Published in Journal of Post Keynesian Economics / Spring 1998, Vol. 20, No. 3, pp. 323-335
 
 

This remarkable rise in the DMP over the last half of the 20th century was due to a radical change in how manufacturing corporations operated between the start and the end of the century. At the start of the century they were engaged primarily if not solely in production. By the end of the century they were engaged primarily in a wide range of non-production activities devoted to the pursuit of monopoly power. The many changes in the nature of the firm over the century have been recognised in a variety of ways by numerous writers, and that literature will not be reviewed here. See, for example, Chandler [1977] [1990], Galbraith [1967], Nelson and Winter [1982], Marris [1974], Schumpter [1942], Simon [1976] Teece [1992] and Williamson [1985].

The excess of value added over the wages of production workers may be called the gross profit on production, and its growth rate relative to the wage bill's rises with the DMP. Its two major components are the gross profit on capital (profit gross of depreciation, interest and taxes) and the expenditures in pursuit of monopoly power. Over the years 1949 to 1993 the gross profit on capital rose at a slightly lower rate than the gross profit on production, but the profit expressed as a rate of return on capital rose more or less steadily over the 44 years. The expenditure in pursuit of monopoly power rose as a fraction of value added and of gross profit on production. A plausible explanation for the rise is that the expenditures in the pursuit of monopoly power generated a rise in monopoly power, and the rise in monopoly power supported a further rise in the expenditures in pursuit of monopoly power. This transformation in the nature of manufacturing corporations may have important consequences for the long-run development of capitalist systems.
 
 

Lerner [1944] and many other economists have recognized that monopoly power in the sale of a product rises with the ratio of its price to its marginal production cost. A firm with no monopoly power has a ratio of one. In neoclassical economic theory marginal cost is a function of output, and its measurement, particularly on the level of a firm or industry, is extremely difficult if not impossible. Perhaps that is the reason why this measure of monopoly power is now rarely if ever recognized in the literature on industrial organization. For example see Scherer and Ross [1990].

Kalecki [1954, pp 1-27] argued that manufacturing firms find it economical to organize production so as to make the cost of production a linear function of output, so that marginal cost is independent of output. The degree of monopoly the firm enjoys is then the ratio of sales or the value of shipments to its labor and material cost of production. A firm with a ratio of one has no monopoly power, in that it is unable to command a price for its products above their production cost. With no monopoly power and no profit on production, the firm would not be able to cover its fixed costs of production and the non-production costs to be discussed shortly. The firm would then go bankrupt sooner or later. Kalecki [1954] and Gordon [1985] present and discuss data on monopoly power in the manufacturing sector of the U.S. under this measure.

It may be advisable to note that our measure of monopoly power is less useful in mining and agriculture than in manufacturing. In these other industries product differentiation is quite difficult, labor and material cost of production varies over a wide range from one location to another, and expenditures in the pursuit of monopoly power other than exploration activity are unlikely to be very profitable. Consequently, the excess of value added over production cost is in large measure a rent, a return on capital that fluctuates with demand.

The Census Bureau of the Department of Commerce collects and reports the number and wages of production workers, the number and compensation of all employees, and value added for all manufacturing establishments in the United States. Value added is the value of shipments less the cost of materials and energy used in production. Hence, subtracting the cost of materials and energy from the numerator and denominator of Kalecki's measure of monopoly power results in the ratio of value added to the wages of production workers, which is the measure of monopoly power, the DMP, proposed here. A case could be made for each of the two measures of monopoly power. The Kalecki measure seems appropriate for a particular product, while our DMP has advantages for a firm or industry. In addition, the data required for the DMP has been collected and reported by the Bureau of Census for well over a century, while its data for the Kalecki measure is distorted by intra-industry shipments.

Table 1 presents for the manufacturing sector of the U.S., the wages of production workers, value added and the DMP in selected years over the period 1899 to 1994. Between 1899 and 1949 the DMP rose from 2.42 to only 2.49. It had a low of 2.31 in 1921 and a high of 2.86 in 1929, and it exhibited no evidence of any trend over the entire 50 years. The two World Wars and the Great Depression of the thirties had a restraining influence on the DMP. By contrast with the first half of the century, over the next 45 years the DMP rose more or less steadily from 2.49 in 1949 to 5.25 in 1994.

The wages in Table 1 are gross of payroll and income taxes paid by the workers, and they exclude the cost of payroll taxes and benefits paid by the employer, such as profit sharing and private health and pension plans. The census data does not report these taxes and benefits separately, and the national income accounts do not break them down between production and non-production workers. Hence, these taxes and benefits can be added to wages paid only under the assumption that the percentage of their total that is chargeable to production workers is equal to the percentage that wages is of the compensation of all employees. There are grounds for questioning such an allocation. Benefits have grown at a much higher rate than payroll taxes paid by the employer, and it is quite likely that non-production employees share more generously in the profit sharing and benefit plans. Furthermore, the employees who benefit from the payments to these funds belong to a different generation than the employees at the time the payments are made, and the future benefits that current workers will receive are not determined solely by actuarial considerations.

Nonetheless, what happens to the DMP when wages are raised to include employer paid taxes and benefits may be of some interest. Making the allocation as described earlier and assuming that there were no such payments in 1899, the DMP falls slightly from 2.42 in 1899 to 2.39 in 1949 and then it rises to 4.12 in 1994. The rise between 1949 and 1994 is reduced, but it is still quite large.

The Pursuit of Monopoly Power

An explanation for the growth in monopoly power described above is the radical change in the nature of manufacturing firms over the course of the century. At the start of the century they were engaged primarily if not solely in production. By the end of the century their primary activity had become the pursuit of monopoly power. The large modern corporation incurs the costs of a wide range of non-production activities for the purpose of maintaining and increasing its monopoly power. Hence, they may be called monopoly activities. The objective of monopoly power is to increase the margin of price over production cost for the firm's products and to increase the sale of the products at these prices. These activities include research and development for the purpose of improving existing products, discovering new products and reducing production costs. They include selling and advertising to increase sales and the mark up of price over production costs. They include labor relations to persuade or intimidate workers to produce more or accept lower wages. They include political contributions, lobbying and corruption of government officials in order to obtain natural resources on favourable terms and other favours of government. They include the employment of lawyers, accountants and financiers to avoid and evade taxes and to influence tax legislation. I could go on. These activities may be harmless apart from their cost and their consequences for the distribution of income. They may be beneficial to the degree that productivity is raised, or they may be malignant in their consequences for society. Regardless, what they all have in common is the pursuit of the profits to be gained from monopoly power. Such corporate behaviour and its consequences are described in greater detail in Korten [1995] Barnet and Cavanagh [1994] and Harrison [1993].

The importance of these monopoly activities is illustrated quite dramatically by looking at the financial statements of Microsoft, a leading high technology company. In 1995, it had sales revenue of $5,937 million, while the labor and material cost of producing the products sold was only $877 million. The cost of research and development was somewhat less at $860 million, while sales and marketing expenses were more than twice as large at $1,895 million. General and administration expenses came to $267 million, and income before deducting income taxes was $2,038 million. Notice that the labor and material cost of producing the output sold during the year was only 15% of the value of the goods sold, while the expenditures to maintain and increase its monopoly power came to 51% of sales revenue, and profits amounted to 34% of sales revenue. The profit of over $2 billion was earned with an investment in inventory, equipment and buildings of only $1.2 billion. The market value of Microsoft's common stock was over $50 billion, reflecting the extraordinary growth opportunities created by its monopoly power. Microsoft is only a somewhat extreme example of the costs incurred and the profits generated in the pursuit of monopoly power by the large modern corporation. In some respects a more extreme example of the corporate transformation that is taking place is Nike, a corporation that subcontracts production and engages solely in the pursuit of monopoly power. See Barnet and Cavanagh, [1994, pp 325-29].
 
 

In our theory of monopoly power it is acquired at a cost. Hence, evidence on the increased importance of the pursuit of monopoly power in the activities of manufacturing corporations is obtained by looking at what happens to the components of gross profits on production, that is the excess of value added over the wages of production workers. Its major components are the compensation of non-production workers, the expenditure on purchased services, gross profit on capital, and the payroll taxes and employee benefits paid by the employer.

Production workers are defined as follows in the Annual Survey of Manufactures

[1995, p. A-1]:

Table 2 presents the compensation of the two classes of employees, their numbers and their compensation rates over the years 1899 to 1994. Salaries rose faster than wages over the entire 95 years, but the difference in their growth rates rose from an annual rate of 1.2% over the years 1899 to 1949 to an annual rate of 2.1% over the years 1949 to 1994.

The number of production workers rose at an annual rate of 1.8% over the period 1899 to 1949, while the figure for monopoly workers was 4.0%, more than twice as high. Over the years 1949 to 1994 there was no growth in the employment of production workers, while the growth rate for monopoly workers was close to 2%. Actually, the employment of production workers peaked in 1969, remained flat until 1979 and it fell by 18% since then. Monopoly workers peaked in 1980 and their employment has remained flat since then. The movement of manufacturing activity abroad contributed to the failure of production employment to rise over the 45 years, but that did not prevent the relative rise in monopoly employment.

The comparative compensation rates for the two classes of employees are most interesting. Over the years 1899 to 1949 the wage rate rose more rapidly than the salary rate, 3.7% versus 2.7%, notwithstanding the higher growth rate in the employment of monopoly workers.. In contrast, over the 1949 to 1994 period, the salary rate rose at a slightly higher rate, 5.2% versus 4.9%. The reversal took place after 1949, and over the 15 years 1979 to 1994, the spread between the two compensation rates widened to 5.1% versus 4.4%.

The data of Table 2 illustrate the rising importance of expenditures in the pursuit of monopoly power relative to expenditures on production over the entire century and particularly the last half. The data is only illustrative, because the employment of monopoly workers is only one of the distributions of gross profits on production. Table 3 presents the distributions of gross profit on production that we could identify and their sum for the years 1949, 1964, 1979 and 1993. Data for purchased services and profit on capital were obtained from the source cited in Gullickson [1995] and 1993 is the last year for which these data were provided.

Salaries of monopoly workers rose over the period 1949 -1993 and in its sub-periods at about the same rates as gross profit on production, but the latter rose at a much higher rate than value added. Purchased services consist primarily of advertising, communication, contract research, financial advice and other advisory services that are employed in the pursuit of monopoly power. They rose at an even higher rate than the salaries of monopoly workers. The high growth rates for these two shares in value added reveal the rising importance of expenditures in the pursuit of monopoly power over the last half of the 20th century.

Gross profit on capital is earnings before deducting depreciation, interest and taxes on income. It rose at about the same rate as value added over the entire period, which would suggest that unlike production workers, capital has not been squeezed by the rising share in value added of expenditures on monopoly power. However, an important statistic here is the rate of return on capital. The Bureau of Labor Statistics calculates the net cost of the capital stock employed in manufacturing, including land and inventory as well as structures and equipment, in 1987 dollars. With the profit figures in Table 3 also converted to 1987 dollars, the rate of profit on capital rose over the years form 12.1% in 1949 to 12.7% in 1964, 13.7% in 1979 and 15.9% in 1993. The rise in the expenditures in pursuit of monopoly power have not been at the expense of profitability on capital.

Expenditures on employee benefits, both payroll taxes and private benefit plans, were practically non-existent as late as 1949. Their history reflects both the welfare state and the private response to it. Hence, they rose at a very high rate from 1949 to 1979. The growth rate was very modest from 1979 to 1993, because they had reached maturity or because the welfare state was in retreat. Private arrangements for economic security have increased sharply relative to social arrangement since the sixties.
 
 

The previous pages have established that over the last half-century, monopoly power and the expenditures made in the pursuit of monopoly power have both increased sharply in the manufacturing sector of the United States. The rise in expenditures devoted to the pursuit of monopoly power increased monopoly power, and that increase financed the further increase in expenditures made in pursuit of monopoly power, and so on. The long-run consequences of this process depend upon a number of things that have not been considered here.

If the expenditures in the pursuit of monopoly power were devoted solely to technological progress, and if growth were simply a consequence of success in this respect, the expenditures would be no cause for concern. It is clear, however, that the modern large corporation operates under a growth imperative. With their shares selling at four, five or more times book value, and with dividend yields at 2.5% or less, the expectation of continued growth is a large component of current price, and policy with regard to growth is not open to choice. Failure to maintain the expectation of continued growth results in a sharp drop in price, the wrath of the mutual and pension funds that control the corporation, and at best a radical reorganization of its operations.

What is the extent to which the pursuit of monopoly power results in productivity growth, and to what extent does it result in redistribution of income? In neoclassical theory the only activity in which the firm engages is production, so that the source of productivity growth is exogenous to the firm. Endogenous growth theory tries to identify the sources of productivity growth. See Romer [1994] and Solow [1994]. According to Schumpeter [1942] management's search for monopoly profits is the immediate source of productivity growth, and the latter is the source of the enormous growth in prosperity enjoyed by all sectors of society in the leading capitalist countries over the prior two centuries. It would, therefore, be of great interest to learn how the increased output due to productivity growth in the manufacturing sector is shared among its stakeholders.

The evidence we have on the above question is not very encouraging. Production employment in manufacturing has fallen sharply, absolutely and relative to non-production employment, and the inequality in compensation between production and non-production workers has increased. These developments in manufacturing cannot be explained entirely if at all by the transfer of manufacturing activity abroad. Over the last 15 or more years, there has been a striking rise in income inequality for the economy as a whole, and the rise in the official unemployment rate has been restrained more by reduced participation in the labor force than by the rise in GNP. See Mishel and Berstein [1993], Bok [1993], Danziger and Gottschalk [1995] and Gordon [1996].

Radical changes are taking place in the not-for-profit sectors of the economy. Hospitals are being privatized, doctors are falling under the control of private corporations and the calls for the privatization of other sectors such as education and prisons are growing louder. These developments may reflect the competitive process described in the neoclassical or the Schumpeterian theories of a competitive capitalist system. Alternatively, they may reflect the ingenuity of the modern corporation in finding new ways to acquire and perpetuate the profits of monopoly power.

Among the most striking developments of the last 15 or more years are the reversal in the rise of the welfare state, and the use of the word reform to describe the contraction of government services, the privatization of hitherto public services, the contraction of social security and the expansion of private arrangements for economic security. There is no greater threat to profits than government, and there is no greater source of increased profits than increased control of government. Consequently, product advertising is not the only activity engaged in by corporations to influence what people think. Corporations and their owners also engage in institutional advertising, donations to political parties, the financing of public service foundations, ownership of the media, and a wide range of other activities in order to acquire the profits from monopoly power. When all of these and the more conventional instruments of monopoly power fail, there is always the alternative of taking one's capital abroad.

The above developments may be the corrective action needed to curb the excesses in the rise of the welfare state. In that event, the reversal in that rise and the expansion of "economic reforms" will come to an end, and an equilibrium will be reached. On the other hand, these developments may reflect the remarkable resources that modern corporations, individually and collectively, can marshal in the pursuit of monopoly power, so that nothing in the system can stand in the way of its continued growth. The democratic process may prove inadequate to the task of restraining a long-run tendency for inequality, unemployment and insecurity to rise in the wealthy capitalist countries and a far worse scenario for the poor ones.
 
 
 
 

Table 1: Wages of Production Workers Value Added and Degree of Monopoly in the United States Manufacturing Sectors, 1899-1994
Year or Period	Wages of Production Workersa (Billion $)	Value Addedb (Billion $)	Degree of Monopoly Powerc
1994 1979 1964 1949 1939 1919 1899	304.3 192.9 65.8 30.3 9.0 9.7 1.9	1,598.5 747.5 206.2 75.4 24.5 23.8 4.6	5.25 3.88 3.13 2.49 2.72 2.45 2.42

 
 

Source: Annual Survey of Manufactures, 1977 and 1995.
 
 
 
 

a. Wages of production workers are gross of payroll and income taxes paid by employees, and they do not include payroll taxes and employee benefits paid by employer.

b. Value added is value of shipments minus cost of energy and materials purchased from other firms that are used in production.

c. Degree of monopoly is the ratio of value added to the wages of production workers.
 
 

Table 2: Compensation, Number and Compensation Rate for Production and Monopoly Workers in the United States Manufacturing Sectors, 1899-1994
 
 

Compensation Number Rate of Pay

(Billion $) (Thousands) (Thousands)
 

Year or PeriodMonopoly Workers	Production Workers		Monopoly Workers
1994 1979 1964 1949 1939 1919 1899	304.3 192.9 65.8 30.3 9.0 9.7 1.9	289.8 136.0 32.9 11.2 3.7 2.7 0.4		11,941 14,538 12,403 11,016 7,808 8,465 4,502		6,403 6,502 4,083 2,551 1,719 1,372 348		25.48 13.27 5.31 2.75 1.15 1.15 0.42		45.26 20.92 8.06 4.39 2.15 1.97 1.15

 
 
 
 
 

1949-94 1899-1949 1979-94 1964-79 1949-64 1939-49 1919-39 1899-1919

5.1 5.5 3.0 7.2 5.2 12.1 -0.4 8.2

7.2 6.7 5.0 9.5 7.2 11.1 1.6 9.5

0.2 1.8 -1.3 1.1 0.8 3.4 -0.4 3.2

2.0  4.0 -0.1 3.1 3.1 3.9 1.1 6.9

4.9 3.7 4.4 6.1 4.4 8.7 0.0 5.0

5.2 2.7 5.1 6.4 4.0 7.1 0.4 2.7

Source: Annual Survey of Manufactures, 1977 and 1995.
 
 

Note: Monopoly workers are persons employed in manufacturing firms minus production workers. Compensation is gross of payroll and income taxes paid by employees, and it excludes the cost of payroll taxes and benefits paid by employers.
 
 

 
 
 
 
 
 
 

Year or Period	Gross Profit on Production a	Salaries of Monopoly Workers b	Purchased Services c	Gross Profit  On Capital c	Employee Benefits d
1993 1979 1964 1949	992.5 444.1 115.5 39.1	283.1 136.0 32.9 11.2	247.0 93.5 20.7 6.1	326.3 139.7 49.2 19.4	136.1 74.9 12.7 2.4

 
 
 
 
 

1949-93 1979-93 1964-79 1949-64

7.4 5.7 9.0 7.2

7.3 5.2 9.5 7.2

8.4 6.9 10.1 8.2

6.4 6.1 7.0 6.2

9.2 4.3 11.8 11.1

^a Sum of the distributions in the next four columns. It is less than value added minus wages of production workers, because the distributions of value added that we could not identify are not included in Gross Profit on Production here.
 
 

^bFrom Annual Survey of Manufactures
 
 

^cFrom Multifactor Productivity and Related Data for 2-Digit (SIC) Manufacturing Industries on Diskette, Bureau of Labor Statistics, in Gullickson (1995).
 
 

^dSum of Employer Contributions for Social Insurance and Other Labor Income in Manufacturing in the National Income and Product Accounts, various issues of the Survey of Current Business.
 
 

Annual Survey of Manufactures. 1995. United States Bureau of Census.

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