements, patents frequently served not as an incentive to investment but rather as a device for limiting production, establishing restricted market areas, limiting the rate of technical advancement, fixing prices, etc. We know that the prewar Standard Oil-I.G. Farben marriage seriously retarded the development of a synthetic rubber industry in the United States. We know that Standard’s concessions to Farben were, in large part, motivated by a desire to suppress the synthetic gasoline patents outside of Germany. We know that Du Pont’s arrangements with I.C.I. resulted in a division of world markets rather than a dynamic, competitive development of these markets.… Investigations revealed … that when Du Pont developed a pigment which could be utilized either in paints or as a textile dye, the director of one of its research laboratories wrote: ‘Further work may be necessary on adding contaminants to “Monastral” colors to make them unsatisfactory on textiles but satisfactory for paints.’ The investigations described the Rohm & Haas research effort to discover a contaminant which would make methyl methacrylate suitable for use as a commercial molding powder but unfit as an ingredient for dentures. The investigations told of the heroic effort by the General Electric research organization to shorten the life of flashlight batteries, etc.” Walter Adams, American Economic Review (May 1954), p. 191.

²³ This approach, suggested originally by Schumpeter, has been given wide currency by J. K. Galbraith’s American Capitalism (Boston, 1952), where we read: “… the social inefficiency of a wealthy community grows with the growth of wealth that goes far to make this inefficiency inconsequential.” (P. 103.)

²⁴ TNEC Investigation of Concentration of Economic Power, Hearings, Part 1 (Washington 1939), p. 12.

²⁵ Ibid., p. 16.

²⁶ Ibid., p. 77.

²⁷ Ibid., testimony of Leon Henderson, p. 159.

²⁸ That a planned economy could easily dispose of the most striking irrationality of the capitalist system—unemployment caused by insufficient demand—is most succinctly shown by M. Kalecki: “It is useful to consider what the effect of a reduction in investment in a socialist system would be. The workers released from the production of investment goods would be employed in consumption goods industries. The increased supply of these goods would be absorbed by means of a reduction in their prices. Since profits of the socialist industries would be equal to investment, prices would have to be reduced to the point where the decline in profits would be equal to the fall in the value of investment. In other words, full employment would be maintained through the reduction of prices in relation to costs. In the capitalist system, however, the price-cost relationship … is maintained and profits fall by the same amount as investment plus capitalists’ consumption through the reduction in output and employment. It is indeed paradoxical that, while the apologists of capitalism usually consider the ‘price mechanism’ to be the great advantage of the capitalist system, price flexibility proves to be a characteristic feature of the socialist economy.” Theory of Economic Dynamics (London, 1954), pp. 62 ff.