Homebrew Industrial Revolution, Chapter Two. Moloch (second excerpt)

[Michel Bauwens has kindly invited me to serialize excerpts from my forthcoming book The Homebrew Industrial Revolution: A Low-Overhead Manifesto. Over the next several weeks, I will post two excerpts from each chapter (one excerpt a week).]

In keeping with the need for stability and control Galbraith described above [see previous post],  the technostructure resorted to organizational expedients within the corporate enterprise to guarantee reliable outlets for production and provide long-term predictability in the availability and price of inputs.  These expedients can be summed up as replacing the market price mechanism with planning.

A firm cannot usefully foresee and schedule future action or prepare for contingencies if it does not know what its prices will be, what its sales will be, what its costs including labor and capital costs will be and what will be available at these costs….  Much of what the firm regards as planning consists in minimizing or getting rid of market influences. [J.K. Galbraith, The New Industrial State]

There’s a reason for twentieth century liberalism’s strong affinity for mass-production industry (e.g. Michael Moore’s nostalgia for the consensus capitalism of the ’50s, when the predominant mode of employment was a factory job with lifetime security).  Twentieth century liberalism had its origins as the ideology of the managerial and professional classes, particularly the managers and engineers who ran the giant manufacturing corporations.  And the centerpiece of their ideology was to extend to society outside the corporation the same planning and control, the same government by disinterested experts, that prevailed inside it.  And this ideological affinity for social planning dovetailed exactly with mass-production industry’s need to reshape society as a whole to guarantee consumption of its output. [See Carson, Organization Theory, Chapter Four]

Galbraith describes three institutional expedients taken by the technostructure to control the uncertainties of the market and permit long-term predictability:  vertical integration, the use of market power to control suppliers and outlets, and long-term contractual arrangements with suppliers and outlets….

Unlike lean, demand-pull production, which minimizes inventory costs by producing only in response to orders, mass production requires supply-push distribution (guaranteeing a market before production takes place)….

Another institutional expedient of Galbraith’s technostructure is to regulate the pace of technical change, with the oligopoly firms in an industry colluding to introduce innovation at a rate that maximizes returns.  Baran and Sweezy described the regulation of technical change, as it occurs in oligopoly markets under corporate capitalism:

Here innovations are typically introduced (or soon taken over) by giant corporations which act not under the compulsion of competitive pressures but in accordance with careful calculations of the profit-maximizing course.  Whereas in the competitive case no one, not even the innovating firms themselves, can control the rate at which new technologies are generally adopted, this ceases to be true in the monopolistic case.  It is clear that the giant corporation will be guided not by the profitability of the new method considered in isolation, but by the net effect of the new method on the overall profitability of the firm. And this means that in general there will be a slower rate of introduction of innovation than under competitive criteria. [Monopoly Capitalism]

Or as Paul Goodman put it, a handful of manufacturers control the market, “competing with fixed prices and slowly spooned-out improvements.” [People or Personnel]

Besides these microeconomic structures created by the nominally private corporation to provide stability, the state engaged in the policies described by Gabriel Kolko as “political capitalism.”

Political capitalism is the utilization of political outlets to attain conditions of stability, predictability, and security—to attain rationalization—in the economy. Stability is the elimination of internecine competition and erratic fluctuations in the economy. Predictability is the ability, on the basis of politically stabilized and secured means, to plan future economic action on the basis of fairly calculable expectations. By security I mean protection from the political attacks latent in any formally democratic political structure. I do not give to rationalization its frequent definition as the improvement of efficiency, output, or internal organization of a company; I mean by the term, rather, the organization of the economy and the larger political and social spheres in a manner that will allow corporations to function in a predictable and secure environment permitting reasonable profits over the long run. [The Triumph of Conservatism]

The state played a major role in cartelizing the economy, to protect the large corporation from the destructive effects of price competition.  At first the effort was mainly private, reflected in the trust movement at the turn of the 20th century….

Merely private attempts at cartelization (i.e., collusive price stabilization) before the Progressive Era—namely the so-called “trusts”—were miserable failures, according to Gabriel Kolko. The dominant trend at the turn of the century—despite the effects of tariffs, patents, railroad subsidies, and other existing forms of statism—was competition. The trust movement was an attempt to cartelize the economy through such voluntary and private means as mergers, acquisitions, and price collusion. But the over-leveraged and over-capitalized trusts were even less efficient than before, and steadily lost market share to their smaller, more efficient competitors. Standard Oil and U.S. Steel, immediately after their formation, began to lose market share.

In the face of this resounding failure, big business acted through the state to cartelize itself—hence, the Progressive regulatory agenda.

Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.”

* * *

If economic rationalization could not be attained by mergers and voluntary economic methods, a growing number of important businessmen reasoned, perhaps political means might succeed.”…

Kolko provided considerable evidence that the main force behind the Progressive Era legislative agenda was big business. The Meat Inspection Act, for instance, was passed primarily at the behest of the big meat packers.   This pattern was repeated, in its essential form, in virtually every component of the “Progressive” regulatory agenda.

The various safety and quality regulations introduced during this period also worked to cartelize the market.  They served essentially the same purpose as attempts in the Wilson war economy to reduce the variety of styles and features available in product lines, in the name of “efficiency.”  Any action by the state to impose a uniform standard of quality (e.g. safety), across the board, necessarily eliminates that feature as a competitive issue between firms.  As Butler Shaffer put it, the purpose of “wage, working condition, or product standards” is to “universalize cost factors and thus restrict price competition.” [Calculated Chaos] Thus, the industry is partially cartelized, to the very same extent that would have happened had all the firms in it adopted a uniform quality standard, and agreed to stop competing in that area.  A regulation, in essence, is a state-enforced cartel in which the members agree to cease competing in a particular area of quality or safety, and instead agree on a uniform standard which they establish through the state. And unlike private cartels, which are unstable, no member can seek an advantage by defecting….

More importantly, the FTC and Clayton Acts reversed the long trend toward competition and loss of market share and made stability possible.

The provisions of the new laws attacking unfair competitors and price discrimination meant that the government would now make it possible for many trade associations to stabilize, for the first time, prices within their industries, and to make effective oligopoly a new phase of the economy…. [Kolko]

The two pieces of legislation accomplished what the trusts had been unable to:  they enabled a handful of firms in each industry to stabilize their market share and to maintain an oligopoly structure between them….

State spending serves to cartelize the economy in much the same way as regulation.  Just as regulation removes significant areas of quality and safety as issues in cost competition, the socialization of operating costs on the state (e.g. R&D subsidies, government-funded technical education, etc.)  allows monopoly capital to remove them as components of price in cost competition between firms, and places them in the realm of guaranteed income to all firms in a market alike.  Transportation subsidies reduce the competitive advantage of locating close to one’s market.  Farm price support subsidies turn idle land into an extremely lucrative real estate investment. Whether through regulations or direct state subsidies to various forms of accumulation, the corporations act through the state to carry out some activities jointly, and to restrict competition to selected areas.

An ever-growing portion of the functions of the capitalist economy have been carried out through the state. According to James O’Connor, state expenditures under monopoly capitalism can be divided into “social capital” and “social expenses.”

Social capital is expenditures required for profitable private accumulation; it is indirectly productive (in Marxist terms, social capital indirectly expands surplus value).  There are two kinds of social capital: social investment and social consumption (in Marxist terms, social constant capital and social variable capital)….   Social investment consist of projects and services that increase the productivity of a given amount of laborpower and, other factors being equal, increase the rate of profit….  Social consumption consists of projects and services that lower the reproduction costs of labor and, other factors being equal, increase the rate of profit.  An example of this is social insurance, which expands the productive powers of the work force while simultaneously lowering labor costs.  The second category, social expenses, consists of projects and services which are required to maintain social harmony—to fulfill the state’s “legitimization” function….  The best example is the welfare system, which is designed chiefly to keep social peace among unemployed workers. [Fiscal Crisis of the State]

According to O’Connor, such state expenditures counteract the falling direct rate of profit that Marx predicted in volume 3 of Capital. Monopoly capital is able to externalize many of its operating expenses on the state; and since the state’s expenditures indirectly increase the productivity of labor and capital at taxpayer expense, the apparent rate of profit is increased. “In short, monopoly capital socializes more and more costs of production.”….

As we have already seen, the use of expensive product-specific machinery requires large-batch production to achieve high throughput and thus spread production costs out over as many units as possible.  And to do this, in turn, requires enormous exercises of power to ensure that a market existed for this output.

First of all, it required the prior forms of intervention described in the last chapter and in the previous section of this chapter:  state intervention to create a unified national market and transportation system, and state intervention to promote the formation of stable oligopoly cartels.

But despite all the state intervention up front to make the centralized corporate economy possible, state intervention is required afterward as well as before in order to keep the system running.  Large, mass-production industry is unable to survive without the government guaranteeing an outlet for its overproduction, and insulating it from a considerable amount of market competition.  As Paul Baran and Paul Sweezy put it, monopoly capitalism

tends to generate ever more surplus, yet it fails to provide the consumption and investment outlets required for the absorption of a rising surplus and hence for the smooth working of the system.  Since surplus which cannot be absorbed will not be produced, it follows that the normal state of the monopoly capitalist economy is stagnation….  Left to itself—that is to say, in the absence of counteracting forces which are no  part of what may be called the “elementary logic” of the system—monopoly capitalism would sink deeper and deeper into a bog of chronic depression. [Monopoly Capitalism]

Mass production divorces production from consumption.  The rate of production is driven by the imperative of keeping the machines running at full capacity so as to minimize unit costs, rather than by customer orders.  So in addition to contractual control of inputs, mass-production industry faces the imperative of guaranteeing consumption of its output by managing the consumer.  It does this through push distribution, high-pressure marketing, planned obsolescence, and consumer credit….

[Ralph] Borsodi’s book The Distribution Age was an elaboration of the fact that, as he stated in the Preface, production costs fell by perhaps a fifth between 1870 and 1920, even as the cost of marketing and distribution nearly tripled.  The modest reduction in unit production cost was more than offset by the increased costs of distribution and high-pressure marketing.  “[E]very part of our economic structure,” he wrote, was “being strained by the strenuous effort to market profitably what modern industry can produce.”

Distribution costs are far lower under a demand-pull regime, in which production is geared to demand….

For those whose low overhead permits them to produce in response to consumer demand, marketing is relatively cheap.  Rather than expending enormous effort to make people buy their product, they can just fill the orders that come in.  When demand for the product must be created, the effort (to repeat Borsodi’s metaphor) is comparable to that of making water run uphill.  Mass advertising is only a small part of it.  Even more costly is direct mail advertising and door-to-door canvassing by salesmen to pressure grocers in a new market to stock one’s goods, and canvassing of grocers themselves by sales reps.  The costs of advertising, packaging, brand differentiation, etc., are all costs of overcoming sales resistance that only exist because production is divorced from demand rather than driven by it.

For those who can flexibly respond to demand, also, predictability of consumer demand doesn’t matter that much….

The advantage of brand specification, from the perspective of the producer, is that it “lifts a product out of competition”:   “the prevalence of brand specification has all but destroyed the normal basis upon which true competitive prices can be established.”…. [Borsodi, The Distribution Age]

It’s telling that Chandler, the apostle of the great “efficiencies” of this entire system, frankly admitted all of these things.  In fact, far from regarding it as an “admission,” he treated it as a feature of the system.  He explicitly equated “prosperity” to the rate of flow of material through the system and the speed of production and distribution—without any regard to whether the rate of “flow” was twice as fast because people were throwing stuff in the landfills twice as fast to keep the pipelines from clogging up.

The new middle managers did more than devise ways to coordinate the high-volume flow from suppliers of raw materials to consumers.  They invented and perfected ways to expand markets and to speed up the processes of production and distribution.  Those at American Tobacco, Armour, and other mass producers of low-priced packaged products perfected techniques of product differentiation through advertising and brand names that had been initially developed by mass marketers, advertising agencies, and patent medicine makers.  The middle managers at Singer wee the first to systematize personal selling by means of door-to-door canvassing; those at McCormick among the first to have franchised dealers using comparable methods.  Both companies innovated in installment buying and other techniques of consumer credit. [The Visible Hand]

In other words, the Sloanist system Chandler idealized was more “efficient” because it was better at persuading people to throw stuff away so they could buy more, and better at producing substandard shit that would have to be thrown away in a few years….

The roots of the corporate state in the U.S., more than anything else, lie in the crisis of overproduction as perceived by corporate and state elites—especially the traumatic Depression of the 1890s—and the requirement, also as perceived by them, for state intervention to absorb surplus output or otherwise deal with the problems of overproduction, underconsumption, and overaccumulation.   According to William Appleman Williams, “the Crisis of the 1890’s raised in many sections of American society the specter of chaos and revolution.” [The Tragedy of American Diplomacy]  Economic elites saw it as the result of overproduction and surplus capital, and believed it could be resolved only through access to a “new frontier.” Without state-guaranteed access to foreign markets, output would fall below capacity, unit costs would go up, and unemployment would reach dangerous levels.

Accordingly, the centerpiece of American foreign policy to the present day has been what Williams called “Open Door Imperialism”:  securing American access to foreign markets on equal terms to the European colonial powers, and opposing attempts by those powers to divide up or close markets in their spheres of influence.  [The Contours of American History]

Open Door Imperialism consisted of using U.S. political power to guarantee access to foreign markets and resources on terms favorable to American corporate interests, without relying on direct political rule. Its central goal was to obtain for U.S. merchandise, in each national market, treatment equal to that afforded any other industrial nation. Most importantly, this entailed active engagement by the U.S. government in breaking down the imperial powers’ existing spheres of economic influence or preference. The result, in most cases, was to treat as hostile to U.S. security interests any large-scale attempt at autarky, or any other policy whose effect was to withdraw major areas of the world from the disposal of the U.S. corporate economy. When the power attempting such policies was an equal, like the British Empire, the U.S. reaction was merely one of measured coolness. When it was perceived as an inferior, like Japan, the U.S. resorted to more forceful measures, as events of the late 1930s indicate. And whatever the degree of equality between advanced nations in their access to Third World markets, it was clear that Third World nations were still to be subordinated to the industrialized West in a collective sense.

In the late 1930s, the American political leadership feared that Fortress Europe and the Greater East Asian Co-Prosperity sphere would deprive the American corporate economy of vitally needed raw materials, not to mention outlets for its surplus output and capital; that’s what motivated FDR to maneuver the country into another world war….

The American policy that emerged from the war was to secure control over the markets and resources of the global “Grand Area” through institutions of global economic governance, as created by the postwar Bretton Woods system, and to make preventing “defection from within” by autarkic powers the centerpiece of national security policy.

The problem of access to foreign markets and resources was central to U.S. postwar planning. Given the structural imperatives of “export dependent monopoly capitalism,” the threat of a postwar depression was very real…. The end of the war, if followed by the traditional pattern of demobilization, would have resulted in a drastic reduction in orders to that same overbuilt industry just as over ten million workers were being dumped back into the civilian labor force.

A central facet of postwar economic policy, as reflected in the Bretton Woods agencies, was state intervention to guarantee markets for the full output of U.S. industry and profitable outlets for surplus capital….

Government also directly intervened to alleviate the problem of overproduction, by its increasing practice of directly purchasing the corporate economy’s surplus output—through Keynesian fiscal policy, massive highway and civil aviation programs, the military-industrial complex, the prison-industrial complex, foreign aid, and so forth….  [The United States government played a central role in creating entirely new industries as outlets for surplus capital:  cybernetics, miniaturized electronics, jumbo jets, and industrial automation.]

Although Galbraith and Chandler commonly justified the corporation’s power over the market in terms of its social benefits, they had things exactly backward.  The “technostructure” can  survive because it is enabled to be less responsive to consumer demand.  An oligopoly firm in a cartelized industry, in which massive, inefficient bureaucratic corporations share the same bureaucratic culture, is protected from competition.  The “innovations” Chandler so prized are made by a leadership completely out of touch with reality.  These “innovations” succeed because they are determined by the organization for its own purposes, and the organization has the power to impose top-down “change” on a cartelized market, with little regard to consumer preferences, instead of responding flexibly to them.  “Innovative strategies” are based, not on finding out what people want and providing it, but on inventing ever-bigger hammers and then forcing us to be nails.  The large corporate organization is not more efficient at accomplishing goals received from outside; it is more efficient at accomplishing goals it sets for itself for its own purposes, and then using its power to adapt the rest of society to those goals.

So to turn to our original point, the apostles of mass production have all, at least tacitly, identified the superior efficiency of the large corporation with its control over the external environment.  Sloanist mass production subordinates the consumer, and the rest of outside society, to the institutional needs of the corporation.

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