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# Zombie Capitalism Global Crisis and the Relevance of Marx

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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 1 960s, 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.

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CHAPTER EIGHT

The End of the Golden Age

The crisis of Keynesianism

"The National Bureau of Economic Research has worked itself out of one of its first jobs, namely business cycles." So proclaimed Paul Samuelson in 1 970. Less than three years later the crisis which was supposed now to be impossible broke upon the world-or at least upon the advanced capitalist countries and a big part of the Third World. The "golden age" had come to a sudden end.

The reaction of governments everywhere was to try to keep it going by resorting to the Keynesian methods they had come to believe infallible. Government budget deficits, rare in the previous three decades, now became the norm. They failed to restore the system to its previous health. Not only was there the first lapse into negative growth-a real recession as opposed to the "growth recessions" sometimes known previously-with soaring levels of unemployment, but it was accompanied by rising levels of inflation, which in a country like Britain could approach 25 percent.

There were attempts to explain what happened as a result of the impact of the sudden very big increase in the price of oil in October 1973 due to the brief "Yorn Kippur" war between Israel and the Arab states and the accompanying embargo on oil exports by Saudi Arabia. But the effect of the price increase was only to reduce the national incomes of the advanced countries by about one percent-and most of the money that accrued to the oil producers ended up being recycled back to the advanced countries via the international banking system. It was hardly enough in itself to explain the scale of the impact on most of the world system-an impact which Keynesian methods should have been sufficient to deal with according to the then conventional economic wisdom. What is more, the oil price increase did not take place in isolation from other developments. Already three years earlier a "growth recession" had hit all the major economies simultaneously in a way which had not happened in the previous quarter century, and had been followed by a very sharp economic upturn and accelerating inflation even before the oil price rise. 1 In short, the recession that began at the end of 1973 was the culmination of precisely the sort of economic cycle that Keynesian-style state interventions had supposedly consigned to the history books.

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Mainstream Keynesians were at a loss. They found that their theory no longer did any of the things they had claimed for it. As one Keynesian, Francis Cripps of the Cambridge Economic Policy Review, later put it, they suddenly realised that:

Nobody really understands how the modern economy works. Nobody really knows why we had so much growth in the postwar world . . . how the various mechanisms slotted together.2

Many Keynesians dropped their former ideas overnight and endorsed the "monetarist" theories propagated by Milton Friedman and the Chicago School of economists. These held that the attempts by governments to control economic behaviour had been misconceived. There was, they argued, a "natural non-inflationary rate" of unemployment, and attempts to reduce it by government spending were bound to fail and to merely cause inflation. All states should do, they insisted, was to control the supply of money so that it grew at the same speed as "the real economy"-and take such action as was necessary to break down "unnatural monopolies" by trade unions or nationalised industries, while holding down unemployment benefits so that workers would then be persuaded to accept jobs at lower wages.

The reply of apologists for capitalism to its critics for 30 years had been that it could be made to work with state intervention. Now it was that it could only be made to work if state intervention was scrapped. As the dissident radical Keynesian Joan Robinson summed up the mainstream shift:

The spokesmen of capitalism were saying: Sorry chaps, we made a mistake, we were not offering full employment, but the natural level of unemployment. Of course, they suggested that a little unemployment would be enough to keep prices stable. But now we know that even a lot will not do so.3

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Labour's prime minister James Callaghan virtually admitted this when he told his party's conference in September 1976:

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

The point was repeated 20 years later by the future Labour prime minister, Gordon Brown:

Countries which attempt to run national go it alone macroeconomic policies based on tax, spend, borrow policies to boost demand, without looking to the ability of the supply side of the economy, are bound these days to be punished by the markets in the form of stiflingly high interest rates and collapsing currencies. 4

Politicians and academics who had been brought up on Keynesianism came to accept the same parameters for deciding economic policy as their old opponents, with no alternative to high levels of unemployment, welfare cuts, "flexibility" to make workers "more competitive" and laws to restrain "trade union power". Keynesians who did not drop their old beliefs were pushed to the margins of the economic establishment. By 2007 a study showed that "72 percent of economic students" were at educational institutions without a single "heterodox economist" who challenged "the neoclassical and neoliberal assumptions".5

But the rush towards monetarism by supporters of the system was not any more able to come to terms with the crisis than Keynesianism. Monetarism was, after all, little more than a regurgitation of the neoclassical school which had dominated bourgeois economics until the 1930s. Just as it had been incapable of explaining the unprecedented severity of the inter-war slump, it was incapable of explaining the crisis of the 1 970s and 1980s, still less of dealing with it. In Britain the monetarist Howe budget of 1 979 was followed by a doubling of both inflation6 and unemployment, and left industrial output in 1 984 15 percent below its level of 1 1 years before.7 The monetarist measures did not even manage to control the money supply; its broadest measures (what economists call M3) grew in 1982 by 14.5 percent instead of the intended 6 to 10 percent. 8 The policy merely served to destroy much of local industry, exacerbate the crisis of the early 1980s and lay the ground for another crisis in 1 990.

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Some economists who had abandoned Keynesianism for monetarism in the mid-1 970s could be seen deserting monetarism in its turn in the early 1 980s. Financial Times columnist Samuel Brittan, who had done much to popularise monetarist ideas in Britain, was by 1 982 criticising many monetarist policies and calling himself a "new-style Keynesian". In the United States, Reagan's economic advisers, faced with the failure of monetarist policies to end a severe slump, quietly ditched monetarism9 and abandoned one of monetarism's central principles-the balanced budget.

But much mainstream economic theory moved in a different direction. A "new classical" school gained influence that contended, very much along the lines of Hayek in the 1930s, that what was wrong with monetarism was that it left a role for the state-intervening in money markets. Friedman, they claimed, had fallen into the same trap as Keynes by urging government moves to shift the money supply: he was, in a certain sense, "a Keynesian". 10 Such moves, they insisted, could not alter business behaviour in the hoped for way, since the "rational expectations" of entrepreneurs would always lead them to discount government intervention in advance. Fiddling with the money supply, like government deficit spending, stopped supply and demand interacting with each other properly. "Booms and slumps", it was claimed, "are the outcome of fraudulent Central Reserve banking" .1 1 It is an amazing commentary on the remoteness of most academic economics from any contact with reality that the new classicals could maintain intellectual credibility when they denied the instability and irrationality of the laissez faire economy in a period which saw three major international recessions.

The high point of these ideas was with a shortlived boom in the mid to late 1 980s. It seemed to vindicate their optimism about the benefits to economic growth of deregulation, privatisation and the removal of all restraints on the greed of the rich. But they lost some of their lustre with the renewed deep recession of the early 1990s. A different school of free market economists gained some support within the mainstream. This was the variant of the "Austrian school" influenced by the ideas of Joseph Schumpeter, which saw the slump-boom cycle as inevitable-and a good thing. The system, it argued, was capable of non-stop expansion, but only on the basis of "creative destruction" which destroyed old forms of production to clear the way for new ones.12 But it was no more able than the mainstream Keynesians, the monetarists and the new classicals to answer a central question: Why was the system plagued once again by recurrent crises and by a long term decline in average growth rates after three decades of unprecedented, almost crisis-free growth?13

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It was the failure of the anti-Keynesians to come to terms with such problems that led some Keynesians-and some on the far left influenced by Keynesianism-to blame them for the demise of the "golden age". It was not the system as such, they argue, that was behind the recurrent crises. But, as Notermans has pointed out:

If neither the recovery from the Great Depression or post-war growth can be attributed to Keynesian policies . . . [it] cannot serve as an explanation for the termination of full employment. 14

So where does the explanation lie?

Where the crises came from

Missing from all the most influential mainstream explanations for the end of the "golden age" was what was happening to the rate of profit. Yet various efforts at measuring it have come to a single conclusion: it fell sharply between the late 1960s and the early 1 980s.

The results are not always fully compatible with each other, since there are different ways of measuring investment in fixed capital, and the information on profits provided by companies and governments are subject to enormous distortions.1.• Nevertheless, economists Fred Moseley, Thomas Michl,16 Anwar Shaikh and Ertugrul Ahmet Tonak,17 Gerard Dumenil and Dominique Levy, Ufuk Tutan and Al Campbell,18 Robert Brenner, Edwin N Wolff,19 and Piruz Alemi and Duncan K Foley20 have all come to very similar conclusions. A certain pattern emerges, which is shown in graphs given by Dumenil and Levy (Figure 1 ) for the whole business sector in the US and by Brenner (Figure 2) for manufacturing in the US, Germany and Japan.

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There is general agreement that profit rates fell from the late 1960s until the early 1 980s. There is also agreement that they partially recovered from about 1982 on, but with interruptions at the end of the 1980s and the end of the 1990s, and never making up more than about half the decline since the long boom. According to Wolff, the rate of profit fell by 5.4 percent from 1966 to 1 979 and then "rebounded" by 3.6 percent from 1979 to 1997; Fred Moseley calculates that it "recovered . . . only about 40 percent of the earlier decline";23 Dumenil and Levy that "the profit rate in

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1997" was "still only half of its value of 1948, and between 60   
and 75 percent of its average value for the decade 1956-65" .24

There were attempts to explain the decline in profitability in the 1 970s as resulting from a wave of workers' struggle internationally which had supposedly forced up the workers' share of total income and cut into the share going to capital. That argument was put forward by Andrew Glyn and Bob Sutcliffe,25 by Bob Rowthorne26 and accepted in part by Ernest Mandel. 27 Glyn's analysis has been given a favourable mention much more recently by Martin Wolf.28 But statistical analysis at the time suggested there had been no increase in the share of wages when tax, capital depreciation and various other factors were taken into account. 29 The argument also failed to explain why all the Western economies moved into crisis at the same point in the mid-1970s. In Italy, Britain, Spain and France there were important improvements in the level of working class organisation in the late 1 960s and early 1970s. But there was no similar improvement in Japan and West Germany, while in the US "there was a sharp decline in real wages of non-agricultural workers from late 1 972 to spring 1975, while productivity on the whole increased" .30

What did seem to make sense-and still does-was Marx's argument about the organic composition of capital. A mainstream study of the US economy showed a rapid growth in the ratio of capital investment to workers employed in manufacturing by over 40 percent between 1957-68 and 1968-73.31 One study of the UK showed a rise in the capital-output ratio of SO percent between 1960 and the mid-1970s.32 Samuel Brittan noted with bewilderment:

There has been an underlying long term decline in the amount of output per unit of capital in manufacturing . . . This is a fairly general experience in the industrial countries . . . One can construct a fairly plausible story for any one country, but not for the industrial world as a whole.33

The more recent calculations of Michl,34 Moseley, Shaikh and Tonak and Wolff35 have all concluded that the rising ratio of capital to labour was an element in reducing profit rates. It is a conclusion that validates Marx's position that a rising ratio of capital to labour can cut into profits-and is an empirical refutation of the position held by Okishio and others that this is impossible. But it still leaves open why this happened then and not earlier.

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It is an issue that can be resolved by looking at contradictions within the long boom already being highlighted in the early 1960s by those who explained the boom in terms of the massive level of arms expenditures.

Arms spending was very unevenly distributed among the most important economies. They consumed a very high proportion of the national output of the US and the USSR in the 1950s (up to 13 percent in the first case, probably 20 percent or more in the second case), a lower proportion in Britain and France, and a much smaller proportion for Germany and Japan. This did not matter unduly in the first years after the Second World War, when there was a relatively low level of foreign trade and most firms were subject to low levels of international economic competition. The taxation to pay for the US arms budget cut into the profits of American firms, for instance, but this did not greatly disadvantage any one such firm in its domestic competition with another. And there was little for capitalists to complain about so long as the overall rate of profit did not decline much from its high level in the immediate post war period. The positive effects of arms spending more than compensated for the negative effects.

But over time the unevenness did come to matter. The US, as part of its programme to use its dominant economic position to cement its hegemony outside the Russian bloc, allowed access to its markets to the West European states and Japan. But economies with low levels of arms expenditure could invest proportionately more and achieve faster growth rates than the US could. Over time they began to catch up with its levels of productivity and to increase their relative importance in the world economy.

Capital growth in Japan over the period 1961-1 971 was 1 1 . 8 percent per year, while i n West Germany over 1950-62 it was 9.5 percent; these compared with figures for the US for 1948-69 of only 3.5 percent.36 Japan accounted for 17.7 percent of the combined advanced countries' GNP in 1977 and West Germany 13.2 percent; in 1953 the figures had only been 3.6 and 6.5 percent respectively. Meanwhile, the US share had fallen to 48 from 69 percent.37 The shift was explained by the benefits Japan and Germany gained from the high level of worldwide arms expenditure, especially by the United States, without having to sacrifice their own productive investment to pay for it. Had all countries had comparable levels of productive investment to that of the West Germans and Japanese there would have been a very rapidly rising global organic composition of capital and a downward trend in the rate of profit. As it was, capital had grown in Japan "much more rapidly than the labour force-at more than 9 percent a year, or more than twice the average rate for the Western industrialised countries . . . " 38 Non-military state capitalisms could only expand without crises because they operated within a world system containing a very large military state capitalism.

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So the Japanese and German experiences did not contradict the thesis of arms expenditure as an explanation of world growth and stability. But they were a contradictory factor in this growth. Their very success meant that a growing chunk of the world economy was not wasting investible output on arms. Nor was that the end of the matter. The very success of the low arms spending economies began to put pressure on the high arms spenders to switch resources away from arms and towards productive investment. For only then could they begin to meet the challenge they faced in market competition from Japan and West Germany.

This was most clearly the case for Britain. Its economy was highly dependent on foreign trade and it ran into balance of payments crises with every spell of rapid economic growth between the late 1940s and the late 1970s. Successive British governments were forced, reluctantly, to abandon their notions of imperial grandeur and to reduce the proportion of the national product going on defence-from 7.7 percent of GDP in 1955 to 4.9 percent in 1970.

In the case of the US, the pressure was less obvious at first, since even in 1965 foreign trade only amounted to about 10 percent of GNP and the country enjoyed a trade surplus throughout the 1950s and 1960s. Nevertheless, arms spending declined from around 13 percent of GNP during the Korean War to between 7 and 9 percent in the early 1960s. The pressure of arms spending on its international competitiveness was suddenly revealed when it shot up by a third with the Vietnam War. The new level was not anything like that of the Korean War. But it was too much for a US industry facing vigorous competition for markets. There was an upsurge of inflation at home and Wall Street turned against the war.39 Then, in 1971 for the first time since the Second World War, US imports exceeded US exports. President Nixon was forced into two measures which further undermined the stability of the world economy: he cut US arms spending40 and he devalued the US dollar, in the process destroying the "Bretton Woods" system of fixed international currency exchange rates that had acted as a framework for the expansion of world trade throughout the postwar period.

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