Zombie Capitalism Global Crisis and the Relevance of Marx

The failure of economic reform was not just a failure of implementation. There was a flaw in the very notion of reform itself. The aim was to restructure the Soviet economy so that those sections of it capable of adjusting to the current international level of the forces of production would expand while others closed down. But this was bound to be an enormously painful undertaking, not just for those workers who suffered in the process but for the mass of the individual members of the bureaucracy as well. Restructuring the British economy between the mid-1970s and the mid-1980s had involved shutting down about one factory in three and destroying capital on such a scale that gross industrial investment in 1990 was still no higher than in 1 972. It is very doubtful that it could have proceeded smoothly if British capitalism had not had the lucky bonus of enormous North Sea oil revenues. The USSR's economy was much larger than Britain, and its enterprises had been much more insulated from the rest of the world for 60 years. The proportion that was to be destroyed by an immediate opening to international competition was correspondingly greater. This, in turn, did considerable damage to the remaining competitive enterprises as they lost suppliers of materials and components on the one hand and buyers for their output on the other.

The roots of the crisis lay in the pressure to accumulate for the sake of accumulation that arose from the bureaucracy's position as part of a competitive world system. The Soviet economy had reached the point at which the precondition for a further wave of self-expansion of capital was a crisis involving the destruction of at least some past accumulation. The only diference between Russia and, say, France or Britain, was that the destruction was to be on a considerably greater scale. And this was because the Soviet Union had undergone six decades of accumulation without restructuring through crises and bankruptcies, while for the British and French economies it was only four and three decades respectively.

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Few people were prepared to see things in these terms at the time. The vast majority of those who had struggled for democratic reform in Russia believed that the turn to market capitalism would open up a glorious future. What they got instead was a devastating slump, the corruption of the Yeltsin years and the domination of the economy and society by former members of the ruling bureaucracy and mafiosi reborn as private capitalist oligarchs. Meanwhile, in the rest of the world the great majority of politicians and theorists in the social democratic and former Stalinist left drew the conclusion that it was socialism that had failed and that the future lay with Western style markets, failing to perceive the depths of the crises brewing there too.

Japan: the sun that stopped rising

The world's second economic power at the beginning of the 1980s was the USSR. Japan took its place as the Soviet crisis of the late 1980s turned into collapse.71 Japan's average growth rate throughout the 1980s was 4.2 percent as against 2.7 percent for the US and 1.9 percent for West Germany. Its annual investment in manufacturing equipment was more than twice that of the US.72 That the future lay with Japan was the near universal conclusion of media commentators. A committee of the US Congress warned in 1992 that Japan could overtake the US by the end of the decade. "After Japan" became the slogan of European and North American industrialists trying to motivate their workforces to greater feats of productivity. The "threat" from the "rising sun" became the excuse for the job losses experienced by American auto workers. Keynesian commentators like Will Hutton and William Keegan wrote books extolling the Japanese model of capitalism.

Then in 1992-3 a financial crisis pushed Japan into its own "period of stagnation", with a growth rate averaging just 0.9 percent a year between 1990 and 2001 .73 By 2007 its economy was only a third of the size of the US's (and the European Union's)74 as against estimates as high as 60 percent in 1992.75

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The blame for what happened is usually ascribed to faults in the running of its financial system-either due to financial markets not being "free" enough in the 1980s, or to inappropriate action by the central banks once the crisis had started. The conclusion from such reasoning is that the Japan crisis was unique and has little to tell us about the direction in which the global system is going. The sudden inability of the world's second biggest economy to grow then becomes the result of accidents.

Yet all the elements of the Marxist account of the crisis of the inter-war years are to be found in the Japanese case. Japan had a rapidly rising ratio of capital to workers from the 1 950s to the late 1980s. This grew in the 1980s by 4.9 percent a year-more than four times as fast as in the US and 70 percent faster than in Germany.76 The result, as Marx would have predicted, was downward pressure on the rate of profit. It fell by about three quarters between the end of the 1960s and the end of the 1980s.

Japanese profit rate"

Return on gross non-residential stock"

The decline seemed manageable until the end of the 1980s. The state and the banks worked with private industry to sustain growth without much attention to profit rates. So long as there was a mass of profit available for further investment, the Japanese system ensured that it was used. Japan had been hit hard by the global recession of the mid-1970s, but was able not only to recover from it before most other countries but also to restructure industry in such a way as to keep expanding throughout the early 1980s when the US and Europe were in recession:

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The crisis [of 1 973-5] indicated that future growth on the basis of heavy and chemical industrialisation was untenable. The role of the state in changing the strategic direction of Japanese capitalism was fundamental. Administrative guidance by MITI [Ministry of International Trade and Industry-CH] began to nudge Japanese capital in the direction of electronics, automobiles, capital equipment and semiconductors . . _. 79

This required high levels of investment. The United States, for example, invested just 21 percent of its GDP during the 1980s compared with a Japanese figure of 31 percent. According to one estimate, the ratio of capital stock to GNP in Japan was nearly 50 percent higher than in the us.so The concentration of investment into certain industries in this way raised their productivity, even though it remained fairly low in the rest of the Japanese economy.st But such high investment could only be sustained by holding down the consumption of the mass of people. Partly this was done by keeping down real wages; partly it was done through providing minimal state provision for sickness and pensions, forcing people to save. As Rod Stevens pointed out when the boom was at its height:

Real wages in Japan are still at most only about 60 percent of real wages in the US, and Japanese workers have to save massively to cope with the huge proportion of their lifetime earnings which is absorbed by such things as housing, education, old age and health care. s^z

But this level of real wages restricted the domestic market for the new goods Japanese industry was turning out at an ever increasing speed. The only way to sell them was to rely on exports. As Stevens also pointed out:

Because of capital's increasingly strict wage control and authority in the workplace, growing labour productivity in the consumer goods branches of the machinery industries (eg motor cars and audio-visual equipment) had to find outlets in export markets if the Japanese working class's limited buying power was not to interrupt accumulation.83

High productivity in the select range of prioritised industry made the required level of exports possible, with Japanese cars and electronics increasingly penetrating the US market. But it brought complications in its wake. Japanese economic success was very dependent on US good will. When the US demanded that Japan accept an upward revaluation of its currency to make its goods less competitive against American goods, Japanese capitalism had little choice but to comply and the volume of exports suffered (even though revaluation meant their value in dollar terms did not).

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The reaction of the state to this was to provide cheap funds to keep industrial investment and expansion going. As Karel van Wolferen has said, "To compensate the corporate sector for the squeeze of the exchange rate, the Ministry [of Finance] encouraged the banks vastly to increase their lending".84 But there had been a weakening of the old mechanisms which directed bank lending into industrial development-caused in part by the growing integration of Japanese capitalism into the world system. 85 The expanded bank lending found its way into speculation on a massive scale:

The explosion of liquidity helped set off an upward spiral of real-estate values, long used as collateral by the big companies, which then justified inflated stock values.86

In what was later called the "bubble economy", property values soared and the stock exchange doubled in value-until the net worth of Japanese companies was said to be greater than that of the US companies, although by any real measure the US economy was about twice the size of the Japanese one. But while the bubble lasted the Japanese economy continued to grow-and even after the bubble had started deflating, bank lending enabled the economy to keep expanding throughout 1991-2 as recession hit the US and Western Europe. Then it became clear that the banks themselves were in trouble. They had made loans for land and share purchases that could not be repaid now these things had collapsed in price. The banking system was hit by recurrent crises right through the 1 990s, writing off a total of around 71 trillion yen (over \$500 billion) in bad loans. The total sum owed by businesses in trouble or actually bankrupt were set at 80 to 100 trillion yen (\$600 to \$750 billion) by the US government, and at 1 1 1 trillion yen (nearly \$840 billion) by the IMF. •7

The role of the financial system in producing the bubble and then the long drawn out banking crisis has led most commentators to locate the origin of the Japanese crisis in faults within that system.

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The problem, neoliberal commentators claim, was that the close ties between those running the state, the banking system and industry meant that there was not the scrutiny about what the banks were up to which a truly competitive economy would have provided. 88 It was this which enabled such a massive amount of dodgy lending to take place. As an explanation, it fails because very similar bubbles have happened in economies like the US which supposedly fulfil all the norms of "competitiveness". It is difficult to see any fundamental diference between the Japanese bubble of the late 1980s and the US housing bubble of the mid-2000s.

The neoliberal reasoning that blames the crisis on the state believes there was a solution-the state should simply have walked away and allowed some of the big banks to go out of business. But this assumes that some banks going bust would not bring down other banks to which they owed money, leading to a cumulative collapse of the whole banking sector. No advanced industrial state dare even contemplate that happening. Whenever it has seemed possible, other states have behaved in general as the Japanese have.

In any case, there is no reason to believe that the banking crisis was the ultimate cause of Japanese stagnation. The neoclassical economists Fumio Hayashi and Edward C Prescott have argued that firms that wanted to invest could still do so, since "other sources of funds replaced bank loans to finance the robust investment by nonfinancial corporations in the 1990s" .89 But they have had to recognise that "those projects that are funded are on average receiving a low rate of return".90 In fact, there was a fall in productive investment, although not anything like a complete collapse. In such a situation, restructuring the banking system, whether through allowing the crisis to deepen, as the neoliberals wanted, or gradually as those of a more Keynesian persuasion suggested, would not solve the crisis. On this American economist Paul Krugman rightly made the point:

The striking thing about discussion of structural reform, however, is that when one poses the question, "How will this increase demand?" the answers are actually quite vague. I at least am far from sure that the kinds of structural reform being urged on Japan will increase demand at all, and see no reason to believe that even radical reform would be enough to jolt the economy out of its current trap.91

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The reason was that the trap lay outside the banking system, in the capitalist system as a whole. The rate of profit had fallen to a point in the late 1 980s which precluded further substantial increases in workers' living standards. But that in turn prevented the domestic economy from being able to absorb all of the increased output. A new massive round of accumulation could have absorbed it, but for that profitability would have had to have been much higher than it was. Richard Koo's study of the crisis, The Holy Grail of Macroeconomics, by stressing the hidden debts of major corporations, hints at what had really gone wrong, but fails to ground the problem of insolvency in the long-term decline of profitability.92

The Japanese state did turn to some Keynesian type solutions, with a big programme of public works construction (bridges, airports, roads, etc). Gavan McCormack writes, "With the onset of chronic recession after the bubble burst at the beginning of the 1990s, the government turned to ever larger-and decreasingly effective-Keynesian deficits", and that "Japan's public works sector has grown to be three times the size of that of Britain, the US or Germany, employing 7 million people, or 10 percent of the workforce, and spending between 40 and 50 trillion yen a yeararound \$350 billion, 8 percent of GDP or two to three times that of other industrial countries" .93 According to one estimate the state's share of output increased from an average of 13. 7 percent in the 1984-1 990 period to 15.2 percent in the 1994-2000 period.94

But it was not enough to fill the gap created by the limited stimulus to investment from the rate of profit, as the graph below shows.

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The economy did not collapse in the 1990s in the way that the US and German economies did in the early 1930s. The state still seemed able to stop that. But it could not lift the economy back to its old growth path. Sections of Japanese capital believed they could escape from this trap by investing abroad-as the gap between Gross Investment and Gross Domestic Investment shows. But it was not an answer for the great bulk of Japanese capital which did its utmost to try to raise the rate of profit through raising the rate of exploitation, even though it could only reduce domestic demand still further and deepen its problems. Nor was it an answer for the Japanese working class, which whether it liked it or not would be compelled to struggle if it was to avoid life getting worse. Economic growth did not rise from the doldrums until the mid-2000s, when Chinese imports of machinery gave a boost to Japanese industry-but this was to prove to be very shortlived.

Japan's crisis was not as devastating to the lives of its people as that which broke out a couple of years earlier in the USSR. Yet, unnoticed by nearly all economists, mainstream and Marxist alike, there was a similarity between them. Capital accumulation had reached the point where it could no longer extract a surplus from those it exploited on a sufficiently rising scale to keep abreast of the internationally competitive level of accumulation it looked to. The barrier to capital accumulation had indeed become capital itself. Those who presided over accumulation had two choices. They could allow their bit of the system to restructure itself through blind competition, taking on trust ideological claims that it would produce new miracles. Or they could play safe, knowing they might never get out of long-term stagnation. The rulers of Russia chose the first path and saw their economy, already halved with the loss of the rest of the USSR, halve in size again. Japan's rulers took the other path, and their economy went through a decade and a half of debilitating stagnation without seeming any closer to a solution to its problems at the end than it was at the beginning. The big question both raised was, how would other countries, particularly the US, react if they fell into the same stagnation trap?

The impact on the Global South

The collapse of the two state-oriented ideological models, Keynesianism and Stalinism, had a profound effect on political forces aspiring after the "development" of Third World economies into full and equal components of the world system. It pushed them to look for new models of capital accumulation in place of the state-directed import-substitutionist model, which was already displaying problems.

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In Asia the tightly regulated Chinese economy and the less tightly regulated, but still centrally directed, Indian economy both began to show worrying signs of stagnation by the mid-1970s,95 forcing governments to look for alternatives; in Latin America the import-substitutionist model was found wanting in its Argentinian homeland as economic and political crises erupted; in Africa the promises made by proponents of "African socialism" were not fulfilled as industrial growth was restricted by the narrowness of national markets and the meagre resources left after the depredations of imperialism. Adding to these problems was a decline in the price on the world market for raw materials and foodstuffs-the main source of the export earnings needed to import equipment for new industries. Particularly after the onset of recession in the advanced countries in 1974, non oil producing Third World countries were caught between increased oil costs and a decline in the terms of trade for primary commodity exports of nearly 50 percent.96

Those running industries which had grown up within the protective barriers of the old model began pragmatically establishing links with foreign capital. Argentina, Brazil and Mexico were typical. Their industrial bases had been established in the 1 940s, 1 950s and 1960s by the state intervening to direct investment in industry, often into state-owned companies. But the more farsighted industrialists-whether in the state or private sectors-saw that they could not get the resources and modern technologies needed to keep up with worldwide productivity levels unless they found ways of breaking out of the confines of the national economy. They began increasingly to turn to foreign multinationals for licensing agreements, joint production projects and funds-and they began themselves to operate as multinationals in other countries.

The trend was reinforced by the success of a number of countries which had long oriented themselves to the world market in achieving very fast growth rates. In Asia four bastions of anti-Communism-South Korea, Taiwan, Hong Kong and Singapore-registered growth rates easily as large as those in Stalin's USSR. And in Europe countries like Spain, Greece and Portugal, which Paul Baran had included as part of the underdeveloped world, grew rapidly enough to join that rich man's club, the European Community. Brazil began following a similar export-oriented path under the military regime that had seized power in 1 964. Its still very large state sector and private capital alike increasingly oriented towards the rest of the world system rather than to a protected national market. The Western financial press rejoiced in this, assuring its readers that Brazil was the great rising Third World country whose industries were destined to challenge those of the West. And there certainly was growth. "For almost 15 years ( 1 965-80) the average rate of growth was 8.5 percent, making Brazil the fourth fastest growing country" .97

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Other Latin American states began to emulate the Brazilian policy. The military coups in Chile ( 1 973) and Argentina ( 1976) were followed by an opening to external capital. And again the outcome seemed encouraging at first. Under the Videla regime in Argentina "the rate of inflation was lowered, real output grew, and a current account surplus was generated" ,98 while Chile's real GDP grew 8.5 percent a year between 1 977 and 1980.99

It seemed that a way had been found to achieve national accumulation by breaking out of the confines of the national market-and, when the policies were undertaken under military regimes, of crushing popular resistance to rising levels of exploitation. There was a similar swing of the intellectual pendulum as in the West and the former Communist states, with the wholesale conversion of "dependency theory" economists to the wonders of free markets. The conversions continued even as the Latin American "miracle" came unstuck.

Growth after 1974 had come to depend on foreign borrowing (as in Poland and Hungary in the same period). Many Latin American countries gambled on ambitious growth targets by borrowing heavily in international financial markets. The external debt of Chile and Argentina almost trebled over a few years, from 1978 to 1 9 8 1.100 But this did not seem to matter at the time-either to the national governments or the international banking system:

Up to the second oil price shock ( 1 979-80) the gamble was worth taking. Export growth was sustained in world markets at favourable prices . . . As a consequence the ratio of debt outstanding to export proceeds was more favourable for all non-oil developing countries in 1979 than in 1970-72.¹0¹

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