Zombie Capitalism Global Crisis and the Relevance of Marx

The dynamic of market competition was relentlessly undercutting the dynamic of military competition. What some people called the "crisis of hegemony"41 of the system in the 1 970s was, in fact, the offspring of something else-the inherent instability of a world of state capitalisms engaged in two quite different dimensions of competition, economic and military, with each other.

One of the paradoxes of capitalism, we saw in Chapter Three, is that, although a rising organic composition of capital reduces average profit rates, it raises the profits of the first capitalist to introduce new machinery. So the Japanese and West Germans, by engaging in capital intensive forms of investment, cut world profit rates, while raising their own national share of world profits.42 Their increased competitiveness in export markets forced other capitalisms to pay, with falling rates of profit, for the increased Japanese and German organic compositions of capital. But this, in turn, put pressure on these other capitalists to increase their competitiveness by raising their own organic compositions. The falling profit rates of the 1 970s were the result. By 1973 the rates were so low that the upsurge in raw material and food prices caused by the boom of the previous two years was sufficient to push the advanced Western economies into recession.

Suddenly there was no guarantee for the major capitalist concerns that new investments on the scale they needed to keep up with international competition would be profitable. Investment began to fall sharply and firms tried to protect their profits by cutting back on employment and labour costs. Declining markets then led to further falls in profits and investment.

The old pattern of boom turning into slump had returned after its 30-year break. When governments reacted by trying to boost demand with budgetary deficits, firms did not immediately respond, as the mainstream Keynesians held that they should, by increasing investment and output. Instead they increased prices to try to recoup their profits, to which workers who still had a degree of confidence from long years of full employment responded by fighting for wage increases. Governments and central banks were then faced with a choice. They could allow the money supply to expand so as to allow firms to further raise prices and protect profits. Or they could try to restrict the money supply with high short-term interest rates, relying on firms then being forced to resist workers' demands. Typically they turned from the first approach in the mid-1970s to the second in the late 1970s. But the success in restoring investment and creating a new period of growth did not last long even when governments had succeeded in subduing working class resistance. The rate of profit could not be raised above the pre-crisis level of 1973, and in 1980-82 a second "oil shock" was sufficient to push the world into a second serious recession, proving that monetarism could no more restore conditions to those of the long boom than could Keynesianism.

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The limits of state directed capitalism

Capitalism was coming up against the limits of the state capitalist strategy for maintaining accumulation. That strategy had worked so long as states were able to ignore the immediate effects on the rate of profit of directing some of the mass of investible surplus value into areas that were not immediately particularly profitable (the Japanese prioritising growth over profitability) or into waste production (the arms economy). But this depended, firstly, on the rate of profit not dropping too sharply, and, secondly, on being able to ignore how the competitiveness of the production of particular goods within the national economy compared to that taking place elsewhere in the world system (or, in Marx's language, to ignore the law of value on a world scale compared with production within the individual units of the national economy). By the mid-1970s both preconditions had been undermined by the contradictory development of the long boom itself.

The rate of profit had now fallen to a degree which made unproductive expenditures or not particularly profitable areas of investment an increasing burden on further accumulation. And the very dynamism of the long boom had produced a growing interconnectedness between national economies. By 1979 US foreign trade amounted to 31 percent of output, as against 10 percent in 1965.43 A much larger proportion of industry than before had to worry about the international comparisons of its costs. Whole industries suddenly found that the value of their output had to be recalculated on the basis of what it would cost to produce it with the more advanced techniques and lower labour costs of other countries-and that meant it was not high enough to provide "adequate" profits.

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This seems to explain the well known stagnation of labour productivity in the US in the 1970s-the value of the machinery on which labour worked was originally reckoned in terms of how much it cost to produce or replace inside the US, but with rising international trade, what mattered was the lower figure that would have been obtained if world comparisons were used.44

In any case, the feature described by Galbraith, of firms being able to downplay the importance of profit in the interests of growth, was undermined. And this was not only a very significant change for the state monopoly capitalism of the US. It was to have devastating consequences for those countries which had gone much further in the direction of full blooded state capitalism in the Eastern bloc and the Third World. They too were to enter into a new period of crises.

The end of the Stalinist model

The assumption of conventional thinking on the right as well as the left was that the Soviet-type economies displayed a very different dynamic to that of the West. It was assumed, with very little dissent45 until the 1970s and sometimes the 1980s, that they could sustain high levels of growth indefinitely, even if they were also marked by major inefficiencies and tended to produce low quality goods. Typical of the attitude on the left, even from people who were scathing about the denial of workers' rights in such societies, was the position Ernest Mandel held. He wrote in 1956:

The Soviet Union maintains a more or less even rhythm of economic growth, plan after plan, decade after decade, without the progress of the past weighing on the possibilities of the future . . . All the laws of development of the capitalist economy which provoke a slowdown in the speed of economic growth are eliminated . . . 46

Mandel still argued in the mid-70s, that "while the recession is hitting all the capitalist economies, the countries with non-capitalist economies are escaping the overall effects of the recession" .47

Such attitudes received a rude shock in the late 1980s when Mikhail Gorbachev, recently appointed as general secretary of the Communist Party of the USSR, revealed that the economy had been suffering from "stagnation" for some years.48 His economic advisor, Abel Aganbegyan, said:

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In the period 1981-85 there was practically no economic growth. Unprecedented stagnation and crisis occurred during the period 1979-82, when production of 40 percent of all industrial goods actually fell.49

The official figures for the Soviet-type economies had already in the late 1960s shown a long-term tendency for their growth rates to decline, by between a third and two thirds.50 The long-term decline in growth rates was paralleled by-and dependent on-something else. The output/capital ratio kept falling-from 2.4 in 195 1 -5, to 1 .6 in 1 956-60 and 1 .3 in 1 961-65. Or, to put it another way, the amount of constant capital required to produce a certain amount of new output kept rising.

The problem was made worse because growing gross output in material terms was not good enough for the ruling bureaucracies. Their concern was with how this material output compared with that produced by their international rivals-that is with the value of the output in international terms. This led to recurrent attempts by sections of the bureaucracy to implement economic reforms, amid complaints about productivity and the quality of what was produced: in the early 1 950s after Stalin's death, in the early 1960s under Nikita Khrushchev and then in the late 1960s under Leonid Brezhnev and his prime minister, Alexei Kosygin.

The reforms had only limited effects. A rise in workers' living standards, in contrast to the very sharp fall in the 1930s, encouraged greater commitment by the workforce and a rise in productivity. But the pressures of competitive international accumulation (military in the case of the USSR, market as well as military in the case of the East European states) led to a repeated tendency of increased consumer goods and food output to be sacrificed to the needs of industrial investment. As Soviet statisticians explained in 1969, "Owing to the international situation it has not been possible to allocate as many resources as intended to agricultural investment" .51 Such a switching of resources from one sort of production to another necessarily led to increasing waste, undermined the morale of the workforce, and led people at every level of managerial hierarchies to hide the resources at their disposal so as to enable them to cope if inputs were suddenly curtailed.52

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It is necessary to note in passing that such a phenomenon was not unique to the Soviet-style economies. Exactly the same pressures apply to those below the top managerial ranks in Western corporations as they are expected to be able to respond to sudden changes in the pressures on them from above in response to changing competition. Under such conditions, the firms' costs of production can depart very widely from those which ought to be achieved. The result can be what one economist has called "xinefficiency"-a level of inefficiency in the company amounting to 30 or 40 percent of production costs.53 Production costs and the prices which would prevail in a "perfect market" depart massively from each other-to use Marxist terminology, there are massive short-term infringements of the law of value.

Such things are rarely studied by mainstream economists because both their micro- and macro-economics deal with what happens between firms, not within them. But there are repeated references to such problems in managerial studies. Interestingly, some Western studies concluded when it came to relationships between enterprises in the USSR "allocative efficiency" (that is, for Marxists, the law of value) did apply: "Inter-firm trade in factors of production may be as efficient as in market economies". 54

What produced crisis and waste inside Western enterprises and Soviet-style economies alike was the drive to accumulate at all costs. It meant, as we saw in Chapter Seven, investment expanding repeatedly at the expense of consumption, increased imbalances in the economy, a continual cyclical pattern to growth and increased alienation of the workforce. Figures given by the Russian economic journalist Vasily Selyunin in 1987 showed the increasing subordination of consumption to accumulation over nearly six decades, with only 25 percent of output going to consumption in 1985 as compared to 39 percent in 1940 and 60.5 percent in 1928. He concluded, "The economy is working more and more for itself, rather than for man". 55

His words echoed (probably unintentionally) those of Marx describing the logic of capitalism as "accumulation for accumulation's sake, production for production's sake" .56 But the drive to such accumulation was not only an expression of the alienation of the capitalist system for Marx. It was also the force ultimately behind the outbreak of crises. For it meant that accumulation reached a point at which it attempted to proceed faster than the extraction of the extra surplus value necessary to make it possible. At such a point new accumulation could only proceed at the expense of existing accumulation, as Grossman spelt out in his theory of "capitalist breakdown" . There was "over-accumulation of capital". The only response open to capitalists in this situation was to shut down the plant, sack some workers and try to restore profits at the expense of the wages of the others. Each of these moves had the effect of making it impossible for some of the already produced commodities to be sold (or, in Marx's words, for the "realisation of surplus value" to take place), creating a general overproduction of goods in relation to the market.

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The Soviet Union had always experienced cyclical downturns as a result of attempts to accumulate too rapidly, as we saw in the previous chapter. But as with the major Western capitalisms in the long boom, the downturns had not turned into economic contraction, a "real recession." Now these became more dificult to avoid as the slowdown in growth had its impact.

Poland and the foretaste of a dire future

Two young Polish Marxists, Jacek Kuron and Karol Modzelewski, produced a pathbreaking study of the economic contradictions in an Eastern bloc country in 1964. They pointed to the findings of certain East European economists about the way over-accumulation affected the rest of the economy. Accumulation came up against three "barriers". The "inflation barrier" signified that too rapid expansion of investment had led either to normal inflation (as the state printed money to pay for it, so raising prices and cutting living standards) or to "hidden inflation" (as cutbacks in the supply of goods to the shops led to shortages, queues and a growing black market. ) The "raw material barrier" signified that there were just not enough inputs for production to reach the projected level. The "export barrier" meant that attempts to make up for the shortages of inputs by importing from abroad led to foreign exchange crises. Kuron and Modzelewksi concluded that a point was soon going to be reached in which the internal reserves would no longer exist for accumulation to continue without creating an immense social crisis. They argued against those who looked to reform:

What we have here is not a contradiction between the objectives of the plan and the anti-stimuli resulting from faulty directives, but a contradiction between the class goal of the ruling bureaucracy (production for production) and the interests of basic groups who achieve the production (maximum consumption). In other words, it is a contradiction between the class goal of production and consumption, and it results from existing conditions, not from mismanagement.57

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Their analysis was partially vindicated in 1970 when attempts to resolve a crisis caused by over-investment at the expense of living standards led to workers occupying the country's Baltic shipyards, attacks on them by the police and the enforced resignation of the country's leader, Gomulka. But at first it seemed that the new leadership had found a way out of the crisis, with a new boom based on massively expanding trade with the West and borrowing from Western banks which permitted imports to rise by 50 percent in 1972 and 89 percent in 1973.

Polish state capitalism was overcoming the limits to accumulation created by the narrowness of its national economy by integration into the world economy through market competition. The other side of this, however, was that the Polish economy was bound to suffer whenever the world economy went into recession. And dependency on the rest of the world system for inputs to production and for export earnings prevented the state shifting resources from one sector of the economy to another so as to ward off any incipient internal recession turning into an actual one. From 1980 to 1982 there developed "a crisis unprecedented in the history of Europe since the second world war" .58 The "national net material product" fell by nearly a third; prices increased by 24 percent in 1981 and 100 percent in 1982; and real wages fell by about a fifth.59

The regime attempted to place the burden of the crisis on the mass of workers-and produced a sudden upsurge of resistance through the Solidarnosc workers' movement. The events served as a warning to the whole of the Russian bloc. Soviet-style state capitalism was not immune to a crisis similar in important ways to that then hitting Western state monopoly capitalism. Both had their roots in the system of competitive accumulation as a whole.60 Catastrophic crisis was inevitable at some point in the not too distant future throughout the Soviet bloc-including in the USSR itself:

By 1981, the choice between maintaining the closed economy and opening up to the rest of the world was indeed the choice between the frying pan and the fire. The first option meant deepening stagnation, growing waste, an inability to satisfy the demands of the mass of the population, and the continual danger of working class rebellion. The second option meant binding oneself into the rhythm of a world economy increasingly prone to stagnation and recession-and giving up the administrative means to stop recession involving contraction of the domestic economy. That is why the Polish crisis of 1980-81 was so traumatic for all the rulers of Eastern Europe. It proved there was no easy solution to the problems besetting every state.61

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The Soviet crash

The Soviet bureaucracy was not long in discovering this the hard way. Its levels of accumulation were reaching the limits of what could be sustained. It depended more on foreign trade than previously, using oil revenues to buy wheat abroad to feed the population in the 1970s and early 1980s (adding to worldwide inflationary pressures). A fall in the world price of oil in the course of the mid-1980s then threw its domestic economic calculations into some disarray. And the decision of the Reagan administration to reassert US hegemony by raising arms spending put pressure on the USSR to do likewise. The external factors added to the internal problems caused by trying to sustain accumulation in the face of declining growth rates.

Gorbachev's promotion to head of the ruling Communist Party was a sign that influential people had recognised the urgency of the situation-his rise owed much to Yuri Andropov, who had witnessed what crisis could lead to as ambassador to Hungary in 1 956 and as general secretary of CPSU during the Polish events of 1980-81. Gorbachev has been blamed since as a "counter-revolutionary" by some people on the left nostalgic for the Soviet style set-up. But his intention was to try to save that set-up through topdown reforms before economic, social and political crisis on Polish lines could arise. His misfortune was that the crisis had reached a point where it could not be overcome by reform.

Reports from ministerial meetings in the winter of 1988-9 provide a picture of increasing economic chaos, with the regime not seeing any way to deal with it. There were bitter clashes over "the balance (or rather the imbalance) between different sectors of the economy", the "number of enterprises" which were "significantly refusing to supply planned output" or were "significantly reducing deliveries" and the way "the volume of new investment continued to grow".62 "The supply of goods to the consumer market" had "suddenly begun to deteriorate sharply and noticeably before our eyes in the second half of 1987 and especially in 1988".63 There was an:

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increasingly strained situation as regards satisfying the public money-backed demand for goods and services . . . The problem of supplying the population with food has worsened . . . The money supply has reached critical dimensions . . . Everything in the economy is in short supply. 64

By October 1989 there was open talk of "the crisis in many parts of the economy, the shortages, the unbalanced market, the collapse of old relations before new ones are put in place, an atmosphere of uncertain prospects and scarcities" .65 Prices were rising, since factories and shops found they could reduce production and simply raise prices, disrupting supplies for the rest of the economy.

The economic crisis, as in Poland, turned into a political and social crisis. Gorbachev had intended to permit a limited opening ("glasnost") of discussion in the ruling party and the media to isolate those in the bureaucracy opposed to his reforms. But people increasingly took advantage of this to give expression to old grievances and their discontent with the deteriorating economic situation. An unprecedented series of mass demonstrations and riots took place in the non-Russian national Soviet republics of Armenia, Kazakhstan, the Baltic states, Georgia, the Ukraine, Byelorussia and Azerbaijan, fusing struggles for national rights with grievances at the social conditions people experienced. So the protests by the Armenian minority in the Karabakh region of Azerbaijan "began as protests against catastrophic mismanagement and miserable economic conditions" .66 The newspaper Pravda said that in 1986 (even before the crisis deepened) there was 27.6 percent unemployment in Azerbaijan and 18 percent in Armenia.67 In Kazakhstan "only half the young people had a chance to find a job in 1981-85" .68 The head of the state-run unions said that across the USSR as a whole 43 million people were living below the poverty line.69 Estimates of the total number of unemployed varied from 3 percent to 6.2 percent (8.4 million people) . Then miners right across the USSR struck in the early summer of 1989 and soon after Abalkin complained, "A wave of strikes has engulfed the economy" .70 This was happening as huge mass movements in Eastern Europe-partly in response to their economic crises-were breaking Soviet control on the region and deepening the general sense of political crisis, encouraging further protests in the USSR's non-Russian republics and weakening the capacity of the central state to impose its will.

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Those running the enterprises did not know how to cope with the wave of protests from below apart from making concessions which raised money wages, and they had even less of an idea about what do about the shortages of inputs needed to maintain the level of production. Stagnation gave way to economic contraction-the beginnings of a slump-in the second half of 1989.

There were calls from economists who claimed that only greater competition between enterprises, and eventually direct competition between firms inside Russia and those elsewhere in the world economy could force managers to be efficient and to produce the things that were needed. But they had no more idea than the ministries at the centre as how to find the resources to complete the investments that were meant to provide the outputs that would restore balance to the economy. The economic collapse continued regardless of what the government did, leading to ever greater discontent and political upheaval. An attempt by Gorbachev to take a hard line to restore central control in the spring of 1991 produced a new wave of discontent which forced him to retreat. A coup against him by those who hankered after a return to the past in August 1991 fell apart, lacking support from the most important generals. There was no popular constituency for trying to return to the old order. But those who preached reform did not have a way forward either, despite the brief popularity for " 100-day" or "300-day" programmes promising miraculous economic recovery.

Such programmes were utopian in the extreme. The collapse of central control left the giant Soviet enterprises in a monopolistic or semi-monopolistic position. They were able to dictate to the market and to produce what they wanted rather than what was needed by the economy as a whole; they were in a position to raise prices and to simply ignore contractual obligations to other enterprises. There was no stopping the combination of deepening recession, inflation and acute shortages of consumer goods and food. Economists, planners and frightened bureaucrats began to look for any scheme to get them out of the mess, until finally they gave up attempting to control what was happening. When Yeltsin and the Communist leaders of the other national republics announced the dissolution of the USSR into its component republics at the end of 1991 they were only giving political expression to the economic fragmentation that was already under way, with the heads of each industrial sector trying to protect themselves from the general economic crisis by relying on their own resources. This was turned into a supposed economic strategy through "shock therapy" policies of Yeltsin's "liberal" ministers and Western advisers like Jeffrey Sachs. The assumption was that, left to compete with each other without restraints from the state, enterprises would soon be pricing goods rationally in a way that would lead the efficient ones to establish links with each other, and that this would restore stability. In fact, all it did was to provide governmental blessing to a slump already under way whose only precedent anywhere in the 20th century was that of 1929-33 in the US and Germany.

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