ICC internal debate on economics (Part 3): War economy and state capitalism

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The principal purpose of this article is to develop some of the groundwork for the analysis of the post-1945 economic boom that was sketched out in International Review n°133 under the title "State capitalism and the war economy".[1] In doing so, it also seems to us useful to examine briefly some of the objections to this analysis raised by other participants in the debate.

As the introductory remarks in International Review n°133 rightly point out, the importance of the debate goes well beyond the analysis of the post-war boom as such to more fundamental aspects of the marxist critique of political economy; it should in particular contribute to a better understanding of capitalist society's main driving forces. These driving forces determine both the extraordinary dynamism of capitalism's ascendant period which impelled it from its beginnings in the city-states of Italy and Flanders to the creation of the first planetary society, and the enormous destructiveness of capitalism's decadent period that has subjected humanity to two world wars whose barbarity would have made Genghis Khan blench, and which today threaten our species' very existence.

What underlies the dynamic expansionism of the capitalist economy?

The key to capitalism's dynamism lies at the very core of capitalist social relations:

  • the exploitation of the producing class by the ruling class takes the form of the purchase of labour power as a commodity;
  • the product of the exploited class' labour must necessarily take the form of commodities (commodity capital) which in turn means that the expropriation of surplus labour by the ruling class necessarily involves the sale of these commodities in the market.[2]

To express this more simply through an example: the feudal lord took surplus produce from his serfs and used it directly to maintain his household estates. The capitalist takes surplus value from the workers in the form of commodities which are of no use to him as such, but which must be sold on the market to be transformed into money capital.

This inevitably creates a problem for the capitalist: who is to buy the commodities that represent the surplus value that the workers' labour has created? Very schematically, two answers have historically been given to this question in the workers' movement:

  • According to some theories, there is no problem: the process of capital accumulation and the normal operations of credit allow the capitalists to invest in another round of production which, being on a larger scale, absorbs the surplus value produced by the previous round and the whole process simply begins again.[3]
  • For the majority of the ICC, this explanation is inadequate.[4] After all, if capitalism can expand indefinitely on its own foundations without any problem, why was the capitalist class seized with the mania for foreign conquest? Why did the bourgeois not stay quietly at home and get on with expanding their capital without the risky, expensive, and violent business of constantly expanding their access to new markets? Luxemburg answers this question as follows in the Anti-Critique: "[There] have to be consumers who receive their means of purchase on the basis of commodity exchange, i.e. also production of goods, but taking place outside of capitalist commodity production. They must be producers, whose means of production are not to be seen as capital, and who belong to neither of the two classes - capitalists or workers - but who still have a need, one way or another, for capitalist commodities".[5]

Until the publication of his latest article in International Review n°135, it seemed reasonable to suppose that comrade C.Mcl shared this basic view of capitalism's expansion in its ascendant phase.[6] In this article, entitled "Origin dynamic and limits of Keynesian-Fordist state capitalism" the comrade seems to have changed his opinion on the subject. If nothing else this shows that ideas change in the process of debate - however it seems to us necessary to pause for a moment to consider some of the new ideas that he puts forward.

It has to be said that these ideas are not at first sight very clear. On the one hand C.Mcl tells us - and we would agree - that the extra-capitalist environment provided capital with a "series of opportunities" amongst other things for the sale of excess goods.[7] On the other hand, however, C.Mcl tells us that these "external opportunities" were not only unnecessary, because capitalism is perfectly capable of developing its own "internal regulation", but that the external expansion of capitalism actually puts a brake on its development; if we understand comrade C.Mcl correctly, this is because the commodities sold in extra-capitalist markets cease to function as capital and do not therefore contribute to accumulation, whereas commodities sold within capitalism both allow the realisation of surplus value (through the conversion of commodity capital into money capital) but also themselves function as elements of accumulation, whether in the form of machines (means of production, constant capital) or as consumer goods (means of consumption for the working class, variable capital). To validate this idea, C.Mcl informs us that the non-colonialist capitalist countries experienced higher growth rates in the 19th century than the colonial powers.[8]

This view seems to us profoundly mistaken both empirically and theoretically. It is an essentially static vision in which the extra-capitalist market is nothing but a sort of overflow pipe for the capitalist market when it gets too full.

The capitalists do not just sell to the extra-capitalist market they also buy from it. The ships that carried cheap consumer goods to the markets of India and China[9] did not come back empty: they returned laden with tea, spices, cotton, and other raw materials. Until the 1860s the main source of cotton for the English textile industry was the slave economy of the American South. During the "cotton famine" caused by the Civil War replacement sources were found in India and Egypt.

In reality, "Within this process of circulation, in which industrial capital functions either as money or commodities, the circuit of industrial capital, whether as money-capital or commodity-capital, crosses the commodity circulation of the most diverse modes of social production, so far as they produce commodities. No matter whether commodities are the output of production based on slavery, of peasants (Chinese, Indian ryots), of communes (Dutch East Indies), of state enterprise (such as existed in former epochs of Russian history on the basis of serfdom) or of half-savage hunting tribes, etc. - as commodities and money they come face to face with the money and commodities in which industrial capital presents itself and enter as much into its circuit as into that of the surplus-value borne in the commodity-capital, provided the surplus-value is spent as revenue (...) The character of the process of production from which they originate is immaterial. They function as commodities in the market, and as commodities they enter into the circuit of industrial capital as well as into the circuit of the surplus-value incorporated in it".[10]

What of the argument that colonial expansion puts a brake on capitalism's development? In our opinion there are two mistakes here:

  1. As the ICC (following Marx and Luxemburg) has repeatedly pointed out, the problem of the extra-capitalist market is posed at the level of global and not individual or even national capital.[11]
  2. Colonisation is not the only form of expansion into extra-capitalist markets.

The history of the United States provides a particularly clear - and important given the rising role of the US economy during the 19th century - illustration of this point.

First of all, the absence of a US colonial empire during the 19th century was due, not to some kind of "independence" from an extra-capitalist environment, but to the fact that this environment was contained within the frontiers of the USA.[12] We have already mentioned the slave economy of the American South. Following the latter's destruction in the Civil War (1861-65), capitalism expanded for the next thirty years across the American West in a continuous process which can be represented as follows: slaughter and ethnic cleansing of the indigenous population; installation of an extra-capitalist economy through sales and grants of the newly acquired "government land" to homesteaders and small ranchers;[13] extermination of this extra-capitalist economy through debt, fraud, and violence and the extension of the capitalist economy.[14]

In 1890 the US Bureau of the Census officially declared the internal frontier closed. In 1893 a severe depression hit the US economy and during the 1890s the US bourgeoisie was increasingly preoccupied with the need to expand its national frontiers.[15] In 1898 a State Department document explained: "It seems to be conceded that every year we shall be confronted with an increasing surplus of manufactured goods for sale in foreign markets if American operatives and artisans are to be kept employed the year around. The enlargement of foreign consumption of the products of our mills and workshops has, therefore, become a serious problem of statesmanship as well as of commerce".[16] There followed a rapid imperialist expansion: Cuba (1898), Hawaii (also 1898), the Philippines (1899),[17] the Panama Canal Zone (1903). In 1900 Albert Beveridge (a leading member of the US "imperialist interest") declared in the Senate: "The Philippines are ours forever (...) And just beyond the Philippines are China's illimitable markets (...) The Pacific is our ocean (...) Where shall we turn for consumers of our surplus? Geography answers the question. China is our natural customer...".[18]

Decadence and War

For Europeans, the imperialist frenzy at the end of the 19th century is often seen in terms of the "Dash for Africa". In many ways, however, the US conquest of the Philippines was of greater importance inasmuch as it symbolises the moment when European imperialist expansion eastwards met US expansion to the West. The first war of this new imperialist epoch was fought between Asian powers as Russia and Japan contended for control of Korea and access to Chinese markets. That war in turn was a key factor in the 20th century's first revolutionary uprising, in Russia in 1905.

What does this new "epoch of wars and revolutions" (as the Third International described it) imply for the organisation of the capitalist economy?

Put very schematically, it implies the inversion of the relationship between the economy and war: whereas in capitalism's ascendant period warfare is a function of economic expansion, in decadence on the contrary the economy is at the service of imperialist war. The capitalist economy in decadence is a permanent war economy.[19]

This is the fundamental problem that underlies the whole development of the capitalist economy since 1914, and in particular the economy of the post-war boom that followed 1945.

Before we go on to examine the post-war boom from this perspective, it seems necessary to consider briefly some of the other positions present in the debate.

1) The role of extra-capitalist markets after 1945

It is worth remembering that the ICC's pamphlet on Decadence... already attributes a role to the continued destruction of extra-capitalist markets in this period,[20] and it is possible that we have underestimated their role during the post-war boom; indeed, the destruction of such markets (in the classic sense described by Luxemburg) continues to this day in the most dramatic forms, as we can see in the tens of thousands of recent suicides among Indian peasants, unable to repay the debts they contracted to buy seed grain and fertiliser from Monsanto and others.[21]

Nonetheless it is difficult to see how these markets could have contributed decisively to the post-war boom if we take into account:

  • the enormous destruction visited on the small peasant economy in many countries between 1914 and 1945 as a result of war and economic catastrophe;[22]
  • the fact that all the Western economies were massively subsidising agriculture during the post-war boom: in these economies the peasant economy was a cost for capitalism rather than a market.

2) Rising debt

Here we are on much more solid ground. It is true that when compared to the astronomical levels that it has reached today after more than thirty years of crisis, the increase in debt during the post-war boom may seem trivial at first sight. Compared to what went before however, its rise was spectacular. In the USA, Gross Federal debt alone rose from $48.2 billion in 1938 to $483.9 billion in 1973, ie a ten-fold increase.[23]


US consumer debt rose massively, from about 4% of GDP in 1948 to more than 12% in the early 1970s:


Real estate loans also rose, from $7 billion in 1947 to $70.5 billion in 1970 - a tenfold increase which largely understates the real situation since massive lending by the government at cheap rates and easy conditions meant that by 1955 the Federal Housing Administration and the Veterans Administration between them handled 41% of all mortgages.[24]


3) Rising wages

For comrade C.Mcl, the prosperity of the post-war boom was due in large part to the fact that wages increased in line with productivity as part of a deliberate Keynesian policy designed to soak up excess capacity and allow a continued expansion of the market.

It is quite true, as Marx had already pointed out in Capital, that wages can rise without threatening profits as long as productivity is also rising. It is also true that mass production of consumer goods is impossible without mass consumption by the working class. And it is also true that there was a deliberate policy of raising workers' wages and living standards after World War II in order to ward off social revolt. None of this, however, solves the basic problem identified by both Marx and Luxemburg: that the working class cannot absorb the full value of what it produces.

Moreover, C.Mcl's hypothesis lies on two major assumptions which in our view are unjustified empirically:

  1. The first, is that rising wages were guaranteed by indexing them to productivity; yet we can find no evidence for this as a general policy except in a few minor cases such as Belgium.[25] To take just two counter-examples, the Italian scala mobile introduced in 1945 tied wages to inflation (a different matter altogether of course) and the "Social Contract" introduced by Wilson's Labour government in Britain at the end of the boom was a desperate attempt to reduce wages in a period of high inflation by indexing them to productivity.
  2. The second is the assumption that Western capital did not seek to call on cheap foreign labour until the beginning of the period of "globalisation" in the 1980s. This is simply wrong: in the USA migration to the cities reduced the rural population from 24.4 million in 1945 to only 9.7 million in 1970.[26] In Europe the phenomenon was even more spectacular: some 40 million people migrated from the countryside or from outside Europe to the major industrial areas.[27]

The fruits of war

World War II - even more than World War I - proved a striking demonstration of the fundamental irrationality of imperialist war in decadence. Far from paying for itself by the conquest of new markets, the war left both vanquished and victors ruined and exhausted. With one exception: the United States, the only belligerent to have suffered no destruction on its own territory. This exception laid the foundation for the equally exceptional - and so unrepeatable - post-war boom.

One of the main defects of the other positions present in this debate is that a) they tend to pose the problem in purely economic terms, and b) they consider only the post-war boom itself and so fail to see that this boom was determined by the situation created by the war.

What, then, was this situation?

Between 1939 and 1945, the US economy doubled in size.[28] Mass production techniques were applied to existing industries (like shipbuilding). Whole new industries were created: mass production of aircraft, electronics and computing (the first computers were used to calculate ballistic trajectories), pharmaceuticals (with the discovery of penicillin), plastics - the list goes on and on. And although government debt peaked massively during the war, for the US bourgeoisie much of this development was pure capital accumulation as they bled the accumulated wealth of the British and French empires through arms orders.

Despite this overwhelming superiority, the United States was not without its problems at the end of the war, to say the least. We can summarise them as follows:

  1. Where to find outlets for the doubling of US industrial production that had taken place during the war?[29]
  2. How to uphold US national interests - now for the first time truly world wide - against the threat of Soviet expansionism?
  3. How to avoid major social upheavals and the potential threat from the working class - no fraction of the world bourgeoisie had forgotten October 1917 - especially in Europe.[30] 

Understanding how the United States set about attempting to resolve these problems is the key to understanding the post-war boom - and its failure in the 1970s. This will have to wait for a future article, however it is worth pointing out that Rosa Luxemburg, writing before the full development of the state capitalist economy during the First, and above all the Second World War, had already given a brief indication of the economic effects of the militarization of the economy: "...the multitude of individual and insignificant demands for a whole range of commodities, which will become effective at different times and which might often be met just as well by simple commodity production, is now replaced by a comprehensive and homogeneous demand of the state. And the satisfaction of this demand presupposes a big industry of the highest order. It requires the most favourable conditions for the production of surplus value and for accumulation. In the form of government contracts for army supplies the scattered purchasing power of the consumers is concentrated in large quantities and, free of the vagaries and subjective fluctuations of personal consumption, it achieves an almost automatic regularity and rhythmic growth. Capital itself ultimately controls this automatic and rhythmic movement of militarist production through the legislature and a press whose function is to mould so-called ‘public opinion'. That is why this particular province of capitalist accumulation at first seems capable of infinite expansion. All other attempts to expand markets and set up operational bases for capital largely depend on historical, social and political factors beyond the control of capital, whereas production for militarism represents a province whose regular and progressive expansion seems primarily determined by capital itself.".[31]

Less than fifty years after the Accumulation was written, the reality of imperialist militarism was described in the following terms: "[The] conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence - economic, political, even spiritual - is felt in every city, every State house, every office of the Federal government (...) we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

(...) Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government". These words were spoken in 1961, not by some left-wing intellectual, but by US President Dwight D. Eisenhower.

Jens, 10th December 2008

[1]    For reasons of space it is impossible to do justice to the whole period from 1945 to 1970. We propose therefore to go no further than to introduce an analysis of the foundations of the post-war boom which we hope to treat in more detail later.

[2]    It is no accident that the first chapter of Capital is titled "Commodities".

[3]    We are leaving aside for the moment the question of the cyclical crises through which this evolves historically.

[4]    We will not repeat here what the ICC has already written on many occasions to support our view that for Marx and Engels - and for Luxemburg in particular among the marxists of the generation that followed - the problem of the inadequacy of the capitalist market is a fundamental difficulty standing in the way of the process of capital's enlarged accumulation.

[5]    www.marxists.org/archive/luxemburg/1915/anti-critique/ch01.htm

[6]    See in particular the article written by the same comrade in International Review n°127 where, under the sub-heading "Rosa's analysis identical to Marx" he demonstrates in a very clear and documented manner the continuity between Marx's analysis and that of Luxemburg.

[7]    "(...) this environment continued to supply a whole series of opportunities throughout the ascendant period (1825-1914) as a source of profit, an outlet for the sale of commodities suffering from overproduction, and as an extra source of labour power".

[8]    "During the 19th century, when colonial markets were most important, ALL the NON-colonial capitalist countries grew more rapidly than the colonial countries (71% more rapidly on average). This observation is valid throughout the history of capitalism. Sales outside pure capitalism certainly allow individual capitalists to realise their commodities, but they hinder the global accumulation of capitalism since, as with armament, they correspond to material means leaving the circuit of accumulation"

[9]    Notably opium in China's case, the highly "virtuous" British bourgeoisie fighting two wars to force the Chinese government to continue to allow their population to poison themselves with British opium.

[10]  Marx, Capital (Lawrence and Wishart), Book II "The process of circulation of capital", Part I, Chapter IV, "The circuit of commodity capital", p113.

[11]  Schematically, if German industry (no colonies) outstrips British industry (with colonies) on the world market, and thus enjoys a higher growth rate, then German industry is also profiting from the extra-capitalist markets conquered by British imperialism.

[12]  When the US stripped Mexico, by force and fraud, of California (1845-1847) and Texas (1836-1845), these states were not incorporated into an empire but into the national territory of the USA.

[13]  For example, the "Oklahoma Land Rush" of 1889: the land run started at high noon on April 22, 1889, with an estimated 50,000 people lined up for their piece of the available two million acres (8,000 km²).

[14]  The history of capitalism's development in the USA during the 19th century merits a series of articles in itself, and we do not have the space to go into it here. It is worth pointing out moreover that these mechanisms of capitalist expansion were not limited to the USA but - as we can see in Luxemburg's Introduction to Political Economy - were also present in Russia's expansion to the East and in the incorporation into the capitalist economy of China, Egypt, and Turkey, none of which were ever colonised.

[15]  This preoccupation had already found expression in the Monroe Doctrine adopted in 1823 which clearly stated that the US considered the entire American continent, North and South, to be its exclusive sphere of interest - and the Monroe Doctrine was enforced by repeated US military intervention in Latin America.

[16]  Quoted in Howard Zinn, A people's history of the United States.

[17]  The conquest of the Philippines, whereby the US first evicted the Spanish colonial power and then conducted a ferocious war against the Filipino insurrectos, is a particularly revolting example of capitalist hypocrisy and barbarism.

[18]  Zinn, op.cit.

[19]  An example will help to illustrate this. In 1805, the industrial revolution was already well under way in Britain: both the use of steam power and mechanised textile production had been expanding rapidly since the 1770s. Yet in the same year, when the British destroyed the French and Spanish fleets at the battle of Trafalgar, Nelson's flagship HMS Victory was nearly fifty years old (the ship was built to designs drawn up in 1756 and finally launched in 1765). Compare this to the situation today where the most advanced technologies are dependent on the armaments industry.

[20]  The Decadence... pamphlet - rightly in our view - associates this phenomenon with the increasing militarism of "Third World" countries.

[21]  One could also cite the elimination of small tradesmen in the advanced economies by the spread of supermarkets and the mass marketing of the most ordinary household items (including of course, food), both phenomena which really got under way in the 1950s and 1960s.

[22]  Stalin's forced collectivisation programme in the USSR during the 1930s, Chinese warlordism and civil war during the inter-war years, the conversion of peasant to market economies in countries like Romania, Norway, or Korea to meet German and Japanese imperialism's demands for food autonomy, the disastrous effects of the Depression on small farmers in the US (Oklahoma dust bowl), etc.

[23]  Unless stated otherwise the figures and graphs are drawn from the US government statistics available on https://www.economagic.com. We are concentrating in this article on the US economy partly because its government statistics are more readily available, but above all because of the overwhelming weight of the US economy in the world economy during the period.

[24]  James T Patterson, Grand Expectations, p72.

[25]  Indeed, according to one study (cedar.barnard.columbia.edu/~econhist/papers/Hanes_sscale4.pdf) "sliding scale" wage agreements had already existed in certain industries in the USA and Britain from the mid-19th century right up to the 1930s, only to be abandoned after the war.

[26]  Patterson, op.cit. This was "one of the most dramatic demographic shifts of modern American history".

[27]  "In Italy, between 1955 and 1971, an estimated 9 million people moved from one region of their country to another (...) Seven million Italians left their country between 1945 and 1970. In the years 1950-1970 a quarter of the entire Greek labour force left to find work abroad (...) It is estimated that between 1961 and 1974, one and a half million Portuguese workers found jobs abroad - the greatest population movement in Portugal's history, leaving behind in Portugal itself a workforce of just 3.1 million (...) By 1973 in West Germany alone there were nearly half a million Italians, 535,000 Yugoslavs and 605,000 Turks" (Tony Judt, Postwar: a history of Europe since 1945, pp334-5).

[28]  The United States accounted for something like 40% of world industrial production: in 1945 the United States alone produced half the world's coal, two-thirds of its oil, and half of its electricity. In addition, the USA held more than 80% of the world's gold reserves.

[29]  Zinn (op.cit.) quotes a State Department official in 1944: "As you know, we've got to plan on enormously increased production in this country after the war, and the American domestic market can't absorb all that production indefinitely. There won't be any question about our needing greatly increased foreign markets".

[30]  But also in the USA. According to Zinn, (op.cit., p417): "During the war there were fourteen thousand strikes [in the US], involving 6,770,000 workers, more than in any other comparable period in American history (...) When the war ended, the strikes continued in record numbers - three million on strike in the first half of 1946".

[31]    Luxemburg, The accumulation of capital, written in 1913, chapter on "Militarism as a province of accumulation" (the emphasis is ours).

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