David Yaffe

The State and the Capitalist Crisis

Written: 1976, based on a speech given to the VESVU Conference, Amsterdam in October 1975.
First Published:February 1976. 2nd Edition, September 1978
Source:RCG website
Transcription/Markup:RCG/Steve Palmer
Copyleft:  © David Yaffe, 1976-1998. Permission is granted to copy and/or distribute this document under the terms of the Creative Commons License.

Foreword to the WWW Edition

This speech/article should be seen as a commentary on the ideological debate following the end of the post-war boom. It was a defence of the Marxist standpoint on the theory of crisis and a Marxist analysis of role of the state intervention in the capitalist economies after the Second World War. Much of the material, therefore, should prove valuable to the new generation of comrades returning to Marxism.

It had, however, a number of weaknesses which have been corrected since that period. It did not integrate the theory of crisis and imperialism. Therefore, inevitably, it underestimated capital's ability to divide the working class. One of the most significant features of 'neo-liberalism' has been the rapid increase of economic and political divisions among the working class in imperialist countries such as Britain, with skilled workers and the middle classes supporting the election of Tory governments on four occasions, as poverty increased for larger and larger sections of the working class. It has been the failure of neo-liberal policies over the last few years which, in turn, has driven the more privileged layers of the working class and middle classes back to Blair's Labour Party. For a discussion of the latter see David Yaffe's article The Politics and Economics of Globalisation from FRFI 137 and Robert Clough's Labour: a party fit for imperialism and much other material contained in the Marxism, Larkin Publications and Fight Racism! Fight Imperialism! sections of the RCG/FRFI web site.

November 1998

Foreword to the Second Edition

The article The State and the Capitalist Crisis was based on a speech given to the VESVU Conference, Amsterdam in October 1975. Nearly three years have passed since that conference and it is clear that the arguments put forward in the article have been confirmed by events. While the average rate of inflation has temporarily fallen in the OECD area from a peak of 12.5% in 1975 to about 7% now, unemployment at the beginning of 1978 in the OECD area was over 16 million, some half a million higher than at the trough of the 1975 recession. Recent trends indicate that matters will get worse with both inflation and unemployment rising together again.

In Britain unemployment is over 1.6 million in spite of artificial state-run schemes to keep it down. Although the rate of inflation has fallen it should be remembered that 1977 saw the greatest fall in living standards in any single year in Britain since statistics were kept. The rate of inflation will soon be rising again, even as unemployment increases. True to form the Labour government has used incomes policies and a compliant TUC General Council to hold living standards down. At present the Labour government wants to impose a 5% increase of wages in a period when inflation is nearly 8% and starting to rise.

The last three years has seen an unprecedented attack on state sector workers in order to cut back state expenditure. In the Civil Service alone 12,000 jobs have been lost since April 1976. All the ideological stops were pulled out by the ruling class to divide state sector workers from workers in the private sector all the better to continue the attack on all workers. The government-allocated funds going into Education and Health Service sectors are now simply inadequate to maintain the already poor standard of service that was normal during the post-war boom. A serious deterioration in these sectors is rapidly taking place.

Most of the ideological positions countered in the article have been used by the press and the Labour and Trade Union leadership to hold back any serious opposition to these attacks on the working class. Even those opposing the Labour government policies have been unable to mount a serious counter attack. They rely on precisely those ideological positions - underconsumptionism, regeneration of industry - which undermine any united class response.*

There is one point in the article which needs developing. The article includes a critique of those sections of the working class movement who remain tied within the framework of debate set by the bourgeoisie. What should be pointed out is that this is not simply a question of their holding 'incorrect ideas', but rather an expression of their own material interests, their own real ties to the continued existence of British imperialism. Opportunist currents necessarily develop in the working class movement and become a major barrier to building a revolutionary movement in theworking class. Whether they consist of the Labour and Trade Union leaders who argue for wage restraint and responsible trade unionists or academics and other pseudo lefts who see wage increases as a significant factor causing inflation, such opportunist currents have an interest in the maintenance of the capitalist system.** Their major role will be to contain the movement which will necessarily develop as the working class is forced by the ever-deepening crisis to defend its living standards.

David Yaffe

2nd September 1978

* This is developed in my article 'Trade Unions and the State: The Struggle against the Social Contract' in Revolutionary Communist 7 pp22-29.

** See 'Which Way Forward for Communists? Critique of the British Road to Socialism' in Revolutionary Communist 7 especially p18ff and also the 'Editorial' in the same issue for a discussion of these points.

The State and the Capitalist Crisis


It is very interesting to compare the discussion about what was taken for marxian economics over the last twenty years with the period we are moving into today. I think it can be said that in the period of the post-war boom the bourgeoisie was confident enough to start talking about and discussing Marx. The whole discussion about marxian economics reflected this confidence. It became fashionable to show how Keynes had Marx as precursor or how near to Marx Keynes was or how near to Keynes Marx was and so on. A book Marx and Modern Economics [1] published in 1968 contained the main contributions over the period on this issue. Its title sums up the whole approach. The bourgeoisie was confident, it was living through the post-war boom. It was witnessing the greatest expansion of capitalist production in its history, and so it could be 'liberal' with Marx. Today we see something quite different. The trend has changed as that confidence has been undermined. A major discussion is taking place between economists, which brings back to life the central theories raised by classical political economy in the period before Marx.[2] Once again we have the ideas of Adam Smith and Ricardo as central components of the discussion about the nature of the present crisis.

The bourgeoisie, soon after Marx had written his devastating critique of political economy, completely dropped the categories used and turned to a standpoint which was to become the foundation of neoclassical economics. The very categories which Ricardo had developed, in particular his labour theory of value, had become too dangerous. The very understanding of capitalism as a class society had to be brushed aside. For the bourgeoisie after Marx the question was not whether there was a division of interest between the working class and the capitalist class. It was not only how much the working class but the capitalist class, the landlord, the technician and every other freebooting hireling of bourgeois society contributed to the product. The division was not between the workers and capitalists but an harmonious division between all sections ofsociety. The basic categories that classical political economy had developed and that Marx had exposed to a revolutionary critique, were, in cowardly fashion, laid to rest. Yet today those categories of classical political economy have been revived. A ruling class in decay has to turn to those warriors of yesterday to find its weapons as the class struggle, class divisions become threatening again. They are able to return to classical political economy in spite of Marx's revolutionary critique precisely because the Marxist movement is so weak today. It, therefore, becomes necessary to show not only how vital the categories developed by Marx are for an understanding of the present crisis but also how those categories are political categories and not economic in the narrow sense of the term. I will show how we can understand the present crisis from the standpoint of the categories developed by Marx and in so doing lay the basis for a political defence of the working class.

The first point I want to make is that Marx was not an economist. Marx was not a writer of a book on economics. He wrote a critique of political economy. That is, a critique of the ideas with which the bourgeoisie attempted to understand its own society. In that sense any critique of those ideas today in relation to the crisis is a critique of political economy. But it is more than that, because underlying the solutions that the bourgeoisie puts forward to solve its crisis are those ideas. A critique of those ideas is, therefore, the basis of a critique of the very solutions which the bourgeoisie wishes to use to solve the present crisis at the expense of the working class. So immediately we are involved with a political question, we are involved in a discussion of the various solutions the different classes in society wish to utilize to overcome the present crisis. That is my starting point. I am not talking about economics, in the narrow sense of the term, but about a critique of political economy, a critique of the ideas with which the bourgeoisie attempts to understand its own society. And this includes a critique of those sections of the working class movement who remain tied within the framework of debate set by the bourgeoisie.

The way capitalism presents itself

Why do we need a theory of crisis? Is such a theory really necessary in dealing with the present problems of world capitalism? I want to explain why a theory of crisis is an essential political weapon. The major problems faced in understanding capitalism arise because of the way capitalist relations of production appear to the working class, the capitalists and to those studying it. Things appear in inverted form. Everything appears to be the opposite of what it actually is. Let us consider an example of this that Marx discussed in Capital. The wage-labour relation seems to be an equal relation. The worker sells his labour power to the capitalist and the capitalist buys that labour power and there seems to be a fair exchange. In the working class movement in Britain there has grown the slogan 'A fair day's pay for a fair day's work'. This results from the idea that there can be some kind of real equality in the exchange of labour power, in the worker selling his capacity to work for a period of time, and what the capitalist pays for that sale. Yet we know that this exchange is an unequal exchange, because underlying it is the fact that the worker works a longer time than the time necessary to produce the consumption goods required to reproduce the worker's capacity to work. And in that time differential, part of the working day is taken gratis by the capitalist. It is in the time that is the difference between the time the worker works and the time necessary to produce the goods that the worker requires that we have the source of profit. And yet in the exchange of a worker's labour power for money, in the process of being paid wages for a job of work done, this unequal 'exchange' has completely disappeared. It seems as though an equal relationship has taken place. The source of capitalist profit, the fact that the worker is exploited, is completely hidden from view.

Now when we come to discuss inflation this kind of problem manifests itself again. If you immediately accept that an equal relationship (exchange) has taken place, then the notion that if wages rise a price rise must follow seems to conform with common sense. You have a theory, which is the general theory that the bourgeoisie uses, that final prices are made up of different types of costs. You have the costs of buying machinery, the costs of buying raw materials, the costs of wages and the cost that is often sneaked in as being a cost like all other costs, that of profits. This latter cost is something to be paid to the capitalist for risking or lending his capital, or for supervising production and so on. Various apologetic theories have been put forward to justify profits. Once all these costs are added up together then the final price is computed. This is the standpoint of the individual capitalist. It is how the individual capitalist experiences the problem.

On this commonsensical view if wages rise, so must the final price. It only needs a little imagination to then argue that wage increases are a primary cause of inflation. On the other hand according to a popular left-wing view it is the price rises of monopolies, the activities of multinational corporations in securing high profits that is the primary cause of inflation. In a similar way the national chauvinists from the imperialist countries have seen in the increasing raw material and oil prices, resulting from the 'selfish' activities of among others the oil states, a primary cause of inflation. In all these cases, different rising costs, which themselves need to be explained, are part of the explanation of rising prices. A rise of wages causes inflation, a rise in profits causes inflation and so on. In other words, inflation, which is the rise of prices is explained in this remarkable conception of the bourgeois economists, by rising prices. And that sums up the brilliant achievement of many bourgeois academics in attempting to explain inflation.

If we are to explain inflation we have to explain why those prices rose, we have to explain why money wages increase, why raw material prices have increased and finally why, in spite of the increase of the mass of profits the rate of profit has fallen. This is what a theory of the present crisis has to attempt to do. It cannot be done by explaining rises in prices by rises of other prices. But the problem is that 'common sense' views tied to the appearance of capitalist production have a lot of appeal. In Britain when the Heath Conservative government was in power they put forward the view that wage costs, wage increases were the fundamental cause of inflation. They argued that a wage freeze was necessary to stop inflation. Unfortunately for the government when they introduced a wage freeze prices continued to rise. How were they to explain this? Well the government did not say that the problem was the contradictions of the capitalist system and not wage increases. No they had to temporarily shift the blame elsewhere. It was the foreigners, it was those other countries, who were putting their prices up, so that import prices of goods brought into Britain were very much higher. Inflation increased because of high import prices, nothing whatsoever to do with the British, or the capitalist system but the foreigners who were putting their prices up. And so at each and every stage those trying to explain inflation and deal with its political consequences always have to avoid the real issues facing them. Otherwise they would be forced to question the very system of production they support. It is the workers, it is the large firms, or the importers, the blame has to shift elsewhere.

We now turn to another argument related to the way capitalism appears. In the advanced capitalist countries over the last ten to fifteen years or so, we have seen an enormous growth of state expenditure. The state in many countries today utilizes more than 50% of the gross national product. Thus has arisen the commonsensical view that as inflation has increased with the growth of state expenditure, then the cause of inflation is the growth of state expenditure. What could be more obvious? You can draw various graphs and produce volumes of statistics and it will appearthat as state expenditure rises the rate of inflation increases as well. And so the cause of inflation is said to be the growth of state expenditure. This view has been put forward by a section of the academic profession who, I suppose, we could call monetarists (it is not the best description of them). What they see as the cause of inflation is the continually growing money supply and the failure of governments to control this growth. They argue that the money supply is continuously rising ('out of control') so that the government can finance its own rapidly rising expenditure. Therefore they say, if you stop the rise of the money supply, if you slow it down and cut back state expenditure, then inflation will slow down as a result.

We will find that the growth of state expenditure cannot explain inflation. On the contrary, the rise of inflation and the rise of state expenditure follow from the contradictions of the capitalist system itself. They are particular expressions of these contradictions at a certain stage of the historical development of capitalist production. It is because of the way things appear, because state expenditure has grown and prices have risen at the same time, that the crude view that the growth of state expenditure is the cause of inflation has come to the fore.

There is a further feature to this problem which has surfaced as a major political discussion in Britain. It is in Britain, a weak link in the capitalist chain, where we already see the central arguments which the bourgeoisie intends to use to begin its attack on the working class. The working class has been divided into two types. There are those who are productive workers, and are good for capitalism as they produce profitable (marketable) goods, and those who are unproductive workers, who are bad as they consume too large a share of the profits produced. It turns out that the major part of unproductive workers are employed in the state sector. As the state sector has been growing and is seen as a primary cause of inflation, the very simple proposition has been put forward that too much investment is going into sectors of the economy employing unproductive workers. This fact underlies the present crisis of capitalism. And so the call and cry has gone out to massively reduce the numbers of unproductive worker. A larger part of society's investment must go into the profitable sector and relatively more productive workers

must be employed. This view is shared by both the right and the left in Britain today. This is a very important trend and a very dangerous one. The ruling class needs to split the working class into productive and unproductive workers as a prelude to attacking all workers. It has no obvious allies to aid it in the form, for example, of a conservative peasantry which would support the ruling class in its attack on the working class. So it must split the working class. And it has developed the ideological basis for doing this from the division between productive and unproductive workers.

The most extreme right-wing view of this kind has been put forward by a monetarist who is now the leading adviser to the conservative opposition in Britain, Sir Keith Joseph. It is worth quoting from him to show how this issue has become a very real question in the minds of these who will attempt to solve the crisis at the expense of the working class. He says:

"Yet is there any substitute for the entrepreneur, from the one-man businessman to the tycoon? Someone has to create the wealth. State enterprise has yet to do so. Until now it has lived off the surplus created by the private sector. But as the state sector grows -- and a new subsidised private sector with it, designed to perpetuate occupational population patterns inherited from the industrial revolution -- the private sector is in danger of collapsing under the burden." [3]

Here we see the perversity of it all. We see a return to the standpoint of Adam Smith. Sir Keith Joseph is calling for a new bourgeois revolution in the period of the decay of the capitalist modeof production. He calls for a new bourgeois revolution to solve the present crisis of capitalism.

The real problem is the enormously growing state sector. What we have to do is return industry to private capital, and not only to private capital but to that special individual the entrepreneur. The situation has got so bad for the bourgeoisie that they dare say that someone has to create the wealth and suggest that this is the entrepreneur. So you see the stand and the lengths that the bourgeoisie has to go to to try and justify its present positions.

I want to leave the discussion of these central problems connected with the appearances of capitalist production and how they give tremendous strength to the views of the bourgeoisie about the nature of the present crisis. I shall now discuss briefly what a theory of crisis should actually attempt to do, what it should show and so on.

The components of a theory of crisis

There are three aspects to the theory of crisis. The first, from a marxist standpoint, is to show that socialism is possible, that it is not some utopian viewpoint, but is scientifically grounded in the development of capitalism itself. So the idea of social planning, the idea of running an economy on the lines of a socialised economy, not on the lines of private enterprise, the idea of planning for people's needs rather than to produce for profit, has to be something that is possible. The theory of crisis has to show how all tendencies in capitalism itself indicate that socialism actually is a possibility, that it is not a utopian dream.

The second aspect is to show that socialism is a necessity. That is that the problems facing the working class, and in that sense the mass of the population, are not resolvable within capitalism. Capitalism cannot solve the basic problems facing humanity. So the second aspect of the theory of crisis is that socialism must be necessary if the basic problems facing the working class are to be resolved.

The third question that must be answered is why, in a period of capitalist decay which has lasted since the beginning of the twentieth century, is it that we still have capitalism? Why is it that the dominant views in the working class movement are those of the reformists, who hold the position that capitalism, with better or more radical government, can resolve the problems facing the working class? Why is it that these views generally have been accepted in the working class movement and why has revolutionary marxism so far been rejected? The first part of my talk was to give part of an answer to this question, to actually show that it is the way that capitalism appears to those who are involved in production, distribution and so on, which gives tremendous strength to bourgeois ideas about the nature of the capitalist system. If we look at our own time, the period of the post-war boom, we can see that ideas, to the effect that the state can act in a neutral way in the interests of all sections of the population and not just the ruling class, have been given tremendous strength by the enormous growth of production over the last twenty or thirty years, and the increasing role the state has played in the capitalist economy. It seems to be the case that the state can play a leading role, can attempt to redistribute income in the interests of the working class. Scientific marxism is required to combat such views. To show this I shall first of all examine incorrect theories of crisis, and then briefly discuss the marxian theory of crisis before going on to the question of the capitalist state.

Incorrect views of the capitalist crisis

The first incorrect view of the crisis I want to deal with has generally been called an underconsumptionist view of crisis. This theory argues that an increase in consumption -- if, for example, the state increases its expenditure -- can rescue the crisis. This is because the crisis is primarily due to the lack of consuming power in society. In classical times Malthus argued a view that was similar to this, except that he wanted the unproductive consumption of landlords and the aristocracy to increase. Today we have the state that can play a central role for this argument. If the state can increase its expenditure, if it can be a stimulus to production, then the crisis can be overcome.

An underconsumptionist view of the crisis, the theory of the permanent arms economy, has been put forward by Michael Kidron and Tony Cliff to explain the post-war boom.[4] It explains the generation of the post-war boom as being due to the growth of arms expenditure. The reformist implications of this standpoint have never been grasped by the writers. Nevertheless others have taken a similar view with regard to all state expenditure rather than a particular component of it. They see a solution to the present crisis with the state increasing its interventionist role in the capitalist economy, rather than decreasing it. This is the dominant view in the British labour movement. The state has to increase its involvement in manufacturing industry or extend Public Works if the crisis is to be solved and unemployment reduced. The argument is often put in the following way by, for example, the Communist Party of Great Britain and many other groups on the radical left: if you reduce the wages of the working class or the expenditure of the state then it will make matters worse. By reducing overall consuming power, less will be spent on the commodities produced and as a result the capitalists will not be able to sell their commodities. They will cease to invest and unemployment will increase. This is a viewpoint that has been put forward very strongly in the recent period. It is in fact nonsense because what the capitalists are concerned about is selling their commodities at a profit not just selling their commodities. The condition for investment to increase is precisely an increase of unemployment and a reduction of wages below the value of labour power. These are the conditions necessary for the capitalists to restore the rate of profit.

Another incorrect view of the capitalist crisis has been put forward by among others Glyn and Sutcliffe. They explain the crisis as being due to two factors. One is increasing international competition making it more and more difficult for cost increases to be passed on in the final prices of the product to be sold. The other is the main increase of costs, the growing wages of the working class, resulting from the increased combativity of the working class movement leading to both direct increases and indirect increases through changes of the 'social wage'. [5] So you have a squeeze on profits, a squeeze which is due to competition preventing prices going up on the one hand, and wages eating into profits on the other. This view is a view which is almost identical to the arguments put forward by Adam Smith. The difference is that in those far off days the problem was not the inability to pass on rising costs by increasing prices, that is of competition preventing prices being raised, but of competition driving prices down. The fall in profits then was said to be due to competition driving prices down while wages more or less remained the same or increased as accumulation accelerated. The bourgeoisie saw the real problem as too much competition and too high wages. Today we have the same basic argument. Profits are falling because international competition is preventing prices going up sufficiently and wages are too high. Marx once said that history repeats itself, 'the first time as tragedy, the second as farce'. Today we see the farce of the crude repetition of views long since criticised and rejected. We need to examine Marx's theory of crisis to lay the foundation of a critique of the above views.

The marxian theory of crisis

I now briefly want to examine the marxian theory of crisis, The point about capitalist production is that it is production for profit. A commodity is not merely a use-value but also a value, an exchange-value. Commodities are not produced unless they make a profit for the capitalist class. Labour is employed by capital to increase the profits of the capitalist class or to lead to the realisation of these profits. The commodity is therefore a use-value and an exchange-value. Now if you increase the productivity of labour, which means that you produce more commodities in the same time, the value of the individual commodity falls. This is a critical point. By increasing the productivity of labour it means that the same commodities contain less value than before. So you have to produce more commodities to have more value than before. This expresses itself by the fact that to produce the same values as before, capital investment has to be continually increased. This is because increases in the productivity of labour mean that less labour is employed by a given amount of capital. If capital investment did not increase then the values produced would not increase, accumulation would not take place and unemployment would grow. So that increasing the productivity of labour is a contradictory process for capital. Many more use-values are produced, but each use-value contains less value. An increase in the productivity of labour is expressed, under capitalist conditions of production, as a rise in the organic composition of capital. That is, more capital is invested as constant capital, on machinery and raw materials than as variable capital, that is paid out as wages for productive workers. So that an increase in the productivity of labour involves an increase in the organic composition of capital, this value relation between fixed capital and raw materials, and labour employed. Profits arise out of the exploitation of workers alone. However the rate of profit is measured over the total capital invested not just that invested in labour power. So that as productivity increases, there are relatively fewer workers exploited by a given amount of capital and a larger cost of machinery etc over which to measure the rate of profit. This means that there is a tendency of the rate of profit to fall. This is (the basis of) Marx's theory of the tendency of the rate of profit to fall. [6] It is a form of the theory which classical political economy could not discover, and it is a theory that is just as much rejected today because of its revolutionary implications as it was after Marx's time.

The tendency of the rate of profit to fall is an expression of the central contradiction of capitalist production. The more capital is invested, the more the tendency of the rate of profit to fall asserts itself. The important point is this, that an increase in the productivity of labour means in Marx's analysis an increase in the rate of exploitation of the working class. This is because less time is needed to reproduce what the workers require, more time of the working day is available for profits. But the same process which increases the rate of exploitation of the working class expresses itself as a fall in the rate of profit. So the rate of profit falls not because workers are less exploited and wages rise but because they are more exploited and the value of labour power falls. And that expresses in heightened form the contradiction of the capitalist system of production. This is really Marx's revolutionary contribution. Because of this at a certain stage in the accumulation process when capital has invested too much in relation to the rate of exploitation, profits are continually rising but not sufficiently for the amount of total capital invested, at a certain stage in this process the capitalist crisis occurs, and the crisis is an indication that capital has been overaccumulated. Too much is invested given the mass of profits produced. Too much is invested given the rate of exploitation of labour.

The capitalist crisis

The capitalist crisis is both the expression of the contradictions of capitalism, an expression of the disease of a system, and of the way capitalism attempts to cure itself internally. It is both the disease and at the same time the way to a cure. Too much capital has been invested, and in the crisis capital is destroyed as capital, machinery and buildings are not used and capital is written off. Firms are forced out of business and become bankrupt. A large amount of capital in the crisis no longer functions as capital and can lay claim to the mass of profits produced. The amount of capital laying a claim to the mass of profits is reduced. In the crisis the process of concentration and centralisation of capital takes place. In general it is only the more productive capitals that survive, the least efficient go to the wall first, become bankrupt first. Large firms buy up small firms in this process where only the most efficient survive. In the crisis unemployment begins to increase, and capitalists are in a stronger position to force the working class to accept a reduction of wages below the normal value of labour power, below the normal levels that have been achieved in previous periods. In that sense the rate of profit can be increased because of the reduction of wages below the value of labour power.

The capitalist crisis begins to create the conditions for a new period of capital accumulation. It reduces wages below the value of labour power, it destroys less efficient capitals, and in this way attempts to restore the rate of profit for capital. Whether it can do this or not, whether capital can reduce wages below the value of labour power, and is able to discipline the working class to work at a higher level of intensity and so on, is a political question. Every crisis poses before the capitalist system the question as to whether it can survive, whether it can go on to a new round of capital accumulation.

We are now able to understand the significance of the two world wars within this context of the capitalist crisis. During the whole inter-war period, it became clear that the first World War alone and the great depression were not able to resolve the crisis of capitalism, to usher in a new period of capital accumulation. In spite of the massive destruction of capital, and very high levels of unemployment during the inter-war years the working class was still too strong. The Russian revolution had had a major effect on working class resistance to the capitalists in the whole of Europe up to the early 1930s. So the actual effects of the first World War and the period after the war were insufficient to restore profitability. It took a second World War and the defeats of the working class expressed by the victory of fascism to recreate these conditions.

I wish to go over the factors, briefly, which were important at the end of the second world war. First of all we have the massive destruction of capital in the war itself. Secondly we had, in the period before the war and leading up to the war, the greatest defeats of the working class in its history. Fascism and war itself were expressions of those defeats. Perhaps the conditions were laid for those defeats when the main leaders of the working class movement in Europe decided to support their own capitalist class and participated in the war between the major capitalist states. The major exceptions to this were the Bolsheviks in Russia. However fascism and war resulted from the crushing blows struck against the Italian, Spanish, German, Japanese and French working class. After the war in Japan and Germany, the working class having been defeated could be controlled and easily 'persuaded' into acceptance of a new period of capital accumulation. The rate of profit, for example, in Germany, once reconstruction began after the war, was the highest that is has ever been in its history. The governments carrying through this process, and this was true for Japan, could be right-wing conservative ones.

In those countries where the working class had not been defeated by fascism or where the bourgeoisie had been thoroughly compromised through its relationship with the fascists it was the actual ability to integrate the leadership of the working class that was central in the reconstruction period. This occurred through the social democratic party in Britain, the Labour Party, and in France and Italy, by bringing the Communist Party into government. This process was necessary if capital was to be able to achieve the conditions, including a low level of wages, that were necessary for the restoration of capital accumulation.

The third and equally important factor was that the inter-imperialist rivalries which expressed themselves in battles between the major advanced capitalist powers during the second world war were temporarily overcome by the end of the second world war. One country dominated and dictated to the world economy, the United States of America. In other words the conflict between capitalist nations had provisionally been resolved by one country dominating the capitalist world. This process has a vivid statistical expression. Just before the second world war, the US share of world industrial output in 1937 was 41%. By 1953 it had increased to 52%. Today, it is below the 1937 figure at approximately 40%. In other words the conditions before the second world war are actually the conditions in terms of world industrial power which are beginning to be established again today. For example, the EEC's share of world industrial output in 1937 was 22%, it fell to 16% in 1953 after the war and by 1970 it was back to the pre-war level of 22%. It is possible to confirm this picture by looking at statistics for the export of goods and the export of capital as well as other factors. The conditions of world power over the post-war boom have led to a situation that is very similar to that before the second world war. Only the situation of Japan and Britain have changed. Japan has seen a considerable growth and Britain a continual decline.[7]

After the second world war the dominance of the US was a major factor in the recovery of the capitalist system. The US could give credits to Germany and Japan once that it had decided to rebuild these nations' economies again in view of the threat that the extension of nationalised property relations into Eastern Europe posed for the capitalist system. The conditions for profitable capital accumulation existed, what was lacking was the funds and the US could provide them. So that the destruction of the war, the existence of a working class which had been defeated or could be 'persuaded' into acceptance of a new period of capital accumulation, and the dominance by one country of the world economy laid the basis for the post-war boom.

State expenditure and the post-war boom

One dominant feature of the post-war boom, in particular during the last 10 to 15 years, has been the growth of the state's role in the capitalist economy. The rest of my discussion will be concerned with the contradictions of state expenditure. I shall examine just what those contradictions are and see why the growth of state expenditure is not responsible for inflation. I shall show why the present crisis is a severe crisis for capitalism and how it can reach classical proportions in the not too distant future.

For a whole period of time capital has attempted to overcome the fall of the rate of profit by pushing up prices to levels which, in monetary terms, maintain the rate of profit. To do this it was necessary to have a continual process of credit expansion which the inter-involvement of capitalist firms with the banks and the state made possible. The necessary conditions for the capitalists to sell their commodities at prices higher than those really merited by the conditions of productionis that credit has to be extended in one form or another to allow these higher prices to be realised, that is to allow commodities to be sold at the higher prices. If credit is not extended, the commodities would not be sold and the real conditions of production would express themselves by a severe fall in the rate of profit.

What the capitalists are attempting to do when they increase their prices is to overcome this fall in the rate of profit. They do not increase prices to make super-profits as the monopoly profit theories of inflation would have it, but to try and maintain conditions of profitability in a situation where the rate of profit is falling. In the period between the two world wars, in fact from around 1895 onwards, we have a continuous increase of prices, outside the years of the great depression, in spite of the large increases in the productivity of labour taking place. The reason for this was that production was allowed to expand by the extensive use of credit, so that capitalists could attempt to maintain their rate of profit by increasing prices. But the growth of credit does not cause the increase of prices, rather the growth of credit is necessary if these prices are to be realised, that is if the commodities are to be sold at these prices. If credit was not extended the individual capitalist would be immediately faced with a severe fall of the rate of profit and would cease to invest so precipitating a severe crisis. The expansion of credit postpones the crisis. Production is allowed to expand through the expansion of credit.

After the second World War, however, this process alone was insufficient to keep capital accumulating at an adequate rate. The state itself, more and more, had to play a significant role in stimulating production, in particular through deficit financing and in guaranteeing the conditions [for] capital accumulation itself.[8] And it is to this process I now wish to turn.

State expenditure by allowing the crisis to be postponed, exacerbates the very conditions that made state expenditure necessary, that is the tendency of the rate of profit to fall. This is really what is central to my position on state expenditure. State expenditure, by postponing the immediate consequences of the fall in the rate of profit, by allowing capital accumulation to expand, necessitates an increase of credit and therefore the money supply to finance its own expenditure. In such a way the state maintains the general conditions of capital accumulation, and supports the attempts of capital to stave off the fall in the rate of profit. However it is just this process which is a contradictory one.

In spite of the intervention of the state the rate of return on capital (this gives some empirical indication as to what is happening to the overall rate of profit of capital) has been continually falling over the main part of the post-war period, in particular since about 1958-60 onwards. The capitalist does not experience the rate of profit falling directly, rather it is experienced as a continual rise in costs. The next part examines the role of the state in this process.

The first point about state expenditure is that it is usually associated with a so-called full employment policy. That is, the capitalist state did not allow unemployment to increase to the levels that existed in the inter-war years. This is a part of the cost paid for integrating the working class in the process of restoration of capitalist production after the war and of keeping the institutions etc of the class tied to the machinery of the state. The point about a 'full' employment policy is that it means that once the process of capital accumulation is underway, the capitalist is not able to reduce wages below the value of labour power as a means of restoring the rate of profit. Because most workers are employed the capitalists do not have the strength to force wages down. However, real wages after tax in most advanced capitalist countries have risen at a rate below that of productivity growth although the standard of living of workers, in the sense of use-values consumed has increased. This means that the value of labour power has continually fallen in spite of increases in the standard of living. Values and use-values are not the same thing. The more you increase the productivity of labour the more use-values you produce in the same time so that each commodity contains less value than before. So according to this argument what has happened is that the value of labour power has fallen and there has been an increase in the rate of exploitation in spite of the improvement in living standards. So to return to the central argument, one method has not been available to the capitalist class to restore the rate of profit and that is to reduce the standard of living of the working class by reducing wages below the value of labour power. This means that the only way open to the individual capitalist to increase profits is to increase the productivity of labour, to continually create conditions which allow the reproduction requirements of the working class, the consumption goods etc, to be produced in less time than before, ie by increasing the rate of exploitation. And this very method of increasing the productivity of labour leads for capital as a whole to a fall in the rate of profit. So the fact that the state has a 'full' employment policy means that the tendencies in capitalist society to increase the productivity of labour are strengthened and this accentuates the tendency of the rate of profit to fall.

The second point in relation to state expenditure involves the effect of the increase of social services and welfare expenditure are on the rate of profit of individual capital. We must make a distinction here between the general rate of profit and the rate of profit of the individual capitalist. The general rate of profit is calculated from the total profits (surplus-value) produced over the total capital invested, but the individual capitalist has to pay part of his profit to the banks as interest for money borrowed, and a contribution to taxation to finance the expenditure of the capitalist state itself. So the general rate of profit falls , but the individual rate of profit falls further because of increased deductions for interest as borrowing increases and as the state's expenditure grows. The next section will examine the growth of the state sector.

We must examine first what social services are, what it is to give higher pensions and unemployment benefit, what it is to increase health and education expenditure and so on. Is it an increase in the wages of the working class? Does it contribute to capital accumulation and make profits for the capitalist class? My general answer to these questions is that far from increasing the profits of the capitalist class, these expenditures are a deduction from these profits. I want to concentrate on health and education expenditure because the role of unemployment benefits and pensions are reasonably clear. People who get pensions do not produce surplus-value for the capitalist. Neither do the unemployed make any contribution to profit making. So we can regard these expenditures as a cost to capital, as a deduction from surplus value. We reject the concept of a 'social wage' to cover this expenditure. These expenditures do not form part of the variable capital (capital invested in labour power for the purpose of increasing profits) and in general are so low in relation to the average working wage that they do not, in any sense, merit the designation wage, let alone 'social'. However, health and education are more complex. I shall examine them in some detail.

To begin with education. What does education do? What has its expansion achieved? Well, my argument is that a very small amount of education is useful for capitalist production in the sense of increasing value and surplus value. Education of course plays an ideological role. But most of it is useless as far as production is concerned. This is why there has been a move in most capitalist countries to cut down expenditure on the university sector and expand on the more 'technical' sectors. It becomes clear, for example, that universities cannot produce a very useful product for capitalist industry when the rate of profit is falling and the crisis is deepening. During the periodof the post-war boom, with the enormous increase of the mass of profits, the situation seems to be a reasonable one, and the bourgeoisie could be 'liberal' about education and was prepared to extend the university and other sectors of education. But once the crisis begins to assert itself, the call is raised to cut down the length of courses in those countries such as Germany, where courses extended over many years, to the three years which is normal in Britain. The 'advantages' of three year courses are suddenly being recognised in a number of countries in Europe at the present time. The reason for this is that the extra years are not only useless as far as profitable production is concerned but very costly as well. Most education expenditure does not help once capitalism begins to move into a crisis situation and so, with or without the best of liberal intentions, it will be cut back.

A small part of education expenditure increases the value of labour power without directly increasing the surplus value produced. Those who are engaged with training productive workers are involved with changing the special commodity labour power itself. The production of this special commodity labour power differs from the production of other commodities. What is involved is the training of a worker who is then going to sell his labour power to the capitalist to be exploited in the process of production. Now if this labour power contains an element of surplus value, an element of profit, then the capitalist who buys that labour power will be paying more than is necessary. He will be paying for labour power which contains an extra element of profit. And this the capitalist class is not prepared to do. They can also avoid doing this. If labour power with a particular skill becomes too expensive, you can do away with using that skill, you can introduce another method of production which does not need that skill. You'll find, for example in industries like computers and other industries associated with the so-called technological revolution that at one stage you had people working there and carrying out basic processes who were university trained. Today the time has come where they can do away with most of these skills altogether and workers who have had an ordinary education (secondary school) can usually work in these industries. That is an indication of how capital determines whether it is going to pay surplus value as part of labour power or not. In general it won't do it, and in general this is the reason that the state has taken over education. Because the state is an employer that does not have to make a profit. The capitalist has to, the state does not have to, and in this sense the state will take over education. In the case of education or training which increases the value of labour power and the productivity of labour the costs of education may be partially offset by the increase in productivity,

But I would argue that most education is not of this kind, most education is of the kind which is not contributing anyway to increasing the value of labour power or its value creating capacity. Further, most workers in capitalist society today are unproductive workers. They are a majority now, and this means that most education is going on unproductive workers anyway.

So for all these reasons I would argue that education expenditure as a whole does not contribute to the increase of profits. Therefore the growth of the education sector is a deduction from the mass of profits, which means that the rate of profit of the individual capitalists falls further than it would otherwise do if this was not the case.

The same is true of health, except that there are no ways in which health can offset the costs involved. Health is merely a cost to capital. Where it is involved with productive workers all it does is increase the value of labour power, without increasing the mass of profits. And in this sense health will reduce the rate of profit. In the case of unproductive workers it reduces the mass of profits without increasing the value of labour power. As far as the police, the growingadministration in the state sector, the obvious unproductive workers are concerned this is merely a reduction of the mass of profits of individual capital.

So the financing of the state sector which is necessary to pay for this growth is a deduction from the growing mass of profits. A deduction from an already insufficient mass of profits, in relation to the total amount of capitol which has been invested. The individual capitalist finds himself with a smaller rate of profit than the already falling general rate of profit.

This is the situation with the social services and in fact most of the state sector. An exception to this is the nationalised industries -- these industries which the state takes over, and by taking them over guarantees the basic inputs, steel, electricity, postage, gas and so on, to the capitalist class at a cheaper rate. In most advanced capitalist countries, the capitalists would not be able to produce these basic inputs at a profit. The state takes them over or subsidises them as the state is able to produce at a lower than average rate of profit, or making no profits at all. It is very hard to decide which is the case because the pricing policies of these industries are such that they are a subsidy to the capitalist class, to the large corporations which use them.

How is the state sector financed, is the final question in dealing with the contradictions of state expenditure. It is financed either out of taxation, or through deficit financing, that is future taxation, because if you borrow money it has to be paid back, and the main revenue of the state comes through taxation. In fact, the deficit is, in most capitalist countries, continually increasing. Taxation obviously falls on the working class as well. That is, the working class pays taxes. But it is more correct to see taxation as a deduction from the profits of the capitalist class. If the working class maintains its real standard of living, that is, through the class struggle itself the working class can maintain its real wages after tax, or if the real wages after tax grow slightly with productivity increases, then taxation is a deduction from the capitalists' profits.

So in spite of the fact that in most advanced capitalist countries, as the rate of profit has been falling, taxes on corporations have been reduced enormously, to the extent that the leading journal of the bourgeoisie (in Britain), The Economist, actually admitted that there is no point in reducing corporation tax (tax on profits of industry) any more, because they were paying so little anyway, they still have to pay gross wages to the working class and it is that part of taxation which is quite vital. This is where the class struggle becomes important. Because if you are introducing incomes policies, wage freezes, social contracts (the latter is what we have in Britain at the present time) what you are attempting to do is to make sure that, as inflation increases, more and more of the

growth of taxation falls on the working class and is actually a deduction from working class wages. This occurs when taxation allowances do not increase as fast as inflation. And if this is the case, then inflation becomes a tax on the working class. You will find that in most capitalist countries the share of taxes falling on the working class has increased enormously. This has meant that more and more workers, who have never paid tax before are actually paying it now. The class struggle determines the outcome of this process.

What I have attempted to show is how the growth of the state is a necessary condition for allowing capital accumulation to proceed. But its cozy existence accentuates the tendency of the rate of profit to fall. The full-employment policies, the fact that a large share of the growing

surplus value has to go to the state, means that the rate of profit falls faster than would otherwise be the case for the individual capitalist. But the rate of profit does not fall because of the growth of state expenditure. The rate of profit falls because of the contradictions within capital accumulation itself. The actual attempt to overcome those contradictions, to maintainaccumulation in conditions where it is not viable given the real conditions of production, the attempt to do this actually makes the problem worse. It accelerates the tendency of the rate of profit to fall.

I have argued that as productivity increases, less and less workers are employed by a given amount of capital. Without the intervention of the state sector unemployment would therefore increase with the growth of the productivity of labour. Private capital would not increase investment sufficiently to maintain full employment given the falling rates of profit. The growth of state expenditure and the maintenance of 'full' employment exacerbates this process, as I have just shown. It makes increases in the productivity of labour all the more essential if the individual capitalist is to increase profits. So that at every stage the capitalist state has to increase its expenditure if full employment is to be maintained. Again we see that the process is a self defeating one.

At a certain stage the growth of state expenditure is insufficient to offset the relative stagnation of accumulation in the private sector. In spite of the fact that the state sector is growing faster than the overall growth of production, it is insufficient to compensate for the fall in employment in the private sector. Inflation and unemployment increase together. The extension of credit and the extension of state expenditure merely lead to an increase of inflation. They do nothing else.

What it means is that we have reached a stage where even the growth of credit and of state expenditure will no longer allow profits to be increased significantly enough for the capitalist to continue to invest. The whole post-war period has avoided a crisis precisely because it has allowed accumulation to go on, capitalists to expand in conditions where, in fact, the real conditions of profitability did not merit this. But it expressed itself not as an immediate fall in production and increase of unemployment, but as rising costs or rising inflation. Each stage of attempting to avoid the crisis meant that more and more credit was thrown into the economy, the state sector was made to increase more and more, and the capitalists had to push up their prices more and more to maintain their profits.

And slowly but surely the rate of inflation gathered momentum, and we are in a situation where in the recent period the rate of inflation has doubled every two years. That is what has occurred. What it means is that no growth of state expenditure now, no expansion of credit will bring about an increase of profitable production. And so there is only one answer to resolve this crisis and that is to re-establish the conditions for a higher rate of profit. And those are two-fold:

One is massive unemployment, to force down wages below the value of labour power. That is to go against those very conditions that the capitalist state has engendered as part of the 'full' employment policy, to increase unemployment massively, to reduce wages massively below the value of labour power. So that what is facing the working class is a large reduction in the standard of living.

And the second is that capital has to be completely and utterly restructured. That is, the less efficient capitals have to be literally destroyed, have to go out of the market, there has to be a major now round of concentration and centralisation of capital.

This problem is not a national problem, it is a world problem. The problem we are seeing is reflected in the growth of inter-imperialist rivalries again on a world scale. The concentration now has reached a stage where we are not talking about small firms merging in individual capitalistcountries, but of massive concentrations of capital that actually have a worldwide domain. The situation we have reached is one where we can say that the conditions internationally that existed before the first world war have much more in common with today's conditions than the period since the war.

In fact, we are entering a situation in which nations have to try and get their working class to accept the kind of struggles that have been taking place in the past and the question of war between nation states is posed all over again. Because the only way the capitalist class can begin to obtain the profits required to restore its rate of profit is in terms of a worldwide change in the balance of power for capitals. This means, as far as I am concerned, a tendency towards protectionism, import controls, and if the situation develops further, a tendency for these antagonisms to be expressed once more in the form of war. This is not exaggerating. We should remember the words of Mr Kissinger on the question of the Middle East, where they were actually talking in terms of sending in the imperialist armies, in particular the US army, to try and deal with this problem of rising oil prices in the way they know best. More and more the question of protectionism and import controls has become a major issue in the daily newspapers, and indeed in the working class movement itself.

And so with the profits falling to the degree they are, with the fact that the state in its traditional role can no longer increase profitable accumulation, the fact that credit policies will no longer work in the degree that they did in the past -- the conditions for this do not exist -- we are now seeing a return of classical crisis conditions. So that now we have an attack on the growth of state expenditure, the very growth which helped maintain capital accumulation over the post-war period. There is an attack on state expenditure, it has to be cut down, says the capitalist class, and in particular an attack on the workers who work in that sector.

On the other hand, there is also an attack on the workers who work in all sectors in the sense that wages, say the capitalist class, are much too high. What we see is an attempt to restructure capital to a greater profitability. And it must take the expression of a growing and growing crisis. Because any increase in state expenditure, any reflation of the world economy will accelerate the rate of inflation. That has reached proportions now where it itself is threatening social stability, so the whole reason for the growth of state expenditure is now at an end. The very way of actually ensuring social stability has now led, in a contradictory manner, to results which threaten social stability. So that is the impasse capital finds itself in. Either you reduce inflation and cut state expenditure, which means massive unemployment again together with cuts in social services and all the hardships this implies. Or you maintain employment and adequate state expenditure levels and accept a massive increase in inflation, which leads to all the problems of financing capitalist industry and state expenditure which have existed over the last few years. Capital has reached an impasse.

David Yaffe


1. Marx and Modern Economics ed. David Horowitz, MacGibbon and Kee 1968.
2. For a discussion of this and what follows see Peter Howell 'Once again on Productive andUnproductive Labour' in Revolutionary Communist 3/4, Nov. 1975 pp46 ff.
3. New Statesman April 1975 p502
4. See Michael Kidron, Western Capitalism Since the War, Penguin 1970, and T. Cliff, 'Perspectives of the Permanent War Economy', Socialist Review 1957. For a critique of the underconsumptionist position see D. Yaffe 'The Marxian theory of crisis, capital and the state' in Economy and Society Vol.2 No.2 May l973, also P. Howell op cit for a refutation of Kidron's standpoint.
5. See Glyn and Sutcliffe, British Capitalism, Workers and the Profits Squeeze, Penguin 1972 and Glyn 'Notes on the Profits Squeeze' in the Bulletin of the Conference of Socialist Economists Feb 1975 Vol.IV No.1. For a critique see Paul Bullock and David Yaffe, 'Inflation, the Crisis and the Post-War Boom' in Revolutionary Communist 3/4, Nov. 1975 pp5-46.
6. For a full discussion of this see ibid pp13-22 and David Yaffe 'The marxian theory...' op cit pp193-207.
7. See Bullock and Yaffe op cit pp37-40 for the relevant statistics and discussion.
8. See ibid for a full discussion of the role of the state, pp31-35.