Zombie Capitalism Global Crisis and the Relevance of Marx

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

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

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

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

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

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

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

In fact, Marxist theory can provide an explanation of the slump which avoids the contradictions of all the mainstream theories. Profit rates in the US had fallen about 40 percent between the 1 8 80s and the early 1920s,40 those in Britain were already in decline before 191441 and those in Germany had failed "to return to their pre-war 'normal' level" .42 Such declines could be traced back to long-term rises in the ratio of investment to the employed workforce (the "organic composition of capital"), about 20 percent in the case of the US.43 American profitability was able to make a small recovery through the 1 920s on the basis of a rise in the rate of exploitation. But the rise was not sufficient to induce productive investment on the scale necessary to absorb the surplus value accumulated from previous rounds of production and exploitation. Firms were torn between the competitive pressures to undertake investment in massive new complexes of plant and equipment (the Ford River Rouge plant, completed in 1928, was the largest in the world), and the fear that any new equipment would not be profitable. Some would take the risk, but many did not. This meant that the big new plants that came into operation towards the end of the boom necessarily produced on too big a scale for the market, flooding it with products which undercut the prices and profits of old plants. New investment came to a halt, leading to a fall in employment and consumption that worsened the crisis.

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

The crisis in these respects was very similar to those described by Marx in passages where he analysed the crises of 1 846 and 1 857 in Britain.44 It also fits with Grossman's interpretation of Marx's account, with its stress on the way in which firms are pushed to undertake new investments that threaten to make the already low rate of profit drop to such an extent that much of the new investment becomes unprofitable so as to cause all investment to freeze up.45

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

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At first it delayed the outbreak of the crisis. The Bolshevik economist Preobrazhensky, attempting to analyse the crisis in 1 93 1 , argued that there had been a big change since Marx's time. Then recessions had led to the elimination of inefficient firms and allowed the rest to enter into new rounds of accumulation. But now the system was dominated by big near-monopolies which were able to prevent the liquidation of their inefficient plants. They would do their utmost to keep their operations intact, even if it meant their plants operating at only a fraction of their usual capacity and cutting investment to the minimum. This produces a "thrombosis in the transition from crisis to recession" and prevents-or at least delays-the restructuring necessary for an emergence from the crisis: "Monopoly emerges as a factor of decay in the entire economy. Its effects delay the transition to expanded reproduction" .46

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

The turn to state capitalism

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

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

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

Such timidity could have only a limited impact on the crisis. All the efforts of the New Deal could not push the upturn that began in the spring of 1933 beyond a certain point. The number of unemployed fell by 1 . 7 million-but that still left 12 million jobless. It was not until 1937-eight years after the start of the crisis-that production reached the 1929 figure. But even then fixed investment in industry remained low47 and there was 14.3 percent unemployment. Yet this "miniboom" gave way in August 1937 to "the steepest economic decline since the history of the US" which "lost half the ground gained by many indexes since 19 32". 48

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

From slump to war

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

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

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

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

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

British and American imperialism could only defend their own positions in the world after the fall of France in 1 940 and Pearl Harbor in 1941 by moving on from the half baked statedirected capitalism of the mid- 1 930s to fully militarised economies of their own. The British state took charge of all major economic decisions, directing which industries should get raw materials and rationing food and consumer goods, with the civilian economy reduced to a mere adjunct of the centrally organised war economy. The US government "not only controlled the armaments sector of the economy, which represented about half the total production of goods. The state decided what consumer goods should be produced and what consumer goods should not be produced". 53 It spent huge sums building armaments factories which it handed over to private corporations to run. Government capital expenditure in 1941 was 50 percent higher than the country's entire manufacturing investment in

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1 939, and in 1943 the state was responsible for 90 percent of all investment.54 Again a militarised state-dominated economy seemed to provide answers to the problems that had faced the economy before the war. Nine million unemployed became less than one million within three years, and there was a growth in the civilian economy despite the vast expenditure on non-productive output. Total output doubled between 1940 and 1943, and consumer expenditure in 1 943-even when measured in 1940 prices-exceeded those of earlier years.ss The war economy could achieve what eight years of the New Deal could not-full employment of the productive capacity of the largest of the ageing capitalisms. As John Kenneth Galbraith has noted, "The Great Depression of the 30s never came to an end. It merely disappeared in the great mobilisation of the 40s" .s6

The Russian variant

There was one other major economy where state direction seemed to provide an alternative to being torn apart in the maelstrom of the world system. This was the USSR. In the 1 930s nearly all commentators saw it as based on radically different principles to those of Western capitalism-and this view persisted among many right up until its implosion in 1989-9 1 . The right defined it simply as "totalitarian", as if there was no dynamic to its economy, and many on the left adopted a mirror image view, speaking of it as "communist" or "socialist", or those who were more critical as "post-capitalist"s7 or a "degenerated workers' state"s8• All these different approaches assumed a high degree of continuity between the Soviet system as it operated in the 1930s and the revolutionary state established in 1 9 1 7.

But the central mechanisms directing the Soviet economy were not established during the revolution, but in 1928-9 under the impact of a profound economic and political crisis. By that time little remained of the revolutionary democracy that had characterised the country in the immediate aftermath of the October Revolution of 1917. A new bureaucratic layer had increasingly concentrated power in its own hands amidst the devastation of an already economically backward country suffering from three years of world war followed by three years of civil war. Nevertheless, the driving force behind the economy through to the mid-1 920s remained the production of goods to satisfy the needs of the population, and living standards rose from the abysmal levels of the war and civil war years, even if bureaucrats' living standards rose disproportionately more than those of workers and peasants.

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

As the Czech historian Michael Reiman has said:

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

Stalin, justifying the subordination of everything else to accumulation, insisted, "We are fifty or a hundred years behind the advanced countries. We must make good this lag in ten years. Either we do it or they crush us". ⁶ "The environment in which we are placed . . . at home and abroad . . . compels us to adopt a rapid rate of growth of our industry" ^.62

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

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

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

Balance sheet of a decade

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

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