According to Stromberg and the Austrians, the chronic problem of surplus output was not a natural result of the free market, but rather of a cartelized economy. As we saw earlier, J.A. Hobson argued that "over-saving" was caused by "rents, monopoly profits, and other unearned excessive profits," and called, in proto-Keynesian fashion, for the state to step in and remedy the problem of "mal-distribution of consuming power."⁶³ Those making such arguments are commonly dismissed, on the libertarian right, as ignorant of Say's Law.

But Say's Law applies only to a free market. As Stromberg points out, a genuine maldistribution of consuming power results from the state's intervention to transfer wealth from its real producers to a politically connected ruling class. And neo-Marxists' work on over-accumulation has shown us that the evils that Keynesianism was designed to remedy, in a state capitalist economy, are quite real. The State promotes the accumulation of capital on a scale beyond which its output can be absorbed (at its cartelized prices) by private demand; and therefore capital relies on the State to dispose of this surplus.

One of the earliest to describe the the several aspects of the phenomenon was Hilferding, in Finance Capital:

All the elements are here, in rough form: the expansion of production facilities to a scale beyond what the market will support; the need to restrict output to keep up prices, conflicting with the simultaneous need to keep output high enough to utilize full capacity and keep unit costs down; the inability of the economy to absorb the full output of cartelized industry at monopoly prices.

But as Hilferding pointed out in the same passage, the natural tendency in such a situation, in the absence of entry barriers, would be for competitors to enter the market and drive down the monopoly price: "The high prices attract outsiders, who can count on low capital and labor costs, since all other prices have fallen; thus they establish a strong competitive position and begin to undersell the cartel."⁶⁵ This, Rothbard argued, is what normally happens when cartelizing ventures are not backed up by the state: they are broken either by internal defection or by new entrants. That is, in fact, what Gabriel Kolko described as actually happening to the trust movement at the turn of the century. Therefore, organized capital depends on the state to enforce an artificial monopoly on the domestic market.

And, Hilferding continued, cartelized industry is forced to dispose of the surplus product, which will not sell domestically at the monopoly price, by dumping it on foreign markets.

Further, anticipating the various Marxist theories of imperialism, Hilferding argued that this imperative of disposing of surplus product abroad requires the activist state to seek foreign markets on favorable terms for domestic capital. One such state policy is the promotion or granting of loans abroad, either by direct state loans, or by banking policies that centralize the banking system and thus facilitate the accumulation of large sums of capital for foreign loans. Such loans could be used to increase a country's purchasing power and increase its imports; but more importantly, they could be used for building transportation and power infrastructure that Western capital requires for building production facilities in an underdeveloped country.⁶⁸ Of course, such direct foreign capital investment in a country, unlike mere trade, required more direct political influence over the country's internal affairs to protect the investments from expropriation and labor unrest.⁶⁹

The state could also intervene to create a wage-labor force in backward countries by expropriating land, thus recreating the process of primitive accumulation in the West. In addition, heavy taxation could be used to force a peasantry into the money economy, by making them work (or work more) in the capitalist job market to raise tax-money. This was a common pattern, Hilferding wrote: in the Third World as in the West earlier, " when capital's need for expansion meets obstacles that could only be overcome much too slowly and gradually by purely economic means, it has recourse to the power of the state and uses it for forcible expropriation in order to create the required free wage proletariat."⁷⁰

Generally speaking, Third World countries provide numerous advantages for capital seeking a higher rate of return:

In Imperialism, Bukharin returned repeatedly to the theme of government policy in promoting monopoly, thorough such devices as tariffs, state loans, etc. In a passage on the effects of foreign loans, Bukharin anticipated today's use of foreign aid and World Bank/IMF credit as coercive weapons on behalf of American corporations:

As Kwame Nkrumah jibed, so-called "foreign aid" under neocolonialism would have been called foreign investment in the days of old-style colonialism.⁷³

Schumpeter, the theorist upon whom Stromberg relies most heavily, described the system as "export-dependent monopoly capitalism":

This process of "dumping" illustrated "Carnegie's law of surplus": "every manufacturer preferred to lose one dollar by running full and holding markets by selling at lower prices than to lose two dollars by running less than full or close down and run the risk of losing markets...."⁷⁵

In describing the advantages of colonies for monopoly capitalism, Schumpeter essentially refuted his own Comtean argument (discussed below in this article) for imperialism's "alien" status in relation to capitalism.

Stromberg explained: "For American manufacturers to achieve available economies of scale, they had to produce far more of their products than could be sold in the U.S."⁷⁷

One point Stromberg does not adequately address here is that economy of scale, at least in terms of internal production costs, requires only thorough utilization of existing facilities. But the size of the facilities was in itself the result of state capitalist policies. The fact that domestic demand was not enough to support the output needed to reach such economies of scale reflects the fact that the scale of production was too large. And this, in turn, was the result of state policies that encouraged gigantism and overinvestment.

Productive economy of scale is "unlimited" only when the state absorbs the diseconomies of large scale production. Overall economies of scale reflect a package of costs. And those costs are themselves influenced by direct and indirect subsidies that distort price as an accurate signal of the actual cost of providing a service. If the state had not allowed big business to externalize many of its operating costs (especially long-distance shipping) on the public through subsidies (especially subsidized transportation), economy of scale would have been reached at a much lower level of production. The state's subsidies have the effect of artificially shifting the economy of scale upward to higher levels of output than a free market can support. State capitalism enables corporate interests to control elements of the total cost package through political means; but the result is new imbalances, which in turn require further state intervention.

In fairness, Schumpeter touched on this issue in passing, as did Stromberg in quoting him: "a firm which could not survive in the absence of empire was 'expanded beyond economically justifiable limits'."⁷⁸ As this quote indicates, Schumpeter dealt, though inadequately, with the extent to which corporate size was the effect of state intervention. He agreed with Rothbard that cartelization or monopoly, as such, could not exist without the state.

Still, Stromberg greatly overestimates the advantages of large-scale production in a free market. In all but a few forms of production, peak economy of scale is reached at relatively low levels of output. In agriculture, for instance, a USDA study found in 1973 that economy of scale was maximized on a fully-mechanized one-man farm.⁸⁰

Walter Adams and James Brock, two specialists in economy of scale, cited a number of studies showing that "optimum plant sizes tend to be quite small relative to the national market." According to one study, even taking into account the efficiencies of firm size, market shares of the top three firms in nine of twelve industries exceeded maximum efficiency by a factor of anywhere from two to ten. But productive economy of scale was a function primarily of plant size, not the size of multi-plant firms. Any efficiencies of bargaining power provided by large firm size were offset by increased administrative and control costs, and other diseconomies.⁸¹ In fact, Seymor Melman argued that the increased administrative costs of multi-unit and multi-product firms are astronomical. They are prone to many of the same inefficiencies--falsified data from below, and "elaborate, formal systems of control, with accompanying police systems--as state-run industry in the communist countries.⁸²

Describing the inefficiencies of large firms, Kenneth Boulding echoed Melman, but in more colorful language:

In the most capital-intensive industry, automobiles, peak economy of scale was achieved at a level of production equivalent to 3-6% of market share.⁸⁴ And even this level of output is required only because annual model changes (which arguably wouldn't pay for themselves without state capitalist subsidies) require an auto plant to wear out the dies for a run of production in a single year. Otherwise, peak economy of scale would be reached in a plant with an output of only 60,000 per year.⁸⁵

In any case, these figures relate only to productive economy of scale. Increased distribution costs begin to offset increased economies of production, according to Borsodi's law, long before peak productive economy of scale is reached. According to an F.M. Scherer study cited by Adams and Brock, a plant producing at one-third the maximum efficiency level of output would experience only a 5% increase in unit costs.⁸⁶ This is more than offset by reduced shipping costs for a smaller market.

The point of this digression is that the size of existing firms reflects the role of the state in subsidizing increased size by underwriting the inefficiencies of corporate gigantism--as Rothbard pointed out, the ways "our corporate state uses the coercive taxing power either to accumulate corporate capital or to lower corporate costs."⁸⁷ A genuine free market economy would be vastly less centralized, with production primarily for local markets.

Besides the problem of surplus output, the state capitalist economy produces a second problem: that of surplus capital. Not only does monopoly pricing limit domestic demand, and thus restrain the opportunities for expansion at home; but non-cartelized industry is seriously disadvantaged as a source of returns on capital, and therefore opportunities for profitable investment are limited outside the cartelized sectors.

According to Hilferding, "while the drive to increase production is very strong in the cartelized industries, high cartel prices preclude any growh of the domestic market, so that expansion abroad offers the best chance of meeting the need to increase output."⁸⁸ Bukharin later described the capital surplus as a direct result of cartelization, in quite similar language. In Chapter VII of Imperialism and World Economy, he wrote:

Monopoly capital theorists have made worthwhile contributions to the issue of capital and output surpluses. For example, the surplus product of cartelized industry drastically increases the importance of the "sales effort"--what Galbraith called "specific demand management" to dispose of the product.⁹⁰ This underscores the importance of the state in the problem of surplus disposal: without state intervention to create the national infrastructure of mass media and its attendant mass advertising markets, specific demand management would have been impossible.

One issue Stromberg neglects is the internal role of the state in directly disposing of the surplus. The role of the State's purchases in absorbing surplus output, through both military and domestic spending, was a key part of Baran and Sweezy's "monopoly capitalism" model. Its large "defense" and other expenditures provide a guaranteed internal market for surplus output analogous to that provided by state-guaranteed foreign markets. By providing such an internal market, the state increases the percentage of production capacity that can be used on a consistent basis.⁹¹

Paul Mattick elaborated on this theme in a 1956 article. The overbuilt corporate economy, he wrote, ran up against the problem that "[p]rivate capital formation... finds its limitation in diminishing market-demand." The State had to absorb part of the surplus output; but it had to do so without competing with corporations in the private market. Instead, "[g]overnment-induced production is channeled into non-market fields--the production of non-competitive public-works, armaments, superfluities and waste.⁹² As a necessary result of this state of affairs,

Such consumption of output, while not always directly profitable to private industry, serves a function analogous to foreign "dumping" below cost, in enabling the corporate economy to achieve economies of large-scale production at levels of output beyond the ability of private consumers to absorb.

It's interesting to consider how many segments of the economy have a guaranteed market for their output, or a "conscript clientele" in place of willing consumers. The "military-industrial complex" is well known. But how about the state's education and penal systems? How about the automobile-trucking-highway complex, or the civil aviation complex? Foreign surplus disposal ("export dependant monopoly capitalism") and domestic surplus disposal (government purchases) are different forms of the same phenomenon.

Marx described major new forms of industry as countervailing influences against the falling rate of profit. Baran and Sweezy, likewise, considered "epoch-making inventions" as partial counterbalances to the ever-increasing surplus. Their chief example of such a phenomenon was the rise of the automobile industry in the 1920s, which (along with the highway program) was to define the American economy for most of the mid-20th century.⁹⁴ The high tech boom of the 1990s was a similarly revolutionary event. It is revealing to consider the extent to which both the automobile and computer industries, far more than most industries, were direct products of state capitalism. More recently, in the Bush administration, to consider only one industry (pharmaceuticals), two major policy initiatives benefit it by providing state-funded outlets for its production: the so-called "prescription drug benefit," and the provision of AIDS drugs to destitute African countries. In another industry, Bush's R&D funding for hydrogen fuel engines is enabling the automobile companies to develop the successor technology to the gasoline engine (with patents included) at public expense; this not only subsidizes their transition to viability in a post-fossil fuel world, but gives them monopoly control over the successor technology. "Creative destruction" is our middle name.