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progress, from the New York garment workers to the streetcar drivers of Tokyo and all points between. There was a war brewing in the Balkans. For a system that had supposedly become crisis-free, politically and socially there was turmoil.

Rosa Luxemburg, who had now replaced Hilferding at the Berlin socialist training school, began work on a massive book that would refute his stability thesis. Luxemburg had promoted mass strikes and attacked militarism – indeed, attacked Lenin for his elitist conception of revolutionary politics. Now she attacked Hilferding.

Luxemburg’s 1913 book, The Accumulation of Capital, was written with twin purposes: to explain the economic motivation for the colonial rivalry between the big powers, and to show that capitalism was doomed. In the process she produced the first modern theory of under-consumption.

By reworking Marx’s calculations she proved, to herself at least, that capitalism is in a permanent state of overproduction. It is forever beset by the problem of too little spending power among the workers. So it is forced to open up colonies, not just as sources of raw material but as markets. The military costs incurred while conquering and defending colonies have the added benefit of soaking up excess capital. It is, said Luxemburg, akin to waste or luxury consumption: it drains off excess capital.

Since colonial expansion was the only pressure valve in a system prone to crisis, Luxemburg predicted that once the entire globe had been colonized, and capitalism introduced across the colonial world, the system must collapse. Capitalism, she concluded, is ‘the first mode of economy which is unable to exist by itself, which needs other economic systems as a medium and soil. Although it strives to become universal … it must break down because it is immanently incapable of becoming a universal form of production.’¹⁷

Her book was immediately torn to shreds – by Lenin and by most of the socialist professors she had worked with. They argued, correctly, that any mismatch between production and consumption was temporary, and would be solved by capital investment moving from heavy industry to consumer goods. In any case, new colonial markets were not the only escape valve from crisis.

But Luxemburg’s book went on to become hugely significant. It introduced the idea of ‘final crisis’ into left-wing economics. It expressed the intuition felt by many activists that monopoly, finance and colonialism were, even amid the peace and prosperity of the 1900s, storing up an almighty final catastrophe. By the 1920s, under-consumption became the left’s main theory of crisis and – once things calmed down – provided its common ground with Keynesian economics for the next fifty years.

Luxemburg remains relevant because she identified something critical to the debate on postcapitalism today: the importance of an ‘outside world’ for systems that successfully adapt.

If we ignore her obsession with colonies and military spending, and instead simply say that ‘capitalism is an open system’, then we are nearer to acknowledging its adaptive nature than those who had followed Marx in trying to model it as a closed one.

What irked the socialist professors about Luxemburg was precisely this insight: that, throughout its entire history and as part of its essence, capitalism must interact with an outside world that is not capitalist. Once the immediate outside world is transformed – indigenous societies annihilated, peasants cleared from the land – it has to find new places to repeat the process.

But Luxemburg was wrong to limit this to the possession of colonies. New markets can also be created at home, not just by boosting the workers’ spending power, but by transforming non-market activities into market ones. And it is curious that Luxemburg missed this, for just such a transformation was going on all around her.

Even as she worked on her book, the first cars were coming off the Ford production line at Highland Park, Detroit. The Victor Gramophone Company was selling 250,000 machines a year in the USA. When she started writing in 1911, Berlin had just one dedicated movie theatre; by 1915 there would be 168.¹⁸ The spectacular upswing of the third long wave (1896–1945) was unfolding, above all, as the expansion of a new consumer market among the lower-middle class and skilled workers. Leisure, the ultimate non-market activity in the nineteenth century, was becoming commercialized.

Luxemburg had ignored the fact that new markets are formed in a complex way, interactively, and that they can be created not only in colonies but within national economies, local sectors, people’s homes and indeed inside their brains.

The real question posed by Luxemburg’s insight is not ‘what happens when the whole world is industrialised’, but what happens if capitalism runs out of ways to interact with an outside world? On top of that, what happens if it can’t create new markets within the existing economy? As we’ll see, this is exactly the problem information technology poses for capitalism today.

THE GREAT DISORIENTATION

In January 1919 Rosa Luxemburg was murdered by a right-wing militia, her body thrown into a canal, following a failed insurrection in Berlin. Rudolf Hilferding died – either by suicide or torture – in a Gestapo cell in Paris in 1941. Between these two events, the economics of anti-capitalism were to become seriously disorientated.

Luxemburg had always opposed Bolshevism, predicting that if Lenin’s party took power in Russia it would end up ruling autocratically. But by the mid-1920s, with supreme irony, her theory had become the state doctrine of the Soviet Union. To understand why, and how the consequences still haunt the left, we have to understand what people lived through in the early 1920s – which was chaos.

The years 1919–20 saw the sharpest boom-bust cycle in history. Rampant inflation was followed by sudden hikes in interest rates, which produced a stock market crash reverberating from Washington to Tokyo. Mass unemployment and giant factories lying idle kept output levels well below those of 1914.

Amid this came events most socialists hadn’t dared dream of. The 1917 Revolution in Russia was just over a year old when workers’ republics

sprang up in Bavaria and Hungary. Germany headed off a socialist revolution only through far-reaching reforms at the outset of the Weimar Republic, including the promise to ‘socialize’ the economy. The year 1919 saw the seizure of factories in Italy, strike action bordering on insurgency in both France and Scotland, general strikes in Seattle and Shanghai. All across the Western world, mainstream politicians had to face the possibility of revolution.

By now the left had more than just Luxemburg’s book to go on. During the war, both Lenin and the Bolshevik theorist Nikolai Bukharin had produced works inspired by Hilferding, each drawing the conclusion that finance-dominated capitalism was proof of the system’s imminent doom. Lenin called this new, declining model ‘imperialism’, and defined it as ‘capitalism in transition’. The scale of organization – by vertically integrated corporations, cartels and the state – meant that the economy was actually becoming socialized under capitalism: ‘Private property relations, Lenin wrote in Imperialism (1916), ‘constitute a shell which no longer fits its contents, a shell which must inevitably decay if its removal is artificially delayed, a shell which may remain in a state of decay for a fairly long period … but which will inevitably be removed.’¹⁹

Bukharin’s pamphlet, written in an all-night library in New York in 1915, went further. He asserted that, because nation states had become aligned with the interests of their dominant industrial companies, the only form of competition left was war.²⁰

If these pamphlets were venerated on the left for decades it was because, though written by amateur economists, they told a story coherent with the data. Monopoly led to colonial conquest; that in turn led to total war – and war led to revolution. Financial dominance led to organized capitalism, which was ripe for takeover by the working class to run on socialized lines.

Both Lenin and Bukharin spent considerable time demolishing the idea that any new kind of capitalism could emerge, in which transnational cooperation could exist. It was the moderate German socialist Kautsky who’d had this brainwave on the eve of the First World War: he envisaged the creation of a single world market dominated by transnational

corporations. But by the time his article ‘Ultra-imperialism’ was published, the war had begun and the whole issue might have seemed academic.²¹

But the Bolsheviks understood that Kautsky’s ultra-imperialism thesis was a major challenge to them. Their attack on it spelled out in clear terms that capitalism had reached its limits, that seizure of power at the first opportunity was necessary, and that all talk of the working class needing ‘more time’ to become better educated and more politically mature was wrong.

There was, in the Bolsheviks’ eyes, a clear dialectical progression – from free market to monopoly, from colonization to global war. Once this had taken place, their philosophical scheme could brook no further evolution: capitalism could not progress except to its own destruction.

By now, the whole far left had effectively accepted one of Luxemburg’s key proposals: crisis theory should describe the finality of capitalism – not its cyclical movement.

Between 1917 and 1923 both wings of socialism got to test out the idea that workers could use state power to socialize capitalism.

In January 1919, Hilferding joined the German government’s socialization commission in Berlin, which for four months attempted to nationalize and plan the economy. But the project collapsed at the design stage, after obstruction by moderate socialists and liberals in government. In Austria – a new country formed from the ruins of the Austro-Hungarian Empire – socialization was more successful. The Socialist-Christian coalition government pushed through a law allowing the nationalization of failing firms, but a socialist plan to take over the banking system was rejected. In the end, Austria was left with three significant state enterprises: a shoe factory, a pharmaceuticals plant and the arsenal of the Austro-Hungarian Empire, which the government tried to convert into a diversified manufacturing company. The fate of this project is best summed up by the man who tried to run it: ‘The problem before the newly founded corporation was to employ its men and machines in producing goods for which a market had yet to be created.’²²

In Hungary, during the brief Soviet republic of 1919, Jeno Varga, a onetime acolyte of Hilferding in the Vienna seminars, became finance minister. He decreed that all businesses with more than twenty workers should be nationalized. All large shops were closed to prevent the middle classes buying luxury goods and using them as investments. Land was nationalized. Soon the Hungarian workers’ republic faced another problem. Factories needed managing, but the workers could not manage. Varga outlined the problem frankly:

The members of the works committees endeavoured to evade productive labour. In the capacity of controllers, they all sat round the office table … they sought to win the favour of the workers, through concessions in discipline, in the amount of work exacted, and in wages, to the detriment of the general interest.’²³

The works committees, in other words, acted in the interest of workers and not of the commissars.

In Russia, the Bolsheviks had overcome such problems by introducing military discipline into the factories and abolishing workers’ control. Now they had a bigger problem: the economy was collapsing under the strain of industrial chaos, shortages and the refusal of peasants to supply grain to the cities.

In 1920 Bukharin outlined a solution: a detailed plan to move rapidly from this improvised system, known as ‘war communism’, to a permanent one of central planning across the entire economy. Lenin scrapped this a year later, as starvation and chaos forced the Bolsheviks to switch to a crude form of market socialism.

For decades, the leaders of pre-war social-democracy had insisted it was pointless to outline a plan for what they would do if they gained power. This was something everybody from the Bolsheviks to the moderates who ran the British Labour Party agreed on: their entire mindset had been created in opposition to utopian socialism, with its doomed experiments and dreams. They recognized that technological progress and business reorganization were so rapid in the run-up to 1914 that any plan locked in the drawer at the party HQ would be outmoded by the time it was needed. They knew they had to control or nationalize the finance system; they knew there would be a conflict between the needs of farmers and urban consumers, as you can’t satisfy both at once. But they showed very little forethought about the problem that would take down both the reformist and revolutionary versions of socialization: namely, the independent action of workers, pursuing their own short-term interests, and its conflict with the need for technocratic management and centralized planning.

From Varga’s recalcitrant works committees in Budapest to the Russian workers who insisted on self-control, or the Fiat workers in Milan who even tried to produce cars without the help of managers, this problem – workers control vs planning – would hit the socialist leaders as a total surprise.

If these early attempts at socialism failed, it is worth remembering that capitalist attempts at stabilization also failed. The peace deal of 1919 condemned Germany’s recovery to stall under the stranglehold of reparations. ‘In continental Europe,’ wrote a distraught John Maynard Keynes, shortly after storming out of the British delegation at Versailles, ‘the earth heaves and no one but is aware of the rumblings. There it is not just a matter of extravagance or “labour troubles”; but of life and death, of starvation and existence, and of the fearful convulsions of a dying civilization.’²⁴

With hindsight, we can see 1917–21 as a near-terminal social crisis, but as an economic crisis it was not inevitable; it was the result of poor policy decisions. For Germany it was the outcome of unpayable war reparations; in Britain and the USA it was caused by central banks setting interest rates too high, to choke off the 1919 boom. In Austria and Hungary it was the result of being hung out to dry at Versailles, with huge debts and no more empire to pay for them.

After 1921, the situation began to stabilize. Kondratieff, as we’ve seen, described 1917–21 as just the first crisis in a long downswing. But stabilization left the Marxists who had embraced the sequence ‘monopoly– war–collapse’ with nowhere to go. Capitalism, they assumed, remained on life support simply due to the immaturity of the proletariat, the unwillingness among workers to take power – plus tactical mistakes by

socialist parties. Lenin allowed for the possibility of growth spurts in this or that sector, but not for the entire system’s survival.

But by 1924 Lenin was dead, Trotsky had been sidelined and Stalin was in control; Varga, who’d fled Hungary for Moscow, was his chief economist. Stalin did not need a theory to explain complexity – he needed a theory of certainty. The certainty of capitalism’s eventual collapse would justify the attempt to build what all left-wing economists said was impossible: ‘socialism in one country’ – and an extremely backward country at that. The basis for a theory of catastrophe had been laid in Luxemburg’s book but it needed more, and this was supplied by Varga.

‘Varga’s Law’ predicted the constant decline of workers’ real incomes. This, he wrote, ‘is the economic basis for the general crisis of capitalism … the absolute impoverishment of the working class comes to the fore’.²⁵ Varga was explicit: the downward trend of mass consumption was a noncyclical, general feature of the twentieth century and would, given time, destroy all support for reformist and liberal politics among workers. Instead of growth there would be, in Varga’s phrase, ‘decumulation’.

It’s hard to remember now how powerful such ideas became once they were spread by word of mouth across the kitchen tables of the working class. In the 1920s and 30s, Varga’s Law was a phrase routinely used by labour movement activists. It made sense of their own experience: wasn’t the whole strategy of British and French governments in the 1920s to enforce wage cuts? And when the collapse occurred, in 1929, didn’t the American government make things worse on purpose, in an attempt to drive down wages? Though completely wrong, the prestige of under-consumption theory soared.

Varga himself produced work of some subtlety in the 1930s. As a follower of Luxemburg, he remained aware that conditions in the world beyond the developed economies could impact on crisis dynamics – so he placed a heavy emphasis on the failure of agriculture in the colonial world as a factor suppressing economic revival in the West. As a result, the ‘authorized version’ of Marxist economics – inevitable and imminent collapse – was plausible. Even the Trotskyists, hounded by Stalin, were

convinced of capitalism’s doom by the late 1930s, their leader insisting that ‘the productive forces stagnate’.²⁶

In a global labour movement now dominated by the Moscow variant of Marxism, no possibility other than collapse was allowed.

Marx had tried to describe capitalism in the abstract: to use a minimum number of general concepts and work upwards from that towards an explanation of the complex, surface reality of crisis. So in Marx, the falling profit rate produces counter-tendencies at many levels of abstraction, both in the pure world of aggregated profits and the dirty world of colonies and exploitation. For Marx, while every real crisis has a concrete cause, the aim is to explain the deep process at work behind all crises.

But the first major structural mutation of capitalism could not be contained within this framework. Finance capitalism created a new reality.

In the 1900s, the attempt to understand finance capitalism inevitably pulled Marxist theory towards concrete phenomena: to questions of sector mismatches and low consumption, to the multi-sector economy, to real prices rather than the abstract amounts of labour Marx dealt in.

This focus on the ‘real’ led Hilferding to conclude the cyclical crisis was over, Luxemburg to move crisis theory to the terrain of collapse, Lenin to assume the irreversibility of economic decline. With Varga, we move from rationality to dogma: the least sophisticated of all the crisis theories becomes the unchallengeable doctrine of a merciless state, every communist party in the world becomes its emissary, and every left-wing intellectual for a generation gets taught utter rubbish.

Throughout the whole debate, the participants were haunted by its political implications in a way no social scientist should be. If Hilferding is right, said Luxemburg, then socialism is not inevitable. It becomes a ‘luxury’ for the working class. They can just as easily choose to coexist with capitalism, and – given their political consciousness – probably will. So Luxemburg was driven to search for an objective rationale for breakdown.

However, all forms of under-consumption theory have an Achilles heel: what if capitalism does find a way of overcoming the low spending power of the masses? By 1928, Bukharin was struck by the intuition that it had done so. Capitalism, he claimed, had stabilized in the 1920s – not temporarily, nor partially – and unleashed a new surge of technical innovation. The cause of this surge, he said, was the emergence of ‘state capitalism’ – a fusion of monopolies, banks and cartels with the state itself.²⁷

With this, crisis theory had come full circle, back to the possibility that organized capitalism could suppress crisis. Bukharin’s misfortune was to say it on the eve of the Wall Street Crash, amid a factional dispute with Stalin. He was expelled from the party leadership and, despite an uneasy decade trying to coexist with Stalin and publicly recanting his former views, was executed like Kondratieff in 1938.

THE PROBLEM WITH CRISIS THEORY

It was not until the 1970s that a solid body of academic work began linking the disparate parts of Marx’s theory into a usable whole. Despite the achievements of economists from the New Left generation in clarifying and rescuing the real Marx, the fundamental problem remains: to understand the fate of capitalism, and its major mutations, crisis theory is not enough.

There is, as Marx suggested, a process whereby labour is expelled by machinery; the result is a tendency for the profit-rate to fall. There is an equal tendency for falling profits to be offset by adaptation (the counteracting tendencies), and a cyclical crisis is what happens when these adaptations break down.

But Kondratieff shows us how at a certain point – when crises become frequent, deep and chaotic – a more structural adaptation is triggered. Because their economic model could not accommodate structural adaptation, Marxists in the early twentieth century had to describe this in terms of historical ‘epochs’, or philosophical categories such as parasitism, decay and transition.