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E.R. McKinney

Some Capitalist Leaders Explain
How Their Profit System Functions

(16 June 1947)

From Labor Action, Vol. 11 No. 24, 16 June 1947, pp. 3 & 6.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

A MAJOR task for all the defenders of and apologists for capitalism today is how to make “our system of free enterprise” work. The Republican and Democratic Parties and the capitalist class began with the position that the first thing to do was to eliminate price control. Let the “law” of supply and demand have free reign unhampered by a blundering and “Socialistic” government bureaucracy. Once the controls were off and “open,” “free” and genuine competition restored, prices would seek their “natural” level like a stone falling to the earth. It was admitted that immediately following the removal of controls prices would show a tendency to rise rapidly but this should alarm no one; things would finally get “adjusted” in the “American way.”

This conception, to the degree that one should attribute honesty to its proponents, was and is based on a fallacy and a considerable amount of downright ignorance. The ignorance and the fallacy revolved around the question of how prices are really determined and this so-called “law” of supply and demand. During the late depression and before the apple vendors were put to work making bullets, before the inhabitants of the Hoovervilles were moved to the various beaver board and sheet iron flop houses erected by the Federal Government, there was an abundance of “demand” but the “supply” was a little short. Not “demand” of course in the technical sense meant by the capitalist economists. What they mean by “demand” is the desire for Something when you have the money to pay for it. And of course one can’t have the money to pay if one’s daily occupation consists of standing in a soup line or waiting at home for the relief investigator to arrive.

Monopoly Capitalism

To talk about prices adjusting themselves on the basis of “free competition” is to ignore entirely the fact that free competition has been negotiated to a large extent in capitalist production and distribution for many a decade. Prices today are monopoly prices; that is, the areas in which prices adjust themselves on the basis of competition and the “law” of supply and demand are narrow. What we have today is competition between monopolies, which subjects all enterprise to their power and control. Prices change, supply and demand adjust themselves to there monopolistic conditions.

The great monopolies were formed expressly for the purpose of escaping the travail of “free” and “open” competition. The packing industry is called the “Big Five,” the steel industry is “Big Steel” and “Little Steel,” rubber is the “Big Three,” automobiles is the “Big Three,” in packaged food there are Standard Brands, General Food, California Packing Co., chain groceries have a “Big Three,” “five and ten” stores, likewise. The whole of electric power is held by two or three big holding companies, with investment bankers at the very top. Railroads are an affiliated system with the bankers in control through interlocking directorates. Communications do it far better: Western Union and American Telephone and Telegraph are each the “Dig One.”

Not only do these giant corporations, trusts and holding companies operate within their own field on a monopoly basis but the whole of capitalist business enterprise functions monopolistically through its trade associations and organizations, for the purpose of establishing prices and wages. By this it is not meant that the leaders of business and commerce sit down together and decide all the details of what prices and wages should be. They can hardly do so given the present organization of capitalism. What they do is to adopt general formulas to take care of the overall needs of industry in the way of prices and wages. They come to some general decision that prices should be increased and not lowered, that wages should be held down, or if increased, only by a certain amount.

This should be clear from what has transpired during the months since the death of OPA. What happened to the “law” of supply and demand? With the country stripped of the usual peacetime abundance of supplies, the manufacturers began operations after the war was over. Fifty-eight millions were at work and unemployment was negligible. But the goods did not get to the retail stores. Manufacturers piled up huge inventories. The goods were packed away in warehouses. From January to February of this year inventories increased from 20 billion to 21 billion; or one billion dollars in a single thirty-day period! Combined with this rapid increase in inventories was a rapid, constant and seemingly limitless increase in prices. Where was the “law” of supply and demand? Where were the price reductions which were to follow the elimination of OPA? Where were the benefits which “free enterprise” would bestow if only the government would take its hand off and give industry an opportunity to produce and make a “fair profit” on its investment?

Despite all this there are capitalists and defenders of capitalism who feel that the system is working fine.

The National Industrial Conference Board got so elated at the way things were going that this institution decided to discover “what keeps the American free-enterprise system ticking so strongly.” Mr. Virgil Jordan, the president of the NICB, in a speech at the meeting of the Edison Electrical Institute, told what he discovered. Mr. Jordan discovered that “our” success is due to our “economic freedom” and “free competition in free markets.” But he sees a dark cloud on the horizon. We have gone too far “in the direction of government controls and private monopolistic practices.” What is really unique in our system “is the American democratic way of life itself.” But according to Mr. Jordan we must keep a very vigilant eye on the “monopolies,” government, business “and now the labor monopolies.” “Eternal vigilance is the price of liberty.”


Mr. R.T. Haslam, of the Standard Oil Co. of New Jersey has written a pamphlet. He has just returned from a good will tour of South America. He found some competition there but nothing like the “complete” competition which prevails in the good old U.S.A. Here “people, corporations, industries and geographic, areas all compete with one another.” Mr. Haslam is very proud of the American system because under this system “people are constantly changing jobs or starting new businesses ... cutting costs and prices ...” Furthermore “our system puts a premium on efficiency, which leads to low prices and high wages, which in turn mean that more people can buy the great quantities of goods we turn out.” It may be necessary to emphasize that this is a brand new pamphlet and was not written in 1928.

In trying to make “our system of free enterprise” work the big business geniuses pay attention to talk about a coming depression. According to the New York Times, one big insurance executive has the cure, or at least he knows where the real danger is. It seems that a source of “imminent danger” is the insistence of misguided people for lower prices. His argument is, if the public believes that prices will come down, they will not buy now. But if people don’t buy now production will have to be reduced. If production is reduced costs will go up. This will necessitate price increases. The moral is, if you don’t want unemployment and higher prices keep paying the present high prices, no matter how high they go.

What Is a Recession

Another interesting aspect of this question is the language used to describe certain phenomena. Prices are not increased or decreased but “readjusted ” There are certain “maladjustments” in “the price structure.” There are also “cost maladjustments” and “scattered inventory losses” following “price adjustments.”

Also, it can now be definitely said that we know the difference between a “recession” and a “depression.” The . difference has been explained by no less an authority than Winthrop Aldrich, chairman of the Chase National Bank. Mr. Aldrich concedes that there may be a recession but one must distinguish between a recession and a depression. “Recessions are to be expected In a dynamic economy, and represent temporary deviations from rapid upward growth. Recessions which correct such distortions are not to be feared. Corrective recessions of this character not accompanied by large unemployment or great inflation. They are necessary to reduce costs and prices to a level which permits an economy to function to best advantage. Moreover, they serve to increase labor productivity and managerial efficiency, and they lay the basis for further improvements in living standards.” That is what a recession is. Mr. Aldrich does not say what a depression is.

What is Mr. Aldrich really saying here? Rapid upward growth today is a distortion which needs to be corrected. Don’t produce too much or you may have to reduce prices in order to sell. The correction provided by a recession only throws a few millions out of work, say two or three millions. Nothing like a depression when 20 million are: “idle.” Recessions increase, labor productivity; that is, the individual worker will produce more for fear of being fired. Recessions produce price and cost redactions. Prices come down because employment comes down, that is, there is less “prosperity.” During a recession, costs are less; particularly “labor costs,” for the reason that when unemployment reaches the “recession” stage, wage rates begin to fall.

These are only a few of the contributions being made to this knotty problem by the country’s “best minds.” President Truman and Senator Taft have entered the forum on this question. Taft has charged that the Truman policy of spending abroad would keep prices up in the U.S. Truman replied that Taft’s economic philosophy was of the “boom and bust” type. This made the senator angry, and he struck back, claiming that Truman’s price policies were an attempt to “veto the law of supply and demand.” Rising prices were caused by Truman’s abolition of price controls. Also his encouragement of wage rises and lastly by Truman’s opposition to tax cuts and “labor reforms.”

But It Won’t Help

While it can be said that Taft has one of the finest cave man economic and political minds extant, and that Truman’s mind is of a type, similar to the mind of Bill Green; no one should become too much alarmed over this dispute. Since Truman and Taft serve the same master, they will not go too far in their disagreements. Both are really anxious to answer the call of the masses, in 1948. Both are willing to be “drafted” by their respective parties.

Not one capitalist or one single political leader knows how to make capitalism work any better than it has been working. The Republican Party doesn’t know, and neither does the Democratic Party. “Efficiency” will not do the job for them. Neither will tax reduction or “labor reforms.”

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