The levels of state expenditure necessary to underwrite the operating costs of capital and render investment productive create a fiscal crisis, parallel to the crisis of accumulation.

Large-scale state capitalist intervention, generally identified with Whigs and Republicans in the mid-nineteenth century, led to a centralization of the economy in the hands of large producers. This system was inherently unstable, and required still further state intervention to solve its contradictions. The result was the full-blown state capitalism of the twentieth century, in which the state played a direct role in subsidizing and cartelizing the corporate economy. Despite such intervention, though, state capitalism was still unstable. As regulatory cartelization advanced from the "Progressive" era on, the problems of overproduction and surplus capital were further intensified by the forces described by Stromberg in the previous two chapters, with the state resorting to ever greater, snowballing foreign expansionism and domestic corporatism to solve them. They eventually led to New Deal corporate state, to a world war in which the U.S. was established (in Samuel Huntington’s words) as "hegemonic power in a system of world order," and an almost totally militarized high tech economy.

A positive rate of profit, under twentieth century state capitalism, was possible only because the state underwrote so much of the cost of reproduction of constant and variable capital, and undertook "social investment" which increased the efficiency of labor and capital and consequently the rate of profit on capital.³ And monopoly capital's demands on the state are not stable over time, but steadily increase:

O'Connor did not adequately deal with a primary reason for the fiscal crisis: the increasing role of the state in performing functions of capital reproduction removes an ever-growing segment of the economy from the market price system. The removal of the price feedback system, which in a free market ties quantity demanded to quantity supplied, leads to ever-increasing demands on state services. When the consumption of some factor is subsidized by the state, the consumer is protected from the real cost of providing it, and unable to make a rational decision about how much to use. So the state capitalist sector tends to add factor inputs extensively, rather than intensively; that is, it uses the factors in larger amounts, rather than using existing amounts more efficiently. The state capitalist system generates demands for new inputs from the state geometrically, while the state's ability to provide new inputs increases only arithmetically. The result is a process of snowballing irrationality, in which the state's interventions further destabilize the system, requiring yet further state intervention, until the system's requirements for stabilizing inputs exceed the state's resources. At that point, the state capitalist system reaches a breaking point.

Probably the best example of this phenomenon is the transportation system. State subsidies to highways, airports, and railroads, by distorting the cost feedback to users, destroy the link between the amount provided and the amount demanded. The result, among other things, is an interstate highway system that generates congestion faster than it can build or expand the system to accommodate congestion. The cost of repairing the most urgent deteriorating roadbeds and bridges is several times greater than the amount appropriated for that purpose. In civil aviation, at least before the September 11 attacks, the result was planes stacked up six high over O'Hare airport. There is simply no way to solve these crises by building more highways or airports. The only solution is to fund transportation with cost-based user fees, so that the user perceives the true cost of providing the services he consumes. But this solution would entail the destruction of the existing centralized corporate economy. For example, when the UK experimented with toll-roads as a method of funding, the attempt to make users pay the full cost of the transportation services they consumed only resulted in truckers being driven onto secondary roads.

The same law of excess consumption and shortages manifests itself in the case of energy. When the state subsidizes the consumption of resources like fossil fuels, business tends to add inputs extensively, instead of using existing inputs more intensively. Since the incentives for conservation and economy are artificially distorted, demand outstrips supply. But the energy problem is further complicated by finite reserves of fossil fuels. According to an article in the Oil and Gas Journal last year,

During the shortages of the late '70s, Warren Johnson predicted that a prolonged energy crisis would lead, through market forces, to a radical decentralization of the economy and a return to localism.⁷ Like every other kind of state intervention, subsidies to transportation and energy lead to ever greater irrationality, culminating in collapse.

Other centralized offshoots of the state capitalist system produce similar results. Corporate agribusiness, for example, requires several times as much synthetic pesticide application per acre to produce the same results as in 1950--partly because of insect resistance, and partly because pesticides kill not only insect pests but their natural enemies up the food chain. At the same time, giant monoculture plantations typical of the agribusiness system are especially prone to insects and blights which specialize in particular crops. The use of chemical fertilizers, at least the most common simple N-P-K varieties, strips the soil of trace elements--a phenomenon noted long ago by Max Gerson. The chemical fillers in these fertilizers, as they accumulate, alter the osmotic quality of the soil--or even render it toxic. Reliance on such fertilizers instead of traditional green manures and composts severely degrades the quality of the soil as a living biological system: for example, the depletion of mycorrhizae which function symbiotically with root systems to aid absorption of nutrients. The cumulative effect of all these practices is to push soil to the point of biological collapse. The hardpan clay on many agribusiness plantations is virtually sterile biologically, often with less than a single earthworm per cubic yard of soil. The result, as with chemical pesticides, is ever increasing inputs of fertilizer to produce diminishing results.

In every case, the basic rule is that, whenever the economy deviates from market price as an allocating principle, it deviates to that extent from rationality. In a long series of indices, the state capitalist economy uses resources or factors much more intensively than would be possible if large corporations were paying the cost themselves. The economy is much more transportation-intensive than a free market could support, as we have seen. It is likewise more capital-intensive, and more intensively dependent on scientific-technical labor, than would be economical if all costs were borne by the beneficiaries. The economy is far more centralized, capital intensive, and high-tech than it would otherwise be. Had large corporate firms paid for these inputs themselves, they would have reached the point of zero marginal utility from additional inputs much earlier.

At the same time as the demand for state economic inputs increases, state capitalism also produces all kinds of social pathologies that require "social expenditures" to contain or correct. By subsidizing the most capital-intensive forms of production, it promotes unemployment and the growth of an underclass. But just as important, it undermines the very social structures--family, church, neighborhood, etc.--on which it depends for the reproduction of a healthy social order.

Those who believe the market and commodity production as such inevitably suck all social relations into the "cash nexus," and undermine the stability of autonomous social institutions, are wrong. But this critique, while not valid for the market as such, is valid for state capitalism, where the state is driven into ever new realms in order to stabilize the corporate system. State intervention in the process of reproducing human capital (i.e., public education and tax-supported vocational-technical education), and state aid to forms of economic centralization that atomize society, result in the destruction of civil society and the replacement by direct state intervention of activities previously carried out by autonomous institutions. The destruction of civil society, in turn, leads to still further state intervention to deal with the resulting social pathologies.

The free market criticism of these phenomena closely parallels that of Ivan Illich in Tools For Conviviality.⁸ Illich argued that the adoption of technologies followed a pattern characterized by two thresholds (or "watersheds"). The first threshold was one of high marginal utility for added increments of the new technology, with large increases in overall quality of life as it was introduced. But eventually a second threshold was reached, at which further increments produced disutilities. Technologies continued to be adopted beyond the level at which they positively harmed society; entire areas of life were subject to increased specialization, professionalization, and bureaucratic control; and older forms of technology that permitted more autonomous, local and individual control, were actively stamped out. In all these areas of life, the effect was to destroy human-scale institutions and ways of doing things, amenable to control by the average person.

In medicine, the first threshold was identified with the introduction of septic techniques, antibiotics, and other elementary technologies that drastically reduced the death rates. The second was identified with intensive reliance on extremely expensive medications and procedures with only marginally beneficial results (not to mention iatrogenic diseases), the transformation of medicine into a priesthood governed by "professional" bureaucracies, and the loss by ordinary people of control over their own health. The automobile reached the second threshold when it became impossible for most people to work or shop within walking or bicycle distance of where they lived. The car ceased to be a luxury, and became a necessity for most people; a lifestyle independent of it was no longer an option.

Those who criticize such aspects of our society, or express sympathies for the older, smaller-scale ways of life, are commonly dismissed as nostalgic, romantic--even Luddites. And such critiques are indeed, more often than not, coupled with calls for government regulation of some kind to protect quality of life, by restraining the introduction of disruptive technologies. The worst such critics idealize the "Native American" practice of considering the effects of a technology for "six generations" before allowing it to be adopted. Illich himself fell into this general category, considering these issues to be a proper matter for grass-roots political control ("convivial reconstruction").

But in fact, it is quite possible to lament the loss of human scale society ("Norman Rockwell's America"), and to resent the triumph of professionalization and the automobile, all the while adhering to strictly free market principles. For government, far from being the solution to these evils, has been their cause. Illich went wrong in treating the first and second thresholds, respectively, as watersheds of social utility and disutility, without considering the mechanism of coercion that is necessary for social disutility to exist at all. In a society where all transactions are voluntary, no such thing as "social disutility" is possible. Net social disutility can only occur when those who personally benefit from the introduction of new technologies beyond the second threshold, are able to force others to bear the disutilities. As we have already seen in our citations of O'Connor's analysis, this is the case in regard to a great deal of technology. The profit is privatized, while the cost is socialized. Were those who benefited from greater reliance on the car, for example, for example, forced to internalize all the costs, the car would not be introduced beyond the point where overall disutilities equaled overall utilities. As Kaveh Pourvand elegantly put it in a private communication, the state's intervention promotes the adoption of certain technologies beyond Pareto optimality.⁹ Coercion, or use of the "political means," is the only way in which one person can impose disutility on another.

The state capitalist system thus demands ever greater state inputs in the form of subsidies to accumulation, and ever greater intervention to contain the ill social effects of state capitalism. Coupled with political pressures to restrain the growth of taxation, these demands lead to (as O'Connor's title indicates) a "fiscal crisis of the state," or "a tendency for state expenditures to increase faster than the means of financing them."¹⁰ The "'structural gap' ...between state expenditures and state revenue" is met by chronic deficit finance, with the inevitable inflationary results. Under state capitalism "crisis tendencies shift, of course, from the economic into the administrative system..." This displaced crisis is expressed through "inflation and a permanent crisis in public finance."¹¹

The problem is intensified by the disproportionate financing of State expenditures by taxes on the competitive sector (including the taxes on the monopoly capital sector which are passed on to the competitive sector), and the promotion of monopoly capital profits at the expense of the competitive sector. This depression of the competitive sector simultaneously reduces its purchasing power and its strength as a tax base, and exacerbates the crises of both state finance and demand shortfall.

The crisis of inputs under state capitalism is further heightened by the state's promotion of the inefficiencies of large size. Most large corporations have been expanded far beyond pareto-optimal levels by government intervention to subsidize operating expenses and conceal the inefficiency cost of large-scale organization.

In addition, existing firms are forced to be even more hierarchical and authoritarian than they otherwise would be because of past actions of the state. Not only were the producing classes originally robbed of their property in the means of production, but the state has intervened on an ongoing basis to decrease the bargaining power of labor and increase the rate of exploitation. For example, consider the action of the ruling class in the '70s to break the power of organized labor, cap real wages, and shift resources from mass consumption to investment. The result was stagnant wages, increasing work loads (aka "increased productivity), and need for all sorts of internal surveillance and control mechanisms within the corporation to keep the increasingly disgruntled work force in line.

These large corporations have the internal characteristics of a planned economy. Information flow is systematically distorted up the chain of command, by each rung in the hierarchy telling the next one up what it wants to hear. And each rung of management, based on nonsensical data (not to mention absolutely no direct knowledge of the production process) sends irrational and ass-brained decisions back down the chain of command. The only thing that keeps large, hierarchical organizations going is the fact that the productive laborers on the bottom actually know something about their own jobs, and have enough sense to ignore policy and lie about it so that production can stagger along despite the interference of the bosses.

When a senior manager decides to adopt a "reform" or to "improve" the process in some way, he typically bases his decision on the glowing recommendations of senior managers in other organizations who have adopted similar policies. Of course, those senior managers have no real knowledge themselves of the actual results of the policy, because their own information is based on filtered data from below. Not only does the senior management of an organization live in an imaginary world as a result of the distorted information from below; its imaginary world is further cut off from reality by the professional culture it shares with senior management everywhere else. “…in a rigid hierarchy, nobody questions orders that seem to come from above, and those at the very top are so isolated from the actual work situation that they never see what is going on below.”¹²

The root of the problem, in all such cases, is that individual human beings can only make optimally efficient decisions when they internalize all the costs and benefits of their own decisions. In a large hierarchy, the consequences of the irrational and misinformed decisions of the parasites at the top are borne by the people at the bottom who are actually doing the work. And the people doing the work, who both know what's going on and suffer the ill effects of decisions by those who don't know what's going on, have no direct control over the decision-making.

Robert Anton Wilson described it in grand terms as the workers’ burden of nescience confronting management’s burden of omniscience:

The only thing that keeps the organizations running is the fact that the people on the bottom who know how to do the work have the good sense to ignore directives from above; that, and the fact that each organization is competing against other organizations hobbled by the same institutional culture. The "genius of our centralized bureaucracies has been," as Paul Goodman put it, "as they interlock, to form a mutually accrediting establishment of decision-makers, with common interests and a common style...."¹⁴

In fact, corporations grow to such size and internal complexity that it no longer pays even to attempt to track the costs of such internal transactions. That would be fine in a free market, where a firm as a whole internalized all its own costs and benefits. In that case, the inefficiency costs of internal complexity and lack of cost tracking would be weighed against other offsetting efficiencies, and growth would stop at the point where they cancelled out. But the matter is different when they keep growing because the state protects them from the inefficiencies of their own size. Mises pointed out that large private corporations were prone to the same problems of economic calculation as a planned economy. The larger a corporation, the more of its internal decisions are administrative rather than market transactions, and the further they are removed from actual market prices. An internal corporate planner, allocating resources administratively, relies indirectly on outside market prices as a source of information in the same way as a state planner in a state-managed economy.

In the Spanish workplaces after the revolution of 1936, unit costs were decreased drastically, and output increased. The reason was that power flowed from the bottom up, and the people making the decisions were directly accountable to the people doing the work. As a result, all the consequences of action were much more fully internalized by those making decisions.

This principle applies, not only in for-profit corporations, but in universities, charities, and other large organizations in "civil society." The New Class paradigm of "professional management" has affected the structure of all large organizations in state capitalist society. In every case, the organization is either subject to outside control by a board of trustees, or to a top-down internal management. Paul Goodman has brilliantly described this tendency, as it operates in a wide variety of organizations. Such organizations come under the domination of a professionalized management, and politically selected senior administrators with "prestige salaries." Because the organization distributes the costs and benefits of action among different people, the masses of productive workers within it are no longer motivated by the intrinsic pleasures of work. Instead, personnel must be subject to administrative compulsion or other forms of extrinsic motivation.

This is the style of organization the overwhelming majority of people work in. Most people have little or no say in their conditions or methods of work, and have no motive for doing it "well" than the need for a paycheck and the fear of being fired. Indeed, the people who evaluate the quality of their work have no clue what quality might actually consist of.

When the prestige-salaried head of a large organization retires, he is never replaced by a production worker from within the organization, who actually understands the process and might make intelligent decisions. Instead, the trustees or directors select from a wide array of resumè carpet-baggers with a history of holding senior management positions in other large organizations. The new head is someone who has thoroughly absorbed the professional culture of senior management, but has never engaged in genuinely productive work in his life.

When the personnel of an organization have no direct interest in its purpose, intrinsic motivation must be replaced by external compulsion. This passage from Ursula LeGuin's The Dispossessed is an excellent illustration:

Paul Goodman used the university to illustrate the principle. Unlike the medieval university, which was a self-organized association of scholars and students, the modern university reflects a purpose imposed from outside. As a result,

In becoming the standard form of organization in the dominant and most influential institutions of our society, the bureaucratic paradigm in industry, education and welfare effectively crowds out or preempts alternative forms of organization based on bottom-up control and decentralism. "Nobody will be able to imagine such a thing. In brief, ...the inevitability of centralism will be self-proving. A system destroys its competitors by pre-empting the means and channels, and then proves that it is the only conceivable mode of operating."¹⁹