Ques 1. Elucidate Paul Baran’s framework to evaluate monopoly capitalism.

Do you think he
preferred competitive capitalism to monopoly capitalism?

According to Baran “The rate of growth of any country at a given point in time depends not only on the
volume of the economic surplus or the size of the savings but also depends crucially on the mode of
utilization of economic surplus.”

Baran believes that only a quantitative measure of growth is not a good way to judge any society. We
need to focus more on the question of development that the content of growth depends not only on the
size of accumulation of the economic surplus but also on what use the surplus is being put to, the
direction of investment and for whom it is being done.

He compared how the classical economists who were fully aware of these propositions saw the problem
being solved mostly by competitive capitalism and whether the monopoly capitalism could meet the
problem of accumulation. He gave four conditions for comparison on the fulfillment of the above
proposition in both the competitive capitalism and monopoly capitalism. The 4 conditions are listed as
below:

1) There should be full utilization of available productive resources for maximum expansion of
output.
2) Of the maximum possible output a large share should be of economic surplus an d not be
consumed by the capitalist.
3) Of the large economic surplus a large part should be accumulated.

Now these are the supply sides conditions. Baran however also gives a fourth demand condition which
needs to be met

4) Of the accumulated surplus, if a large part needs to be invested then there must be sufficient
profitable investment outlets as well.

Baran then gives the following arguments whether the above conditions are met in competitive
capitalism:

A) Condition of Full Utilization:If an economy is under competitive capitalism where the main
motive is cost reduction and profit maximization then the capitalist would make sure that the
maximum productive resources are put to maximum output.
B) Condition of Large Surplus: Baran says this condition will be met in competitive capitalism
because:
1) The Reserve army of labour and competition among workers would prevent the wages from
rising and prevent it from eating the product. Wages would be near subsistence level.
2) The unproductive labour which does not contribute to the economy but feeds on the
economic surplus will be reduced.
3) State should not be extravagant state and should be prevented from consuming the surplus.
C) Condition of Accumulaion:
[1)] “Modest consumption habit and frugality” of small capitalist whoo unlike feudal lords
believe in saving more than consuming.
 1)[2)] “Capitalist Desire” would encourage them to accumulate more as the need and desire of
power is greater than their need of consumption.
2)[3)] “Competition for Cost Reduction” would force capitalist to undertake technological
progress than consume

D) Demand Condition:Now that we have the accumulated surplus for investment in the M-C-M
circuit, it will only be undertaken when there is a profitable market and appropriate investment
outlets. The need for investment is high for social benefit even though the capitalist has the
negative right to say no to investments and hold on to his wealth and accumulation if he cannot
see any profitable ventures. However, we see that in the classical age of capitalism no capitalist
really bothered about the market because with colonization and a lack of industrialization in
anywhere but England, new markets were opening up everywhere for the sale of England’s
produce. Market demand was not their worry. The small corporations could find their own
markets in the colonies and elsewhere to off-load their produce. The only worry as Ricardo had
pointed out was that with industrialization setting in, if agricultural productivity lagged then
there would be a stagnation in food grain production which would then lead to cheap food
grains being imported from outside. Moreover, with the progress in capitalism, industrial
working class would increase, more food would be required in the cities, food will become more
expensive and wage-costs would go up. And this would then ultimately choke profits.

Baran now discusses whether these conditions are met in the monopoly capitalism or not and how they
are met. Now we see that even due to excess capacity in monopoly capitalism there is no full utilization
of resources but still a monopoly produces a much larger volume of output than competitive capitalism.
Now out of this large output maximum does goes to economic surplus but not like in the case of
competitive capitalism. This is because the wages are no longer at the subsistence level. There are trade
unions and the workers have more bargaining power. So, we now see that the surplus is being created
not through cost competition but due to profit redistribution. Earlier we saw that in transition to
capitalism there was distribution of assets and wealth from the feudal lords the capitalists. However
now there is distribution from small capitalists to big monopoly capitalists.And it is through this shift of
profits from numerous small capitalists to big monopoly capitalists that creates the economic surplus.
Thus a large part of assets and profits are also now concentrated in the hands of monopoly capitalists.
But although this economic surplus under a monopoly is larger in absolute terms than under
competitive capitalism it is still significantly lower than the largest possible surplus.

The third condition of accumulation of economic surplus is also met through this distributional trick
from small to big capitalist.

These were the supply which are met in the monopoly capitalism. However Baran points out that the
real problem is the demand condition of finding profitable markets for the large economic surplus
generated and accumulated. According to Baran, it is in way under consumption, the problem of finding
markets in comparison of the volume of surplus. This is because of several constraints:

1) The world is not expanding and the global markets are not opening up at the same rate as in 18 th
century as capitalism has already spread and scope of new markets is less.
2) The size of surplus is very big and hence needs many more potential investments outlets.
 3) The world is now divided among many monopoly companies and one monopoly firm would
want to maintain distance from others, draw lines and agree upon certain conditions such as
territorial agreements because they are conscious of the fact that if they try to take on another
monopoly firm the other could do the same.
4) Moreover since the monopoly is also a price maker it is not required to produce to the
last point in order to expand output. It has an incentive to not produce the maximum
level of output and manipulate it.

Even though Baran shows that in competitive capitalism all four conditions are being met while
in monopoly capitalism, there is a demand problem, it however does not mean that Baran was
in favour of competitive capitalism. In fact he is explicit about monopoly being a productively
superior system and is at a higher stage in evolutionary terms compared to competitive
capitalism.

However this according to him does not imply that MC is a rational system on its own as he
points out.Baran, almost scorning the academic circles for their support of perfect competition
despite the technological advances such as elevators and airplanes made by the monopoly
capitalists, says:
“Whereas the productive superiority of the large scale enterprise was in front of everybody’s
eyes, beyond any doubt the conventional academic circles were concerned with optimal
equilibrium conditions and how monopoly depresses consumer surplus.” ………… “the
proliferation of monopoly rather than initiating a concern on the mode of utilization of the
surplus only engaged to get a dismayed reaction from the academic circles, preoccupied with
the idea of petty business lamenting the loss of competitive capitalism”

In spite of having very different opinion about the normativity of monopoly capitalism, Baran
like Schumpeter thought MC is definitely superior to competitive capitalism.The nature of
industrial organization received attention only through the lens of neo-classical micro-
economics where it is just a dismayed reaction and a failure. Coming back to his view that the
demand problem in monopoly capitalism is an internal systemic problem he says that there is
a) a ‘continuous inadequacy of channels of private investment in relation to the volume of
investible economic surplus generated’. With the end in the continuous entry and exit of
perfectly competitive firms there is no longer a wasteful utilization of surplus. The
monopoly through its “Rationality” is actually saving much more. But while monopoly
capitalism is itself generating a huge amount of economic surplus it is the lack of market
and the lack of profitable investment opportunities that pose a problem.

b) There is a range of technological possibilities of investment opportunities which maybe

socially urgent and beneficial and have the capacity to absorb these investments. Social
needs exist.
What then in the structure of capitalism do not make these projects worth while? According to
Baran there is a tendency of under-consumption in the post Second World War age monopoly
phase of capitalism. That they have the surplus to produce, but they do not realize the potential
demand, do not produce and are thus not able to effectively invest the large economic surplus.
Moreover according to Baran it is the whole structure of the system of monopoly capitalism
where profits are concentrated in the hands of a small number of capitalists which is
problematic. They will think twice today before bringing in an innovation to not disturb their
arrangements with other big competitors. Moreover the rate of expected profits of monopolies
is also much higher so they only invest the surplus in projects which give them a handsome
return. So many projects which could give moderate profits and are often undertaken by
competitive capitalists are not taken up by monopolies because the profit share is less than
usual. Moreover, there are also entry barriers and territory barriers to prevent new firms from
coming in or expanding their size, so that monopolies still have a hold on manipulating prices.
So therefore in any given situation the volume of investment tends to be lower than the volume
of economic surplus. So there is a tendency of overproduction or under consumption.

This however is not a justification for the superiority of competitive capitalism. In fact Baran
says and also as Schumpeter points out Monopoly plays a progressive role in the transition of
capitalism from competitive to monopoly in both qualitative and quantitative sense. Theforces
of production have developed significantly as is visible from the progress of science and
technology and the level of output in the phase of monopoly capitalism. Yet monopoly
capitalism having achieved this progressive development in terms of its productive ability, is
according to Baran, now a retrogressive force because its own structure of relations of
production hinders the realization of its own potential and development in the direction of
human welfare. The relations of production after playing a collusive role are now playing a
fettering role and posing an obstacle to the real beneficial use of technology. The productive
potential of the world today with the available surplus, resources and technology is so high that
they can very well solve the basic problems of humanity of hunger and poverty. Yet this is not
done because it is not profitable enough for the monopoly capitalists. It is not a productive or
technological problem as Schumpeter has also pointed out. It is a problem of the relations of
production and who has control over the surplus and technology. So while Baran critiques the
monopoly phase of capitalism he does not say competitive capitalism is better. Quoting Lenin
he says that while monopoly capitalism is a progressive transition from competitive
competition, but just because it is superior does not mean that monopoly capitalism is a
rational utilization of the productive potential of the society or the best mode of utilization of
surplus.

Very good