Chris Harman


Crisis of State Capitalism

Part I

(November 1976)

From International Socialism (1st series), No.93, November 1976, pp.22-29.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

WHEN the workers of Poland struck on 26 June they did more than force a postponement of price increases. They also exploded a myth – the claim that the societies of Eastern Europe are somehow immune from the crises of the world economy.

The myth has been widely propagated. It remains an article of faith for the Communist Parties of Western Europe, even when they claim to have broken with Stalinism and discovered ‘Eurocommunism’. As the British Communist Party put it at its last congress.

‘In contrast to the deep economic crisis in the capitalist world, the Soviet Union and the other socialist countries continue their steady advance, without soaring inflation, mass unemployment, insecurity or cuts in social services.’

The myth has also been given currency by genuine opponents of Stalinism like Ernest Mandel. In for example, his article The Generalised Recession of the International Capitalist Economy:

‘While the recession is hitting all the capitalist economies, the countries with non-capitalist economies are escaping the overall effects of the recession ...’

This perhaps is more guarded than his claim of 20 years ago that

‘... the Soviet Union maintains a more or less even rhythm of economic growth, plan after plan, decade after decade, without the progress of the past weighing on the possibilities of the future.’ (Quatrieme Internationale, 1956, no.1-3)

But it is equally confused.

International Economic Crises

CAPITALIST crises have never hit all capitalist countries with the same intensity at the same time. The fact that a world economy exists means that no particular country can escape being affected in some way by the crisis. But there can be very considerable variation in the exact form these effects take.

This can be shown by looking at the biggest ever crisis that of the early 1930s.

This led to a catastrophic drop in production and living standards in the two most powerful industrial economies, the US and Germany.

Industrial Production


















In both countries industrial output fell to nearly half its 1928 figure.

Real wages fell substantially in Germany and by a third in the US, In France and Britain there were also considerable drops in industrial production, of 30 per cent and 16.5 per cent respectively. These figures were not nearly as bad as for the US and Germany. And in Britain employed workers actually saw their real wages rise in the recession.

This was because the wage cuts enforced on workers were less than the drop in the price of imported food.

Japan was every bit as much a capitalist country as the US or Germany.

But the impact of the recession was much less marked. Industrial production fell 8½ per cent between 1929 and 1931. In 1932, however, when the crisis continued to get worse in the other main countries, production picked up in Japan, until it overtook the 1929 figure in 1933 – something that did not happen in Germany and the US for another three years.

The different impact of the world crisis upon different economies is shown even more vividly in the second crisis of the 1930s, that of 1937-8.

In the case of the biggest capitalist economy, the US, industrial production fell by a fifth, to below the 1928 figure, despite all the talk of Roosevelt’s ‘New Deal’. In Britain too industrial production fell and unemployment began shooting up. But in Nazi Germany where the economy certainly remained capitalist, industrial production soared ahead despite the world recession, from a figure of 106.3 in 1936, to 117.2 in 1937 and 126.2 in 1938 (1928 = 100).

In Japan too the growth of production did not falter in these years.

Such instances show how misguided are those who point to the lack of a western type recession in the last two years as proof that the East European countries are ‘non-capitalist’.

The East European states have not been hit by the most recent crisis in exactly the same way as the main western states. But they have not been able to avoid it affecting them deeply, although in ways that differ in some respects from countries like the US or Britain.

Indeed, one of the most significant things about the last couple of years has been the way in which there has been a growing intermeshing between a form of cyclical crisis experienced by the East European economies and the crises of the west.

‘Internal’ Crises in Eastern Europe

DESPITE the mythology the expansion of the East European economies has never been at an even pace. Nor, for that matter, has it been planned, in the sense of being guided by pre-ordained targets that lead to the whole economy growing according to a single rhythm.

There have, in fact, been very sharp fluctuations in the rate of economic growth and, in particular, of the rate of investment.

This is shown by the two graphs (1 and 2) for Poland and Czechoslavakia. [1*] Fluctuations in the latter country have been even more sharp than the ‘particularly marked’ fluctuations that Mandel notes in France (Late Capitalism, p.234) but ignores in Eastern Europe.

The fluctuations often have nothing whatsoever to do with the targets laid down in the so-called ‘plans’, as is shown, for example by the Yugoslav economy in the early 1960s (when it was was still run on more or less the same basis as. the other East European countries).

Rate of Growth







12.0 per cent

 7.2 per cent


12.6 per cent

 7.0 per cent


10.3 per cent

15.6 per cent

It only needs to be added that in 1951, 1952 and 1967 there was a negative of growth in Yugoslavia (as there was in Czechoslavakia in the early 1960s).

Real wages are likewise subject to sudden and unplanned fluctuations. For instance, the Hungarian ‘plan’ of 1950 called for an increase in workers living standards of 35 per cent by 1955. During the ‘implementation’ of the ‘plan’ living standards actually fell by 20 per cent. [1]

In Poland there have been very wide fluctuations in real wages over the last 26 years. Between 1950 and 1955 they fell by about 10 per cent. Then, after the strikes and demonstrations of 1956-7 the official figures show them as shooting up by about 17 per cent by 1959. But in 1960 they fell by l½ per cent.

After that they began to rise again slowly (although no increase at all is shown for the year 1964-5) so that the average increase for the period 1960-70 was under one per cent. [2]

When account is taken of price rises not included in the official statistics and of a restructuring of the wages system to the benefit of managers, it seems likely that real wages hardly rose at all, and may even have fallen.

‘The yearly increases in wages of one or two per cent did not mean real wage increases for the mass of the workforce.’ [3]

At the end of this period, in December 1970 Gomulka decreed increases in the prices of food, clothing, furniture etc that had the effect of pushing real wages below the figure for 1960 – until strikes forced Gomulka’s successor Gierek to abandon the increases.

It is no wonder that the Polish economist Pajerska has pointed to the ‘highly irregular growth of real wages.’

But the wage fluctuations do not take place in a vacuum.

‘They are not an accidental phenomenon, but a logical consequence of other premises in the field of development policy.’ [4]

They are part and parcel of the tendency of the whole economy to oscillate wildly.

‘Analysis of the dynamics of industrial production in Czechoslovakia, the GDR and Hungary supplies an interesting picture. The rate of growth shows relatively regular fluctuations ... These fluctuations are still more pronounced if analysis is confined to producer goods.’ [5]

How do these fluctuations occur?

Many East European economists have pointed to what is sometimes called ‘over-investment’, ‘to a tendency for over fulfilment of plans in the higher stage manufacturing industries’. [6]

All the bureaucratically centralised economies tend to embark on vast investment projects, on a scale that cannot be sustained by the resources internal to the economy. As the famous Polish economist, Kalecki, put it:

‘When the rate of growth of the national income exceeds a certain level, the output of certain industries, particularly those producing raw materials, lags behind the demand for those products owing to technological and organisational factors ...’ [7]

Expansion runs into what is sometimes called the ‘raw material barrier’, and begins to grind to a halt.

The initial period in which investment and apparent economic growth soared is now followed by a period in which growth rates stagnate. So as to complete some of the investments, raw material and components are switched from other investments, which are ‘frozen’, left uncompleted for years at a time.

There is enormous economic waste as whole chunks of wealth are tied down in unfinished projects.

At the same time, other investments are completed, but turn out goods which can only be utilised in conjunction with the products of other investments that are frozen. So, for example, a tyre producing factory may be finished, but a car factory will not be finished. The vehicles for which the tyres are intended do not exist; stocks of tyres accumulate for which there is no outlet.

The total effect of these two forms of waste can be immense – in Hungary in 1961-4 this accounted for eight per cent of the national income for Yugoslavia in 1960-70 for 10 percent [8], in Poland in the years 1960-63 increased stocks alone accounted for 5-8 percent of the national income. [9]

According to Moshe Lewin, four billion rubles of equipment were unused in 1965-7 in the Soviet Union as ‘producers’ goods remained unmarketed or kept accumulating in some parts of the economy when they were needed in some other.’ [10]

The official figures for economic growth include much of this waste as ‘increased production’ – although, in fact, it does not increase the real national wealth at all. So, for instance, in Czechoslovakia in 1967 the official figures for economic growth hid the scale of economic crisis – for three quarters of the official ‘increases’ was made up of unusable stocks.

The authorities are forced to ‘freeze’ investments so as to deal with a crisis produced by their own tendency to over-invest. But their intervention serves, in the short term, only to increase the chaos in the economy. ‘Administrative intervention’, according to the Yugoslav economist Horvat, ‘intensifies economic fluctuation’.

At the factory level, the result is the very negation of planning. Managers are told by ‘planners’ to switch repeatedly from one sort of output to another, at the shortest possible notice.

‘Paradoxically, a system so heavily planned from above, left the factory unplanned, unable to prepare itself correctly for future tasks ...’ [11]

Managers try to protect themselves in advance from such unpredictability by hoarding supplies of raw materials, components and skilled labour. The worker in turn does his best to conceal from the manager the amount of output he can produce when really pushed. The overall result is that no-one knows, least of all the ‘planners’, how much the economy is really capable of producing.

Instead of real planning taking place ‘strict methods of government dictation are evolved for filling the gaps in the economy made by the decisions and activities of the government itself.’ [12]

However, the crisis due to the ‘raw material barrier’ and the freezing of investments does not last indefinitely.

Eventually the pouring of resources into a select group of ‘priority’ projects enables them to be finished and to pass into production. At that point the output of the whole economy begins to rise at an accelerating speed. Resources can then be released to finish other investments. The economy moves from crisis and a slow real growth rate to an overcoming of the immediate crisis and a very rapid growth rate. Meanwhile, however, the crisis has produced unfortunate by-products.

The first is inflation

The vast expansion of investment at the beginning of the cycle necessarily involves an expansion of the workforce (usually through turning peasants into workers, although also now through the use of immigrant labour – e.g. Czechoslavkia and East Germany have imported labour from Poland, from Cyprus and even from Vietnam). The new workers are paid money wages on the assumption that the expansion of the economy will itself produce an increased flow of goods for these to be spent on.

At the same time, in all sections of the economy enterprises are borrowing from the banks to buy materials and components for new investments. And they rely upon a quick increase in production. When the crisis begins and production does not increase as expected, the classic inflationary situation occurs of an expanded supply of money chasing a fixed number of goods.

The actions of the authorities to deal with the crisis by freezing some investments to finish others aggravates this state of affairs. Usually it is the resources intended for consumption and agricultural investment that arc raided so as to finish projects in heavy industry. The result is that consumers have more money at their disposal than the worth of the existing stock of the consumer goods. [13]

The regime has two ways of dealing with such a devlopment. One is to let prices of consumer goods and food rise. That is why countries like Poland had a rate of inflation similar to that of western states during the 1960s.

But in a state where there is only one employer, inflation is likely to get blamed on the government and to have very explosive political consequences (as in Poland in 1970 and 1976). The bureaucracy is often frightened to allow too many obvious price increases, and freezes many prices in the state sector (although not in the quite large semi-private sector – the prices in the Kolkhoz markets in Russia, prices on the black market, the price of so-called cooperative housing, prices in hard currency shops).

However, price freezing does not do away with the cause of inflationary pressure – too few consumer goods being available compared with the money in the population’s hands. What is often called ‘hidden inflation’ results. There are not enough goods to go round, and nothing can be obtained without queuing (except by the bureaucracy itself, which is well supplied by goods from its own shops in its party offices etc.). [14]

It becomes a near-impossibility for workers to find enough supplies in the shops to spend their weekly wage on. Despite many hours spent queuing, they still have unspent money in their pockets at the end of the week. This they can either spend in the highly inflationary non-state sector or effectively give it back to the state by putting it in the savings bank.

So, for instance, last year it was claimed that wages in Poland rose by about 9 per cent. But at the same time savings rose by a figure equal to 6.8 per cent of wages. It seems that workers were unable to spend more than about two per cent more than the year before (even though average prices had risen nearly five per cent). Of course, the worker might eventually be able to use his accumulated savings – except it takes so long to save to buy the sort of things the worker would want to spend them on. like a cooperative flat (a worker can have to wait more than seven years before being able to take possession of a flat after paying down the deposit) as to virtually guarantee that the savings will be devalued by inflation before that point is reached. [15]

The crisis has another important side effect. In order to complete as many investments as possible, the bureaucracy will be strongly tempted to step up its imports from abroad. But it will not have the same ability to arbitrarily increase exports. The result is a balance of payments deficit (as growth runs into what is called the ‘foreign trade barrier’).

The Root of the Crisis

SO FAR we have described the cycle of crisis and its by-products, inflationary pressure, foreign payment problems, and a lack of accounting and inefficiency throughout the economy.

But why does the cycle begin in the first place? After all, if the initial cause is ‘over-investment’, surely the bureaucracy can so arrange things as to fit the rate of investment to the resources of the economy?

That would certainly be the case if the Eastern countries really were socialist economies, where production was determined by need and, in Marx’s words, ‘accumulated labour is but a means to widen, to enrich, to promote the existence of the labourer.’ [16]

But this is not the case in these states.

Competition, not need, provides the driving force of their economies.

Superficially it seems that competition plays no role, since the state owns almost all of industry, and its monopoly of foreign trade reduces the direct impact of external competition on particular sectors of the economy to a minimum.

But the barriers erected to trade between each of the East European states and the rest of the world (including each other!) do not stop their having relations with the rest of the world. The world system continues to dominate their internal running, because the bureaucracy is committed above all to trying to ‘catch up and overtake’ its capitalist neighbours. The main goal set the economy is economic growth, particularly in the section of the economy that produces means of production. The bureaucracy deliberately imposes on the economy as a whole the necessity of competing in growth terms with the western economies. The accumulations of means of production outside their borders determine the drive to accumulate means of production inside each of the East European states.

The initial drive to accumulate (in the period 1948-55) was motivated above all by military considerations. Stalin saw the development of heavy industry as providing the military potential he needed in his conflict with the western powers.

However, the very drive to accumulate produced a new pressure for accumulation. As we have seen, accumulation soon exhausted the raw materials to hand within the individual country. Imports were necessary to sustain it.

But imports could only be obtained if exports were increased (and. in practice, this applied just as much to exports to the ‘socialist’ countries as to the west – the state capitalist countries have rarely been prepared to give each other real economic aid). The more industrialisation proceeded the more the East European states depended on pushing up their sales abroad, until with states like Hungary. Czechoslovakia or Poland these account for a very high proportion of the national product.

The Eastern states found themselves in a situation not appreciably different to that of any western capitalist. So as to accumulate they have to sell their goods. But they cannot sell their goods unless they are accumulating as fast as their competitors, continually expanding the scale of production, introducing new technology, keeping wage costs to a minimum, finding the cheapest possible source of raw materials. To survive they have, in fact, to subordinate the internal development of their economies to the needs of external competition.

The result is that once they have embarked on the path of competitive accumulation, there is no turning back and no end to it.

It is this which explains why the rate of accumulation is set at a level that is too big to be sustained by the resources within the economy. They are competing with economies larger and more advanced than themselves. They can only survive if they invest at a similar sale in particular industries as their competitors, even if that scale is too great for the local economy.

The forces of production operate on a world scale, as part of an international social organisation, but they are controlled, appropriated, within the private boundaries of the national bureaucracies. The result is inevitably a continual clashing between the forces of production and the national boundaries. Hence the raw material barrier, the foreign trade barrier, the inflation barrier, the periodic crisis.

The Crisis of State Capitalism and the Classical Capitalist Crisis

THE UPS and downs of the bureaucratically centralised economy bear an uncanny resemblance to the ‘business cycles’ experienced by western capitalism throughout most of its life.

In both cases rapid accumulation leads to shortages of raw materials and skilled labour. These shortages can only be solved by a slump in the growth rate (or even a cutback in production, as in the most recent western recession or the recessions in Yugoslavia, or in Czechoslovakia in the early 1960’s). But this in turn enables an equilibrium eventually to be restored so that production can shoot ahead once more, until again shortages are encountered, etc.

In both cases the cause of the initial too-rapid boom is the competition between rival capitalist establishments (in one case rival firms, in the other rival national ruling classes). In both cases, too, the boom leads to production lagging behind demand for raw materials and consumer goods, and therefore to inflation or hidden inflation.

There is, however, one significant difference between the operation of the cyclical crisis typical of the East European states over the last 25 years and that typical of classical western capitalism (i.e. prior to 1940). The western boom-slump cycle went something like this:

When the economy moved from boom to slump, this was expressed in the fear that each capitalist had of being driven out of business.

The boom had pushed up his raw material costs, his interest repayments and the money wages he paid his workers. For the least efficient firms these increases could be enough to wipe out all the profits and to drive them into the red. The increased cost of new investment meant that they can no longer be embarked upon with any certainty of making a profit. New investment declined. But this meant that there was a sudden drop in the demand for the output of the sector of the economy producing means of production (e.g. construction, machine tools). Workers in this sector were sacked. Without wages they couldn’t buy the goods produced by other factories, which sacked their workers in turn.

There was very rapidly a movement from an inflationary boom – too much money chasing too few goods, to a deflationary slump – too little money chasing too many goods. A general crisis of overproduction resulted.

In the crisis many individual firms went bankrupt. Their workers were thrown on to the dole queues for hire at lower wages by more efficient capitalists, and their factory space, machinery and raw materials were sold off at cut-price rates.

Eventually this combination of cheap means of production and cheap labour power would create the conditions for a new burst of profitable investment, a new boom. Paradoxically, it was the event which drove capitalist society to desperation, the slump, that prepared the ground for a new burst of optimism in the boom.

The bureaucratic state, as we have seen, experiences the first part of this cycle, the phase of ‘over-investment’. But it tries to react to it in a slightly different fashion to the classical entrepreneur. Instead of relying on blind competition to determine which sections of the economy go under and which survive at their expense, the bureaucratic state itself intervenes to reestablish equilibrium on a different basis. It is able more or less to dictate which sections are ‘frozen’ and which expand at their expense. Bureaucratic directives, not the market, determine that workers and resources move from making one thing to making another.

The result is that although the crises have cut growth rates and produced unused productive capacity in various sections of industry, they have not usually led to a fall in industrial output, plant closures and sharp rises in unemployment. [17]

The bureaucracy, with its centralised control over all the internal industrial resources of the economy [18] has an ability to intervene and deal with the effects of the crisis that under laissez faire capitalism neither the single firm nor the state could. The individual firm was too small in relation to the national economy to intervene in this way, and the state was politically too weak to impose a single will on the rival capitalist concerns: they would not, for instance, allow it to take control of investable resources and instead insisted that they themselves decide when it was profitable to start investing again.

However, dependence for resolving the crisis on administrative direction rather than blind market forces does not mean that the East European economies are qualitatively different to those in the west and the so-called third world.

Two important considerations apply here.

(1) Within western capitalism the last 80 years have seen a growing tendency for the state to merge with the most powerful capitalist interests. Sixty years ago Lenin and Bukharin already referred to the western states as ‘state monopoly capitalisms’.

Today the process of monopolisation and stratification has gone much further than in Lenin and Bukharin’s time. The corollary of this has been an increasing tendency for the state to try to impose some sort of planning of the constituent parts of the national economy in the interests of the major capitalist groups.

There are still limits to this. In countries like the US, Britain, present day western Germany, etc., the component sections of the capitalist class are still too distrustful of each other and of the capitalist state to permit a single economic power centre to emerge to direct their national accumulation effort. Particular, competing, interests are powerful enough to prevent a full blooded transition from state monopoly capitalism to state capitalism, as Wedgewood Benn with his scheme for state capitalist directed investment through the National Enterprise Board found to his cost. [19]

However, the tendency has still been for the role of the state to increase, and even in certain circumstances to dominate the whole economy.

In Germany and Japan in the 1930’s the different sections of the ruling class forgot their distrust of the state. They enhanced its powers to smash the working class organisations, to force up the rate of profit and to expand out of the crisis at the expense of rival capitalist powers.

In Nazi Germany, by 1937 the state had a complete monopoly of foreign trade, directed a growing proportion of investment, and was over-riding the objectives of particular giant firms to its schemes for saving German capitalism. [20]

It was on this basis, that German capitalism could expand at precisely the point when the US and Britain entered the second deep slump of the 1930’s.

A similar process, of course, happened in 1939-40 in Britain and the US in response to the threat from a reinvigorated German capitalism. The state and the major capitalist groups imposed a war economy, which compelled the individual capitalist groups to accept a centralised direction to the economy. Their mutual antagonisms remained powerful enough, however, to ensure the partial dismemberment of the after 1945. Even then, the state through the permanent arms economy continued to control a substantial sector of the economy and to direct a huge amount of investment more or less regardless of the ups and downs of the non-state sector.

But it has been in the so-called ‘developing’ countries where this process of state intervention has gone furthest. In many of these the individual capitalist groups have been too weak to prevent the state dominating the industrial sector of the economy – indeed, in many cases this has been the only way individual capitalists could conceive of overcoming their own weakness compared with the giant firms of the west.

In the most extreme cases (e.g. Egypt and Syria in the early 1960’s) this has led to a virtual state monopoly of industrial production.

In other cases it has meant the state playing the dominating role in the most important sectors of industry (even if these are a minority of the total) and banking.

So, for instance, even in Brazil the state controls 72.3 per cent of the shareholding in the 100 biggest companies; in Mexico there is

‘... a strong state presence in the vital sectors of the economic system. The state owns the major part of the banking system, of the oil and petrochemical industry, of the electrical production industry and transport. It has a strong articipation in trade, iron and steel and heavy industry ...’ [21]

In Argentina, the industrial capitalists

‘... used the state between 1930 and 1950 to transfer capital from the agricultural export sector to internal industries ... They nationalised foreign capital linked to export industries and made productive services and transport into state monopolies ... After 1953 the state was used in a new cycle to transfer capital from light industry to heavy industry and engineering ...’ [22]

In these countries the state does not respond to a crisis as the individual classical capitalist would, by waiting for a rise in profitability before investing. To do that would be to abandon the pretentions of its national capitalists to ‘catch up’ with their international competitors. Rather the state is likely to step up its own direct and indirect investment to compensate for the failure of the private sector of the capitalist class to invest.

‘The Argentine bourgeoisie opted for a plan of development through the production of means of production ... This politics resolved in a bourgeois manner the narrowness of the internal market for means of consumption and the low rate of profit that caused the fall in private investment. Through successive instalments of inflation and of economic contractions, the rate of surplus value was raised, while capital was transferred from production of means of consumption to production of means of production ...’ [23]

In Brazil the role of the state helped to ensure that the economy has continued to expand (although at a reduced rate) through the world recession, on the basis of a continuing growth of production of means of production. [24]

The rate of growth for 1976 is expected to be 2.5 to 3 per cent. But capital goods output will rise to 15 per cent, ‘due to provision of official finance on.a massive scale’. [25]

(2) But a second point has to be noted both in relation to the East European state capitalisms and to the various hybrids between state monopoly capitalism and bureaucratic state capitalism. The state may be able to reorganise the internal economy so as to deflect some of the classical products of the crisis (above all a collapse of new investment). But it cannot exercise the same control over the external economic relations of the national capital – unless it is in a position to expand in an imperialist manner, as did Germany and Japan in the 1930s.

And the more accumulation takes place, the more important foreign trade and its impact becomes. Productive forces operate increasingly at an international level, and it becomes increasingly difficult for any national capitalism (state capitalist or otherwise) to accumulate in isolation from the world system.

We will expand on this point later, but first it is necessary to look briefly at another vital component to the crisis in the Eastern states.

Declining Growth Rates and the Crisis

IF THE cyclical crises were the only difficulty facing the Eastern European economies, the bureaucracy could sleep easily. For by definition, cyclical crises pass and give rise to a new period of expansion and optimism. Trotsky remarked that ‘capitalism lives by slumps and booms, just as a human being lives by inhaling and exhaling.’ [26]

The same might almost be said of the East European state capitalisms.

However Trotsky was quick to add that on top of its cyclical crises, capitalism was faced with a long term tendency at work through slump and boom, to make each crisis worse than the one before. Marx located the origin of this in the trend for the long term rate of profit to decline.

The bureaucratic state capitalisms also face a long term trend towards crisis, on top of their cyclical difficulties.

The more they develop industrially, the more their rate of economic growth tends to decline.

Twenty five years ago they claimed growth rates two or even three times that of their western rivals. Today, their growth rates are only about the same as western growth rates. As Branko Horvat has noted, ‘expansion in the most important countries of the world, capitalist and centrally planned alike, is slowing down ...’ [27]

The fundamental cause of state capitalism’s declining growth rates lies in the fact that new investment is less and less productive.

Growth of national income
per unit of investment,







In eight years, the new output produced by each unit to increase in investment fell by more than 40 per cent!

Average increase in industrial output
per rouble of investment (USSR)







In this case the fall was by more than 25 per cent in ten years. [29] It might be asked: does this matter? After all, total production is continuing to rise. The use values at the disposal of the state grows ever more massive.

But it is no the volume of use values at the disposal of the rulers of Russia and the East European states that worries them. They do not live in either a socialist society where what matters is the use values available to feed, clothe, shelter and give a happy life to the population. Nor do they live in a hermetically sealed, bureaucratically run state that can forget what is happening elsewhere in the world, and therefore measure its success by the quantity of use values at the disposal of the bureaucrats.

They know that their long term survival depends upon being able to maintain a level of accumulation as high as, if not higher than their rivals’. If the bureaucrats’ economy produces inferior goods at a slower speed than its rivals, then in the long term they will have the economic and military potential to force the bureaucratic state into a subordinate client state role.

Therefore what obsessed the bureaucrats is the success they have in producing greater quantities of goods with less outlays of labour than their rivals – or in Marxist terms, the production of exchange values. [30]

As Brezhnev has put it,

‘... the fundamental question in the economic competition between the two world systems is not only how much you produce, but also at what cost, with what outlays of labour.’ [31]

Yet the rulers of the bureaucratic states find that it takes greater and greater quantities of accumulated labour, of ‘dead’ labour, to expand the value of production. [32]

They face the same long term problem as western capitalists. The more accumulation takes place, the more they are confronted with a tendency for the rate of profit to decline. [33]

As a result, the decline in the rate of growth continues, even though the proportion of industry devoted to producing means of production, to accumulation, grows.

Today about 75 per cent of industrial output of the USSR consists of producer goods, compared to only about 70 per cent in 1950-55; in Czechoslovakia 61 per cent compared with 55 per cent; in Poland 65 per cent, compared with 55 per cent. [34]

It is this which gives added urgency to the short term cycle of crisis. The long term decline in growth rates means that the bureaucracy has fewer reserves for dealing with each crisis than the one before. As in the classical capitalism of Marx, crises get progressively worse, and have more and more political ramification, (as in 1956, 1968-9. 1970-71). [35]

Indeed, in some ways the trend is more pronounced than Marx foresaw for western capitalism.

Despite all its faults, the periodic crisis served a positive function for capitalism in Marx’s day. By leading to the bankruptcy of some capitalists, it cleared the ground for others to prosper.

  1. The most inefficient capitalists would be driven out of business, and the more efficient capitalists could buy up machines and factory space on the cheap. The system as a whole was restructured on the basis of ‘the survival of the fittest’.
  2. The recession created a temporary excess of raw materials, which cut their price.
  3. it created a pool of unemployed which served to weaken trade union organisation and cut money wages.

The cheapening of labour, raw materials and means of production did away with the inflationary pressures that had developed during the boom. And it counteracted the long term tendency of the rate of profit to fall.

In the bureaucratically centralised economies this semiautomatic process of ‘rationalisation’ of production does not take place. There is no automatic mechanism, for instance, for diverting resources from backward, inefficient factories to modern, more efficient ones. [36] Nor is there any automatic countering of the long term inflationary pressures.

It was analyses of the way in which the system was more and more driving towards crisis that enabled revolutionary Marxists writing in the early sixties to foresee and repitition of the workers uprisings of 1953 and 1956. This was especially true of the pioneering work of the Polish Marxists Kuron and Modzelewski. [37]


The second part of this article will appear in our next issue. – Ed.


Note by ETOL

1*. There are no graphs printed with the article.


1. According to Ivan Berend of the Hungarian Academy of Science.

2. Figures given in Lidia Beskid, Ekonomista, 1968, no.2, translated in East European Economies, Vol.II no.3.

3. R.N. Ciorski, Der Wirtschaftspolitische Hintergrund und die Folgen der Dezember-1970-Ereignisse in Polen, in Ost-Europa-Wirtschaft, Dec. 74.

4. Josef Pajetska, Ekonomista, 1965, no.2, translated in East European.

Economics, vol.V no.2.

5. Goldman and Korba, Economic Growth in Czechoslovakia, Prague 1969 p.41; cf. also Branko Horvat, Business Cycles in Yugoslavia (Eastern European Economics, vol.X no.3-4). According to the Mandels of this world it should have been impossible for Horvat to have written a book with such a title, let alone to get it published in Yugoslavia; cf. also Periodic Fluctuations in Soviet Growth, Soviet Studies, January 1969, p.331.

6. Goldman and Korba, op. cit., p.43; see also Beskid, op. cit.

7. Introduction to The Theory of Economic Growth in a Socialist Economy, p.44.

8. Sources quoted in C. Harman, Bureaucracy and Revolution, p 257.

9. J. Kuron and K. Modzelewski, A Revolutionary Socialist Manifesto (An Open Letter to the Party), p.31.

10. Political Undercurrents in Soviet Economic Debates, p.143.

11. Lewin, op. cit., p.145.

12. Tony Cliff, Russia: A Marxist Analysis, London 1964, p.274.

13. This trend to satisfy the needs of completing heavy industry investments through raiding consumption is sometimes called ‘crossing the inflation barrier’.

14. Many Poles thought the party shops had disappeared until the strikes in June, since the notorious shops with ‘yellow curtains’ no longer existed in the streets. But it is reliably reported that when striking workers in Radom entered the local party first secretary’s offices to get an explanation for the price rises they found a well stocked party shop there. It was this which provoked their anger and turned a strike into a near-uprising.

15. Apologists for Stalinism of various hues in Britain (see Red Weekly, 7 July 1976) claim the increased production of cars shows that the bureaucracy has the interests of the workers at heart. But the average worker would have to save all his earnings for two years to buy a small Fiat. Even then there is only one car manufactured for every 70 salary or wage earners. Moreover, as the Financial Times has pointed out (25 February 1976):

‘Polski-Fiat will remain the main vehicle for the attack on overseas markets, exporting a little over half its production.’

16. Communist Manifesto, in Marx: Revolutions of 1848, p 81.

17. Although as we have pointed out above, this has happened in Yugoslavia.

18. Although not always of agricultural resources – in Poland, for instance the large agricultural sector is still controlled by millions of independent peasants.

19. And, of course, an important factor here is that the most powerful firms in a country like Britain are nationally based multinationals (ICI, Shell, BP etc.) who do not want their multi-national effort subordinated to the needs of the less profitable firms that make up the rest of British capitalism.

20. Of course, it did all this collaboration with the giant monopolies, but that did not stop it ignoring their particular interests, as with the building of the Hermann Goering Works.

21. Paesi Emergenti, Citta Futura, Rome, January 1976, pp.21 and 26.

22. ibid., p.5.

23. Miguel Angel Garcia, Argentina, Citta Futura, March 1974, p.14.

24. Steel output rose 10 per cent in 1975, cast iron output 14.9 per cent, electricity output 12.8 per cent, EIU Quarterly Review, Brazil, 1975 no.4.

25. ibid., 1976, no.2.

26. First Five Years of the Comintern, 1, p.200.

27. Horvat, op. cit., p.203.

28. J. Pajetska, Ekonomista (Warsaw), 1965, 2.

29. Figures given in K. Fitslyon, Soviet Studies, Summer 1969, p.179.

30. For elaborations of this argument see Tony Cliff State Capitalism in Russia, C. Harman Bureaucracy and Revolution.

31. Pravda, 24 April 1970.

32. This too is in the main a reflection of the fact that the value to them of total output depends upon its exchange value on a world scale. They are forced to match insofar as they are also improvements in productivity and innovations in the technology taking place outside Russia, and therefore to jack up the ratio of dead labour to living labour.

33. Of course, the output investment ratio is not identical with the rate of profit. To find the rate of profit it is necessary also to take account of any change in the amount of national income going to productive workers as a result of the new investment. This can make the rate of profit change by a bigger or smaller amount than the output-investment ratio. But the trend is likely to be in the same direction.

34. C. Harman, op. cit.

35. Of course, for Marx there were ‘counteracting tendencies’ that affected the particular expressions of this long term trend. The same applies in Eastern Europe: a harvest failure can make the crisis very acute, an oil find can alleviate a particular crisis.

36. Quite the opposite. The desperate search for components to complete half-finished projects means that antiquated obsolescent plant is kept in operation, even if its costs of operation are very high. What matters to the frantic bureaucrat, looking for resources to achieve priority targets is quantity not quality. (There is a whole literature on this from East European economists, although they rarely even hint at what the cause of the phenomenon is). As Peter Bains has put it, ‘Western capitalism has mechanisms of greater or lesser efficiency for restructuring capital in crisis, but Russia has not internal means for doing so ...’ It only needs to be added that it is ‘classic’ western capitalism that has means for restructuring through cyclical crisis – with later, state monopoly capitalism things are much more difficult.

37. Op. cit. It was also true of part two of Tony Cliff’s 1964 edition of Russia: A Marxist Analysis (not included in the 1974 edition) and of Prospect for the Seventies, The Stalinist States by C. Harman in IS 42. There is, as far as I know, no analysis of the economic dynamic leading to crisis in any of the works of the proponents of the ‘post-capitalist’ view of Russia, (unless you count writings in the thirties, of Trotsky, who did not believe the Stalinist regime in Russia could survive the world war).

Last updated on 17 November 2009