Chris Harman

Zombie Capitalism

Part Two: Capitalism in the 20th Century

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The Long Boom

The “Golden Age” of Western capitalism

Many economic forecasters expected the world economy to slip into crisis again after the war, after a brief period of boom as in 1919. It did not happen. What followed was the longest boom that capitalism had ever known – what is often now called “the golden age of capitalism”, or in France, “the glorious thirty years”. By the 1970s American economic output was three times the 1940 level; German economic output was five times the (depressed) level of 1947; French output up fourfold. A thirteen-fold increase in industrial output turned Japan, still thought of as a poor country in the 1940s, into the second largest Western [1] economy after the US. And along with economic growth went rising real wages, virtually full employment and welfare provision on a scale people had only been able to dream of previously.

Conditions were very different in Asia, Africa and Latin America – what became known as the “Third World” after the Bandung conference of 1955. There massive poverty remained the lot of the vast mass of people. But the European powers were forced to relinquish their colonies, and increased per capita economic growth [2] created the expectation that eventually the economically “less developed” countries would begin to catch up with the most advanced.

It became the orthodoxy on both the right and much of the left to proclaim that the contradictions in the system perceived by Marx had been overcome. The key change, it was argued, was that governments had learnt to intervene in the economy to counteract tendencies to crisis along the lines urged in the 1930s by John Maynard Keynes. All that was needed for the system to work was for the existing state to disregard old free market orthodoxies and to intervene in economic life to raise the level of spending on investment and consumption. This could be done either by changes in interest rates (“monetary measures”) to encourage private investment, or through increasing government expenditure above its tax revenues (“fiscal measures”). “Deficit financing” of the latter sort would increase the demand for goods and so the level of employment. It would also pay for itself eventually through a “multiplier effect” (discovered by Keynes’s Cambridge colleague Richard Kahn). The extra workers who got jobs because of government expenditures would spend their wages, so providing a market for the output of other workers, who in turn would spend their wages and provide still bigger markets. And as the economy expanded closer to its full employment level, the government’s revenue from taxes on incomes and spending would rise, until it was enough to pay for the previous increase in expenditure.

These two measures were soon seen as the archetypal “Keynesian” tools [3] for getting full employment and accepted as essential for economic management by both Conservative and social democratic politicians in the 1940s, 1950s, 1960s and early 1970s. Keynes had, as we saw in the last chapter, expressed more radical notions at points, notably the contention that the very process of expanding capital investment led to a decline in the return on it – “the marginal efficiency of capital”. [4] He had even gone so far as to urge the gradual “euthanasia” of the “rentier” who lives off dividends [5] and to argue that “a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment”. [6] But Keynes himself shied away from these more radical insights – “in practice he was very cautious indeed” [7], writes his ultra-moderate biographer Robert Skidelsky, and the version of Keynesianism [8] that hegemonised mainstream economics for the 30 years after the Second World War purged Keynes’s theory of its radical elements. For this reason, the radical Keynesian Joan Robinson denounced it as “bastard Keynesianism”. [9]

Mainstream economics believed in those years that it had the capacity to enable governments to do away with the crises that had plagued capitalism since the early 19th century. The capitalist system could now, the orthodoxy preached, deliver endless prosperity, rising living standards and a decline in the level of class struggle – providing governments accepted its diktats and avoided the “mistakes” of 1929–32.

John Strachey had been by far the best known Marxist writer on economics in Britain in the 1930s. His books, The Nature of Capitalist Crisis, The Coming Struggle for Power and The Theory and Practice of Socialism had taught Marxist economics to a whole generation of worker activists and young intellectuals, with the message that capitalism could not escape from recurring and ever deeper crises. Yet by 1956 he was arguing, in his book Contemporary Capitalism, that Keynes had been right and Marx wrong on the crucial question of whether the capitalist crisis could be reformed away. [10] Keynes’s only mistake, Strachey held, was that he failed to see that the capitalists would have to be pressurised into accepting his remedies: “The Keynesian remedies ... will be opposed by the capitalists certainly: but experience shows they can be imposed by the electorate.” [11]

The belief that Keynes’s ideas were responsible for the long boom persists today, with a widespread view on the left that the abandonment of those ideas is responsible for the crises of recent years. This is essentially the position put forward by the journalists Dan Atkinson and Larry Elliot in a series of books [12], the Observer columnist Will Hutton [13] and the radical economic consultant Graham Turner. [14] A version of it is accepted by some Marxists. Gérard Duménil and Dominique Lévy ascribe the post-war growth to a “Keynesian” approach by industrial capital, in which accumulation was based on a “compromise” with working class organisations on the terrain of the welfare state. [15] David Harvey presents a picture of capitalism expanding on the basis of “a class compromise between capital and labour” in which “the state could focus on full employment, economic growth and the welfare of its citizens”, while “fiscal or monetary policies usually dubbed ‘Keynesian’ were widely deployed to dampen business cycles and to ensure reasonably full employment”. [16]

Yet the most amazing fact about the period in which Keynesianism reigned supreme as the official economic ideology was that the measures it proposed for warding off crises were not used. The economy expanded despite their absence until the 1960s in the US and the 1970s in Western Europe and Japan.

As R.C.O. Matthews long ago pointed out, the economic expansion of the post-war years in Britain did not depend on the specific Keynesian “remedies” to recurrent crises of budget deficits or a higher level of government investment than in the pre-war years. [17] Meghnad Desai has noted, “In the USA Keynesian policies were slow to be officially adopted ... They finally triumphed with the Kennedy-Johnson tax cut of 1964.” [18] That was after the Great Boom had already lasted 15 years (25 years if you exclude the shortlived recession of the late 1940s). The same point is made for Germany by Ton Notermans: “Countercyclical demand management policies were only pursued in Germany ... during the 1970s.” [19] In so far as government intervention was used to determine the speed of the economy, it was to slow down booms, not to avert recessions, as with the “stop go” policies of British governments faced with balance of payments problems in the 1950s and 1960s. Michael Bleaney, re-analysing the figures used by Matthews and others, concludes that Keynesianism played little role in the West European long boom, and only a limited one in the US. And he notes that it was the big increase in US levels of military expenditure compared with the pre-war years that provided most of the “fiscal stimulus”: “Largely because of much higher defence spending, total government spending on goods and services increased by nearly 9 percent of potential GNP.” [20]

The explanation of the boom as a result of Keynesian policies is often combined with references to a “Fordist” period in which the great capitalist corporations accepted a compromise with workers based on wages high enough to buy a continually increasing amount of output. The French economist Michel Aglietta, for instance, has argued that “Fordism” regulated “private working class consumption” by “generalising the wage relation” to guarantee “the maintenance cycle of labour power”. [21] So, for him and his “Regulation School” version of Marxism, Keynes is the prophet of Fordism, with Keynes’s criticism of neoclassical economics and his notion of “effective demand” a partial recognition of the need for production and consumption to be integrated at a certain stage of capitalist development.

Certainly, one element in the dominant state interventionist ideology of the post-war decades was the contention that welfare provision could counterbalance cyclical ups and downs in the demand for consumer goods. The “supply side” need of capital to ensure the reproduction of labour power for it to exploit (which we have looked at in Chapter Five) seemed to coincide with “demand side” worries about keeping markets expanding. Promises to expand welfare provision also suited social democrat and Christian Democrat parties in Europe as a way of winning votes and luring workers away from the Communist parties to their left. Yet none of this is adequate to explain why the global economy should boom in the post-war years after slumping pre-war.

What is more, there was no conscious policy by the “Fordist” managers of mass production industries to opt for such a supposed “Keynesian” policy of raising real wages and welfare provision. As Robert Brenner and Mark Glick say, US capital never:

resigned itself to the principle of maintaining labour’s share or failed to fight tooth and nail to limit the degree to which wages kept up with the cost of living or with productivity. There was never anything resembling a generalised “social contract” on how revenue was to be divided between investment and consumption or between profits and wages. [22]

The reality was that as capitalism expanded in the post-war decades, the full employment that resulted forced employers and the state to pay much more attention than previously to reproducing labour power and deflecting working class discontent. Both the conventional Keynesian account and “Regulation” theory confuse causes with effects. In the process they fail to account for the most significant feature of the post-war decades: the rate of profit in the US was between 50 and 100 percent higher than in the four decades before the Second World War. And it more or less sustained that higher level until the late 1960s. [23] It was this which explained why capitalists kept investing on a scale sufficient to keep the economy booming without most states needing even to try using the “counter-cyclical measures” suggested by Keynes. But how were such high profit rates achieved and sustained alongside rapidly rising real wages?

Part of the answer lies in the impact of the slump and the war. Some firms had gone bankrupt in the slump. Much capital had been written off. Restructuring through crisis had begun to perform some of its old role of allowing capital to undertake renewed accumulation with a lower rate of profit. The destruction of the war provided further assistance. Vast amounts of investment which would otherwise have raised the ratio of investment to labour (and therefore profits) were instead used for military purposes. Shane Mage, for instance, estimated the combined effect of the crisis of the 1930s and the Second World War on the US economy: “Between 1930 and 1945 the capital stock of the US fell from 145 billion dollars to 120 billion dollars, a net disinvestment of some 20 percent.” [24] Written off was an amount equal to a fifth of the pre-existing accumulated surplus value plus all the additional surplus value produced over those 15 years. Meanwhile, capitalists in the defeated states, Germany and Japan, emerged from the war with much of their capital destroyed. They had no choice but to write off much of the value of old investments as they began accumulation afresh, with a skilled labour force forced to accept low wages by the massive unemployment resulting from military devastation.

But these factors are not, in themselves, a sufficient explanation for the length and continuity of the boom. They do not explain why profit rates did not resume their downward slope once new productive investment came into effect. Had capitalism continued on its pre-war trajectory there would have been crises at least every ten years or so. Yet, although there were periodic dips in growth rates, sometimes described as “growth recessions”, there was only one brief spell of falling output in the US (in 1949) and none in the other major industrial countries for more than a quarter of a century.

Attempts have been made to explain the boom as a result of rapid technological innovation, the waves of immigration of young workers in the 1950s and 1960s, or the cheapening of raw materials from the non-industrial countries. But such things had not been able to prevent cyclical crises previously. Technological innovation might have reduced the cost of each unit of new investment, but it would also have reduced the life span of old investments, so increasing deductions from profits due to depreciation costs; massive immigration to Britain from Ireland and to the US from Europe had characterised the 19th century without stopping pressures on profit rates; the cheapening of raw materials was in part caused by the way the boom itself encouraged capitalists to produce synthetic substitutes within the industrial economies (artificial fibres, plastics, etc.).

There was, however, one new factor that could explain what was happening. There was an unprecedented level of peacetime arms spending. It had been only a little over 1 percent of GNP in the United States before the war. Yet post-war “disarmament” left it at 4 percent in 1948, and it then shot up with the onset of the Cold War to over 13 percent in 1950–53, remaining between five and seven times the level of the inter-war years throughout the 1950s and 1960s.

The military consumed an enormous quantity of investible surplus value that would otherwise have gone into the productive economy – according to a calculation by Michael Kidron, an amount equal to 60 percent of US gross fixed capital formation. The immediate impact of such spending was to provide a market for the output of major industries:

More than nine-tenths of the final demand for aircraft and parts was on government account, most of it military; as was nearly three-fifths of the demand for non-ferrous metals; over half the demand for chemicals and electronic goods; over one-third the demand for communication equipment and scientific instruments; and so on down the list of eighteen major industries one-tenth or more of whose final demand stemmed from governmental procurement. [25]

The role of military expenditure has been ignored by most mainstream Keynesian accounts of the post-war boom and by many Marxists. On both sides there has been a tendency to identify capitalism with the pure “free market” form it took for a brief period in Britain in the 19th century and to see the state and the military as extraneous to it. Missing has been any sense of the changes that had already begun to be analysed by Hilferding, Bukharin and Lenin, let alone the further transformations brought about through slump, war and the Cold War.

Some Marxists and a few Keynesians did, however, grasp one important impact of arms spending. It provided a market for the rest of the economy that was not affected by the ups and downs of the wider economy – a buffer that limited the downward movement of the economic cycle. So the American Marxists Paul Baran and Paul Sweezy could see arms spending as an important mechanism for absorbing an ever growing “surplus” and overcoming overproduction. [26] They could not, however, explain why taxation to pay for it did not have the effect of reducing demand elsewhere in the economy. And, as Michael Bleaney has pointed out, the military purchases of the US government could not have played a major direct role in boosting the European economies. [27]

The account of the impact of waste expenditure (see Chapter Five) on the dynamic of the wider economy provided by Kidron was able to deal with such problems, since its starting point was not “underconsumptionism” but the rate of profit. Arms expenditure, like “unproductive” expenditures, might be a deduction from profits in the short term, but in the long term it had the impact of reducing the funds available for further accumulation and so slowed the rise in the ratio of investment to the employed labour force (the “organic composition of capital”).

Kidron’s logic found empirical confirmation in what actually happened to the organic composition of capital. Its rise in the post-war decades in the US was much slower than in the pre-slump decades. [28] It was also much lower than that which occurred in post-war Europe, where the proportion of national output going into arms spending was considerably lower than in the US. [29]

Arms, accumulation and planning

The arms economies were not a result of a conscious strategy aimed at warding off slumps. They followed from the logic of imperialist competition in the Cold War era. But sections of capital certainly appreciated their effects in keeping the boom going. “Military-industrial complexes” emerged, drawing together the military and those in charge of the arms industries, which had a direct interest in pushing forward the inter-imperialist conflicts. They were able to unite the ruling class as a whole behind their policies not only because of fear of the rival power, but also because of the effect of arms budgets in sustaining accumulation.

John Kenneth Galbraith described in the 1960s the inter-relation between government expenditure and what he termed the “planning system” by which each large corporation planned its investments many years in advance:

Although there is a widespread supposition to the contrary, this increase [in state expenditures] ... has the strong approval of the businessmen of the planning system. The executive of the great corporation routinely opposes prodigality in government expenditure. But from his pleas for public economy defence expenditures are meticulously excluded. [30]

One effect of such expenditures was to allow the great corporations to undertake long-term planning of their own investments with the assurance that they would be able to make a profit on them and turn it into cash by selling their goods (“realising their surplus value”, to use Marx’s terminology). This changed their internal operations in ways which seemed to contradict the usual assumption about capitalist behaviour being motivated by shortterm profit requirement and price competition for markets.

Galbraith painted a picture of how the situation appeared:

The market is superseded by vertical integration. The planning unit takes over the source of supply or the outlet; a transaction that is subject to bargaining over prices and amounts is thus replaced with a transfer within the planning unit ... As viewed by the firm, elimination of a market converts an external negotiation and hence a partially or wholly uncontrollable decision to a matter for purely internal decision. Nothing, we shall see, better explains modern industrial policy – capital supply is the extreme case – than the desire to make highly strategic cost factors subject to wholly internal decisions. Markets can also be controlled. This consists in reducing or eliminating the independence of action of those to whom the planning unit sells or from whom it buys ... At the same time the outward form of the market, including the process of buying and selling, remains formally intact. [31]

At a time when “the largest 200 manufacturing enterprises had two thirds of all assets used in manufacturing and more than three fifths of all sales, employment and net income” [32], this represented a huge section of the US economy in which most economic operations were not subject to the immediate vagaries of the market. There was competition between the giants, but it was to a large extent undertaken by means different to the old competition to sell goods more cheaply than one another. The giant firms learnt that they could ward off potential competitors by resorting to non-productive methods – the use of their wealth to get a tight grip over distribution outlets; the use of advertising to hype up their own products, regardless of their intrinsic merits; the systematic cultivation of well greased contacts with buyers from governmental bodies.

Galbraith thought this represented a fundamental change in the nature of capitalism itself. And Marxists who defined capitalism simply in terms of the “free market” competition between rival private capitalists could easily come to the same conclusion, since the huge area of production internal to the great corporations was not directly subject to the law of value. Extreme variations in the degree of “x-efficiency” – the internal efficiency of companies – showed how far many differed from the capitalist ideal. And capital did not automatically move under the impact of market forces out of sectors with big fixed investments, a high organic composition of capital and a low rate of profit, as a simplistic reading of Capital might suggest. Whether it did so or not depended on the decisions of managers who might decide to sacrifice short-term profitability for long-term growth within markets over which they already had a stranglehold. If the law of value continued to operate it was in the long term, since eventually corporations would not be able to grow and to keep rivals and newcomers to the industry at bay unless they continued to get enough surplus value to make massive new investments. But often they would only discover whether they had done so once the long boom itself came to an abrupt end.

The other advanced capitalisms

The picture so far has been of the US economy in the post-war boom. It was responsible for approaching half of total world output at the end of the war, and its dynamic determined to a great extent what happened elsewhere. But the big European economies, with substantial but lower levels of arms spending, showed many of the same features. In Britain and to a lesser extent France, great investments in arms industries had the effect of drawing the rest of the economy forward, counteracting some of the pressures for the organic composition to rise and the rate of profit to fall, and permitting continual economic expansion – all without resort to Keynesian measures.

In Germany armaments were less important. But the role of the government remained important. One Marxist account tells how:

far more than in any other capitalist country the bourgeoisie in the Federal Republic made use of the state apparatuses and the monetary and fiscal system to force capital accumulation by means of favourable depreciation rates, credits for reconstruction at favourable rates of interest and finance for investment. All this took place in contradiction to the official neoliberal economic theory ... [33]

In Japan state capitalism advanced further in its influence over civilian industry than almost anywhere else in the Western world – despite a low level of direct state ownership. The state and the largest private firms worked together to ensure that that portion of the national income that had gone into arms before 1945 now went into productive investment:

The motive force for rapid growth was fixed investment in plant and equipment. Private fixed investment grew from 7.8 percent of GNP in 1946 to 21.9 percent in 1961. [34]

When imported raw materials were in short supply in the late 1940s and the 1950s the government took charge of their allocation to industries it thought would best contribute to the growth of the economy, to the building up of key industries like coal mining, iron and steel and the expansion of exports.

The Ministry of International Trade and Industry (MITI) issued “guidelines” to industry which it ignored at its peril. The giant firms that had accepted the dictates of the war economy before August 1945 as essential to military expansion now accepted the dictates of MITI as essential to peaceful economic expansion:

Japanese entrepreneurs are vigorous in investing. They will not confine their fixed investment within the limit of gross profits or internal accumulation, unlike the case of entrepreneurs in other advanced countries. Even if the fixed investment is over and above their gross profits, the enterprise will undertake investment so long as bank finance is available. [35]

In other words, the heads of big business and the state worked together to ensure the growth of Japanese national capitalism by mobilising the whole mass of surplus value and directing it towards “strategic” sectors, regardless of considerations of short-term profitability. What other state capitals did with military considerations uppermost, Japanese state capitalism did in the interests of overseas market competition. Exports played a very important role in driving the economy forwards. And that meant that Japanese growth was ultimately dependent on the US arms economy. As Robert Brenner shows in a highly empirical study:

German and Japanese manufacturers derived much of their dynamism by means of appropriating large segments of the fast-growing world market from the US and UK, while beginning to invade the US domestic market. This redistribution of market share – the filling of orders (demand) by German and Japanese manufacturers that had formerly been supplied by US producers – gave a powerful boost to their investment and output. [36]

It was not “social compromise” and the “welfare state” that produced the long boom and the “golden age”. Rather they were all by-products of militarised state capitalism. Prosperity rested on the cone of the H-bomb. [37]

Labour power in the Great Boom

Throughout the first post-war decades unemployment was at levels known previously only during brief boom periods. In the US unemployment was less than 3 percent in the early 1950s; in Britain it hovered between 1.5 and 2 percent; in West Germany a high level of unemployment caused by the economic dislocation of the early post-war years fell to 4 percent in 1957 and a mere 1 percent in 1960.

So the problem for industrialised capitalist states was not coping with unemployment, but its opposite – ensuring that employment grew at sufficient speed to feed capital’s seemingly insatiable appetite for labour power. The US employed workforce rose by 60 percent between 1940 and 1970. Such expansion demanded completely new supplies of labour power. Whether politicians and government administrators liked it or not, the state could not leave supplying the key raw material for economic or military competition, labour, to the vagaries of a “free” labour market. The state had to supplement – and even partially supplant – the wages system with services and subsidies provided by itself on a much greater scale than previously.

One answer to the shortage of labour power lay in reducing the agricultural workforce still more, with state-sponsored amalgamations of small farms – an approach followed in much of Western Europe. Another lay in encouraging massive emigration of people from less developed countries to the cities of the industrial countries (from Turkey, Eastern and Southern Europe to Germany; from Yugoslavia, Portugal, Spain and Algeria to France; from the West Indies and the Indian subcontinent to Britain; from Puerto Rico to the US). A third solution – again adopted almost everywhere – was the drawing of married women into paid employment. Yet each of the ways of enlarging the labour force created new problems for capital and the state.

Squeezing labour from agriculture could work only if resources were put into agriculture in order to increase its productivity. This could be very expensive. But the alternative was that the provision of food for the growing urban population and raw materials for industry would suffer, creating working class discontent and bottlenecks in accumulation. And eventually there was little in the way of spare labour power left in the countryside to provide for the needs of industry as the peasantry shrank in numbers.

Migration from the Third World was a very cheap way of getting labour power. The advanced country had to bear none of the costs of rearing and educating this part of its labour force – effectively, it was getting a subsidy from the immigrant workers’ country of origin. [38] The new workforce was usually younger than the “native” workforce, and demanded less in the way of health care, old age pensions and so on. And its members were usually more prepared to tolerate low wages, harsh working conditions, rigid discipline and so on – in short, to be super-exploited. The pool from which this new labour came was potentially limitless.

Yet there were practical limits. As migrant workers became accustomed to living and working in their new home, they demanded conditions closer to those of established workers; they wanted decent accommodation and welfare benefits. The state had either to increase its expenditure on these things – or to see growing social tensions that could lead to either intensified class struggles (to a considerable extent the revolt in France in 1968 was a revolt of such new workers) or to “racial” clashes between old established and newer workers. Unable to afford the social expenditure needed to head off such sources of social instability – and eager to deflect discontent away from itself – the state usually reacted by imposing controls on further immigration.

The wholesale entry of married women into the workforce also demanded a certain level of investment by the state. Means had to be found to ensure that it did not lead to the neglect of child rearing – the socialisation of the next generation of workers – or a breakdown in the provision of food, shelter and clothing for the male workforce. Many of these means could be provided, at relatively low cost, with the application of new technology. The refrigerator, washing machine and vacuum cleaner, the replacement of the coal fire by electricity, gas or oil heating, the popularisation of frozen foods, the spread of fast food outlets, even the television set – all had the effect of reducing the amount of effort needed to ensure the reproduction of both present and future labour power. And they usually cost not a penny to the state or capital, being paid for by the family out of the enlarged income it received as the wife took up paid employment. Caring for young children while both their parents worked created greater difficulties, since the provision of nursery facilities could be costly for the state – even if these costs too could often be recouped from the wage of the working wife.

So all the methods of expanding the labour force could work, up to a certain point – but beyond that they tended to imply quite considerable overhead costs. Welfare costs could be borne while the system was expanding rapidly. The “insurance” principle ensured, as we saw in Chapter Five, that some sections of the working class paid for welfare provision to other sections. The extra cost amounted to only 2 or 3 percent of GNP in Western Europe, while in the US the state made a small surplus. [39] But the costs would become a burden once the Great Boom collapsed.

There was another solution available to the labour shortage. But it was even more expensive. It was to increase state expenditure on the reproduction of the labour force, so as to increase the average level of skill. In all the advanced countries there was a considerable increase in educational expenditures during the Great Boom – particularly in the upper grades of secondary education and in higher education. [40]

Finally, there was a third area of expansion of state expenditures designed to increase productivity – expenditures designed to provide a feeling of security for employed workers. Into this category fell old age pensions and unemployment benefits. As James O’Connor noted, “The primary purpose is to create a sense of economic security within the ranks of employed workers and thereby raise morale and reinforce discipline.” [41] Hence in many countries in the late 1960s wage-related unemployment benefits and redundancy payments were introduced. They were the other side of the “shake-out” of labour from older industries.

This “socialisation” of labour costs had some important consequences for the system as a whole. Under conditions of acute labour shortage, the national capitalist state had to tend and care for labour power as well as exploit it if productivity was to match international levels. But this meant that workers had some possibilities of being able to sustain themselves without selling their labour power. There was a partial negation of the character of free labour – but only a partial negation, since the state applied all sorts of pressures to keep people in the labour market.

Yet even this limited “negation” of the free labour market was a burden that put up the overheads of each national capital. As such they exerted a downward pressure on the rate of return on the total national investment. For a long period this did not seem to matter. Other factors were at work protecting the rate of profit. But once the upward dynamic of the boom began to weaken, the costs of welfare became a crucial problem. The two functions – of increasing productivity and buying consent – were no longer complementary. Capital had to try to reduce the cost of maintaining and increasing productivity, even if doing so upset its old mechanisms for keeping control over the working class. This was to be an important factor shaping class struggle once the long boom faltered.

The Eastern bloc

The Western economies and Japan were not the only ones to achieve rapid growth rates during the post-war decades. So too did the USSR and the countries it dominated in Eastern Europe. Soviet electricity output grew by 500 percent between 1950 and 1966, steel output by just under 250 percent, oil output by 600 percent, tractor output by 200 percent, fabric output by 100 percent, shoe output by 100 percent, the housing stock by 100 percent. [42] By the mid-1970s the same consumer goods which had transformed people’s lives in Western Europe and North America – the television set, the refrigerator, the washing machine – were also making their appearance in Soviet and East European homes, even if more slowly. [43] Since the collapse of the Eastern bloc in 1989–91 it has usually been forgotten that in the 1950s and 1960s even by many Western opponents of the USSR took it for granted that its growth rate was higher than regimes elsewhere in the world had achieved. A trenchant critic of the system, Alec Nove could write, “The success of the Soviet Union ... in making itself the world’s second industrial and military power is indisputable.” [44]

But simply growing fast did not overcome the external pressures for more growth, since even after decades of industrialisation the Soviet economy was still less than half the size of its then main military competitor, the US. Indeed, in some ways the pressures grew greater. At the beginning of industrialisation, there were enormous reserves of labour that could be released for industry from agriculture. That meant it was not of any great concern to those at the top of the bureaucracy if much of this labour was used wastefully. It started to matter as the countryside began to empty of young men – leaving much of the agricultural production needed to feed the cities to be done by diminishing numbers of ageing people. The slave labour camps were run down soon after Stalin’s death in 1953, in part for political reasons but also to release inefficient slave labour for efficient exploitation as wage labour. It was an indication that the phase of “primitive accumulation” was at an end. There was recurrent talk within official circles from that time onwards about economic “reform”. During one such phase, in 1970, the leader Leonid Brezhnev spelt out the rationale:

Comrade Brezhnev dwelt on the question of the economic competition between the two world systems. “This competition takes different forms,” he said. “In many cases we are coping successfully with the task of overtaking and outdistancing the capitalist countries in the production of certain types of output ... but the fundamental question is not only how much you produce but also at what cost, with what outlays of labour ... It is in this field that the centre of gravity between the two systems lies in our time.” [45]

This was the same logic of competitive accumulation that operated on the sometimes huge state sector of the Western industrial capitalisms – or, for that matter, on the giant corporations described by Galbraith. The organisation of production inside the USSR might involve the putting together of different use values (so much labour, so many physically distinct raw materials, such and such a particular sort of machine) to produce further use values. But what mattered to the ruling bureaucracy was how these use values measured up to the similar conglomerations of use values produced inside the great corporations of the West. And that meant comparing the amounts of labour used in the USSR to the labour used in the Western corporations. Or, to put it in Marx’s terms, production within the USSR was subject to the law of value operating on the global scale. [46]

One of the illusions created by the rapid non-stop growth of the USSR was that it proceeded smoothly and rationally according to the various Five Year Plans, in contrast with the ups and downs in the West. But the relentless drive to accumulate had as a necessary by-product disorganisation, chaos and waste in whole areas of production. At the beginning of every “plan” vast new industrial projects would begin to be constructed. But after a while it would become clear that they could not all be finished. Some (usually catering for people’s consumption needs) would be “frozen”, while the resources for them were diverted elsewhere (to the production of means of production). This meant a continual chopping and changing of the goods resources were expected to produce; sudden pressure on people to produce more of one product and less of another; concealment by people at every level in the production process of the resources at their disposal in case they were suddenly pressed to produce more; massive amounts of waste as some of the things contained in the plans were produced, but not other things necessary for their use (such as the case in the 1980s when vast amounts of fertiliser were wasted because one of the frozen projects was the building of the factory to provide the bags for packing the fertiliser). [47]

Since the collapse of the Soviet Union it has become habitual on both the left and the right to blame all this simply on bureaucratic irrationality, without acknowledging its similarity to the irrationality of the managerial despotism within Western enterprises – and the common roots of both in the subordination of human labour to competitive accumulation, that is, to the self-expansion of capital. Yet it was possible to trace each of the forms of irrationality within the Soviet economy back to over-investment – just as it is with managerial irrationality within Western corporations.

There was not only waste in the Soviet-type economies. There was also unevenness in growth over time, as in the West. Studies in the 1960s, mainly by Eastern European economists, revealed the presence of cyclical ups and downs in economies modelled on the USSR. The Czechoslovaks Josef Goldman and Karel Korba told in 1968 how:

Analysis of the dynamics of industrial production in Czechoslovakia, the German Democratic Republic and Hungary supplies an interesting picture. The rate of growth shows relatively regular fluctuations ... These fluctuations are even more pronounced if analysis is confined to producer goods. [48]

The Yugoslav Branko Horvat was able to publish a book called Business Cycles in Yugoslavia [49], which pointed out that even before the market reforms of 1968 the Yugoslav economy was “significantly more unstable” than ten other economies that were cited, “including the United States”. A Western academic showed that such unevenness was already visible in the Soviet Union from the time of the first Five Year plan onwards. [50]

The pattern of unevenness showed great similarities with the Western capitalist states during the long boom. Its origin lay in the dynamics of competitive accumulation. As we saw in Chapter Three, at a certain point in any boom the competitive drive of capitalists to invest leads to a drying up of existing supplies of raw materials, labour and loanable capital (i.e. non-invested surplus value). The prices of all these things – commodity prices, money wages and interest rates – begin to rise until the least profitable firms suddenly find they are operating at a loss. Some go out of business. Others survive, but only by abandoning planned investments and closing down factories. Their actions in turn destroy markets for other capitals, forcing them to abandon investments and close down factories. The “excess demand” of the boom gives rise to the overproduction of the slump. The secret of the Western long boom of the 1940s, 1950s and 1960s lay in the way the national state could reduce the pressures leading to over-accumulation (by diverting a portion of capital into non-productive military channels); take direct action to try to maintain a high rate of exploitation (through wage controls); intervene to slow down the boom before it led key firms to become unprofitable; and maintain a minimum guaranteed level of demand through military orders. The state monopoly capitalist arms economy was not able to do away with the cyclical pattern of capitalist accumulation. Specifically, it could not stop competitive pressures causing capitalists to tend to expand production during upturns in the economy on a scale which exceeded the available resources. But it was able to prevent such spells of “over-accumulation” leading to slumps of the pre-Second World War sort.

Something of the same pattern existed in the Soviet-type economies. Bottlenecks arose throughout the economy, threatening the closure of vast sectors of production through shortages of inputs. Output never rose nearly as rapidly as planned. The monetary funds paid out by enterprises for materials and labour exceeded the output of the economy, giving rise to inflationary pressures which found direct expression as price rises or “hidden” expression as acute shortages of goods in the shops.

Left to itself, over-rapid accumulation by certain key enterprises would soon have absorbed the resources many enterprises depended on to keep operating at existing levels, leading to the wholesale closure of their plants and the destruction of the markets for the output of other enterprises. It would have become a crisis of overproduction of commodities. But as in the West in the long boom, the state stepped in to try and pre-empt this by “cooling down” the economy. It ordered enterprises to “freeze” certain investments and to divert resources to others. This involved factories suddenly switching from one sort of output to another. The myth of the pre-planning of production gave way to the reality of after the event, “a posteriori”, allocation, with a repeated shifting of inputs and outputs. One plan target which always suffered in the process was that for consumer goods production. The result was to increase still further the discrepancy between the funds laid out by enterprises on wages and the goods available for these wages to buy – to increase open or hidden inflation.

Deep social and political crises in 1953 (East Germany), 1956 (Poland and Hungary), 1968 (Czechoslovakia) and 1970–71 (Poland again) showed how the tensions this produced could find sudden expression. But so long as it was possible to restore growth rates, the tensions could be reduced, usually by a combination of repression on the one hand and concessions over living standards on the other. Such remedies hid temporarily the underlying pressures towards crisis

Those who failed to analyse the system in terms of competitive accumulation failed to see this. This was true of the Western procapitalist theorists of “totalitarianism”. One can search their writings of the 1950s and 1960s in vain for some hints that Russian type systems contained inbuilt economic contradictions. It was also true of most of those who saw them as some sort of socialist or workers’ states. They were continually over-optimistic about the economic prospects – in their own way mirroring the illusions of the Western Keynesians.

Arms, profits and of the Cold War

The arms budgets of the great powers were central to their economic development. But their roots were not narrowly economic. They flowed from a new struggle to divide and redivide the world between the main victors of the Second World War, the US and the USSR – the Cold War.

The US had aspirations for its industries, the most advanced and productive in the world, to penetrate the whole world economy through “free trade”. The Western European powers, exhausted by the war, were in no position to challenge it directly (although British politicians often expressed a private desire to do so). Russia’s rulers were in a different situation. The war’s end left them dominating virtually the whole of northern Eurasia, from the borders of Western Europe right through to the Pacific. With levels of industrial productivity less than half those of the US, they were in no position to sustain themselves in economic competition through free trade. But they could contest the US attempt at global hegemony by blocking its access to the economies under their control – not just the territory of the old Russian Empire, but also the countries of Eastern Europe which they subordinated to their military-industrial goals. The US, for its part, rushed to cement its hegemony over Western Europe through financing pro-American Christian Democrat and Social Democrat political parties, the Marshall Plan for reviving European industry within parameters favourable to US interests, and the creation of the NATO military alliance and setting up US bases in Western Europe.

The pattern was laid for the next 40 years, of each of the two great powers reaching out to draw as much of the world as possible into its sphere of influence so as to gain a strategic advantage over the other. They fought a bloody war over control of the Korean peninsula, not because of the little wealth it then possessed, but because of the strategic implications for the whole of the East Asian and Pacific region. Each tried over the following decades to extend its sphere of influence by giving aid and arms to states which fell out with its rival.

The Cold War conflict could not be explained by economics as often understood, in terms simply of profit and loss accounting. The armaments bills of both great powers soon exceeded anything their rulers could hope to gain from the increased exploitation of the lesser powers under their control. At no stage in the 1940s or 1950s did total US overseas investment (let alone the much smaller return on that investment) exceed US spending on arms. Even in the period of “disarmament” prior to the outbreak of the Korean War “military expenditure totalled something like $15 billion a year. Thus it was 25 times as high as the sum of private capital exports.” [51] By 1980 total expenditure on “defence” had risen to around $200 billion – less now than total overseas investment of $500 billion, but still substantially more than the profits that could possibly accrue from that investment.

The picture for the USSR was somewhat similar. In the years 1945-50 it pillaged Eastern Europe, removing plant and equipment wholesale from East Germany and Romania, and forced the region as a whole to accept prices below world market levels for goods going to the USSR proper. [52] But even in that period the economic gains from this must have been substantially less than the escalation of the USSR’s arms budget once the Cold War had well and truly begun. And from 1955 onwards fear of rebellion in Eastern Europe led the Soviet government to relax the direct economic pressure on its satellites.

The imperialism which necessitated arms spending was not that of a single empire in which a few “finance capitalists” at the centre made huge super-profits by holding billions of people down. Rather it was the imperialism of rival empires, in which the combined capitalists of each ruling class had to divert funds from productive investments to military expenditure in order to ensure that they hung on to what they already possessed.

The calculation in both Washington and Moscow was simple. To relax the level of military spending was to risk losing strategic superiority to the rival imperialism, enabling it to extend its sphere of dominance. So the Russians lived in fear of an attempted US “rollback” of Eastern Europe, which would have broken these economies from the USSR’s grasp, leading in turn to the possibility of an unravelling of the ties which bound the other constituent parts of the USSR to its Russian centre (something that did in fact happen eventually with the great economic and political crisis that shook the whole Eastern bloc in the years 1989 to 1991). At the same time, the US feared for its hegemony. As one US spokesman put it at the time of the Korean War, “Were either of the two critical areas on the borders of the Communist world to be overrun – Western Europe or Asia – the rest of the free world would be immensely weakened ... in economic and military strength ...” [53]

It was necessary, in other words, to turn vast amounts of value into means of destruction – not in order to obtain more value but to hold onto that already possessed. Such was the logic of capitalist competition applied to the relations between states. So the Cold War amounted to a new inter-imperialist conflict of the sort described by Bukharin, and it soon overshadowed the old imperialist conflicts between the West European powers.

Decolonisation and developmentalism in the Global South

Eighty five percent of humanity lived outside the advanced industrial countries. Their experience of the “golden age” was very far from golden. The great majority still lived in the countryside, and there was little change in the poverty that plagued their daily lives.

One important political change did, however, take place. The West European powers were forced, bit by bit, to abandon direct colonial rule, a process starting with a weakened Britain ending its 190 year old empire in India in 1947 and ending with Portugal handing over power to liberation movements in Africa in 1975. The US replaced Western European influence in some regions. It took control of South Vietnam when the French withdrew in 1954 – until it too was forced to withdraw after the most bitter of wars in the mid-1970s. It became the dominant influence in most of the Middle East and parts of Africa. But, like the European powers, it retreated from formal colonisation, granting independence to the Philippines and keeping direct control only over Puerto Rico.

This retreat from direct colonisation had as a direct corollary the end of the old clashes between the Western powers over the partitioning of the rest of the world. The drive to war between them seemed to have gone once and for all. It was also accompanied, as we have seen, by something else unexpected by the classic theories of imperialism – losing their colonies did not stop Western economies participating in the long boom and conceding regular rises in living standards to their workers. And the advanced countries without any colonies – West Germany, Japan and Italy – had the economies which expanded fastest of all. Meanwhile, for the first two post-war decades, exports of capital stayed down at the very low levels they had sunk to in the great slump of the 1930s. As Mike Kidron pointed out in 1962:

Even in Britain ... the significance of capital exports has declined tremendously: latterly they have run at about 2 percent of gross national product compared with 8 percent in the period before World War One; they now absorb less than 10 percent of savings compared with some 50 percent before; and returns on foreign investment have been running at slightly over 2 percent of national income compared with ... 10 percent in 1914. [54]

The foreign investment that did take place was decreasingly directed towards the less industrialised parts of the world: “The concentration of activity is increasingly within the developed world, leaving all but a few developing countries outside the reach of the new dynamism.” [55]

There was also a shift in the demand for Third World products. Raw materials from agricultural countries had been indispensable for industrial production in the West before the First World War, and colonial control was an important way for industrialised countries to ensure their own supplies and block access to their rivals. But now there were synthetic substitutes for most raw materials – artificial fertilisers, synthetic rubber, rayon, nylon, plastics. A parallel transformation of agriculture in Western Europe and North America reduced food imports from the rest of the world. By the late 1950s withdrawal from colonies in Africa and Asia was no longer the threat it would once have been to the industrialists of the European countries. Companies which had made their fortunes from plantations and mines of the Global South began to diversify their investments into new lines of business.

There was one great exception to this picture – oil. Here was the raw material of raw materials, the ingredient for manufacturing plastics, synthetic rubber and artificial fibres, as well as providing for massively expanding energy needs and propelling the ever greater proliferation of motor vehicles, tanks and aircraft. And the supplies of it were increasingly to be found outside Europe and North America. By the mid-1970s Saudi Arabia, Iraq, Iran, Kuwait, and the petty sheikhdoms around the Arabian Peninsula were the countries that mattered – as was shown by the temporary interruption of supplies during the Arab-Israeli war of 1973. It was not an accident that the one version of old style colonialism that continued to get untrammelled support from all the Western states was the settler state of Israel – fostered in its early years as a “Jewish homeland” by British imperialism, armed for its seizure of 78 percent of Palestine in 1948 by the US and the USSR, allied with Britain and France in their attack on Egypt in 1956, and backed wholeheartedly by the US in the aggression that gave it control of the rest of Palestine in June 1967. [56]

Indigenous governments and capitalist development

The dismantling of the European colonial empires was a fact of immense importance for something like half the world’s people who had lived under their thumb. It also raised very important questions for those who had, in one way or another, fought against the hold of those empires. What happened to imperialism – and the fight against it – if empires no longer existed?

The reaction of many social democrats and liberals in the West was to say that imperialism no longer existed. This was, for instance, the conclusion drawn by John Strachey. In End of Empire (1959) he argued that rising living standards meant businesses no longer needed colonies to absorb the surplus and prevent overproduction. In effect, he was saying that Hobson’s alternative to imperialism, a reflation of the domestic economy, had prevailed and solved the system’s problems.

An important section of the left rejected such reasoning. They could see that the former colonial countries were still plagued by poverty and hunger – and that the Western firms that had benefited from empire remained entrenched in them. What is more, the end of the European empires was not the end to the violence inflicted on the peoples of Third World, as the US state picked up the cudgel of the departing Europeans.

Yet rejection of facile talk about an end to imperialism was often accompanied by quotes, parrot fashion, from Lenin’s 1916 analysis without recognising the changes that had occurred since it was written. His insistence that the great Western powers were driven to divide and redivide the world between them through direct colonial rule hardly fitted a situation in which colonies had gained independence. The response of most of the left was quietly to redefine imperialism to mean simply the exploitation of the Third World by Western capitalist classes, dropping the drive towards war between imperialist powers so central to Lenin’s theory for what was in reality a version of Kautsky’s ultra-imperialism. At the same time they simply replaced talk of colonialism with talk of “neo-colonies” or “semi-colonies”.

Lenin had written of “semi-colonies”. For him these were places like China at the time of the First World War, where “independence” concealed continued political subordination to foreign armed forces in partial occupation of the country. There were some places where things did seem like this after the end of direct colonial control in the 1950s and 1960s. In many cases the departing colonial administrations were able to ensure that their place was taken by their own creatures, with enormous continuity in the personnel of the state, especially when it came to key positions in the armed forces. So, for instance, France had granted “independence” to huge areas of West and Central Africa by handing power to people who continued, as in the past, to work with French companies, use the French currency – and periodically invite French troops in to maintain “order”.

But in some of the most important cases independence did mean independence. Governments proceeded not only to take seats in the United Nations and set up embassies all over the world. They also intervened in the economy, nationalising colonial companies, implementing land reforms, embarking on schemes of industrialisation inspired by the preaching of theorists of economic development or often by Stalin’s Russia. Such things were undertaken with varying degrees of success or failure in India, Egypt, Syria, Iraq, Algeria, Indonesia, Ghana, Equatorial Guinea, Angola and South Korea, as well as by the more radical regimes of China, Cuba and Vietnam. Over time even some of the “docile” ex-colonial regimes began to follow the same path. This was true, for instance, of the Malaysian regime [57], of the Shah’s regime in Iran in the 1960s and early 1970s, and of the Taiwanese regime. Even the dictator Mobutu, brought to power with the help of the CIA in Congo-Zaire in 1965, nationalised the mighty Union Minière de Haut Katanga mining corporation along with 70 percent of export earnings three years later.

To call regimes like Abdul Nasser’s Egypt or Jawaharlal Nehru’s India “neo-colonial” or “semi-colonial” was a travesty – as it was with “populist” regimes in Latin America or the Fianna Fail governments in Ireland. Attempts were made in each case to establish not only independent political entities, but also independent centres of capital accumulation. These still operated within a world dominated by the much stronger capitalisms of the advanced countries, but they were by no means mere playthings of them.

A new “developmentalist” orthodoxy pointed the means by which such economies were meant to close the gap with the advanced industrial nations. It held that capitalist market mechanisms could not achieve that goal. As the staff of the World Bank later recalled of “the dominant paradigm at that time”:

It was assumed that in the early stages of development markets could not be relied upon, and that the state would be able to direct the development process ... The success of state planning in achieving industrialisation in the Soviet Union (for so it was perceived) greatly influenced policy makers. The major development institutions (including the World Bank) supported these views with various degrees of enthusiasm. [58]

Just as Keynesianism was dominant within bourgeois economics in the advanced countries at the time, so statist, “import substitutionist”, doctrines were hegemonic when it came to the Third World. The main proponent of these in the 1940s and 1950s was the very influential United Nations Economic Commission for Latin America, directed by the Argentinian economist Raoul Prebisch. It argued that development could only take place if the state intervened to block imports to foster the growth of new local industries [59], since otherwise “dependence” on the advanced capitalist economies would prevent “industrialisation.” [60]

More radical versions of such “dependency theory” dominated much of the left worldwide in the 1960s. The writings of Paul Baran (especially The Political Economy of Growth) and Andre Gunder Frank (who talked of the “the development of underdevelopment”) [61] dominated most Marxist thinking on the subject (even though Gunder Frank did not see himself as Marxist). [62]

Baran wrote that:

Far from serving as an engine of economic expansion, of technological progress and social change, the capitalist order in these countries has represented a framework for economic stagnation, for archaic technology and for social backwardness. [63]


The establishment of a socialist planned economy is the essential, indeed indispensable, condition for the attainment of economic and social progress in underdeveloped countries. [64]

Gunder Frank was just as adamant:

No country which has been tied to the metropolis as a satellite through incorporation in the world capitalist system has achieved the rank of an economically developed country except by finally abandoning the capitalist system. [65]

“Socialism” for Baran and “breaking with capitalism” for Gunder Frank meant following the model of Stalinist Russia. [66]

The “dependency” argument, whether in its mainstream or radical form, was a weak one. It assumed that capitalists from the advanced countries who invested in the Third World would deliberately choose not to build up industry even when it would have been profitable. This did not fit the facts. There was considerable foreign finance of industrial development in Tsarist Russia, Argentina and the British dominions before the First World War. Nor did Western states at all times use their power to prevent industrialisation. Sometimes they did and sometimes they did not. Finally, a ruling class of one country which depends on bigger capitalist countries for much of its trade and investment does not completely lose its ability to forge an independent path of capital accumulation. The European economies, for instance, have long been to a high degree dependent on what happens in the US economy without the European ruling classes simply becoming American puppets.

So pervasive was the view that “capitalism means underdevelopment” that people read it back into some of the Marxist classics. Baran quoted Lenin to back up his case, while even someone as perceptive as Nigel Harris could ascribe such views to “the Bolsheviks in 1917”. [67]

Lenin’s writings on imperialism had in fact put forward a completely different view, as did Leon Trotsky’s writings of the late 1920s. Lenin wrote that the export of capital “accelerates the development of capitalism in the countries to which it is exported” [68], while Trotsky wrote that capitalism “equalises the cultural and economic development of the most advanced and most backward countries” [69], even if as it did so “developing some parts of the world economy while hampering and throwing back the development of others”. [70]

What mainstream dependency theory did do for a period was provide an ideological justification for methods which enabled the rulers of some politically independent states to achieve impressive levels of accumulation, even if only for a period. Argentina’s rate of economic growth through the 1950s and 1960s was comparable with that of Italy [71] and by the early 1970s a third of its workforce was in industry, with only 13 percent on the land. [72] Brazil’s 9 percent growth rate was one of the highest in the world [73] and by the mid-1980s the Economist could refer to Sao Paulo as “a Detroit in the making”. [74] South Korea experienced rapid economic growth of about 8 percent a year after a general, Park Chung Hee, seized power in 1961 and forced the big firms (or chaebols) to work within a framework established by the state and embarked on state capitalist industrialisation.

China, where state control of the economy came closest to the Russian model endorsed by the radical dependency theorists, had an economic growth rate no higher than these figures once it had completed the first short stage of economic recovery from 20 years of civil war and Japanese invasion. The imposition of plans which diverted resources towards new heavy industries – steel, cement, electricity – in a very poor, overwhelmingly agricultural country like the China of the early 1950s meant squeezing the living standards of the mass of the population. What the peasants had gained through land reform in the previous decade, they now lost through rigorously enforced taxation of their output. Then came the ultimately disastrous attempt at collectivisation through so-called People’s Communes, in an attempt to bring about a “Great Leap Forward” in economic development. The leap cut total agricultural output, led to famine in vast areas of the countryside and had to be abandoned. Much of the new industry was far from efficient. The growth of heavy industry out of all proportion to what was happening in the rest of the economy led to acute shortages of inputs needed to keep plants running, and to the production of other goods which had no immediate use. There were massive swings between spells of fast industrial expansion and spells of near stagnation, and many of the grandiose new giant plants were only able to work at a fraction of their capacity.

There was usually growth even in countries that were not as successful as Brazil and South Korea. The manufacturing output in India grew by 5.3 percent a year from 1950 to 1981, and agricultural output by 2.3 percent, even if there was continual disappointment at the economy’s inability to exceed a “Hindu” growth rate of 4 percent. Sub-Saharan Africa had “per capita growth rates of around 2 percent in the early 1960s” which “rose to nearly 5 percent by the end of that decade”. [75] Egypt, whose leader Abdul Nasser nationalised almost all of industry, grew about 6 percent per year through the first half of the 1960s. Such outcomes in terms of levels of economic growth were enough to convince one “revisionist” Marxist, Bill Warren, to come to the conclusion in the early 1970s that most of the rest of the left were wrong. Countries in the Third World could catch up with the West without breaking with capitalism:

The prospects for successful capitalist economic development (implying industrialisation) of a significant number of major underdeveloped countries are quite good ... Substantial progress in capitalist industrialisation has already been achieved ... In so far as there are obstacles to this development, they originate not in current imperialist-Third World relationships, but almost entirely from the internal contradictions of the Third World itself ... The imperialist countries’ policies and their overall impact on the Third World actually favour its industrialisation ... [76]

He provided figures showing the real per capita economic growth that was in fact happening. In challenging the assumption of the radical version of dependency theory he was on strong ground. So too was he when he made the point that if the left saw its main priority as supporting industrialising regimes as “anti-imperialist” it could “find itself directly supporting bourgeois regimes which, as in Peru and Egypt, exploit and oppress workers and peasants while employing anti-imperialist rhetoric”. [77]

But lacking from his analysis was any real accounting for the enormous unevenness between Third World countries, even though his own figures showed that per capita annual growth in two of the most populous countries, India and Indonesia, was only 1.2 percent and 1 percent (compared to 6.8 percent for South Korea, 4.9 percent for Thailand and 7.1 percent for Zambia). He also failed to see that rapid capitalist development was not necessarily smooth and uninterrupted through time:

Private investment in the Third World is increasingly creating the conditions for the disappearance of imperialism as a system of economic inequality between nations of the capitalist world system, and ... there are no limits, in principle, to this process. [78]

This led him to make a prediction that would soon be put to the test – and proved dramatically wrong:

As for future prospects, the World Bank’s view is that the majority of countries in the 1970s will, as in the 1960s, remain free of debt servicing problems ... The first three years of the 1970s strongly suggest that this will be the case. [79]

Warren had taken the crude account by Gunder Frank and Baran that had maintained development was an impossibility of and simply turned it upside down. Lacking was any sense of the chaotic, unpredictable character of economic growth for the weaker sections of the world system that Trotsky insisted on when recognising that capitalism does not always lead to stagnation:

By drawing countries economically closer to one another and levelling out their stages of development, capitalism operates by methods of its own, that is to say, by anarchistic methods which constantly undermine its own work, set one country against another, one branch of industry against another, developing some parts of the world economy while hampering and throwing back the development of others ... Imperialism ... attains this “goal” by such antagonistic methods, such tiger leaps and such raids upon backward countries and areas that the unification and levelling of world economy which it has effected is upset by it even more violently and convulsively than in the preceding epoch. [80]

It was a truth that would affect the lives of many hundreds of millions of people over the next four decades.

In the Global South, as in the West, Japan and the Eastern bloc, variants of what Lenin and Bukharin had called “state capitalism” did permit a long period of economic growth. But those who extrapolated from that to see a smooth, crisis-free future were soon to be proved wrong.

* * *


1. I use the term “Western” as short for “Western style”, in contrast to the “Eastern bloc” countries.

2. Albert Fishlow, Review of Handbook of Development Economics, Journal of Economic Literature, Vol. XXIX (1991), p. 1730.

3. Monetary measures were included in the conventional Keynesian tool kit, although Keynes had been sceptical about their efficacy.

4. J.M. Keynes, General Theory of Employment, Interest and Money, pp. 135–136, 214, 219 and 376.

5. As above, p. 376.

6. As above, p. 378.

7. Robert Skidelsky, John Maynard Keynes, Vol. 2, p. 60.

8. Generally called “orthodox Keynesianism” or “the post-war synthesis”.

9. J. Robinson, Further Contributions to Economics.

10. J. Strachey, Contemporary Capitalism (London, Gollancz, 1956), p. 235.

11. As above, p. 239.

12. The most recent is Dan Atkinson and Larry Elliot, The Gods that Failed (Bodley Head, 2008).

13. See, for instance, Will Hutton, The State We’re In (Jonathan Cape, 1995).

14. Graham Turner, The Credit Crunch (Pluto, 2008). Turner looks to a mixture of the ideas of Keynes and the pre-war monetarist Irving Fisher.

15. Gérard Duménil and Dominique Lévy, Capital Resurgent: Roots of the Neoliberal Revolution (Cambridge, Harvard University Press, 2004), p. 186.

16. David Harvey, A Brief History of Neoliberalism, p. 10.

17. R.C.O. Matthews, Why has Britain Had Full Employment Since the War?, Economic Journal, September 1968, p. 556.

18. Meghnad Desai, Testing Monetarism (London, Frances Pinter, 1981), p. 76. See also Robert Brenner, The Economics of Global Turbulence, p. 94.

19. Ton Notermans, Social Democracy and External Constraints, in K.R. Cox (ed.), Spaces of Globalisation (Guildford Press, 1997), p. 206.

20. Michael Bleaney, The Rise and Fall of Keynesian Economics (London, Macmillan, 1985), p. 101.

21. P. Aglietta, Theory of Capitalist Regulation (London, New Left Books, 1979), p. 165.

22. Robert Brenner and Mark Glick, The Regulation Approach: Theory and History, New Left Review, 1:188 (1991). For my own, earlier, criticism of the Regulation School, see Explaining the Crisis, pp. 143–146.

23. See Gérard Duménil and Dominique Lévy, The Economics of the Profit Rate, Figure 14.2, p. 248. For various interpretations of the rate of profit in these decades, see Shane Mage, The Law of the Falling Tendency of the Rate of Profit; Joseph Gillman, The Falling Rate of Profit; William Nordhaus, Brookings Papers on Economic Activity, 5:1 (1974); Victor Perlo, The New Propaganda of Declining Profit Shares and Inadequate Investment, Review of Radical Political Economics, 8:3 (1976); Martin Feldstein and Lawrence Summers, Is the Rate of Profit Falling?, Brookings Papers 1:1977, p. 216; Robert Brenner, The Economics of Global Turbulence; Fred Moseley, The Falling Rate of Profit in the Post War United States Economy; Anwar Shaikh and E.A. Tonak, Measuring the Wealth of Nations. Different ways of measuring are used, and the figures differ somewhat from each other, with some showing a long-term decline and some a dip in the mid 1950s. But none of them show a fall to the level of the first three decades of the 20th century, or to the level of the late 1970s.

24. Shane Mage, The ‘Law of the Falling Rate of Profit’, p. 228.

25. Michael Kidron, A Permanent Arms Economy, International Socialism, 28 (first series, 1967), available at

26. For a longer discussion on the analyses of Baran, Sweezy and Steindl, see the Appendix, Other Theories of the Crisis, in my book Explaining the Crisis.

27. Michael Bleaney, The Rise and Fall of Keynesian Economics, p. 104.

28. Mage argues that it rose 45 percent 1946–60. See The Law of the Falling Tendency of the Rate of Profit, p. 229; Gillman argues that the ratio of the stock of fixed capital to labour employed more than doubled between 1880 and 1900, but grew by only 8 percent between 1947 and 1952; Duménil and Lévy show the capital-output ratio for the US nearly doubling between 1945 and 1970, but quadrupling for West Germany, France and Britain combined (Duménil and Lévy, Capital Resurgent, Figure 5.1, p. 40). They also show (p. 144) output per unit of capital invested (the “productivity of capital”) as falling by about a third in the last two decades of the 19th century for the US, but remaining more or less fixed from 1950 to 1970 – this ratio tends to move in the inverse direction to the organic composition.

29. See Michael Kidron, Western Capitalism Since the War (London, Weidenfeld and Nicolson, 1968). For earlier versions of a “permanent war economy” theory, see the article by T.N. Vance (also known as Walter Oakes) in Hal Draper (ed.), The Permanent Arms Economy (Berkeley, 1970).

30. John Kenneth Galbraith, The New Industrial State (Princeton University Press, 2007), p. 284.

31. As above, pp. 33–34.

32. As above, p. 2.

33. E. Altvater and others, On the Analysis of Imperialism in the Metropolitan Countries, Bulletin of the Conference of Socialist Economists (Spring 1974).

34. K. Hartani, The Japanese Economic System (Lanham, Lexington Books, 1976), p. 135.

35. Miyohai Shonoharu, Structural Changes in Japan’s Economic Development (Tokyo, Kinokuniya Bookstore Co, 1970), p. 22.

36. Robert Brenner, The Economics of Global Turbulence, p. 94.

37. The phrase used by Tony Cliff.

38. Kidron estimated that this resulted in a total transfer of value to the developed countries in 1971 of over $14 billion dollars – Michael Kidron, Capitalism and Theory, p. 106.

39. See Anwar Shaikh, Who Pays for the ‘Welfare’ in the Welfare State?, Social Research, 70:2, 2003,

40. For Britain, see, for instance, Social Trends (1970), which showed that the vast bulk of increasing educational expenditure was concentrated in these areas, while primary education expenditures hardly grew at all.

41. James O’Connor, The Fiscal Crisis of the State (Transaction Publishers, 2001), p. 138.

42. Figures from Alex Nove, An Economic History of the USSR (London, Allen Lane, 1970), p. 387.

43. See the figures in V. Cao-Pinna and S.S. Shatalin, Consumption Patterns in Eastern and Western Europe (Oxford, Pergamon, 1979), p. 62.

44. Figures from Alex Nove, An Economic History of the USSR, p. 387. Angus Maddison’s more recent calculations suggest the output of the USSR grew about three-fold between 1945 and 1965, slightly faster than the 19 states he includes in Western Europe and more than 50 percent faster than the US. [download].

45. Pravda, 24 April 1970.

46. This was a key insight of Tony Cliff in The Nature of Stalinist Russia [1948], reprinted in Marxist Theory After Trotsky, pp. 80–92.

47. D.W. Conklin, Barriers to Technological Change in the USSR, Soviet Studies (1969), p. 359.

48. Josef Goldman and Karel Korba, Economic Growth in Czechoslovakia (White Plains, NY, International Arts and Sciences Press, 1969).

49. Branko Horvat, Business Cycles in Yugoslavia, Eastern European Economics, Vol. X, pp. 3–4 (1971).

50. Raymond Hutchings, Periodic Fluctuation in Soviet Industrial Growth Rates, Soviet Studies, 20:3 (1969), pp. 331–352. The unevenness from year to year is shown clearly in Madison’s figures for GDP, see horizontal-file_03–2007.xls

51. F. Sternberg, Capitalism and Socialism on Trial, p. 538.

52. For details, see my book, Class Struggles in Eastern Europe 1945–83 (London, Bookmarks, 1988), pp. 42–49.

53. New York Times, 5 July 1950, quoted in T.N. Vance, The Permanent War Economy, New International, January–February 1951.

54. M. Kidron, Imperialism: The Highest Stage but One, in Capitalism and Theory, p. 131.

55. J. Stopford and S. Strange, Rival States, Rival Firms (Cambridge University Press, 1991), p. 16.

56. For a succinct account of the role played by Israel as a tool for imperialism see John Rose, Israel, The Hijack State (London, Bookmarks, 1986), available at

57. See the fascinating account of how Malay nationalists used ethnic riots against the country’s Chinese minority to stage a “coup” committed to the path of “state capitalist” development of industries under their own control – Kua Kia Soong, Racial Conflict in Malaysia: Against the Official History, Race & Class, 49 (2008), pp. 33–53.

58. World Bank, World Development Report, 1991, pp. 33–34

59. For summaries of these arguments, see I. Roxborough, Theories of Underdevelopment (London, Macmillan, 1979), Chapter 3; Nigel Harris, The End of the Third World (Harmondsworth, Penguin, 1987) and R. Prebisch, Power Relations and Market Forces, in K.S. Kim and D.F. Ruccio, Debt and Development in Latin America (South Bend, Notre Dame, 1985), pp. 9–31.

60. I. Roxborough, Theories of Underdevelopment, pp. 27–32.

61. A. Gunder Frank, The Development of Underdevelopment, Monthly Review, September 1966.

62. As Roxborough points out, Gunder Frank “never claimed to be a Marxist”, Theories of Underdevelopment, p. 49.

63. P. Baran, The Political Economy of Growth (Harmondsworth, Penguin, 1973), p. 399.

64. P. Baran, The Political Economy of Growth, p. 416.

65. A. Gunder Frank, Capitalism and Underdevelopment in Latin America (Harmondsworth, Penguin, 1971), pp. 35–36.

66. Despite Baran’s preparedness to criticise certain features of Stalin’s rule, he quoted Stalin favourably himself and accepted Stalinist claims about the USSR’s agricultural performance and living standards that were completely false. See, for example, P. Baran, The Political Economy of Growth, p. 441.

67. Nigel Harris, The Asian Boom Economies, International Socialism, 3 (1978–9), p. 3.

68. Lenin, Imperialism, Chapter 4, The Export of Capital.

69. Leon Trotsky, The Third International After Lenin (New York, Pioneer, 1957), p. 18.

70. Leon Trotsky, The Third International After Lenin, p. 209.

71. See the comparison of Italian and Argentinian growth rates in M.A. Garcia, Argentina: El Veintenio Desarrollista, in Debate, 4 (1978), p. 20.

72. Argentina, Citta Future Anno VI, 1 (Rome n.d.), p. 3.

73. Figures given in Geisa Maria Rocha, Neo-Dependency in Brazil, New Left Review, 2:16 (2002).

74. Economist, 29 March 1986.

75. Press release summarising a report for the World Bank by Benno Ndulu, Facing the Challenges of African Growth, available at [No longer available online].

76. Bill Warren, Imperialism and Capitalist Industrialization, New Left Review, 1:81 (1973).

77. As above.

78. As above.

79. As above.

80. Leon Trotsky, The Third International After Lenin, p. 209.

Last updated on 11 May 2021