Chris Harman

Zombie Capitalism

Part Two: Capitalism in the 20th Century

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The Great Slump

An unprecedented crisis

The deepest slump capitalism had ever known followed by the most sustained boom, interspersed with the bloodiest war in human history. Such was the course of capitalism in the middle 50 years of the twentieth century.

The epicentre of the slump was the United States, which had emerged from the First World War as the greatest economic power, with 50 percent of global industrial production, overtaking both victorious Britain and defeated Germany. The onset is often identified with the Wall Street Crash of 29 October 1929, when the New York stock exchange fell by almost a third. But “business was already in trouble before the crash”, with auto output down by a third in September compared with March 1929. [1] Over the next three years US industrial production fell by about half, and the slump spread across the Atlantic to Europe, where there were already incipient signs of crisis. German industrial production also fell about half and, with a slight delay, French fell by nearly 30 percent. Only Britain saw a smaller fall – of about 20 percent – but that was because its heavy industries were already in a depressed condition.

By 1932 a third of the workforce in the US and Germany were unemployed and a fifth in Britain. Those hit were not only manual workers as in previous crises, but white collar employees who thought of themselves as belonging to the middle class. Hundreds of local banks went bust in the US and some giant banks in Europe collapsed spectacularly, destroying people’s savings and aggravating the general sense of disaster. Hitting all industrial countries at once, the crisis destroyed the demand for the output of agricultural countries, driving down the prices farmers received and creating vast pools of misery. No region of the globe avoided at least some decline in output [2], and world trade fell to a third of its 1929 level. [3] By comparison, both world output and world trade had grown during the previous “Great Depression” of the 1870s and 1880s. [4]

The 1920s boom

The ideological shock of the crisis was increased by the way capitalism had seemed to have recovered in the preceding years from the destruction of the First World War. Industrial output in the US had doubled from 1914 to 1929, with the emergence of a host of new industries that began to revolutionise patterns of consumption – radio, rayon, chemicals, aviation, refrigeration, and the replacement of horse-borne by motorised transport. The boom in the US had a beneficial impact in Europe. Germany, racked by civil war in 1919–20 and then unparalleled inflation in 1923, had then seen industrial output grow 40 percent above its 1914 level. In France industrial production had doubled. The press had displayed an unbounded optimism about capitalism, proclaiming a “new era” of endless prosperity. Mainstream economists had been just as confident. Alvin Hansen wrote that the “childhood diseases” of capitalism’s youth were “being mitigated”, while America’s most eminent neoclassical economist, Irving Fisher, had stated on the eve of the Wall Street Crash that “stock prices have reached what looks like a permanently high plateau”, and continued to exude optimism for some months after, while in Britain John Maynard Keynes had assured his students, “There will be no further crash in our lifetime”. [5] Social democrat Marxists joined in the chorus, with Hilferding’s theory of “organised capitalism”, as a system in which the anarchy of the market and the trend towards crisis had disappeared. [6] Suddenly they were all proved wrong.

The initial reaction of mainstream politicians and their fellow travellers in the economics profession was to assume that they only had to wait a short time and the slump would begin to correct itself. “Recovery is just around the corner,” as US president Herbert Hoover assured people. But recovery did not come in 1930, 1931 or 1932. And the economic orthodoxy which had been so confident in its praise of the wonders of capitalism so recently could not explain why – and it still cannot explain why today.

There have been attempts at explanation. The most common among the most orthodox at the time was that articulated by the English economist Arthur Cecil Pigou. Workers, according to his argument, had priced themselves out of their jobs by not accepting cuts in their money wages. Had they done so, the magic of supply and demand would have solved all the problems. Irving Fisher belatedly put forward a monetarist interpretation, arguing that the money supply was too low, leading to falling prices and so cumulatively increasing debt levels. More recent monetarist theorists put the blame on the behaviour of the central bankers. If only, the argument went, the US Federal Reserve Bank had acted to stop the money supply contracting in 1930 and 1931, then everything would have been all right – the arch monetarist of the post-war decades, Milton Friedman, traced its mistakes and the depth of the slump back to the death of New York Reserve Bank president Benjamin Strong in October 1928. [7] By contrast Friedrich von Hayek and the “Austrian” school argued that excessive credit in the 1920s had led to “an imbalance in the structure of production” [8], which would be made worse by increasing the money supply. Still other economists blamed the dislocation of the world economy in the aftermath of the First World War, while John Maynard Keynes stressed an excess of saving over investment that led to a lack of “effective demand” for the economy’s output. Finally, there was the claim, still perpetuated in much media commentary today, that the raising of US tariffs by the Smoot-Hawley Act in the summer of 1930 unleashed a wave of protectionism preventing a recovery that would otherwise have occurred if free trade had been allowed untrammelled sway.

Ever since then the proponents of each view have found it easy to tear holes in the arguments of those holding the other views, with none being able to survive serious criticism. That is why the current Federal Reserve head, Ben Bernanke, sees explaining the slump as the ever illusive Holy Grail of his profession. Yet if the slump of the 1930s cannot be understood, neither can the chances of it recurring in the 21st century be seriously assessed.

Disentangling the real causes of the slump from this mishmash of contradictory argument involves, first of all, looking at what really happened during the 1920s.

Rapid economic growth and the proliferation of new consumer goods had encouraged people to see this as a decade of continual rises in living standards and enormous productive investment – a story that is still frequently accepted today. But in fact wages rose by a total of only 6.1 percent between 1922 and 1929 [9] (with no increase after 1925) and the manufacturing workforce remained static while industrial production expanded by about a third. Michael Bernstein notes that “the lower 93 percent of the non-farm population saw their per capita disposable income fall during the boom of the late 1920s”. [10] The fall in labour’s share of total income meant that the proportion of national output that could be bought with wages fell. The economy could only keep expanding because something else filled the resulting gap in demand.

Many analyses have argued that investment fulfilled this role. Gordon Brown tells how much recent literature sees “that the most notable aspect of the 1920s was over-investment”. [11] A chastened Hansen noted in his analysis of the slump that, although a “vast sum of $138,000,000,000” of “investment” had “led consumption” during the 1920s, only half of that was business investment, and of that only a third was new investment, ie a mere $3 billion a year. [12] In other words, beneath the appearance of rapidly expanding investment, the reality was a relatively low level of productive accumulation despite the impetus provided by the new industries. Other analyses, by Simon Kusznets [13], Steindl [14], and Gillman [15], bear this out.

Only one, stark, conclusion can be drawn from such figures. The boom could not have taken place if it had only depended on the demand for goods created by productive investment and wages. A third element had to be present to prevent the piling up of unsold goods and recession in the mid-1920s. As Hansen recognised, “Stimulating and sustaining forces outside business investment and consumption were present ... with these stimuli removed, business expenditures would have been made on a more restrictive scale, leaving the economy stagnant if not depressed”. [16]

Hansen, as a mainstream economist, even if by now a critical one, saw these forces as being “non-business capital expenditures (residential building and public construction)” and “ the growing importance of durable consumer goods financed in large part by a billion dollar per year growth of instalment credit” and “rather feckless foreign lending”. [17]

A classic Marxist analysis of the slump by Lewis Corey puts the stress on the growth of luxury consumption, unproductive expenditures and credit. The 1920s were a decade in which incomes from dividends and managerial salaries rose several times faster than real wages [18], until “the bourgeoisie” (including the non-farm petty bourgeoisie) were responsible for over 40 percent of consumption, according to him. [19] Then there was growing expenditure on advertising and sales drives as firms sought markets for the growing number of goods they were turning out – this expenditure, in the form of incomes for sales personnel in these same industries, could then create a market for some of the goods businesses were trying to sell. A doubling of consumer credit [20] enabled the middle class and some layers of workers to buy “on the never never” some of the new range of consumer goods, with car sales at a level in 1929 they were not to reach again until 1953. And finally there were upsurges of non-productive speculative investment in real estate and the stock market. Such things could not create fresh new surplus value to solve the problem of profitability (they merely involved funds passing from one capitalist pocket to another). But their byproduct was unproductive expenditure in new building, new managerial salaries and conspicuous consumption, all of which absorbed some of the goods being poured out by industry, encouraging further speculation:

Superabundant capital became more and more aggressive and adventurous in its search for investment and profit, overflowing into risky enterprises and speculation. Speculation seized upon technical changes and new industries which were introduced regardless of the requirements of industry as a whole ... [21]

Spending on new non-residential construction rose by more than half over the decade, and was “most intense in the central business districts of cities”. This was most notable in New York, where work on the world’s tallest building, the Empire State Building, began in 1929 – only for it to be known by 1931 as “the Empty State Building”. [22]

While the US boomed, there was also a boost to economic expansion in Europe with an inflow of American funds that could make up for some of the destruction caused by the war – the impact of the US Dawes plan of 1924 was particularly important in encouraging loans to Germany.

These factors were already losing their capacity to sustain the boom in industry before the Wall Street Crash. There was the beginning of a recession in 1927, but a brief upsurge of investment in heavy industry and autos in 1928–9 pulled the rest of the economy forward. [23] Then, in the late spring and early summer of 1929, this came to a sudden end, with a sharp fall in fixed investment [24] and auto production. [25] The expansion of credit and the scale of speculation that sustained unproductive expenditures had hidden the underlying problems right up to the last minute. But once there was a single tiny break in the chain of borrowing and lending that held it up, the whole edifice was bound to come tumbling down. Marx’s comment on crises could not have been more apposite:

The semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash. Business is always thoroughly sound until suddenly the debacle takes place. [26]

The recession precipitated a sudden contraction of speculative ventures and unproductive expenditures, so reducing still further the market for industrial output. Faced with declining sales, industrialists were already beginning to borrow from the banks, rather than lend to them. Those who had engaged in the speculative boom (including both industrialists and banks) now tried to borrow more in order to cover their losses after the crash, but borrowing was now very difficult. Those who could not borrow went bust, creating further losses for those who had lent to them. The slump spread from one sector of the economy to another.

Once the decline started there seemed no end to it. Industrial decline led to pressure on the banks, which in turn deepened industrial decline and put more pressure on the banks. But that only further exacerbated the disproportion between productive capacity and consumer demand, further worsening the crisis in industry. As firms tried to sustain sales by competitive price cutting, profits everywhere fell and with them the willingness even of firms that survived to invest. The non-productive expenditures that helped to fuel the boom were cut right back as companies tried to conserve their funds and the slump grew deeper.

The position in Europe was no better, with recession also already under way when Wall Street crashed. Conditions were worst in Germany, the world’s second biggest industrial economy, which began experiencing an economic downturn in 1928 [27]: “By the summer of 1929 the existence of depression was unmistakable” [28], as unemployment reached 1.9 million and the spectacular failure of the Frankfurt Insurance Company began a series of bankruptcies.

Problems in each country impacted on those in others. There had already been an outflow from Germany of some of the American funds associated with the Dawes plan before the Crash. It now became a torrent as hard-hit American institutions recalled their short-term loans from Germany, creating difficulties for German industrialists who had been relying on them to finance their own industrial overcapacity. Austria’s biggest bank, the Creditanstalt, went bust in May 1931. Britain was hit by the withdrawal of foreign funds from its banks, and broke with the world financial system based on the gold standard. This in turn created vastly exaggerated fears in the US where the Federal Reserve Bank raised interest rates, and there was “a spectacular increase in bank failures” [29] and industrial production slumped even more.

The proliferating impact of the crisis made it easy for people to confuse effects with causes. Hence the contradictory interpretations from mainstream economists, with some blaming too much money, some too little; some central bank interventions, some lack of intervention; some excessive consumption, some too little consumption; some the gold standard, some the turn of states to protectionism and competitive currency devaluation; some the rapidity of the growth of investment, some its tardiness; some the forcing down of wages, some their “stickiness” in falling; some the scale of indebtedness, some the refusal of the banks to lend. [30]

Yet amidst the contradictory interpretations there was an occasional partial glimpse that something fundamental was causing havoc to the system to which all the mainstream economists and politicians were committed. The two economists usually thought as representing polar opposite attitudes, Keynes and Hayek, both stumbled on the same factor but in such a way that neither they nor their apostles took it seriously.

The main theme running through Keynes’s General Theory of Employment, Interest and Money was that saving can exceed investment, opening up a gap that reduced the effective demand for goods, and therefore output, until the reduced level of economic activity had cut saving down to the level of investment. This could be overcome, he argued, by cutting the rate of interest (“monetary measures”) and putting more money in people’s pockets by tax cuts and increased government spending (“fiscal measures”). But he recognised that these measures might not work, since people and firms might still decide to save rather than spend. In particular he was “somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest”. [31] He is best known for explaining the weakness of investment on the crowd psychology of speculators – “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done” [32] – and the flagging “animal spirits” of entrepreneurs. [33] But at points in the text he threw in another factor. He argued that the very process of expanding capital investment led to a decline in the return on it – in “the marginal efficiency” – and therefore to a blunting of the spur to further investment. [34]

He believed the declining “marginal efficiency of capital” to be an empirical fact which could be found, for instance, in the interwar “experience of Great Britain and the United States”. The result was that the return on capital was not sufficiently above the cost to the entrepreneurs of borrowing as to encourage new investment, so tending “to interfere ... with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing”. [35]

This he sees as both a long-term trend and a short-term effect turning the boom into a slump in each cycle:

the essence of the situation is to be found in the collapse of the marginal efficiency of capital, particularly ... of those types of capital which have been contributing most to the previous phase of heavy new investment. [36]

Keynes’s explanation for this was grounded in his overall “marginalist” approach, with its acceptance that value depended on supply and demand. As the supply of capital increased it would grow less scarce, and the value to the user of each extra unit would fall until, eventually, it reached zero. [37] This theoretical reasoning seems to have been too obscure for most of Keynes’s followers. The “declining marginal efficiency of capital” hardly appears in most accounts of his ideas. Yet it is the most radical single notion in his writings. It implies that the obstacles to full employment lie with an inbuilt tendency of the existing system and not just with the psychology of capitalists. If that is so, there would seem to be no point in governments simply seeking to “restore confidence”, since there is nothing to restore confidence in.

Hayek expressed in passing the same view of what was happening to profits, although from a different reasoning. He claimed that cyclical crises resulted from disproportions between different sectors of production – with “excessive credit” causing the output of producer goods to grow too rapidly in the relationship to the output of consumer goods. [38] In this way, he believed, he could explain the cycle as an inevitable means by which the different sectors adjusted to each other, much as Marx saw the crises as able partially to resolve internal contradictions in capitalism – but what Marx viewed negatively Hayek viewed positively. His theory still, however, had a big hole in it. Why should the lag between the sectors cause so much greater problems than in previous decades? Why, in particular, should the production goods sector not keep growing fast enough to pull the rest of the economy behind it? The answer he put forward in passing in 1935 (and which never made it into the Hayekian orthodoxy) was that profitability fell with the expansion of what he called “roundabout processes of production” – that is processes with a high ratio of means of production to workers, or as Marx would have put it, a high organic composition of capital:

That [profit] margins must exist is obvious ... if it were not so, there would exist no inducement to risk money by investing it in production rather than to let it remain idle ... These margins must grow smaller as the roundabout processes of production increase in length ... [39]

In other words, both Keynes and Hayek recognised, though they could not clearly explain, the feature which is central to Marx’s theory of capitalist crisis – the downward pressures on the rate of profit.

In fact, Marxist theory can provide an explanation of the slump which avoids the contradictions of all the mainstream theories. Profit rates in the US had fallen about 40 percent between the 1880s and the early 1920s [40], those in Britain were already in decline before 1914 [41] and those in Germany had failed “to return to their pre-war ‘normal’ level”. [42] Such declines could be traced back to long-term rises in the ratio of investment to the employed workforce (the “organic composition of capital”), about 20 percent in the case of the US. [43] American profitability was able to make a small recovery through the 1920s on the basis of a rise in the rate of exploitation. But the rise was not sufficient to induce productive investment on the scale necessary to absorb the surplus value accumulated from previous rounds of production and exploitation. Firms were torn between the competitive pressures to undertake investment in massive new complexes of plant and equipment (the Ford River Rouge plant, completed in 1928, was the largest in the world), and the fear that any new equipment would not be profitable. Some would take the risk, but many did not. This meant that the big new plants that came into operation towards the end of the boom necessarily produced on too big a scale for the market, flooding it with products which undercut the prices and profits of old plants. New investment came to a halt, leading to a fall in employment and consumption that worsened the crisis.

The blind self-expansion of capital had led to an ever greater accumulation of constant capital compared with living labour. This expressed itself on the one side by a rate of profit considerably lower than a quarter of a century before and on the other by employers holding back wages and so diminishing the share of output that could be absorbed by workers’ buying power. “Overproduction” and the low rate of profit were aspects of the same process that would eventually lead to the slump. An upsurge of unproductive expenditures and credit could postpone this, but do no more. The stage was set for a deep crisis – and it only required scares in the stock exchange and the financial sectors for it to occur.

The crisis in these respects was very similar to those described by Marx in passages where he analysed the crises of 1846 and 1857 in Britain. [44] It also fits with Grossman’s interpretation of Marx’s account, with its stress on the way in which firms are pushed to undertake new investments that threaten to make the already low rate of profit drop to such an extent that much of the new investment becomes unprofitable so as to cause all investment to freeze up. [45]

But there remains something else that has to be explained – why the automatic market mechanisms which had always in the past been capable, ultimately, of lifting the economy out of crisis no longer seemed to be working. Three years after the crisis started, industrial production in the US, Germany, Britain and France was still declining. To explain this it is not enough just to look at the tendency of the rate of profit to fall. The other long-term trend in Marx’s account – the concentration and centralisation of capital as the system aged – also played a role, as was suggested in Chapter Three.

At first it delayed the outbreak of the crisis. The Bolshevik economist Preobrazhensky, attempting to analyse the crisis in 1931, argued that there had been a big change since Marx’s time. Then recessions had led to the elimination of inefficient firms and allowed the rest to enter into new rounds of accumulation. But now the system was dominated by big near-monopolies which were able to prevent the liquidation of their inefficient plants. They would do their utmost to keep their operations intact, even if it meant their plants operating at only a fraction of their usual capacity and cutting investment to the minimum. This produces a “thrombosis in the transition from crisis to recession” and prevents – or at least delays – the restructuring necessary for an emergence from the crisis: “Monopoly emerges as a factor of decay in the entire economy. Its effects delay the transition to expanded reproduction.” [46]

Once the crisis erupted, the sheer size of individual industrial or financial capitals was such that the collapse of any one of them threatened to drag others down with it. The banks would lose the money they had lent it, and so cut off credit to other firms. Its suppliers would be driven out of business and so damage other firms dependent on them. And the end to its spending on investment and wage bills would reduce demand in the economy as a whole. The delayed crisis was now a much magnified one, which could not automatically resolve itself. The response of the big capitals was to turn to the state for “bail-outs” to keep the system going.

The turn to state capitalism

At first governments continued to place their hopes in the untrammelled operation of the market mechanism, with only limited actions to protect some banks. But the crisis continued to get worse, particularly in the US and Germany. Enormous damage was being done to capital itself as it tried to operate with little more than half its previous production levels. At the same time desperation was leading the mass of people to look to remedies that might turn the whole of society over. Major sections of capital began to look for an approach that might solve their problems, however much it broke with old ideological shibboleths. By the summer of 1932 the head of General Electric in the US was campaigning for state intervention. The shift which eventually took place was from forms of monopoly capitalism in which the state kept in the background, providing services to big capital but keeping away from attempting to direct it, to forms in which it attempted to ensure the international competitiveness of nationally based capital. That came to involve consciously restructuring industry by shifting surplus value from one section of the economy to another.

The shift had been foreshadowed in the later stages of the First World War, when the state had taken draconian powers to force individual capitals to concentrate their efforts on the military struggle. But in the aftermath of the war, the state had given up the power it had acquired. Now the sheer scale of the crisis forced a rethink. Political crises in the US and Germany brought governments to power early in 1933 prepared to implement radical change in order to save capitalism from itself.

In the US this took the form of Roosevelt’s New Deal. It extended already existing public works schemes to mop up some of the unemployment, guaranteed the funds of the banks which had not gone bust, encouraged the self-regulation of industry through cartels, destroyed crops so as to raise agricultural prices and incomes, carried through very limited experiments in direct state production and also made it a little easier for unions to raise wages (and therefore the demand for consumer goods). Federal expenditure, only around 2.5 percent of GDP in 1929 reached a peacetime peak of just over 9 percent in 1936. It was a recognition that capitalism in its monopoly stage could no longer solve its problems without limited state intervention. But it was still limited intervention: federal expenditure fell back in 1937.

Such timidity could have only a limited impact on the crisis. All the efforts of the New Deal could not push the upturn that began in the spring of 1933 beyond a certain point. The number of unemployed fell by 1.7 million – but that still left 12 million jobless. It was not until 1937 – eight years after the start of the crisis – that production reached the 1929 figure. But even then fixed investment in industry remained low [47] and there was 14.3 percent unemployment. Yet this “miniboom” gave way in August 1937 to “the steepest economic decline since the history of the US” which “lost half the ground gained by many indexes since 1932”. [48]

The 1920s had shown that the non-productive expenditures associated with monopoly capital (marketing expenditures, advertising, speculative ventures, luxury consumption) could postpone crisis but not stop its eventual impact being greater than previously. The 1930s showed that “pump priming” by governments might produce a short-lived and limited revival of production, but could not give a new lease of life to the system either. A more profound change in the direction of state capitalism was needed.

From slump to war

It was here that the German and Japanese examples were significant. The major sections of their ruling classes accepted political options that subordinated individual capitalists to programmes of national capitalist accumulation imposed by the state while repressing the working class movement. The major capitalist groups remained intact. But from now on they were subordinated to the needs of an arms drive which they themselves supported. Armaments and the expansion of heavy industry drove the whole economy forward, providing markets and outlets for investment, as wages lagged behind rising output and profit rates were partially restored.

In Germany such methods pulled the economy right out of the slump (after two years of less effective “pump priming”) and kept it booming while the American economy was slumping again in 1937. By 1939 output had climbed 30 percent above the 1929 level and unemployment had fallen from six million to 70,000, with the creation of eight million new jobs. [49] Most of the new production went into arms and the heavy industries that provided military preparedness, but a tenth of increased output did go into raising private consumption. [50] And the economic expansion itself paid for a large percentage of the cost of fuelling the boom, with only about a fifth of government spending being covered by a budgetary deficit. In effect, the Nazi dictatorship was able to ensure that new investment took place, even though initial profit rates were low.

However, there were major problems with any such policy. Germany was not a self-contained economic unit. The forces of production internationally had long since developed to the point where they cut across national boundaries, and there was a growing need for certain strategic imports as the armaments boom took off. The only way to overcome this while keeping the German economy self-contained, and therefore immune to international recessionary pressures, was to expand the boundaries of the German Reich so as to incorporate neighbouring economies, and to subordinate their industries to the German military drive.

The logic of state-directed monopoly capitalism led to a form of imperialism Lenin had referred to in 1916 – the seizure of “highly industrialised regions”. [51] Beyond a certain point such expansion led to inevitable clashes with other great powers which feared threats to their own empires and spheres of influence. As they reacted by building up their own armed forces, the German and Japanese regimes in turn had to direct even more of the economy towards arms – and to reach out to grab new territory – in order to “defend” the lands they had already grabbed. This provided their capitalists with new sources of surplus value to counter any downward pressure on profit rates. But at the same time it increased the hostility of the existing empires – leading to the need for a greater arms potential and further military adventures. The breaking points were the German seizure of western Poland and the Japanese onslaught on Pearl Harbor. [52]

Just as deepening slump in each major capitalist country had fed into the slumps developing elsewhere, so now did the path out of the slump through military state capitalism.

British and American imperialism could only defend their own positions in the world after the fall of France in 1940 and Pearl Harbor in 1941 by moving on from the half baked state- directed capitalism of the mid-1930s to fully militarised economies of their own. The British state took charge of all major economic decisions, directing which industries should get raw materials and rationing food and consumer goods, with the civilian economy reduced to a mere adjunct of the centrally organised war economy. The US government “not only controlled the armaments sector of the economy, which represented about half the total production of goods. The state decided what consumer goods should be produced and what consumer goods should not be produced.” [53] It spent huge sums building armaments factories which it handed over to private corporations to run. Government capital expenditure in 1941 was 50 percent higher than the country’s entire manufacturing investment in 1939, and in 1943 the state was responsible for 90 percent of all investment. [54] Again a militarised state-dominated economy seemed to provide answers to the problems that had faced the economy before the war. Nine million unemployed became less than one million within three years, and there was a growth in the civilian economy despite the vast expenditure on non-productive output. Total output doubled between 1940 and 1943, and consumer expenditure in 1943 – even when measured in 1940 prices – exceeded those of earlier years. [55] The war economy could achieve what eight years of the New Deal could not – full employment of the productive capacity of the largest of the ageing capitalisms. As John Kenneth Galbraith has noted, “The Great Depression of the 30s never came to an end. It merely disappeared in the great mobilisation of the 40s.” [56]

The Russian variant

There was one other major economy where state direction seemed to provide an alternative to being torn apart in the maelstrom of the world system. This was the USSR. In the 1930s nearly all commentators saw it as based on radically different principles to those of Western capitalism – and this view persisted among many right up until its implosion in 1989–91. The right defined it simply as “totalitarian”, as if there was no dynamic to its economy, and many on the left adopted a mirror image view, speaking of it as “communist” or “socialist”, or those who were more critical as “post-capitalist” [57] or a “degenerated workers’ state”. [58] All these different approaches assumed a high degree of continuity between the Soviet system as it operated in the 1930s and the revolutionary state established in 1917.

But the central mechanisms directing the Soviet economy were not established during the revolution, but in 1928–9 under the impact of a profound economic and political crisis. By that time little remained of the revolutionary democracy that had characterised the country in the immediate aftermath of the October Revolution of 1917. A new bureaucratic layer had increasingly concentrated power in its own hands amidst the devastation of an already economically backward country suffering from three years of world war followed by three years of civil war. Nevertheless, the driving force behind the economy through to the mid-1920s remained the production of goods to satisfy the needs of the population, and living standards rose from the abysmal levels of the war and civil war years, even if bureaucrats’ living standards rose disproportionately more than those of workers and peasants.

Then in late 1928 a wave of panic hit the bureaucracy in the face of warlike threats from Britain and a domestic crisis as peasants held back supplies of food, creating hunger in the cities. [59] Afraid of losing their control over the country through a combination of rebellion at home and armed pressure from abroad, the bureaucracy, led by Joseph Stalin, turned pragmatically to a series of measures that involved super-exploitation of the peasantry and the working class in order to build the industry the country lacked. The cumulative effect was to push the whole economy towards a new dynamic other than that of fulfilling people’s needs – a dynamic ultimately determined by military competition with the various Western states.

As the Czech historian Michael Reiman has said:

There were not enough resources to guarantee the proposed rate of industrial growth. The planning agencies therefore decided ... to balance the plan by means of resources the economy did not yet have at its disposal ... The fulfilment of the plan depended on a very brutal attack on the living and working conditions of industrial workers and the rural population ... This was a plan of organised poverty and famine. [60]

Stalin, justifying the subordination of everything else to accumulation, insisted, “We are fifty or a hundred years behind the advanced countries. We must make good this lag in ten years. Either we do it or they crush us.” [61] “The environment in which we are placed ... at home and abroad ... compels us to adopt a rapid rate of growth of our industry.” [62]

In undertaking the task of accumulation, the bureaucracy substituted itself for a capitalist class that no longer existed. But the methods it used were essentially those of capitalist industrialisation elsewhere in the world. “Collectivisation” – in reality the state takeover of the land – increased the proportion of agricultural output available for industrial accumulation while driving a very high proportion of the peasantry from the land, just as enclosures had for England’s early capitalists. The growing industries were mainly manned by wage labour – but some subordinate tasks were carried out by some millions of slave labourers. The rights workers had held onto through the 1920s were abolished.

Control of the economy by a single centralised state bureaucracy with a monopoly of foreign trade meant accumulation could proceed without interruption, as in the militarised state monopoly capitalisms of the West. But the economy could not be isolated completely from the wider world system, any more than those of Germany and Japan could in the late 1930s. Importing machinery for industrialisation from the West depended on export earnings from grain at a time of falling world prices – and that depended on the state seizing the grain from starving peasants, some millions of whom died. Preobrazhensky noted, “As exporters we [the USSR] are suffering severely from the world crisis.” [63]

There was, however, a relative isolation from the world economy, and this meant the accumulation could proceed as long as there was some surplus value, regardless of the rate of profit at any particular time. This did not, however, overcome economic contradictions. Fulfilling the production plans for heavy industry and armaments invariably involved diverting resources to them from consumer goods industries, whose output fell even as the economy as a whole expanded at great speed. Such an outcome was the opposite of “planning” in any real sense of the word. If two of us plan to go from London to Manchester but one of us ends up in Glasgow and the other in Brighton, then our “plan” did not guide our action. The same was true of Soviet planning. As in the West competitive accumulation produced a dynamic of growth on the one hand and of chaos, inefficiency and poverty on the other. It also produced a tendency to imperialist expansion beyond national borders, as was shown in 1939 when Stalin divided Eastern Europe with Hitler, taking half of Poland, Estonia, Lithuania and Latvia – only to find in 1941 that Hitler had set his eyes on seizing and pillaging the USSR for German capitalism.

Balance sheet of a decade

In the 1930s there had been a widespread feeling among the supporters of capitalism that it was in deep trouble; among its opponents that it was finished. Lewis Corey had written of the “decline and decay of capitalism” [64], John Strachey that “there can only exist for the capitalist areas of the world an ever more rapid decay” with “the permanent contraction of production” [65], Preobrazhensky of “the terminal crisis of the entire capitalist system” [66], Leon Trotsky of “the death agony of capitalism”. [67] Their prophesies did not seem absurd at a time when the supporters of capitalism were tormented by worries as to what had gone wrong with their supposedly infallible system. Yet the desperate turn to state capitalism and massive arms production allowed the system to enter into a new phase of expansion. The question remained: for how long?

* * *


1. Charles Kindleberger, The World in Depression 1929–39 (London, Allen Lane, 1973), p. 117. See also Albrecht Ritschl and Ulrich Woitek, What Did Cause the Great Depression?, Institute for Empirical Research in Economics, University of Zurich Working Paper 50, 2000, p. 13.

2. See the estimates for GNP in Angus Maddison, Historical Statistics for the World Economy: 1–2003 AD, available at: [download].

3. For a much more detailed account of the spread of the crisis, with sources, see my Explaining the Crisis, pp. 55–62.

4. See figures given in Fritz Sternberg, The Coming Crisis (London, Victor Gollancz, 1947), p. 23; Lewis Corey, The Decline of American Capitalism (London, Bodley Head, 1935), p. 27. Available at

5. Quoted in R. Skidelsky, John Maynard Keynes, Vol. 2 (London, Macmillan, 1994), p. 341.

6. Quoted in W. Smaldone, Rudolf Hilferding, p. 105.

7. See, for instance, Randall E. Parker, Economics of the Great Depression, p. 14.

8. See the summary of the Austrian view by Randall E. Parker, Economics of the Great Depression, pp. 9–10. See also F.A. Hayek, Pure Theory of Capital (London, Routledge and Keegan Paul, 1941), p. 408, and Profit, Interest and Investment (London, Routledge, 1939) pp. 33, 47–49, and 173. For a very good contemporary exposition of Hayek’s position see John Strachey, The Nature of Capitalist Crisis (London, Victor Gollancz, 1935), pp. 56–82.

9. Figures given by Corey in The Decline of American Capitalism. Robert Brenner and Mark Glick, The Regulation Approach: Theory and History, New Left Review, 1:188 (1991), argue that wages rose sharply in the years before the Crash, but the graph they provide from S. Lebergott, Manpower in Economic Growth (New York, McGraw-Hill, 1964) only suggests a rise of about the same level as Corey’s figures.

10. Michael A. Bernstein, The Great Depression (Cambridge University Press, 1987), p. 187. He adds that for the population as a whole it rose 13 percent, and for the top 1 percent of the non-farm population the figure was 63 percent.

11. Robert J. Gordon, The 1920s and the 1990s in Mutual Reflection, paper presented to economic history conference, Duke University, pp. 26–27 March 2004.

12. Alvin Hansen, Full Recovery or Stagnation (London, Adam and Charles Black, 1938), pp. 290–291. Hansen’s figures were for 1924–29.

13. Simon Kuznets, Capital in the American Economy (Oxford University Press, 1961) p. 92.

14. Joseph Gillman, The Falling Rate of Profit (London, Dennis Dobson, 1956), p. 27.

15. Joseph Steindl, Maturity and Stagnation in the American Economy (London, Blackwell, 1953), p. 155 and following.

16. Alvin Hansen, Full Recovery or Stagnation, p. 296.

17. As above, pp. 296 and 298.

18. See the calculations in Lewis Corey, The Decline of American Capitalism, Chapter 5.

19. As above, p. 170.

20. Barry Eichengreen and Kris Mitchener, The Great Depression as a Credit Boom Gone Wrong, Bank of International Settlements, Working Papers No. 137, September 2003. Available at

21. L. Corey, The Decline of American Capitalism, p. 172. Compare also Gillman, pp. 129–130.

22. Barry Eichengreen and Kris Mitchener, The Great Depression as a Credit Boom Gone Wrong.

23. See, for instance, the account given by E.A. Preobrazhensky in The Decline of Capitalism (M.E. Sharp, 1985), p. 137.

24. See, for instance, Robert J. Gordon, The 1920s and the 1990s in Mutual Reflection.

25. C. Kindleberger, The World in Depression 1929–39, p. 117.

26. Marx, Capital, Volume Three, p. 473.

27. Alvin Hansen, Economic Stabilization in an Unbalanced World (Fairfield, NJ, A.M. Kelley, 1971 [1932]), p. 81.

28. C. Kindleberger, The World in Depression 1929–39, p. 117.

29. Milton Friedman and Anna Schwartz, The Great Contraction 1929–33 (Princeton University Press, 1965), p. 21.

30. John Strachey’s 1935 account of these contradictory arguments still makes powerful reading today. See Strachey, The Nature of the Capitalist Crisis, pp. 39–119. For interviews with past and present mainstream economists putting forward different interpretations, see the two volumes by Randall E. Parker, Reflections on the Great Depression (Edward Elgar, 2002) and The Economics of the Great Depression.

31. J.M. Keynes, General Theory of Employment, Interest and Money, p. 164.

32. As above, p. 59.

33. As above, pp. 161–162.

34. As above, pp. 135–136 and 214.

35. As above, p. 219.

36. As above, p. 316.

37. As above, p. 221. For Keynes’s account of the “marginal efficiency of capital” and its tendency to “diminish”, see pp. 135–136, 214, and especially, 314–324. For a comparison of Keynes’s position with Marx’s, see Lefteris Tsoulfidis, Marx and Keynes on Profitability, Capital Accumulation and Economic Crisis, available at [no longer available online]

38. Hayek’s recognition of the physical as well as the value character of production distinguishes his writings from those of most of the rest of the marginalist neoclassical school. He admits the importance of Marx in developing such ideas. See F.A. Hayek, Prices and Production, p. 103. This provides him with certain insights missing in Keynes, despite the much more reactionary conclusions Hayek draws. He was too honest for many of his disciples, who can’t accept the implication that crises are inevitable.

39. F.A. Hayek, Prices and Production, quoted in Strachey, The Nature of the Capitalist Crisis, p. 108.

40. See the calculations in Joseph Gillman, The Falling Rate of Profit; Shane Mage, The Law of the Falling Rate of Profit: Its Place in the Marxian Theoretical System and its Relevance for the US Economy (PhD thesis, Columbia University, 1963, released through University Microfilms, Ann Arbor, Michigan); Gérard Duménil and Dominique Lévy, The Economics of the Profit Rate (Edward Elgar, 1993), p. 254; Lewis Corey, The Decline of American Capitalism gives figures for the 1920s only.

41. For profitability before 1914, see Tony Arnold and Sean McCartney, National Income Accounting and Sectoral Rates of Return on UK Risk-Bearing Capital, 1855–1914, Essex University Working paper, November 2003, available at For profitability before and after the First World War, see Ernest Henry Phelps Brown and Margaret H. Browne, A Century of Pay (London, Macmillan, 1968), pp. 412 and 414; tables 137 and 138.

42. Theo Balderston, The Beginning of the Depression in Germany 1927–30, Economic History Review, 36:3 (1985), p. 406.

43. Calculations from Joseph Gillman, The Falling Rate of Profit, p. 58; Shane Mage, The Law of the Falling Rate of Profit, p. 208; and Gérard Duménil and Dominique Lévy, The Economics of the Profit Rate, p. 248 (figure 14.2).

44. These are to be found in Marx, Capital, Vol. 3, part V.

45. This is interpreting Grossman’s account as showing how capitalism is driven to extreme crises, not to a breakdown from which it has no escape. See Rick Kuhn, Economic Crisis and Social Revolution, School of Social Science, Australian National University, February 2004, p. 17.

46. E.A. Preobrazhensky, The Decline of Capitalism, pp. 33 and 29. Preobrazhensky was, however, vague as to how this impeded recovery from the crisis. Like many Marxist economists of the first decades of the 20th century he did not pay much attention to the passages in Marx on the tendency of the rate of profit to fall.

47. Michael Bleaney, The Rise and Fall of Keynesian Economics (London, Macmillan, 1985), p. 47.

48. Charles Kindleberger, The World in Depression 1929–39, p. 272.

49. Figures given in Fritz Sternberg, Capitalism and Socialism on Trial (London, Victor Gollanz, 1951), p. 353; Arthur Schweitzer, Big Business in the Third Reich (Bloomington, Indiana University Press, 1964), p. 336.

50. Arthur Schweitzer, Big Business in the Third Reich, p. 335.

51. See Chapter Four.

52. Chris Harman, Explaining the Crisis, p. 71.

53. Fritz Sternberg, Capitalism and Socialism on Trial, pp. 494–495.

54. A.D.H. Kaplan, The Liquidation of War Production (New York, McGraw-Hill, 1944), p. 91.

55. As above, p. 3.

56. John Kenneth Galbraith, American Capitalism (Transaction Publishers, 1993), p. 65. The view that the depression only really ended with the war is accepted by most of the mainstream economists interviewed in Parker’s two volumes.

57. The view of Paul Sweezy and Paul Baran in the US, of the editorial team of New Left Review in Britain, [of] the left wing of European social democracy, and of the great majority of academic Marxists.

58. Trotsky had developed this notion in the 1930s, and it continued to be accepted by supposedly “orthodox” Trotskyists until the collapse of the USSR in 1991 –and in a few cases even afterwards.

59. M. Reiman, The Birth of Stalinism (London, Taurus, 1987), pp. 37–38, provides an account of the crisis based on internal documents.

60. As above, p. 89.

61. Joseph Stalin, Problems of Leninism, quoted in Isaac Deutscher, Stalin (London, Oxford University Press, 1961), p. 328.

62. Stalin, quoted in E.H. Carr and R.W. Davies, Foundations of a Planned Economy, Volume One (London, Macmillan, 1969), p. 327.

63. E.A. Preobrazhensky, The Decline of Capitalism, p. 166.

64. Lewis Corey, The Decline of American Capitalism, p. 484. His concept of decline did not rule out short periods of growth, but with “shorter upswings” and longer “depressions”.

65. John Strachey, The Nature of Capitalist Crisis, pp. 375–376.

66. E.A. Preobrazhensky, The Decline of Capitalism, p. 159.

67. Leon Trotsky, The Death Agony of Capitalism and the Tasks of the Fourth International (1938), available at

Last updated on 05 April 2020