This chapter shows how the immense surplus absorbing capacity of the state is both shaped and constrained by monopoly capitalism. Classical, neoclassical, and Marxist economics assumed full capacity and employment, and subsistence wages for workers. This meant all financing for the state would come from taxing the capitalist surplus. Capitalists took this as a powerful rationale for a minimal state. But as we will keep repeating, monopoly capitalist conditions are different. Production is not at full capacity, because the system doesn’t produce enough ‘effective demand’ for full employment or production deployment. If the state can utilize this excess productive capacity, it can create additional surplus without having to ‘encroach on the income of their citizens,’ either through direct purchases or subsidies/welfare payments. 

These ideas can be traced to Keynes in the 1930s, when the Great Depression put capitalist production/output rates at a historic low. At the time, the consensus was that the state could only create demand if it was bringing in more money than it spent. The effect of stimulus was believed to be correlated not to the magnitude of government spending, but to that of the government deficit. At the time of writing, that view was seen as incorrect. Instead, earnest economists had recognized that: 

• The impact on effective demand from government spending is determined both by the deficit size and the absolute level of government spending

• Temporary deficits only have temporary effects

• A persistent deficit will only raise effective demand if it constantly grows 

The next section is a close study of American government spending, but the book’s age can be shown by one clause from one phrase B+S use to set it up: “...since American fiscal history has not been characterized by persistent and steadily mounting deficits…”. At present (2025), this statement could not be less true. The American deficit ballooned during the Vietnam War, and has only accelerated since, due to endless imperial military spending. Keep this in mind, while we relate this 1960s analysis of prior American government spending, in relation to surplus absorption. 

Focusing on the turn of the 20th-century to the 1960s, B+S show that government spending as a percentage of gross national product (GNP) increased from 7.4% (1903) to 28.8% (1961). This trend sped up after the Great Depression, a critical low point in the monopoly capitalist system. This shows the increasing role the American state took on as demand creator and surplus absorber after the Depression. 

Two notes must be made about this trend. 

• First, the increased quantity of spending says nothing about how this money was spent. 

• Second, expanding state spending seems to occur in any expanding economic system, not just monopoly capitalism. A socialist state would (and has) expanded state spending even more rapidly and widely, to meet the needs of the people. 

So, government spending can produce effective demand, to increase overall surplus, without detracting from private sector surplus. We’ve seen previously that the private sector can’t create sufficient investment opportunities. Since the state can (in theory), both state and private sector surplus can grow in tandem. State encroachment on private surplus only occurs when the economy reaches full capacity, which it did near the end of WWII. 

A survey of corporate profits shows that they are most affected by economic depression, not high taxation or state spending; after-tax profits are steadily ~6% before and after the Great Depression, but only ~3% from 1929-1938. Increased effective demand from state spending, and the accompanying increased employment, have positive effects for both the capitalist and working classes. So increasing state spending becomes relatively assured. What remains open, is what this spending goes towards. 

B+S divide government (local, state, and federal) spending into three categories: non-defence purchases (all non-military goods and services), transfer payments (benefits, pensions, interest, subsidies, etc.), and defence (military) purchases. Comparing 1929 and 1957, non-defence purchases rose (as a % of GNP) from 7.5% to 9.2%, transfer purchases from 1.6% to 5.9%, and defence purchases from 0.7% to 10.3%. We can see ~4x and ~15x increases in transfer payments and defence purchases, respectively, accounting for ~90% of overall increased spending. The main positive government impacts we think of (healthcare, infrastructure, education, etc.) come from non-defence purchases. But spending in this area barely grew overall during this period. 

Transfer payments, including unemployment benefits, pensions for WWI veterans, etc., quadrupled relatively, showing the development of the American ‘welfare state.’ Realistically, both non-defence purchases and transfer payments should grow together to maximize a population’s welfare. What obviously stands out is the explosion of state spending on weapons and war. This fundamental restructuring of the American economy post-WWII, made a reduction/elimination of military spending liable to crater the economy (this problem is only worse in the present).  

In the political system of monopoly capitalism, bourgeois democracy, votes are the surface of political power, but money is the core. All systemic political actions require vast amounts of money, and in monopoly capitalism, money, and thus political power, come from the giant corporations. For this reason, any real mass party seizing nominal power legally would require the capitalist class to surrender their real financial power, in order to overcome capitalism’s contradictions. No ruling class has ever historically done so. 

Instead, the loyal organs of capitalist state power (army, police, intelligence agencies, etc.) would impose authoritarian rule. However, monopoly capitalist oligarchies prefer the democratic sheen of bourgeois democracy to authoritarianism, as long as it remains a viable option. They gain real legitimacy from what amounts to electoral spectacle. The ‘checks and balances’ so lauded for protecting democracy from tyranny must be recognized as obstacles to prevent the working masses from turning our theoretical democratic power into sovereign political power. Until the Great Depression, there was no pretense of the government serving the masses. The state was supposed to serve the interests of capital. 

The New Deal was the liberal, Keynesian capitalist response to the Depression. Between 1929 and 1939, non-defence purchases rose from 7.5% to 13.3% of GNP, transfer payments from 1.6% to 4.6%, and defence purchases from 0.7% to 1.4%. More than 90% of state spending went to ‘welfare.’ This ‘welfare state’ solution is what liberals still claim would solve capitalism’s contradictions. However, this spending boost looks less rosy in context. Government spending from 1929-1939 rose from $10.2B to $17.5B (~70%), but GNP fell 12.7%, and unemployment rose 14%. The New Deal was a failure, as the US economy only recovered through 1940s wartime mobilization. To reduce unemployment to 1.2% by 1944, the US government continually increased spending, to >$100B by that year. So $17.5B in non-war-time spending looks big, but it was ~1/3-1/4 of what was really necessary. 

So why did the New Deal fail to attain what the war proved was actually within easy reach? Within the 1939 American monopoly capitalist structure, the increase in civilian spending had reached its limit. The forces opposing further expansion were too strong to overcome. Local and state spending are funded by property taxes, which are harder to dodge. For local elites, higher local spending means higher tax bills, so there’s little incentive beyond a bare minimum level of spending. This conservative structure meant that local and state expenditures only rose from 7.4% (1929) to 8.7% (1957). So we must look at the federal level to find the real increases. 

Government spending to create effective demand, and put idle resources to work, is generally good even for the oligarchs, so this spending is incentivized. What then determines the level of spending? The oligarchy’s composition, and how spending levels affect their interests. B+S examine two areas, housing and health, to identify interdependencies. 

The real estate oligarchy will oppose nearly all public housing projects; the private medical profession will oppose public healthcare wherever they can profit from care. There’s also little reason for either to oppose spending in the other’s sector. But if public spending increases are proposed in both, it incentivizes them to unite and oppose it. This incentive accelerates as more oligarchic sections are threatened by state service provision. They will thus cohere around any spending program beyond a low, necessary limit to prevent social collapse. As more expansive budgets are proposed (obviously necessary to absorb surplus), resistance increases more broadly. At each individual level, competition from the state might be relatively small. But a state capable of providing society-wide needs is an existential threat for monopoly profits. 

Successful state-backed projects (like the Tennessee Valley Authority) are so scary to private capital, as the infamous ‘threat of a good example.’ The oligarchy can’t lose the 'common sense' notion that the ‘competitive’ private sector is always more effective than state planning. Effective state programs decommodify goods and services, removing them from the ever-rising monopoly capitalist price structure. The state can then offers goods and services at the real socially necessary production cost. 

What about areas where there was no wide-scale private competition to state-provided services, such as education. The 1960s saw declining numbers of American graduates in physics, biology, engineering, etc., due to oligarchic opposition to expanded federal education spending. Why? 

• First, the oligarchy’s private education system would be threatened by a near-peer adversary in a public system overwhelmingly educating working class children. Education is a social leveler, so oligarchies always oppose broad and effective public education. 

• Second, monopoly capitalism needs exploitable labour for hard jobs. An undereducated population, less aware of their intellectual potential or exploitation, is a plus in these circumstances. 

• Finally, as a middle path between the first two points, oligarchies still need a way to promote talented, ambitious, lower class individuals. Monopoly capitalism has ruled out industry as such a possibility, so limited, quality public education remains the only trajectory for overcoming class disadvantages, to serve the oligarchy. This is how public education gets funded partially, without threatening oligarchic privilege.  

We’ve now seen the New Deal’s civilian state spending programs fail to put monopoly capitalist society’s labour and resources to work. In the next chapter, we will see how WWII managed to achieve what the New Deal couldn’t.