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Revolutionary Road

Alex Callinicos

The Revolutionary Road to Socialism

Why Capitalism Is in Crisis

The Origins of the Slump

Probably the most common explanation of the world economic crisis is that it arises from factors outside human control. According to this theory the world is running out of natural resources. There just isn’t enough to go round, they say, to keep the present population of the world alive at the standard of living (some of us) have come to expect.

This sort of explanation sees the years 1973 and 1974, when the price of oil rose fourfold, as the crunch point, a sign that the world had reached the limits of economic growth. We have no choice, its supporters suggest, but to accept lower living standards. As for the Third World, the problem is that people are breeding too much. Population is growing much faster than food production, and so it is inevitable that people will starve.

Theories of this kind are sometimes known as Malthusian, after the Anglican clergyman who was the first to argue that the source of poverty was that working people were having too many children. But the Malthusians are wrong. The growth in world food production has consistently kept ahead of the growth in population since the Second World War. The United Nations Food and Agricultural Organisation estimates that the average person needs 2,354 calories a day, and that the world produces about 2,420 per head – and could easily produce more.

The reason why 800 million people don’t have enough to eat is that the most important producers of food are a handful of rich countries – the United States, Canada, Australia, Argentina. The farmers of these countries do not produce meat and grain out of love for their neighbours, but in order to make a profit. The trouble for those 800 million people in the Third World is that they don’t have enough (or any) money to buy the food that the rich offer them. So they go hungry.

The situation is even more obscene than that. The profits of the rich farmers depend on the prices they can get for their products. The prices of goods fluctuate with changes in their supply and demand. When goods are scarce, their prices are high; when they are plentiful, their prices are low. Western governments actually create artificial scarcity in order to keep the prices of their farmers’ goods high. The European Common Market’s wine lakes and butter mountains are famous. In 1982, when there was a bumper harvest of champagne grapes, first-class champagne was turned into vinegar to keep the price – and profits – high. Expensive champagne hits only the rich; expensive butter, meat and grain hits the poor.

Now, in the United States, the biggest food producer of all, the government is paying farmers to keep a portion of their land out of production. So enthusiastic was the response to this government scheme that by March 1983 farmers had agreed to take 82.3 million acres out of production: 35 per cent of wheat acreage, 39 per cent of maize and sorghum, 43 per cent of rice. Grain prices rise as a result, and people who cannot afford to pay go hungry.

Crises today are not caused by natural scarcity. In the past, when people starved, it was a result of harvest failure – there wasn’t enough to go round. Now such scarcity is artificially created. Now we have overproduction. Not too little, but too much is produced – ‘too much’ not compared to people’s needs, but to the profits of those who control the world economy.

The other popular explanation of the crisis claims that it is caused by workers being paid too much. You hear this in a variety of different forms. People say that the trade unions are too powerful, that they are holding the country to ransom. The Tory government and its supporters in Fleet Street say that workers are ‘over-priced’ – in other words, their wages are too high.

The implication of this analysis (like that of the other) is that the way out of the crisis is to cut living standards. In this way, workers will ‘price themselves into jobs’: once wages have been cut far enough, then employers will find it worth their while to take on more workers, and unemployment can be cut.

Once again, this theory doesn’t fit the facts. For one thing, what we are now confronted with is a world recession. In some countries there have been strong and militant trade unions and workers have been able to squeeze large concessions from the employers. Britain and Italy are the best examples in western Europe. But countries such as the United States and West Germany, where the unions are much less militant, have also been hit by the slump, in some cases very hard (German unemployment rose faster than anywhere else in Europe in 1983). So the strength of workers can’t be the cause of the international crisis.

It can’t even explain what has happened in Britain. During Margaret Thatcher’s first term of office, unemployment more than doubled. The government’s own figures show that the take-home pay of a married man with two children on average earnings went up by 39 per cent between 1979 and 1983. Prices went up by exactly the same amount, wiping out this increase, while higher taxes would leave such a worker 4.3 per cent worse off in real terms. Workers on less than average earnings suffered a bigger wage-cut. Meanwhile, unemployment continues to rise, and is expected by forecasters to carry on doing so for the next few years. So lower wages have been accompanied by higher unemployment. So much for workers being ‘priced into jobs’!

The idea that lower wages will solve the crisis isn’t just wrong, it’s mad. If workers’ wages are lower, they can afford to buy fewer goods. Some of those now producing these goods will be laid off. They will have less money to spend, so demand will fall even lower, more workers will be laid off ... and so on, in a vicious spiral.

The theory that high wages are the cause of the slump has one merit. Although mistaken, it unintentionally reveals the real source of the problem. Wages are too high compared to what? Certainly not people’s needs. In order to live decent and fulfilled lives most working people would need much higher wages than they receive at present. Relative to what, then, are wages too high? The answer is, relative to profits. Wages are too high for employers to make what they regard as an adequate profit.

As in the case of the theory that scarcity is the cause of the slump, we come back to profits. Fields go unsown because their crops would not realise a satisfactory profit. Workers are unemployed because it isn’t profitable to give them a job. The central conflict, then, is between the livelihoods of most people on this planet and the profits of the few. So to understand what is wrong we need to grasp what role profits play in the world economic system.

Capitalism – a class society

The basic insight into how societies like our own are run was provided by Karl Marx, who died a hundred years ago, in 1883. In his masterpiece, Capital, Marx pointed out that the economic system in which we live, capitalism, is a class society. The wealth produced in this system depends on the labour of those who work in the factories, mines and offices. As every strike shows, when this labour is withdrawn, capitalism is paralysed. Yet these workers do not control the economic system.

On the contrary, a tiny minority controls what Marx called the ‘means of production’ – land, factories, mines, and the machinery that is used to produce goods. One sociologist estimates that 1,000 companies dominate the British economy. Those who control these companies, and their families, amount to between 25,000 and 50,000 people, less than 0.1 per cent of the population. It is this tiny minority who control and dominate our lives.

The rest of us outside the charmed circle of the rich do not own anything which gives us economic power. At best we may own our homes – and that is a dubious benefit, making us the debtor of some bank or building society. To earn anything more than the pittance which those on the dole receive, we must sell our labour-power, our ability to work, to the capitalist controllers of the economy.

Why do these capitalists employ us? Out of the goodness of their hearts? No – because it is on us that they depend for their wealth. Production in the capitalist system does not take place to meet people’s needs. Its aim is profit. Goods are produced to be sold on the market. They realise a profit when their price is higher than it cost to produce them.

The crucial element in production is labour. Without it, production grinds to a halt. And workers have, from the capitalists’ point of view, the peculiar virtue that they can produce more than it cost to employ them. A worker may, for example, take four hours to produce the equivalent of his or her daily wages. But if he or she works for another four hours every day, what is produced during this time is pure profit for the capitalist.

It is this ‘surplus-value’, as Marx called it, what the worker produces for the capitalist after replacing his or her wages, that is the source of profits. The wealth of the capitalists derives from the exploitation of workers – from the way in which workers are compelled to work for the capitalists, not only to replace their wages, but to create profits.

This is what Marx described as the secret of capitalist production. It is usually assumed that capitalists and workers share the same interests, that they are in the same boat, that there is some ‘national interest’ uniting them. This is not true. At the heart of the capitalist system is the basic conflict of interest between capital and labour which arises from the exploitation of the worker.

This doesn’t mean, however, that all workers are reduced to poverty. The situation is compatible with rises in workers’ living standards. Real wages have increased quite considerably in Britain over the past century. But this increase has been accompanied by an enormous rise in the productivity of labour – in the amount of goods each worker produces. So even if a worker is paid much more than he or she would have been a hundred years ago, he or she also produces much more. So the profits of capital have also risen. In relative terms workers are just as badly off, even if our standard of living has risen.

Profits and Crises

Capitalism, then, is an economic system based on production for profit. But it’s important to understand why capitalists are so interested in profits, and what they do with them. It isn’t a matter of capitalists being greedy – of their wanting profits to spend on wine, women and song (although often they are and they do). when the system is working well at any rate, profits aren’t blown by capitalists on high living; the bulk is reinvested in further production.

This is what Marx called ‘the accumulation of capital’. Profits are squeezed out of workers in order to be themselves invested in squeezing out more profits, which are in turn reinvested ... It is production for production’s sake.

Why does this happen? Above all, because of the pressures of the system. Capitalism, Marx pointed out, is a competitive system. No single capitalist dominates the economy. Instead, a number of different capitalists compete with one another for markets. It is their economic rivalries which force capitalists continually to accumulate, to reinvest profits.

The capitalist who has the lowest costs is likely to dominate the market. So each must invest in improved machinery which will increase the productivity of his workers, and thus give him an edge over his rivals. Any capitalist who fails to keep up will eventually be driven out of business.

The pressure of competition thus compels capitalists to accumulate. When Marx wrote, in the second half of the nineteenth century, the economy was divided into large numbers of small capitalists none of whom dominated their market. Today firms are more likely to be vast semi-monopolies operating on a multinational scale. But the competitive pressures are the same.

For example, Ford UK is apparently obsessed by the fact that productivity in Japanese car plants is six times that of its own workers. The need to match Japanese productivity, or lose markets, leads to the introduction of new technology, and to attempts to reduce costs and speed up production lines.

The effects of competition were, Marx argued, paradoxical. On the one hand, capitalism is an immensely dynamic economic system. Economic rivalries constantly force capitalists to improve productivity and increase output, leading to an enormous expansion in humanity’s power over nature. On the other hand, competition is the source of economic crises.

How this happens is as follows. Competition leads capitalists to reinvest their profits in improving productivity as a way of cutting costs. Now what higher productivity tends to mean is that the amount of plant and equipment each worker sets in motion increases. Imagine the mass of machinery as a ball and chain attached to his or her leg. As time goes on, this ball and chain gets larger and larger. A hundred years ago, building a house involved no more tools than a spade and a trowel – today it needs excavators, cranes, concrete mixers.

From an abstract point of view, this is no bad thing. It means that less and less human labour is required to produce a growing quantity of goods – or houses. We can rely instead on a growing mass of machinery.

But this development causes severe problems for the capitalist. For it means that he has to lay out an ever larger amount of money on plant and equipment for every worker he employs. Yet it is the worker who is the source of the capitalist’s profits – his or her labour produces that surplus above his or her wages. So the cost of investments rises faster than the profits squeezed out of the workforce. In other words, the return that the capitalist gets on his investment, the rate of profit, falls.

This process, which Marx called the tendency of the rate of profit to fall, is fundamental to how capitalism works. It isn’t something that any individual capitalist plans for. On the contrary, any investments he makes are intended to reduce costs and so undercut his rivals. And as long as he is the only one to have made this investment his profits will rise. But once everyone else has followed him, as they must if they are to avoid bankruptcy, then his advantage is wiped out, and the rate of profit falls.

The tendency for the rate of profit to fall is thus an unintended consequence of competition between capitalists. It is the source of the crises which regularly afflict the capitalist system. For there comes a point where the rate of profit has fallen so low that a slump begins.

Firms try to compensate for the falling return on their investments by grabbing a larger share of their markets. Capitalists compete for the labour and raw materials they need to increase production. Demand runs ahead of supply, and prices rise, pushing up costs and eating into profits. This is what happened in the early 1970s, the last time that the world economy experienced a genuine boom. In 1972–3 Western industrial production shot up by an astonishing 10 per cent. But the competition among capitalists which fuelled the boom also forced prices through the ceiling. Between 1971 and 1974 raw-material prices more than doubled. The crunch came when the price of oil quadrupled, precipitating the first great slump since the 1930s.

The fundamental cause of economic depressions is the low rate of profit. The weaker capitalists, who find it difficult to keep their heads above water at the best of times, go into debt and are driven out of business altogether. The stronger ones survive by cutting production and sacking workers. Resources are unused. Some of these resources are human – workers are laid off, school-leavers go straight to the dole queue. Others are material – factories are closed, machinery rusts. Waste takes place on an enormous scale. Bizarrely enough, this waste is very useful to the capitalist system. It permits an economic reorganisation that will restore the rate of profit to a satisfactory level. The pressure of unemployment forces workers to accept lower wages and worse working conditions. And the smaller, less efficient capitalists go bust. The survivors can buy up their plant and equipment cheap.

This goes on until the rate of profit has risen to a level which the capitalists consider to be ‘adequate’. When this point is reached, they are prepared to invest. Workers are taken on, there is more money around so demand for goods rises, and the economy begins to pick up. This carries on until we have a boom and the whole cycle starts off again.

Why shouldn’t this succession of booms and slumps go on for ever? The short answer is that capitalism changes over time. It ages. What this means is that, as a result of competition, the capitalists get bigger and bigger. The hundreds of small individual employers of 100 years ago are replaced by a vast multinational corporation. And often the corporation is owned by the state, like Renault or BP or British Leyland.

This means that bankruptcy becomes a much more serious business. In the nineteenth century an individual employer could go bankrupt without damaging the national economy. This is no longer so in the case of the 1,000 big companies which today dominate the British economy (and the same is true of all the advanced industrial countries). If a significant number of these companies went under, that would break the back of the national economy.

So governments, of whatever colour, pump money into lame-duck firms. Margaret Thatcher has subsidised British Leyland on a massive scale and Ronald Reagan has propped up Chrysler, even though this goes against all their economic principles.

What this means is that economic crises no longer play their role of restoring the rate of profit. Inefficient firms, if they are big enough, aren’t wiped out, but are kept going. The system is clogged up with inefficient capitalists.

This situation is reflected in the persistence of inflation. In the past, prices rose during booms, and fell in slumps. Now they rise all the time. Recessions don’t get rid of inflation, but only slow down the rate at which prices increase. In 1983 there were some four million unemployed in Britain, but the rate of inflation was about five per cent, a very high level by historical standards.

What is more, the times are past when one country could solve its economic recession at the expense of its neighbour – through massive restrictions on trade, for example, or by fighting a small war in Africa to grab new markets. Today we live in one world economy. The motor car or radio set ‘made in Britain’ is in fact made up of parts manufactured everywhere in the world – microchips from Sri Lanka, gearboxes from Spain, seat covers from India, copper wiring from Chile.

Each part of that world economy depends on the whole – and when recession strikes, it strikes everywhere, bringing bread queues in Poland, starvation in Mexico, mass unemployment in Britain.

This means that any policy of import controls to protect national trade is doomed to fail. Those who advocate such controls do so because they believe that imports cause unemployment. In fact, there is little evidence for this. One study of West German manufacturing industry showed that for every one job lost thanks to competition from cheap imports there were forty-eight caused by rationalisation, employers deliberately cutting their own workforces in the quest for higher productivity.

Import controls don’t make sense in a world economy. Countries that apply them invite retaliation. In 1980 the British government tried to cut textile imports from Indonesia worth £10 million. The Indonesian government responded by cancelling contracts for imports from Britain of chemical plant, oil equipment, and other goods worth £150 million. So who gained?

Protectionism isn’t just economic nonsense. It encourages workers to believe that unemployment is caused, not by the capitalists who exploit them, but by their fellow workers in other countries. Yet these workers are often exploited – and thrown out of work – by the same multinational companies. British workers end up supporting their own employers in opposition to German, say, or South Korean workers.

The politics of import controls is nationalist, pitting countries against one another. It carries within it the danger, not just of trade wars, but of real ones. During the Great Depression of the 1930s, protectionism spread like wildfire. World trade shrunk, and states built up their armaments in order to win by military means what they could not gain by economic competition. Economic crises breed war.

Each slump becomes harder for the capitalist system to solve.

This does not mean that slumps are permanent. The cycle of growth and recession will continue as long as capitalism does. Capitalism is an anarchic system, in which production is not under collective social control, but is left to the chances of competition. This means, that economic balance can only be achieved by blundering from one extreme to another, from boom to slump.

The capitalist system is at an impasse. The rate of profit is still too low for a genuine economic revival. The Economist, the big-business magazine, estimates that real wages in Britain would have to be cut by 30 per cent in order to restore the rate of profit to the level it was at in the 1960s. That is a far greater cut than anything Thatcher has been able to achieve, and would require confrontation with the labour movement on a scale that capitalists do not yet seem willing to contemplate.

The crisis has roots deep within capitalism. It can be ended only by abolishing capitalism and replacing it with a planned socialist economy. Collective democratic control on a world scale would end the anarchy of a system that staggers from slump to boom and back to slump again. Socialism would harness the immense productive powers created by capitalism – but it would use those powers to meet people’s needs, not for the pursuit of profit. The working people of the world would co-operate together, rather than being chained to warring nation-states.

Socialism is essential. The only question is how to achieve it.

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Last updated: 2 June 2015