Chris Harman

Economics of the Madhouse

Chapter 4
Getting bigger

16. The concentration of capital

The way in which recession can ease some of the long term problems of capitalism has led some supporters of the system to claim there are no such long term problems. People like former Tory chancellor of the exchequer Nigel Lawson say that recurrent crises are nothing to worry about, since slumps are invariably followed by booms. The Austrian school of economists including Hayek positively revel in the ‘destruction’ of the slump since, they say, it is ‘creative’, laying the ground for the production of ever greater amounts of wealth.

A variant of this argument is to be found among some people influenced by Marxism. The restructuring of the system and the ‘devaluation’ of capital that occurs in a recession, they say, allows the system to purge itself of all the downward pressures on the rate of profit. As a result, there need be no long term tendency for slumps to get worse or booms to be shallower and shorter. The alternation of boom and slump may have horrible effects for workers, they imply, but there is no reason why the system cannot go on as it is at present indefinitely. Nor, they sometimes add, is there any reason why a Labour type government should not be able to improve the condition of workers within the system.

But any such argument ignores something else that happens to capitalism as it gets older. The number of competing firms tends to get fewer, while a handful of very large firms come to dominate whole industries and whole economies – a process which Marx called the ‘concentration and centralisation of capital’.

If any one of these giant firms goes bust, there is enormous damage to the rest of the economy. Banks that have lent it money are very badly hit. So too are other industrial firms which expected to sell it machinery and raw materials or to sell consumer goods to its workers. Suddenly their profits are turned into losses. Such is the scale of the damage that the ability of other firms to buy up machinery and raw material on the cheap does not nearly begin to compensate for it. Instead of the destruction of some firms benefiting others, what threatens to develop is an economic black hole that sucks into it profitable and unprofitable firms alike.

The result is that, once the system is dominated by a handful of giant firms, crises do not automatically resolve themselves. Instead they get worse as each giant that collapses knocks over others in a domino effect.

Many apologists for capitalism try to deny that there is a tendency for the system to be dominated by a handful of big firms in this way. So Thatcherites in Britain, Republicans in the US, even Islamists in Algeria talk of the importance of small or medium size firms, claiming these are the dynamic centre of the economy. But this ignores the way that each crisis leads to some firms eating up others, concentrating capital in fewer hands. Of course, new firms do arise as individuals find, by luck, judgement or crookery, that they are in a situation to set themselves up as capitalists. And, as Marx noted, these new firms, in their eagerness to break into the big time, sometimes show themselves to be much more innovative and competitive than their larger rivals. So, for instance, in the 1970s and 1980s many advances in computing, especially as regards software, were made by medium and small companies. But the great majority of these firms did not survive very long and were soon taken over by giants – either pre-existing ones or new ones. By the 1990s three or four giant firms dominated the field internationally. More generally, the Financial Times could report in the autumn of 1992 that, ‘a new generation of entrepreneurs that prospered in the boom of the 1980s is systematically being wiped out.’

The result of such a wiping out of small firms in recession after recession for a century and a half has been the increasing dominance of the giants. As Hobsbawm says, already a century ago:

The formation of trusts and cartels characterised Germany and the US in the 1880s... By 1897 there were 82 industrial combinations with a capitalisation of more than 1,000 million dollars, in the three years 1898-1900 eleven great combinations were formed with a capitalisation of 1,140 million dollars, and the greatest combination of all, US Steel, appeared in 1901 with a capitalisation of 1,400 million dollars.

The process was further accelerated during the inter-war years, when in each country a handful of firms came to dominate each industry – for example, Ford, General Motors and Chrysler in the US motor industry, ICI in the British chemical industry, or Krupps and Thyssen in German heavy industry. By the 1970s the degree of economic concentration was such that in the US the hundred biggest firms owned 48.4 percent of industrial assets and in most industries there were two or at the most three major competitors. In Britain at the same time the 100 largest firms produced 49 percent of total output and in many industries, like chemicals, food processing, detergents, mainframe computers and car components, there were at most two competitors.

The recessions of the last 20 years have resulted in still further concentration, with a series of takeovers and alliances between firms that cross national boundaries, so that a firm trading under a US name may well be owned in Britain or France, and one trading under a British name owned in Japan. This is especially true of finance and of the major industries – telecommunications, computers, aerospace, motors, chemicals, food processing, pharmaceuticals – but it is also increasingly true of banking and of a vast range of ‘service’ industries, from private security to film production.

Today estimates suggest that the 500 biggest transnational corporations control two thirds of world trade, with the 15 biggest – including companies like General Motors, Exxon, IBM and Royal Dutch Shell – having a combined income greater than that of over 120 countries.

If any of these giants goes bust, far from helping to ‘clear out’ the system it makes problems worse. The result is that, despite what governments say about the wonders of the ‘free market’, they panic when the market threatens the future of any giants, and do everything they can to keep these corporations afloat.

This was already shown a century ago, when British authorities committed to the market and ‘free trade’ rushed to prop up Barings Bank the first time it was on the verge of collapse. It was shown on a wider scale in the inter-war years, when in one country after another right wing governments intervened, nationalising firms if necessary, to stop the collapse of major banks and major industries. It was shown again in the 1980s, when the Bush government in the US intervened to bail out the Savings and Loan institutions and the Thatcher government organised a ‘lifeboat’ operation to salvage the Johnson Matthey Bank.

There were more outright bankruptcies in the early 1990s than there were in the recessions of the mid-1970s or the early 1980s – at least, in the US and Britain. The S&Ls may have been propped up, but a number of big firms on both sides of the Atlantic went to the wall – the giant airline PanAm, the huge international Bank of Credit and Commerce International, the conglomerate Pollypeck, the property giant Olympia and York, the world’s biggest printing concern, Maxwell Communications Corporation.

However, that is not the end of the matter. Even outright bankruptcy did not have the positive impact on the rest of the system it once had. For most of the capital of such giants is not owned by individual shareholders who bear the losses of such collapses and leave other big firms to gain. Instead the main shareholders are banks and other financial institutions and they must seek to recoup their losses from the remaining, profitable sections of the system. So it was the banks who had to pay much of the cost for the collapse of Maxwell, Olympia and York, PanAm, Pollypeck and so on. In the wake of this the banks sought to make up for these losses by raising their interest rates to other borrowers – including other big firms.

When individual shareholders (or, in the Maxwell case, individual pensioners) suffer, this is advantageous to the system as a whole, enabling it to prosper as the shareholders and their capital are written off. But when the giant financial institutions suffer, the situation is very different. The losses incurred have to be borne by these institutions and so serve to reduce profitability through the rest of the system. This intensifies rather than alleviates its tendency towards crisis.

The clearest sign of this was the continuing high level of long term interest rates right through the recession – generally twice as high as in the 1960s and in marked contrast to what happened in the recession of the early 1980s, when real interest rates were negative.

Instead of clearing room for the rest of the system to resume profitable growth, the bankruptcies of modern day multinationals put a bigger burden on it.

17. Imperialism and war

Capitalism’s long term problems were already visible more than a century ago during the ‘Great Depression’ of the 1880s, when Carnegie complained about the intractability of crises. They were visible again during the 1930s, when some commentators spoke of capitalism’s ‘final crisis’. In both cases capitalists and workers alike found themselves waiting for a recovery that it seemed would never come.

Yet not only did capitalism recover on both occasions, but the post-depression years were some of the most dynamic in the history of the system. This was especially true of the expansion which took place from the 1940s to the early 1970s. The period saw a ‘long boom’ that involved the biggest and most sustained spell of expansion in the history of the system.

These experiences led people both at the turn of the century and again in the 1960s to claim that capitalism was gradually giving way to a better form of society, which was not on the verge of collapse, which did not need to experience periodic slumps, and which did not lead to ever more bitter class confrontations.

In fact, on both occasions capitalism discovered new mechanisms for offsetting the tendency of crises to get deeper. But these were temporary measures, and as their effects wore off, crises returned with a vengeance.

The main mechanism at the end of the last century was for capitalism to reach out beyond its original heartlands in Western Europe and North America – a process which became known as imperialism.

In the 1870s and 1880s the major capitalist powers set about expanding and consolidating their hold on much of the rest of the world. British governments extended the old British Empire, to take in about a third of the earth’s surface – including half of Africa, the whole Indian subcontinent and much of the Middle East. French governments seized Indochina and most of the rest of Africa, and began to dominate the Lebanon (although it was still allegedly under Turkish control). The United States seized the Philippines from Spain and took control of the nominally independent states of Cuba and central America. Holland spread out from its base in Java to take over all of what is now Indonesia. Belgium took the Congo (now Zaire). Italy seized Tripoli (now Libya) and Somalia. Germany began to dream of a colonial empire of its own, colonising Tanganika (now Tanzania) and South West Africa (now Namibia), and trying to establish a base in North Africa. All the major European powers established zones of influence in China, effectively dividing the country between them. By 1914 the only country in Africa to remain independent was Ethiopia, while in Asia, apart from divided China, only Afghanistan and Thailand were not ruled directly from Europe.

The European powers carved out these empires because their financiers and industrialists believed there were vast profits to be made there. They saw control of territory as the key to getting cheap raw materials and so gaining an advantage over other capitalist countries.

International diplomacy came to centre on the struggle between the great powers to establish colonies in Africa and Asia and to exercise influence over nominally independent governments in the Middle East, Latin America and Eastern Europe. Those powers with empires sought to strengthen them by building up their military forces. Those without empires sought to take colonies and influence from those with. And, when it came to the crunch, they were prepared to wage world war against each other with Britain, France and Russia on the one side, and Germany and Austro-Hungary on the other.

Some mainstream historians claim the drive to empire was motivated by non-economic considerations. But this ignores the fact that from the 1880s onwards amongst the most enthusiastic supporters of colonisation were the very industrialists and financiers who had been doubtful about their value earlier. By the 1890s half of British total investment was going overseas. Firms whose business depended on empire came to dominate the economies of Britain (with banks like Barings, industrial conglomerates like Unilever, and, increasingly oil companies like Anglo Iranian – now BP – and Shell), France (the Suez Canal company) and Belgium (the giant Union Miniere). In Germany heavy industry applied increasing pressure for the government to carve out a ‘sphere of influence’ in the Balkans and the remnants of the Turkish empire.

As Eric Hobsbawm has quite rightly noted:

Political historians have professed to find no economic reasons for the virtual division of the world between a handful of West European powers (plus the USA) in the last decades of the nineteenth century. Economic historians have no such difficulty.

Overseas investment took place because industrialists and financiers sought secure profits and cheap raw materials. But it had a very important indirect impact on the system as a whole. If half of investment went overseas, there was a 50 percent reduction in the funds available for investment at home. Firms became less worried that if they did not undertake labour saving investment their domestic competitors would. So overall investment no longer rose faster than the employed labour force: indeed, the ratio of investment to output in Britain actually fell from 2.16 in 1875-83 to 1.82 in 1891-1901. Profit rates were able to rise and the long drawn out capitalist pessimism of the 1880s gave way to a new period of optimism and boom.

Unemployment which had risen to over 13 to 14 percent three times in the years of the ‘Great Depression’ was less than 10 percent from 1895 to 1912.

No wonder the dominant ideas in the newly founded Labour Party in Britain were ‘gradualist’. No wonder too that ‘revisionist’ and ‘gradualist’ ideas were increasingly influential in the supposedly ‘Marxist’ German social democratic party. For a time it did seem to superficial observers that capitalism could provide security and improved living standards for workers.

But the period of capitalist ‘prosperity’ did not last long. Imperialism was only able to counter falling profitability for a couple of decades. Opportunities for investment overseas eventually began to run out, and profits made on existing investments started to flow back into the advanced capitalist countries. By the end of the first decade of the present century this was raising the level of funds seeking profits in Britain back to that of 20 years before: the ratio of investment to labour in industry rose, according to one calculation, from 1.92 in 1891-92 to 2.19 in 1908-13 – that is, to a slightly higher level than on the eve of the ‘Great Depression’ of the late 1870s and early 1880s. Not surprisingly, there were new signs of downward pressure on profit rates and the crises got more serious, with unemployment rising back to about 15 percent by 1913-14.

At the same time, the pressure for capitalist states with small empires to get a share of the action led to repeated clashes with established imperialisms. The result was a war between the US and Spain over the Philippines and Cuba, a war between Japan and Russia over the domination of North China and Korea in 1904-05, a clash between France and Germany over influence in Morocco, a race between Britain and Germany to build more battleships and, finally, a clash between Russia and Austro-Hungary over influence in south eastern Europe – the clash which precipitated the First World War.

Imperialism had eased the system’s tendency to ever greater economic crises, but only for a period, and at the price of leading it to the horror and waste of world war. And in the aftermath of the war, economic crisis re-emerged on a greater and more damaging scale than ever before in the history of the system.

18. Militarism and state capitalism

The crisis that began in 1929 was by far the worst the system had ever known, with unemployment in the two biggest industrial powers, the US and Germany, rising to about a third of the workforce. What is more, the slump showed little sign of ending on its own accord.

It required government intervention to begin bringing about limited economic recovery in both economies in 1933-34, with the Roosevelt ‘New Deal’ in the US and public works schemes from the new Nazi government in Germany. But neither did more than scratch the surface of the slump. Industrial output in Germany was still only four fifths of the 1929 figure in 1934, while in the US one in seven of the population were still unemployed in 1937 when a new phase of economic downturn started – described by one historian as ‘the steepest economic decline in the history of the US’.

Real recovery from the crisis did not start until governments began massive preparations for war. In Germany this happened in 1935 with the establishment of a ‘preparedness’ economy, based on massive rearmament. It did not happen in the US until 1941 when the country entered the Second World War. As J.K. Galbraith pointed out: ‘The Great Depression of the 1930s never came to an end. It merely disappeared in the great mobilisation of the 1940s.’

Preparation for war had some of the same benefits for capitalism as imperialism, of which it was a logical extension. It offered giant firms the opportunity to seize control of raw materials and industrial plant from their rivals in other countries – as when German big business took over the economies of Czechoslovakia and Poland and began to challenge British big business for control of the Middle East’s oil with the ‘desert war’ in North Africa, or when Japanese big business seized plantations previously run by British, French and Dutch companies in Vietnam, Indonesia and Malaya.

What is more, preparation for war provided firms with a state guaranteed market for their goods which was not affected by fluctuations in the rest of the economy. The demand for food and consumer goods went up and down with boom and slump. So did the demand for factories to make these things and ships and trucks to move them. But the demand for tanks, battleships and military aircraft rose so long as governments continued to arm themselves.

In fact, the state did not merely order arms from the private sector. It increasingly planned the whole economy – if necessary nationalising private firms – in order to make sure arms were produced on time and in the right quantities.

In Nazi Germany from 1935 onwards the state took control of much of the banking system in order to ensure that their deposits were used to finance the arms drive. Industrial concerns were compelled by law to deposit all profits above a certain level with the state for the same purpose. Under the four year plan of 1936 Goering was made ‘economic dictator’. His aim was to push through an investment programme of six to eight billion marks, whether it was profitable or not, using every method – investment subsidies, tax exemptions, guarantees of prices, orders and profits. When the head of one giant firm, Thyssen, refused to do what he was told, Goering confiscated his property and forced him to flee into exile.

Similarly, once the US had entered the war, the state controlled not only the armaments sector of the economy – which represented about half the total national output – but also decided what consumer goods should be produced. It became responsible for 90 percent of total investment and spent vast sums building new armaments factories which it then handed over to private firms to run.

Effectively, the drive to war led the state to override the old market mechanisms – and to neutralise any opposition to it doing so from the big firms. Economic development inside Nazi Germany or wartime America was no longer dependent on the ‘free’ flow of funds to the most profitable parts of the economy. Instead the state decided what needed to be produced and then caused funds to flow to the appropriate sectors – whether by giving direct orders to firms or by rigging the market so as to make those sectors profitable.

But it was not only the state’s overriding of market mechanisms that made the war economy work. The sheer waste of producing arms and the barbarous destructiveness of war played their part. They had the same impact on the system as the destruction of capital that takes place during a slump has. They reduced the resources available for investment in productive industry – and with that the tendency for investment to grow faster than the labour force.

This was first noted by the German Marxist Grossman writing in the 1920s:

The destructions and devaluations of war are a means of warding off the immanent collapse [of capitalism], of creating a breathing space for the accumulation of capital... War and the destruction of capital values bound up with it weaken the breakdown [of capitalism] and necessarily provide a new impetus to the accumulation of capital.

Although wars allow some of the biggest individual capitalists to expand their holding massively, the effect on the system as a whole he explained, is to ‘pulverise values’ and ‘slow down accumulation’, so that investment does not rise any faster than the employed labour force. That in turn stops the rate of profit falling.

The same argument was developed and expanded in the 1940s, 1950s and 1960s by an American Marxist who wrote under the names Oakes and Vance, and by the British Marxist Mike Kidron. They showed that although arms production slowed down the pace at which capital accumulation occurred, it also allowed it to proceed more smoothly, without coming to a standstill in repeated slumps. The war economy compared to the peace economy was rather like the tortoise compared to the hare in Aesop’s fable. At first accumulation in a war economy proceeds more slowly than in a peace economy, because so many resources that could be invested productively are wasted on arms instead. But the war economy, for this very reason, is not forced to stop to ‘recover its breath’ through a slump, and so overtakes the peace economy.

This was shown dramatically during the Second World War. Of the output of the American economy in 1943, nearly half went on war programmes. Yet, even with this waste, the output of consumer goods was greater than it had been in the slump-becalmed peace economy of the late 1930s. And even after being taxed to pay for some of these arms, the profits of American companies were more than twice as high in the war years as they had been in 1938.

It was shown again in the Cold War years between the late 1940s and the mid-1970s. Most economic observers had expected the post World War Two world to witness a repeat of the great crisis of the inter-war years. It did not happen because arms expenditures remained at a much higher level than ever before during ‘peacetime’. From making up less than 1 percent of American output in the 1930s, they were at around 15 percent in the early 1950s, and even during the 1960s, when they were down to about 8 or 9 percent, were still equal to the total investment in civilian industry.

Capitalism experienced what some have called its ‘golden age’ between the 1940s and the 1970s. Country after country experienced virtually unprecedented economic growth. The American economy trebled in size, that of Germany grew fivefold, that of France fourfold. Even the miserable, long declining British economy was producing twice as much by the 1970s as in the 1940s.

Capitalism prospered as never before. And life for most workers also got better. Unemployment all but disappeared in most of the advanced industrial countries, falling to about 1 percent in Britain, Germany and Scandinavia. Not only were the great cities rebuilt after the devastation of the war, but new housing estates replaced slums that went back to the 1830s or 1840s. Free health services helped people to live longer and improvements in pensions made many able, for the first time, to look forward to their old age.

Poverty did not disappear. It persisted in ‘depressed areas’ based on old industries that missed out on the boom. It also afflicted the chronically sick, single parent families and some of the old. But in the advanced countries it was usually hidden poverty. The unemployed no longer hung about on the streets as in the 1930s and beggars were unknown.

The boom was a boom of the advanced industrial countries. But it did not leave the rest of the world untouched. Countries like Italy, Spain, Portugal, South Korea and Singapore began to catch up with, and even in a few cases overtake, old established industrial countries like Britain. Elsewhere, in the large ‘third world’ countries like India, China, Brazil and Mexico there was rapid growth of pockets of industry, even if the mass of the population continued to live in backbreaking poverty in the countryside or in burgeoning urban slums. The growth enabled even the poor to believe that it was only a question of waiting before things got better.

These long years of boom gave rise to very similar ideas that had developed in the 1890s. Capitalism, it seemed to superficial thinkers, had overcome all its problems. Indeed, some writers went so far as to assert it was not capitalism any more but some higher form of economic organisation.

Yet none of this expansion of the system could have occurred without the horrors of World War Two, the immense waste of the post-war arms economy, and the immense danger to the whole of humanity from the nuclear arms race. The ‘glories’ of the ‘golden age’ depended on the barbarity of the nuclear bomb.

19. State capitalism, Stalinism and the third world

Military state capitalism was not something confined to the advanced Western states. For some 40 years it was very much the model for capitalist development right across the world. Indeed, one of the economies to move first and most thoroughly to state capitalism was that of a relatively backward country, Stalin’s Russia, in the late 1920s. This called itself socialist. But by the late 1920s the country was already far from the genuine socialism which had inspired the revolution of 1917. This had aimed at a society where workers consciously determined what happened. But the unleashing of civil war by the old ruling class and military intervention by all the Western powers strangled the revolution.

There was unparalleled economic devastation, the closing down of almost all of Russian industry and the effective destruction of the working class that had made the revolution. Without the working class there could be no workers’ democracy.

The revolutionaries who had led the revolution had remained in power in the early 1920s. But their rule increasingly depended on a bureaucracy made up of many of the administrators of the old Tsarist empire together with a new layer of full time party functionaries headed by Joseph Stalin. Such bureaucrats preserved some of the language of the revolution, but increasingly ruled on their own behalf, driving the revolutionaries of 1917 out of the ruling party. The face of a suffocated corpse may look like that of a living human; similarly in appearances Russia in 1927 resembled Russia in 1917. But in reality it was fundamentally different.

For a time the new rulers of Russia were happy to leave the land and some sections of industry and commerce in private hands, relying on the support of the privileged owners (known as Nepmen) to oust those like Trotsky who wanted to stick by the principles of 1917. But this policy led to a great economic crisis in 1927-28 just as there were renewed threats of Western intervention. The new rulers then did a great U-turn, adopting their own version of military state capitalism.

They were desperate for some means to defend their control over Russia from foreign threats. The answer, they decided, lay in building up industry at the maximum speed. This alone would enable them to produce tanks, battleships, aircraft and machine guns of the same scale as the Western states. As Stalin said:

To slacken the pace of industrialisation would mean to lag behind and those who lag behind are beaten... We are fifty to one hundred years behind the advanced countries. We must make good this lag in ten years or they will crush us.

Stalin’s logic was the same as that of any small capitalist who faces competitive pressure from a bigger capitalist – to tell his workers to make every conceivable ‘sacrifice’ in order to catch up with the rival.

The way to ‘catch up with the West’, for Stalin, was to copy inside Russia all the methods of ‘primitive accumulation’ used elsewhere. The British industrial revolution had been based on driving the peasants from the land through enclosures and clearances; Stalin smashed peasant control of the land through ‘collectivisation’ which forced millions to migrate to the cities. British capitalism had accumulated wealth through slavery in the Caribbean and North America; Stalin herded millions of people into the slave camps of the Gulag. Britain had pillaged Ireland, India and Africa; Stalin took away the rights of the non-Russian republics of the USSR and deported whole peoples thousands of miles away from their homes. The British industrial revolution had involved denying workers the most elementary rights and making men, women and children work up to 16 hours a day; Stalin followed suit, abolishing the independence of the unions, shooting down strikers, and cutting real wages by about 50 percent.

The only significant difference between Stalin’s methods and those of Western capitalism in its infancy was that, while Western capitalism took hundreds of years to complete its primitive accumulation, Stalin sought to achieve his in a couple of decades. The brutality and barbarism were, therefore, much more concentrated in time.

The Stalinist bureaucracy could not ‘catch up’ by copying the small scale ‘market’ capitalism of England during the industrial revolution. Russia could only succeed militarily if its industries were similar in size to those of the West. But there was no time to wait for private firms to grow larger as they gobbled each other up. The state had to intervene to bring about the necessary scale of production.

State capitalist monopolies, not small private firms, were to carry accumulation through. And the state had to coordinate the whole economy, subordinating production of everything else to this accumulation.

Most people saw this as socialist – and many still do. For Stalinism did indeed break the backbone of private capitalism in Russia and later in Eastern Europe, China and so on. But its own methods were very similar to those of the Western war economies. It planned as they planned – so as to hold down the consumption of the masses while building up heavy industry and arms production.

As Michael Kaser, one of the foremost Western writers on the East European economies, notes, the new ‘socialist planners’ in the region after 1945 often simply took over the methods established during wartime German occupation, ‘Many market relations suppressed by the price and quantity controls of 1939-45 never reemerged’.

One of the best known Polish planners, Oskar Lange, noted:

Methods of highly centralised administrative planning and management widely using... coercion are not characteristic features of socialism, but rather a technique of the war economy.

Such a model of state intervention and ‘planning’ had an appeal to the rulers of many of the world’s weaker capitalisms in the 1930s, 1940s, 1950s and 1960s. Mussolini’s Italy responded to the crisis of the 1930s by setting up two huge state run firms, IRI and ENI, to build up new industries. In Brazil and Argentina authoritarian governments put state run industries at the head of the economy. The rulers of former colonies like India, Egypt, Syria, Iraq and Algeria looked to massive levels of state ownership and five year plans to bring about industrialisation. So too did Kuomintang ruled Taiwan and the military dictatorships of South Korea. Right wing French governments adopted an approach called ‘indicative planning’, while even Britain briefly drew up a (stillborn) long term plan in 1966.

The motives were everywhere the same as Stalin’s had been. The rulers of less competitive capitalist countries needed the state to pool their resources and to protect them from the immediate effects of fluctuations in the world market. Otherwise they would never be able to face up to the industries of their bigger and more competitive rivals.

As a result, for nearly half a century the orthodoxy of capitalist economics was that there had to be state intervention and that ‘planning’ was a good thing.

John Maynard Keynes had been the apostle of this approach in the West, Joseph Stalin in Russia. They were very different personalities – one a liberal minded academic and civil servant who made himself a million on the stock exchange, the other a murderous dictator. The supporters of one tended to be in the social democratic and Labour parties, of the other in their bitter rivals, the Stalinist parties. Yet they shared one important idea: they each believed that taking over the existing state and using it to direct the national economy could prevent crises and ensure continual industrial advance.

20. The end of an illusion

There were, as we have seen, enormous changes in the fortunes of the capitalist system in the 30 years between 1932 and 1962.

In 1932 all of the predictions Marx had made about the system seemed to be being fulfilled. There was a catastrophic crisis worse than ever before. A third of people were jobless in the world’s two largest industrial economies – Germany and US. Millions of middle class people found themselves in the same desperate plight as the mass of workers, even in the advanced economies. In colonial countries the collapse of raw material prices plunged unprecedented numbers into dire poverty. The sheer depth of the crisis was breeding the most barbarous dictatorships known in history, with the rise of Hitler in Germany. There seemed to be no hope anywhere except by a complete break with capitalism.

As Anthony Crosland, a leading Labour right winger, wrote in 1956 about the atmosphere in his youth:

The pervasive influence of Marxist analysis in the 1930s was a reflection of an intellectual ferment without parallel in the history of the British labour movement... More and more people came to feel that some thoroughgoing analysis was needed to explain the catastrophe which appeared to be engulfing world capitalism...

Things seemed very different a quarter of a century later. There was full employment in all the advanced industrial countries. Output seemed to be expanding inexorably with the longest boom the system had ever known. Real wages went up year after year, while even right wing governments provided welfare states to care for the poor, the sick and the old. Nazism seemed like a nightmare from long ago as parliamentary democracy stabilised in advanced countries and began to make inroads in the less developed South European countries.

This was the background against which many intellectuals who had once proclaimed their belief in Marxism now insisted it no longer applied. They accepted the then prevailing orthodoxy that crises were a thing of the past and that the class struggle was withering away. Capitalism, they insisted, was slowly changing into a post-capitalist ‘affluent’ society in which the only argument was over how exactly to spread the benefits of limitless wealth and ever greater leisure time.

Crosland put the argument in a highly influential book, The Future of Socialism:

The belief that the ‘inner contradictions’ of capitalism would lead first to a gradual pauperisation of the masses and ultimately to the collapse of the whole system has by now been rather obviously disproved... Full employment has replaced depression, the instability is vastly less, and the rate of growth appreciably more... The present rate of growth will continue, and the future is more likely to be characterised by inflation than by unemployment... Almost all the basic characteristic features of traditional pre-1914 capitalism have been either greatly modified or completely transformed.

This had occurred, he claimed, because the state had succeeded in taking the key economic decisions out of the hands of old style capitalists who were only interested in profits:

The capitalist business class has lost [its] commanding position... Decisive sources and levers of economic power have been transferred from private to other hands... Acting mainly through the budget, though with the aid of other instruments, the government can exert any influence it likes on income distribution and can also determine within broad limits the division of total output between consumption, investment, exports and social expenditure... The economic power of the capital market and the finance houses, and hence capitalist financial control over industry are much weaker. This change makes it absurd now to speak of a capitalist ruling class.

Such were the arguments which led the leadership of the British Labour Party to make their first concerted effort, in 1959, to ditch the party’s 40 year old commitment to ‘common ownership of the means of production, distribution and exchange’. Although the leadership eventually backed off from this change, their arguments did strike a chord with many workers, who no longer saw political action to challenge the system as a priority.

Twenty years later things had turned full circle again. The great post-war boom came to an end with the recession of 1974-76, and suddenly the Keynesian methods in which people like Crosland had put their faith no longer seemed to work.

Crosland himself now admitted his earlier account had been too glib, although he still tried to defend its essentials. ‘Extreme class inequalities remain, poverty is far from eliminated, the economy is in a state of semi-permanent crisis and inflation is rampant’, he wrote in 1974. ‘British society – slow moving, rigid, class ridden, – has proven much harder to change than was supposed... The early revisionist writings were too complacent in tone...’

In the next two years, as the inability of Keynesian methods to deal with the recession became evident, literally hundreds of economists and economic journalists who had been convinced Keynesians suddenly switched to the ‘monetarist’ doctrines of the pre-1930s orthodoxy. Politicians were quick to join the rush. In Britain the Labour prime minister, James Callaghan, embraced the new doctrine in public at the 1976 party conference:

We used to think you could just spend your way out of recession by cutting taxes and boosting government borrowing... That option no longer exists; and in so far as it ever did exist, it worked by injecting inflation into the economy. And each time that has happened, the average level of unemployment has risen.

His government’s ‘alternative’ to Keynesianism was to allow unemployment to more than double while imposing an International Monetary Fund programme that cut £8 billion (equivalent to more than £20 billion today) off the welfare budget.

Even on Labour’s right there were a few senior figures horrified at what was happening. Crosland, the man who had insisted in 1956 that Britain was no longer capitalist, now told stunned Foreign Office officials, ‘The IMF is a capitalist body, it’s intolerable that a socialist government should have its philosophy imposed on it’.

Yet people like Crosland found it impossible to shift the rest of the Labour government. The only alternative they could suggest to the IMF programme was to impose import controls, as governments right across the world had done in the 1930s. But their colleagues and their advisers insisted these would not work, and they ended up caving in to exactly the policies of unemployment and welfare cuts that Keynesians had once said would never again be necessary.

The experience of the British Labour government was not an isolated one. It was repeated in the 1980s in France, where the Mitterrand Socialist Party government abandoned Keynesian attempts at ‘reflation’ for policies that resulted in nearly four million unemployed; and in Sweden, where a Social Democrat government followed policies which left the archetypical Social Democrat dreamland suffering 14 percent unemployment.

The harsh reality was that Keynesianism did not work.

For a time in the early 1980s a last attempt was made to revive Keynesian policies in Britain by the left of the Labour Party. They elaborated an ‘alternative economic strategy’ which they entitled ‘socialist’. In fact, it centred on the old belief of Keynes and Crosland that a high degree of state control, including import controls, could lead the private capitalist section of the economy out of recession. In any case, by the late 1980s many of the best known proponents of the policy had abandoned it. Former leading left wingers like Robin Cook, David Blunkett and Clare Short were soon to endorse the new Clause Four with its espousal of the ‘rigours of the market’.

21. Fatal flaws

The failure of ‘Keynesian’ state intervention to stop capitalist crisis in the West was matched by the Stalinist economies of the East sliding into crisis. This increased the confusion of those in the West and the ‘third world’ who had looked to the state to overcome the absurdities of capitalism. So long as the Eastern economies seemed to be going from strength to strength, their example was used to justify policies to build up investment and competitiveness through state controls in the West. If only Stalinism could somehow be combined with parliamentary democracy, much of the left claimed, then there was a way of getting out of the crisis through a programme of reform.

But such a view could not survive events in the 1980s when it became clear that the Eastern states were beginning to collapse economically. Poland went through a characteristic boom-slump cycle in the late 1970s and early 1980s – and, in the process, saw the rise of the mass workers’ movement Solidarnosc and its crushing by military rule. From 1986 onwards the leader of the USSR, Mikhael Gorbachev, revealed its economy was suffering from ‘stagnation’ – until he himself fell from power as stagnation gave way to a slump as great as that in the West in the inter-war years.

As the Berlin Wall fell and the USSR disintegrated, many of those who had seen socialism as a mixture of Stalin and Keynes now claimed that capitalism had proved its superiority to socialism.

In reality, what failed was not socialism, but the strategy of overcoming the old crises of market capitalism through state capitalism. This left rulers and ruled alike helpless in the face of further crises – as was shown in the West with the deep recession which began in 1990 and in the East with the failure of privatisation and the market to bring the deepening slump to an end.

There had been a phase of capitalist history during which the methods of military state capitalism could ward off crises. But the phase had passed. Then nothing governments tried could put things right again.

This had been foreseen by the pioneering Marxist studies of military state capitalism made at the height of the post-war boom by people like Vance and Kidron. They had pointed out in the 1950s and 1960s that military state capitalism contained inbuilt flaws which were ignored by Keynesians and apologists for Stalinism alike.

First, competition between the great powers led them to undertake forms of military production that involved ever greater amounts of capital investment per worker. Typically, bomber production was increasingly supplanted by missile production, battleship production by nuclear submarine production. Plants like Boeing’s in Seattle which had once employed 120,000 people would soon employ less than half that number. Consequently a level of arms spending that would provide full employment for the economy as a whole in the early 1950s would not be able to do so by the early 1970s.

Second, arms spending by the great powers provided a market for many smaller countries that did not themselves spend significantly on arms. So the US, spending more than 8 percent of its national product on arms, bought TVs, cars and steel produced from Japan which, spending less than 0.5 percent on arms, was able to devote massive resources to updating its civilian industries.

The industries of the low arms producing countries grew more quickly than those of their high arms competitors, and they came to make up a much bigger portion of the world system than they had two or three decades earlier. At the same time the high arms producers were under pressure to compete in civilian industries by diverting resources to them from arms: in the US the proportion of national output going into arms fell from about 12 percent in the early 1950s to around 7 percent in the 1970s.

But a decline in the overall proportion of the world system’s investible resources going into arms production was to bring back to life all the old forces that create economic instability throughout the system. So the 1970s saw the first recessions since the 1930s affecting all the major Western economies at the same time. These years also saw the revival on a huge scale of the old tendencies pointed to by Marx – for investment throughout the system to rise much more quickly than the employed labour force and for the rate of profit to fall.

Finally, a third trend that had developed during the Great Boom fatally hampered the ability of national governments to cope with the crises.

The massive expansion of the system had been accompanied by a massive growth of world trade, at about twice the speed of world economic output. The sums flowing between banks in different countries on a typical day came to dwarf the foreign exchange deposits of national governments. This made it increasingly difficult for these governments to keep a check on what capitalists were doing with their funds. In the 1950s most governments assumed they could, for instance, establish a fixed exchange rate for their currencies; by the late 1980s many felt incapable of doing so.

The growth in trade was accompanied by an internationalisation of finance and production, as only firms that operated across national boundaries could afford to invest in the most advanced forms of technology. A handful of multinational giants came to dominate the aircraft industry, the computer and software industries, the motor industry, the telecoms industry, the shipbuilding industry.

Capitalist governments which stopped their own national industries from collaborating with these firms risked losing access to the most modern techniques. But those that opted for collaboration handed control of key sections of industry to multinational capitalists whose concern was international profits, not national capitalist stability.

Governments found themselves increasingly powerless just as crises erupted on a scale not known for half a century. The British government in 1976-77 and the French government in 1981-82 were crippled by ‘flights of currency’ the moment they followed even the most minimal ‘Keynesian methods’.

The political leaders of a host of ‘third world’ and ‘newly industrialising’ countries learnt the same lesson the hard way in the course of the 1980s. As their economies began to show signs of crisis they rushed to embrace the market and ‘structural adjustment programmes’ provided by the IMF and the World Bank, in the futile hope that ‘free market’ capitalism would succeed where state capitalism was failing.

Things were not all that different in the Eastern states. They found their growth rates declining and their economies increasingly crippled by their attempts to compete from within narrow national boundaries with the larger Western economies. Even the biggest of the Eastern economies, the USSR, was less than half the size of the US economy whose arms production it tried to keep up with. When the US undertook a new round of arms spending with the ‘second cold war’ of the 1980s, the rulers of the USSR suddenly found they could cope no longer.

The only way out of this seemed to be to abandon the centrally directed military state capitalist economy for the free play of the uncontrolled world market, with its unpredictable ups and downs.

Hence the sudden ‘discovery’ by the rulers of all the Eastern bloc countries, from Hungary and Poland to China and Vietnam that ‘socialism’ did not work – a discovery which shattered the confidence of all the Western and ‘third world’ admirers of the old state capitalism. Hence too the remarkable spectacle of many life long socialists in the West and the ‘third world’ embracing the joys of the market economy in 1989-90, just as it was about to enter a new, devastating recession which proved how little, in essentials, it had changed since Marx tore its pretensions apart.


Last updated on 16 November 2009