FREE ECONOMY VS. CAPPITALISM

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80R01731R000200150066-6
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• Original Classification: K
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: June 12, 2012
• Sequence Number: 66
• Publication Date: April 30, 1959
• Content Type: LETTER

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FREE ECONOMY VS. CAPITALISM
Economists are seeking through studies of history,
events, and statistics to arrive at an accurate knowledge
of how our economic system operates, that is, of its
mechanics. This knowledge, they assume, will show what
the system can deliver in terms of production, employ-
ment, stable dollar, etc. Despite the growing complete-
ness and accuracy of statistics, we have not arrived at
this knowledge. This failure is evident from the varied
explanations offered for the causes of our undesirable
economic conditions, unemployment, inflation, etc., and
the many, often conflicting plans offered for their
solution. This variety of explanations and solutions is
to be expected when each economist's interpretation is
influenced by his personal experiences and self-interest.
The present state of economic knowledge offers no ac-
cepted basis for determining the contribution of each
individual to production, and the effect of his activities
on the economy. Lacking such basis, each individual's
compensation has necessarily been left to his personal
self-interest. Bankers, businessmen, farmers, and workers
have sought to obtain through their own and their or-
ganizations' efforts the maximum interest rates, prices,
subsidies, and wages regardless of their respective con-
tributions to production. To this end they have resorted
to political pressure. Their compensations 'are justified
on the grounds that under our free economy, individuals
are entitled to all they can legally secure.
All our undesirable economic conditions-unemploy-
ment, unjust compensations, inflation, etc.-result from
our failure to arrive at a sound basis for economic
measures. This basis, contrary to the assumption of
economists, is not the mechanics of the economic system.
While the mechanics of the system show the mathe-
matical relationships among the various price factors
entering into its operation, for example between wage
rates and operating profits, they do not provide the basis
for arriving at just wages and profits. An equation con-
taining every price factor that enters into the operation
of the economic system is derived in Economics Is An
Exact Science by Jerome Levy (New Economic Library,
New York, 1943, 500 pages). It is an accurate expres-
sion of the mechanics of the system which economists
are seeking to arrive at through studies of statistics.
Fortunately the capitalist system provides such a basis.
It is a self-evident truth that our economic system,
like all things, will not operate as well as it can and
should unless each of its component elements does its
specific job correctly. We shall define the functions of
these elements and outline what constitutes their correct
operation.
1. The function of SELF-INTEREST is to motivate the
individual to work and accept risks in order to secure
an income.
The correct operation of self-interest requires that
effort and risk be the sole justifications for income. To
the extent that income is obtained without effort and
risk, production and employment will decline.
The function of self-interest also requires that the
individual be assured the opportunity to work and accept
risks. If jobs are limited or arbitrarily restricted, if the
individual who is willing to invest is not assured oppor-
tunities for commensurate compensation and protection
against unjustified limitations on his activities, the effi-
ciency of self-interest will be lowered.
2. The function of the WORKER is to produce goods
by physical and mental effort.
Since effort is the worker's sole contribution to pro-
duction, the function of the worker requires that he be
paid a wage that accurately measures his effort. (The
individual can, of course, be both a worker and an
investor.)
3. The function of the INVESTOR is to assume the
risks involved in the production of goods. His corollary
function is to produce desired goods efficiently.
Investors include individuals and organizations that
lend money to concerns to be used in the production
of goods. While their money per se assumes the same
risks as the owners' money, their degree of risk is less
as they are more or less guaranteed against loss by the
owners. Such lenders will hereafter be designated as
"guaranteed investors."
The function of the investor is inherent in the capital-
ist system. In the production of goods there are two
risks, (1) natural, that the worker's product will be
partially or totally destroyed by floods, droughts, insects,
etc. and (2) economic, that it will not bring a price in
money or goods equal to its work value, the value of the
effort devoted to its production. Socialism is the economic
system under which these risks are assumed by the state;
capitalism is the system in which these risks are assumed
by private individuals called investors.
Investors assume these productive risks in the expecta-
tion of selling the resultant product at a profit. Because
the contribution of the investor to production is measured
by his risk and ability to produce desired goods effi-
ciently, he should be assured the opportunity to secure
a profit proportionate to the amount and degree of
his risk. He should also be assured a profit based on
his risk that measures his relative ability to produce
desired products efficiently. The rates of interest received
by guaranteed investors should reflect the extent that
they are guaranteed against loss by the equity investors.
For example, if a loan is amply protected by a lien on
properly, the interest rate should accordingly be low.
4. The function of the MONEY-LENDER is to lend
money and extend credit for personal consumption and
speculation.
The money-lender's compensation like that of the
investor should be based upon his risk.
Copyright 1959 by New Economic Library
575 West End Avenue, New York 24, N. Y.
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?i. The function of the CONSUMER is to determine by
his purchases what goods shall be produced and what
organizations shall produce ,hem.
To enable the consumer to arrive at a just decision,
there must be fair competition. All concerns must pay
wages that accurately measure their employees' efforts.
The percentage of profit of each industry must be limited
to the degree of risk associated with the production of
its products and services. All products must be accurately
described and advertised. No taxes should be imposed
that penalize some products to the advantage of others.
6. The function of LAND is to contribute by its room,
fertility, resources, and location to the production of
goods.
Effort and the assumption of risks are the only con-
tributions that man makes to production. Ownership of
land per se is not a contribution. Any risks assumed by
landowners are speculative, not productive, and do not
entitle the landowner to a compensation. It follows that
income from land, which is not due to effort and risk,
belongs to society. Moreover, as land is a gift of nature,
the function of land requires that it be used for the
benefit of present and future generations.
7. The function of the MONETARY SYSTEM is to make
available the amount of sound money needed by the
economy.
Sound money requires that the dollar be redeem-
able in desired goods having a constant value in units
of effort and productive risk. Its correct functioning re-
quires an excess amount of money. Otherwise the rates of
interest secured will depend not alone upon the degrees
of risk assumed, the sole contribution of the guaranteed
investor and money-lender to production, but also upon
the supply of money. If there is a shortage of money,
they will be able to secure rates of interest in excess of
their risk, their contribution to production.
Sound money requires that every dollar issued repre-
sent the production of desired goods. It must, moreover,
have a constant value in units of effort and risk. This
re cures -that wages be based solely upon effort, using a
common constant yardstick for determining the wages
for all occupations, and that each industry's markup
be based on its degree of risk. If wages and industry's
markup rise, the dollar will produce and buy less goods.
Prices will rise accordingly.
8. The function of PROFITS is to induce private indl-
ividuals to assume the risk of production, to become
investors.
Profits are created not by individual concerns, but by
various activities of society. They are offered to investors
(or their concerns) to compete for as schools offer prizes
to their students. To fulfill its function every dollar
profit offered should induce a commensurate production
of desired goods. This production will not be obtained
if wages exceed effort and if operating percentages of
profit exceed the degrees of risk assumed. If profits are
so offered to investors and society makes the required
amount available, we will have full employment. To
illustrate: if society makes $10,000.00 available as
profits, and full employment requires industry to expend
$100,000.00, the average weighted markup of the
nation's indust ies (not their individual member con-
cerns) should Duet exceed 10%. If it is more, say 121/2%,
industry will ?n;nly expend $80,000.00 to secure the
$10,000.00 protct, with a proportionate decline in em-
ployment-(12"'% of $80,000.00 is $10,000.00).
Briefly, if indu try expends $10 for every dollar profit
secured we will have full employment, if it expends $8,
employment wiI decline accordingly.
To assure full employment and just profits, every
industry must luu- assured the opportunity of securing a
share of the a' iilable profits proportionate to its pro-
ductive risk, avd each member concern a share of its
industry's profit; that measures its relative risk and ability
to produce desired products efficiently. Thus, if an
industry's share of the nation's total profits is limited to
51/',1() of its quays itative risk, some of its member concerns
may earn more, others less-depending upon their rela-
tive ability and ,efficiency. Should an industry earn more,
say 1 % more, ach member concern will be taxed 1 %
of its quantitat 'ye risk irrespective of earnings.
9. The function of TAXES is to provide the govern-
ment with the funds needed to carry on its various
activities.
The contribus ;on of the government to the individual
is represented by his income which includes the undis-
tributed profits of his corporation. Thus, taxes should
be levied solely on income. This requirement rules out
corporation po lits taxes, property taxes, sales taxes,
excise taxes, tafiifs for income, etc.
10. The func on of GOVERNMENT is to see that every
element of the ~ ystem does its job. Under socialism the
government as runes the functions of the investor,
money-lender ar,d consumer.
The governn snt is obligated to see that all economic
measures are jr accord with the functions of the com-
ponent elements of the system. Its economic powers are
limited; it shot Id not adopt measures that violate these
functions.
It is evident from our explanation that the measures
required to assure the correct operation of each element
of the system arc in accord with the measures required
to assure the oirrect operation of the other elements.
They will assur _ full employment, just wages, profits,
and interest, dollar whose purchasing power will
increase in aco,rdance with our technological advances
and more effici, tit business methods. They will appreci-
ably increase th, use of the latest equipment and business
methods. Finally, they will protect the individual from
the losses andiirdignities he now suffers under our free
economy. The unjust compensations and undesirable
activities that haracterize our free economy will be
eliminated. By limiting the income of the individual to
his efforts and productive risks and emphasizing the
need for effici+ icy, the required measures will assure
a far greater onual increase in production than we
have ever had.
JEROME Levy
S. JAY Lavv
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WILL CAPITALISM SURVIVE?
The United States and the Soviet Union are engaged in a struggle for world supremacy.
Barring a war the outcome will depend to a great extent upon their respective productivity. A
socialist country operating at its system's maximum theoretical efficiency will have the following
advantages over the United States based upon the way our economic system is now functioning.
1. There will be no featherbedding and. standby employees.
2. There will be no stoppage of production arising from strikes, picketing, slow-downs, boy-
cotts, and lockouts.
3. There will be no interference with management's right to produce as efficiently as it can.
4. There will not be the inefficient, costly competition that exists among the various means of
transporting freight: railroads, trucks, barges, pipe-lines, and airlines.
5. There will be no schemes to promote sales such as trading stamps and prizes that increase
the cost of distribution.
6. There will not be the labor officials, corporation personnel, and members of mediation
boards that are now required by collective bargaining.
7. There will be no security exchanges and real estate organizations with their associated
brokers and personnel.
8. There will not be the large advertising and public relations expenditures.
9. There will not be the large entertainment expenses that enter into the cost of our private
business.
10. There will not be the lawyers and tax specialists with their associated personnel made
necessary by our private business transactions, the transfer of estates before and after
death, and labor-management disputes.
11. There will be fewer organizations to collect and invest funds for education, medical care,
pensions, security, etc. in place of the many that now exist. Many educational institutions,
foundations, unions, and private business organizations have their individual funds.
12. There will be no rent paid to private owners of land who make no contribution to pro-
duction by effort or risk.
13. There will be no excessive interest charges, excessive based upon the degree of risk assumed.
14. There will be no profits paid monopolistic public utilities where the risk associated with
their operation is assumed by the consumers of their essential services. These corporations
are now allowed by law to charge rates that will assure the return of their investment
plus a profit.
15. There will be no unemployment with its loss of production and increased overhead.
These advantages in terms of the efficient use of manpower and the reduction of industry's
overhead are great. To the extent that the Soviet Union will operate its socialist economy at max-
imum efficiency, it will have a marked competitive advantage over us. if our capitalist system is oper-
ated correctly, most of these advantages will be eliminated entirely and the others greatly minimized.
To assure the correct operation of our capitalist system, we must accept as the basis for eco-
nomic measures the self-evident truth that our economic system like all things will not operate as it
can and should unless each of its component elements does its specific job. This truism is accepted
in all fields except economics. Why?
The present basis for our economic measures is studies of history, events, and statistics which
each individual interprets in terms of personal experience and self-interest. As a result our economic
measures throughout history have represented the self-interest of our more powerful groups, despite
the fact that they have violated more or less the functions of the various elements of our economic
system. These elements and their functions follow.
1. The function of self-interest is to motivate the individual to work and accept risks in order
to secure an income.
2. The function of the worker is to produce goods by physical and mental effort.
3. The function of the investor is to assume the risks associated with the production of goods.
His corollary function is to produce desired goods efficiently. Investors include the indi-
viduals and organizations that lend money to concerns engaged in the production of goods.
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Copyright 1959 by New Economic Library
575 West End Avenue, New York 24, N. Y.
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4. The function of the money-lender is to lend money, or extend credit for non-productive
purposes, personal consumption, and speculation.
5. The function of the consumer is to determine by his purchases what goods shall be produced
and what organizations shall produce them.
6. The function of land is to contribute by its room, fertility, resources, and location to the
production of goods.
7. The function of the monetary system is to make the amount of sound money available
that is needed by business and consumers. Sound money requires a dollar of constant pur-
chasing power in units of effort.
8. The function of profits is to induce private individuals to accept the risks of production,
to become investors.
9. The function of taxes is to provide the government with the funds necessary to carry on
its various activities.
10. The function of government is to see that every element of the system does its job
correctly.
The measures to assure the correct operation of each element will assure full employment,
compensations based upon the individual's respective contributions to production, an ever higher
standard of living, and greater individual freedom than we now have- -especially in economic activities.
Capitalism even as inefficiently operated in the United States has an important advantage over
socialism. Unlike socialism it is basically the expression of the individual's desire to produce and
live as he chooses, based upon his personal qualifications and preferences. Translated in terms of
hourly output per worker, these freedoms have made us the most productive nation in history. They
are, however, being curtailed by our flagrant violations of the economic rights of the individual.
These rights follow.
1. The individual has the right to work or not to work, invest or save, as he sees fit.
2. As worker he is entitled to the opportunity of a job, equal opportunity with other
workers to secure a job based upon his qualifications, a wage that measures his efforts,
and good working conditions.
3. As investor he is entitled to an opportunity but not guarantee of profit proportionate
to the risk he assumes in the production of goods and the assurance of a profit based
upon this risk that measures his relative ability to produce desired goods efficiently. He
is entitled to the opportunity to produce as efficiently as he can. (As guaranteed inves-
tor, money-lender to industry, he is entitled to a rate of interest that measures his
degree of risk as determined by free competition).
4. As consumer he has the right to buy any product he desires (provided that its pur-
chase will not harm others) without being penalized for his choice, at a price that does
not reflect unnecessary inefficiency by industry and excessive payments to those who
have contributed to its production.
5. The individual workers, investors, and consumers have the right to associate with mem-
bers of their respective groups to gain and maintain their rights.
It is unlikely that the Soviet Union is now operating its socialist system at maximum effici-
ency. But in view of its advances in scientific fields, and its emphasis on education and production,
it can become the world's dominant industrial nation if we do not adopt the measures required for
the correct operation of our capitalist system. These measures will raise the standard of living of
our people appreciably and weaken considerably the Soviet Union's chance for world industrial
supremacy. It will be difficult, however, to have them accepted bey Cruse they will deprive powerful
groups of their present vested ability to secure excessive compensations.
According to reports on the industrial progress of the Soviet Union we have little time to act.
If we are too late, there may not be another chance in the foreseexible future. Unless our people are
willing to take an active interest in assuring the correct measures and our politicians have the
courage and the ability to lead them accordingly, Mr. Kruschev'r~ forecast may come true. These
measures are discussed in some of our other publications.
JEROME LEVY
SJAY LEVY
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-` THE CAUSES OF INFLATION
Rising Wages
If wages were business' only expenditure and
all goods were sold at cost, prices would advance
as wages rose. To illustrate, if $100 wages were
paid to produce 100 units of goods, each unit
would sell for $1.00, its labor cost. If wages
were advanced 10%, each unit would sell for
$1.10 reflecting the 10% increase in wages.
The selling price of goods, however, includes
business' markup in addition to their labor cost.
If industry maintained a constant percentage
markup, the selling price of goods would still
move proportionately to wages. To illustrate, if
industry paid $100 as wages to produce 100
unit of goods and operated at 20% profit on
cost, each unit sold would sell for $1.20. If
wages were advanced 10% raising labor costs
from $1.00 to $1.10 per unit of goods, industry
operating at 20% would sell each unit for $1.32.
This would be 10% above $1.20, its previous
selling price. The increase in selling price would
be basically due to the 10% increase in wages.
Rising Profits
Industry, however, does not maintain a con-
stant percentage markup. Let us see how prices
would be affected if wages advanced 100/-0 and
PERCENTAGE OF MARKUP OF MANUFACTURING INDUSTRIES, 1952-1957
1952
1953
1954
1955
1956
1957
(a) sales of manufacturing
industries
250.2
265.9
248.5
278.4
307.3
319.9
(b) operating profits be-
fore depreciation, de-
pletion, and profit
taxes
(c) percentage markup on
sales (b -,--a)
rise would be due to higher wages and 15% to
industry's increased markup. (If industry's orig-
inal markup were less than 20%/-0, its contribu-
tion to higher prices would be less than 15%/0.)
The table and following discussion show to
what extent industry's higher markup has been
responsible for the rise in industrial prices since
1952.
Industry's operating percentage of profit var-
ied little during the years 1952-1957. The larg-
est increase was from 11.2% in 1954 to 12.7%
in 1955. Data for 1958 are not yet available.
There will probably be a decline from 1957.
The above figures indicate that the increase in
prices since 1952 has been due almost exclu-
sively to rising wages.
Wages Caused Rising Prices, 1952.1957
The average hourly wages in manufacturing
industry increased from $1.67 in 1952 to $2.07
in 1957, 24%. Industrial wholesale prices in-
creased on the Bureau of Labor Statistics Index
from 113.2 in 1952 to 125.6 in 1957, 11%.
The increased hourly output of the worker
resulting from advanced equipment and more
efficient business methods was responsible for
limiting the price rise to 11%. The average
(a) and (b) in millions of dollars. Sources: Federal Trade Commission, Securities and Exchange Commission.
industry increased its markup 10% from 20%
to 22%/-0. In this case the wage cost of goods
would rise from $1.00 to $1.10, industry's
profit per unit of goods from $.20 to $.242
(22%'0 of $1.10), and the unit selling price from
$1.20 to $1.342. Of the $.142 increase in selling
price $.12 would be due to the 10% increase in
wages and $.022 to the 10% increase in indus-
try's markup. Percentagewise, 85% of the price
worker contributed very little, if anything, by
his efforts, to the increased output. To the con-
trary, unions in many instances have limited
individual output and placed obstacles on the
use of labor-saving equipment and methods.
It is evident from the foregoing that the over-
all increase in industrial prices since 1952 has
been due exclusively to rising wages. It follows
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575 West End Avenue, New York 24, N. Y.
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that stabilizing wages is the essential step to
stabilizing prices. Prices could be stabilized by
industry reducing its markup as wages advanced.
Since wages have advanced over 4% a year and
industry's markup has averaged 12%, industry
would operate at a large loss within a very
short time.
earn $1.00; operating at 121/ % it will expend
$8.00 to earp $1.00. In other words, a 21/200
increase in iit.dustry's markup will decrease ex-
penditures by 20% with a closely proportionate
decreased demand for labor. Industry's markup,
under fair competition, is determined by its
degree of risk -the greater the degree, the more
industry will expect for each dollar expended.
Union representatives claim that the major
cause of inflation is the excessive margins and
administered prices of large corporations. They
can hardly be expected to admit that the primary
cause is rising wages. The foregoing also shows
that the Federal Reserve Board's controls are
ineffective.
Alleged Need For Rising Wage Rates
The following are important reasons advanced
for ever increasing wages (wage rates and fringe
benefits): (1) they are necessary to raise the
standard of living of the workers and (2) they
promote employment. We shall discuss both
reasons.
In our previous illustration we found that
operating profits, assuming a constant percentage
markup, rise proportionately to wage rates. Be-
fore the 10% increase in wage rates, the work-
ers' wages were $100.00 and industry's profits
$20.00; after the increase the workers' wages
were $110.00 and industry's profits $22.00, the
same ratio in both instances, five to one. If we
base the purchasing power of the workers and
investors (their employers) on their respective
wages and operatirg profits, it follows that the
workers as a unit cannot increase their relative
purchasing power at the expense of their em-
ployers by securing higher wages.
higher wages will, however, increase the rela-
tive purchasing power of the workers and their
employers at the expense of those living on
fixed incomes or past savings (holders of life in-
surance policies; owners of U.S. Savings Bonds,
other Federal, State, and Local government
securities, and corporate bonds and notes; share-
holders in savings and loan associations; deposi-
tors in savings banks; and the beneficiaries of
private pension funds). Moreover, if all workers
do not share equitably in the wage rises, some
will benefit at the expense of others.
The second argument is that higher wages
promote employment. Industry's expenditures,
and thus employment, are dependent upon its
markup. The higher the markup, the less the
expenditures and vice versa. To illustrate, indus-
try operating at 10% will expend $10.00 to
Demands For Higher Wages
Cause Unemployment
Labor's continual demands for higher wages
increase the risk of business. They, therefore,
contribute to industry's markup and thus unem-
ployment. A concern in submitting a price on its
product for future delivery often raises its
markup to protect itself against probable in-
creased costs arising from union demands and
activities. It is logical to assume that if wages
were stabilized, competition would become keen-
er with a resultant decline in industry's markup.
A one percent decline in markup would create
five million jobs. The foregoing does not support
the contention that rising wages create employ-
ment, but the contrary.
Wages have only one function, to compensate
the worker for his contribution to production.
This contribution is measured by the physical
and mental -(forts demanded by his job. Just
wages, therefore, require a procedure that will
accurately nv=asure these efforts using a com-
mon, constant yardstick for all occupations. The
correct operation of capitalism demands such a
procedure.
In the production of goods the self-employed
worker assumes two normal risks: (1) natural,
that his product may be partially or totally
destroyed by floods, droughts, and so forth and
(2) econom4c, that he may not be able to
exchange it for others of equal. work value.
Under capitalism these risks are assumed by the
private investor. To fulfill his function the in-
vestor must pay a wage that measures the value
of the worker's work or efforts. The value of
such effort Must, therefore, be accurately de-
termined. Tho necessary procedure is explained
in other of our publications. It will appreciably
benefit over ninety per cent of our people, but
will be agaiiist the immediate interests of con-
cerns paying lower wages than their competitors
and union aicials seeking to perpetuate their
powers regardless of the welfare of the rank
and file.
JEROME LEVY
S JAY LEVY
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