The tendency of the surplus to rise, 1963-1988 - the 'economic surplus' - the extent to which a society 'has the discretion to go beyond the basic needs of its producers'

THE TENDENCY OF THE SURPLUS TO RISE, 1963-1988

In the increasingly universal monopoly-capitalist economy and culture of the late twentieth century, people no longer need what they want or want what they need. Wants are artificially manufactured while the most desperate needs of innumerable individuals remain unfulfilled. Although labor productivity has steadily risen, the overall efficiency and rationality of society has in many ways declined. Indeed, it is almost impossible to arrive at any other conclusion if one considers the lavish office structures in cities like New York, Dallas, Atlanta, and Los Angeles, where employees use the most technologically advanced means to "develop" yet another laundry detergent, television commercial, or leveraged buyout, while on the ground below large numbers of people lack decent housing, food, clothing, medical care, and education; if one considers automated assembly plants existing in the same social space as millions of unemployed, partially employed, "discouraged," and poorly paid workers; or if one contemplates what it means to launch still another aircraft carrier, the total costs of which are equal to half the annual federal budget for elementary and secondary education. All these problems diminish in proportion, moreover, if one expands one's vision to encompass the globe, comparing the lives of the wealthy at the center of the world economy to the degradation, squalor, misery, and starvation that are the everyday reality for the majority of the world's population in the underdeveloped countries.[1]

In an age of increasing environmental consciousness, it is clearer than ever that to follow this pattern of uneven development for much longer is to invite destruction for the world and its people. From the standpoint of human history and the ecological needs of the planet, any social formation or civilization must be judged by the way in which it uses its human, natural, and economic resources. Very few researchers in our society, conditioned as they are by the class environment in which they live - and hence schooled to believe that the free market solves all problems - are motivated to evaluate capitalism in such rational and comprehensive terms.

Especially neglected, since it goes to the heart of the matter, is the economical between social irrationality and the allocation of the rapidly-expanding economic surplus of monopoly capitalism. The economic surplus of any society represents the range of economic freedom at its disposal, the extent to which it has the discretion to ge beyond the basic needs of its producers. It thus measures the resources that are immediately available to alleviate suffering and improve the quality of life.

Like all meaningful social concepts, the economic surplus must be understood in relation to historically specific conditions. Its definition therefore may vary depending on the range of historical considerations at issue, and the concept itself is best approached by successive approximations. In its simplest, most general definition the net economic surplus of a society can be understood as the difference between its output and its essential costs of production.

From a practical standpoint, essential costs of production in a highly privatized system like that of the United States consist of the after-tax wages of most employees engaged in private production. These essential (or prime) costs represent the disposable income of the workers and lower managers whose labor constitutes the real source of the nation's product. Excluded from essential costs in this conception are the profit element in the compensation of corporate officers, the wages of government workers, and the compensation of employees in legal and financial services and advertising (since these expenses are a use of the social surplus). The net surplus in this accounting is then equal to the sum of profits, rent, interest, taxes, the profit share of corporate officer compensation, advertising costs, the costs of financial and related services, and legal costs. Depreciation costs can be added to this (as is common in national income accounting) in order to arrive at the gross (as opposed to net) economic surplus.[2] Over the years the gross surplus as we have defined it here has slowly but steadily risen from about $300 billion in current dollars (50 percent of GNP) in 1963 to about $2.7 trillion (55 percent) in 1988.

The actual gross surplus in this sense is far in excess of gross savings as measured in the national income accounts, which were about $640 billion in 1988. Yet it is less than two interesting alternative conceptions of surplus: (1) the "potential gross surplus," which would be available to society at full employment (in 1988, 5.4 percent of the labor force was officially unemployed, while millions more were "discouraged," and had ceased to search for work, or were underemployed); and (2) the "planned gross surplus," which would be available if both production and consumption were reorganized so as to eliminate waste built into the business process (e.g., elaborate packaging, frequent model changes, planned obsolescence, etc., that have become intermingled with the costs of production).

To say that "capitalism has been simultaneously the most efficient and the most wasteful productive system in history," as Douglas Dowd has recently argued, is to point to the contrast between the great efficiency with which a modern factory produces and packages a product such as toothpaste, and the contrived and massive inefficiency of an economic system that has people pay for toothpaste a price over 90 percent of which is owed to its marketing, not to its production.[3]

Such questioning of the structure of production, inherent in the very concept of planned surplus, requires of course that one "step outside" present-day capitalist society in order to view it from the standpoint of a more rational world order. Our goal in this essay (and in the calculations on which it is based) is not nearly so ambitious. We are concerned almost entirely with actual gross surplus, and hence we confine ourselves to the type of criticism that is readily understood within the conceptual boundaries of the present social order. Nonetheless, it is essential to keep the concepts of potential and planned surplus in mind as further stages in a single line of argument, particularly since the shift to a more rational, democratic, humane, and environmentally sustainable society would necessitate a movement toward the kind of economic structure suggested by the concept of planned surplus.

Setting aside the difficult questions of the potential and planned surpluses, then, what can be said about the more straightforward and manageable issue of actual gross economic surplus? Twenty-five years ago the economist Joseph Phillips provided calculations of the actual economic surplus in an appendix to Baran and Sweezy's Monopoly Capital, from which our own framework is derived. Two findings that Baran and Sweezy emphasized in Phillips' estimates were particularly noteworthy. First the magnitude of the surplus in Phillips' calculations had increased from 47 percent of GNP in 1929 to 56 percent in 1963. This supported Baran and Sweezy's core thesis that monopoly capitalism is characterized by a tendency for the surplus to rise so steadily that problems of surplus absorption constitute the main source of economic crisis. Second, the portion of surplus associated with traditionally-defined property income (profit, rent, and interest) had declined, according to Phillips' figures, from 58 percent of GNP in 1929 to 32 percent in 1963.[4] This meant that more and more income to capital was being concealed in the form of excess depreciation, corporate officer compensation, advertising, etc.

The Phillips calculations, although resting on what was in many ways a brilliant statistical exposition of the surplus, embodied a few minor difficulties - as might be expected of such pioneering work - related to the issue of double-counting. Nevertheless, his calculations continue to represent an indispensable starting point for research on the surplus. In what follows we have calculated the gross economic surplus for the years 1963-1988, following some of the guidelines that Phillips laid out, but departing from him in notable respects in light of important criticisms of his work.

Our own calculations for gross surplus (which cannot be compared directly with Phillips' because of conceptual differences) found not only that the gross surplus increased relative to GNP from 1963 to 1988, but also that profit, rent, and interest (calculated on a before-tax basis) declined from 35 percent of gross surplus in 1963 to 29 percent in 1988. Moreover, while corporate profits dropped from 20 percent of gross surplus in 1963 to 11 percent in 1988, net interest rose from about 5 to 15 percent over the same period, reflecting the growing importance of debt in the economy. It is therefore evident, as Baran and Sweezy wrote in 1966, that "not only the forces determining the total amount of surplus need to be analyzed but also those governing its differentiation and the varying rates of growth of the components."[5] We shall return to this question in our conclusion.

Our estimates of the gross economic surplus for the United States appear below under the heading "Table 1: Total Gross Economic Surplus and its Major Components: 1963-1988." We limit our calculations to the years from 1963 (the last year in Phillips' tables) to 1988 (the latest year for which good data were available in most of our categories). In constructing our estimates, we generally adhered to Phillips' logic, although we have tried to stick more consistently than he did to the procedure of drawing our figures from only one side (the income side) of the national account ledger in order to avoid some minor double counting which Phillips' figures included. As already noted, our figures should be understood as estimates of gross surplus (which includes depreciation allowances) in contrast to Phillips' estimates of net surplus. Finally, it should be noted that our estimates of gross surplus were designed to err - if at all - on the low side.

In order to facilitate understanding our estimates, our table is preceded by brief explanatory notes telling how we arrived at some of the most important or difficult estimates. We recommend that those who want a detailed understanding of the logic of the estimates and their origins read Phillips' Appendix in Monopoly Capital.

Adjusted Corporate Profits: These figures were taken straight from the national income accounts. They register before-tax corporate profits adjusted for the capital gains which result from inventory accounting practices.

Profits of Unincorporated Business: We have followed Phillips' approach to the letter in making these estimates, with the exception that we employ before-tax figures for profits.

Rental Income, Net Interest, Business Contributions to Social Insurance: We take these figures straight from the relevant national income accounts. Both rental income and net-interest are before-tax.

Surplus Employee Compensation: Following Phillips, we include employee compensation in finance, insurance, real estate, and legal services. After obtaining the raw figures for employee compensation in financial and legal services, we subtract in each industry half of the total corporate officer compensation paid out in that sector (since this falls under the category of hidden profits in our estimates - see "profit in corporate officer compensation" below.) The sum of the adjusted figures is then finally reduced for taxes paid out of employee compensation.[6] This allowance is necessitated by our inclusion of taxes on wages and salaries elsewhere in our estimates (see below).

Advertising Costs of Corporations: We include only that portion of advertising expenditures carried out by active corporations, since this magnitude constitutes the great bulk of business advertising and because figures on unincorporated business advertising are not readily obtainable. Although this element of surplus comes from the expenditure side of the ledger, its inclusion does not represent double counting, since such items as advertising expenses are charged to surplus value before profits are calculated and taxes are paid.

Our estimates for corporate advertising are compiled as follows. First, we take the figure for total corporate advertising for a given year. Then, we subtract from this a percentage based on our estimate of the relative share of traditionally-measured forms of property income in all business income.[7] This is done so as to allow for that portion of advertising expenditures which goes into the profit, rental, and interest income of advertising agencies and other businesses, which is counted in our estimates of incorporated and unincorporated business profits. Following this step, we then reduce the resulting figure further by deducting a portion of the "profit element in corporate officer compensation" (which we count elsewhere) commensurate with corporate advertising expenditures relative to total business income. The figure thus obtained might be thought of as the labor income which exists because of corporate advertising expenditures. We then adjust it downward so as to account for taxes paid out of this income.

Profit in Corporate Officer Compensation: As Phillips pointed out in the Appendix to Monopoly Capital, "[a] significant part of this income [the pay of corporate officers] represents a share of profits, although it is not explicitly treated as such." For this reason, we consider such income to be a disguised form of surplus. In the interest of making a strictly conservative estimate of the surplus, we have elected to follow Phillips' assumption that one-half of corporate officer compensation represents a deduction from surplus value, with the other half representing "labor income." In light of the explosion of corporate officer compensation which has taken place recently, this assumption is, if anything, too low.

Gross Business Depreciation: In his Appendix to Monopoly Capital, Phillips argued that untangling the problem of excess depreciation allowances (the difference between what the government allows businesses to deduct from their profit figures as "depreciation" and the actual wastage of plant and equipment) was the key to incorporating depreciation into the surplus. The implication of his argument was that some portion of depreciation allowance was socially necessary, and should therefore be left out of the estimate of the surplus. Thus, the task for Phillips was to arrive at a solid estimate of the actual magnitude of excessive depreciation allowances, so that this could be incorporated into his table. Our approach differs from his. Because the very term "depreciation reserves" now tends to obscure the actual pattern of deployment of these funds (which are overwhelmingly used for financial speculation, corporate take-overs, new investments, and other capital outlays unrelated to the wear on the plant and equipment that supposedly justifies their deduction from corporate income), we have elected to treat the whole of depreciation allowances as part of the surplus. This explains why our estimates should be understood as estimates of gross (as opposed to net) surplus. Our approach conforms closely with standard national income accounting practices in which it is common to refer to gross national product and gross saving rather than net.

Indirect Business Tax and Nontax Liabilities: This is another form of government revenue that businesses charge against surplus value before the calculation of profits. As such, it belongs in our estimate of the surplus. In addition to excise, sales, and business property taxes, it includes such items as the windfall profits tax on crude oil production and fines and fees assessed by regulatory agencies.

Estimated Taxes on Wages and Salaries: Because taxes on wages and salaries fund the state and reduce the income available to for consumption, they must be incorporated into our estimates.[8] This is not to deny that some part of this tax revenue may be returned to the working class in the form of what radical theorists now commonly refer to as "the social wage." But these revenues are more properly understood, in our view, as constituting part of the societally appropriated surplus rather than as "wages" as such. In order to incorporate them, we have taken the sum total of wages and salaries paid to individuals for each year, deducted from this sum that portion which represents disguised surplus paid to corporate officers (see above), then used Joseph Pechman's estimate of a fairly consistent 26 percent overall average tax burden to arrive at an estimate of the taxes of various sorts paid out of this adjusted wage and salary figure.

Elements of Surplus Omitted from Our Estimates: It is absolutely essential to recognize that the Phillips estimates of the surplus are, like our own, conservative in several additional respects. Although Phillips did attempt to develop rough estimates for the waste inherent in the penetration of the sales effort into the production process (which in Phillips' day amounted to something like 10 percent of GNP), he was unable to compute year-by-year estimates and therefore left this component of the surplus out of his measure. Likewise, we are forced to leave this element out of our estimates. On top of this, both sets of estimates leave out the further wasted output represented by unemployment. Finally, we have elected to exclude Phillips' category "Waste in Distribution" because of the extreme difficulty we would encounter in trying to replicate Phillips' method in this area, which relied heavily on one-of-a-kind sources of data.

Our final estimates of the surplus for the years 1963-1988 appear on the following pages. [Tabular Data Omitted]

Conclusions

We would like to repeat that these figures were calculated using a method different from that of Phillips, and are not strictly comparable with his figures. As we have mentioned, we believe that Phillips encountered minor difficulties with double counting, and have shifted his approach slightly so as to avoid them.

Despite our qualifications and the inevitable shortcomings in the data, it seems desirable to draw some tentative conclusions from our estimates.

The first is derived from the sheer size of the surplus in relation to the stagnant levels of real productive investment. Thus in 1988 gross investment was only 24 percent of gross economic surplus, or $633 billion out of a total of $2,684 billion. Our estimates therefore strongly support the argument that we are in an age where capitalism is experiencing a disintegration of the last remaining vestiges of its own limited rationality as a social system. As Paul Sweezy stated in the October 1990 "Review of the Month," "[t]here's no way the capitalist class can now manage the vast amount of surplus the economy is capable of producing."

Second, our figures show an upward trend in the relative size of the surplus between 1963 and 1988. Thus the "law of the tendency for surplus to rise" has been found to be fairly consistent, with only minor interruption in the late 1960s and early 1970s. This suggests that the problem of surplus absorption continues to grow despite the declining secular trend-rate of growth in the system as a whole. In fact, our figures show that even in severe (supposedly "corrective") downturns in the business cycle, the size of the surplus (in contrast to the share of profits as such) may not drop by very much. Our measurement dropped by only one-tenth of a point between 1981 and 1982, the upper turning point of the steepest post-war recession to date.

Third, the entire rise in surplus as a percentage of GNP over the quarter-century covered by our figures can be accounted for by the growth of the following four items: net interest, surplus employee compensation (i.e., finance, insurance, real estate and legal services), advertising costs, and the profit element in corporate officer compensation. Thus if these four elements were subtracted from our estimates of the surplus, the general trend would be reversed, and gross surplus would fall as a percentage of GNP from 43 percent in 1963 to 40 percent in 1988 (rather than rising from 50 to 55 percent). Hence, the rise in gross surplus between the end of the Kennedy administration and the end of the Reagan administration can be accounted for entirely by factors reflecting the general shift away from production toward finance and marketing in the economy as a whole.

Finally, our estimates ought to give serious pause to those inclined toward supply-side explanations of the crisis of U.S. capitalism. Our figures, as we have seen, reveal that while traditionally defined profit figures have fluctuated, the rate of extraction of surplus product from the direct producers has shown a far steadier upward trend. And what is true for the United States in this respect is obviously true in a much more heightened way for the capitalist world economy as a whole over the same period. It is only in this light that one can truly understand the growing imperative for the creation of socialist democracies where society's economic surplus would be used rationally to meet the needs in common of humanity as a whole.

NOTES

1. See Douglas Dowd, The Waste of Nations (Boulder, Colorado: Westview, 1989), p.

66; Paul A. Baran, The Longer View (New York: Monthly Review Press, 1969), pp.

92-111. 2. Gross economic surplus in our definition is meant to be equivalent to the gross

social accumulation fund, or the range of freedom that society has both to

maintain its existing physical infrastructure and to accomplish those tasks that go

beyond the basic consumption needs of its employed population. Our definition

of gross economic surplus is therefore meant to be equivalent to what, in Marx's

terms, would be called gross surplus value - or total surplus value plus depreciation.

This in turn reflects our view that most textbook definitions of Marx's surplus

value, which typically identify it with profit, rent, and interest and ignore such

factors as surplus employee compensation, the profit element in corporate officer

compensation, etc., are overly simplistic, downplaying precisely those elements

of surplus product that are rising most rapidly in the current epoch. 3. Dowd, Waste of Nations, pp. 65-66. 4. Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review

Press, 1966), pp. 10-11. 5. Ibid. 6. Based on Joseph A. Pechman's authoritative 1985 study, Who Paid the Taxes,

1966-1985? (Washington: Brookings Institution, 1985), we assume that all U.S.

individual taxpayers - regardless of income or wealth - have carried a roughly

equal combined tax burden (including income, sales, property, excise, and other

taxes) of about 26 percent of income throughout the period 1963-1988. 7. Here we apply precisely the same method of estimating the labor/traditional

property income split of business income connected with advertising that Phillips

employed to estimate the labor share of unincorporated business income. See

Phillips' Appendix, pp. 370-372 and Table 19, Column 2, p. 386. 8. See Paul A. Baran, The Political Economy of Growth (New York: Monthly Review Press,

1957), pp. 123-129.

Michael Dawson and John Bellamy Foster teach sociology at the University of Oregon. A longer, more detailed study based on the research presented here will be published in John Davis, ed., Economic Surplus in the Advanced Economies (Edward Elgar).

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