The Crisis of Keynesian Economics by Geoffrey Pilling (1986)
Ancient Egypt was doubly fortunate and doubtless owed to this its fabled wealth in that it possessed two activities, namely pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. (GT: 131)
One of the most obvious features associated with the nature of postwar capitalism has been the significant rise in public or state spending. Whatever measure one adopts, the increases have been dramatic – in the case of Britain from some 25 per cent of GNP in the pre-war period in over 50 per cent by the mid-1970s, according to one typical estimate. And the trend has been the same in all the major capitalist countries, though it has proceeded at differing speeds. Keynesianism made such spending respectable by arguing that it was one of the principal means available to protect the economy against undue fluctuations in activity. Indeed, the view that we now live in a ‘mixed economy’ with its public and private sectors became one of the main strands in social democratic thinking and one which was held to demonstrate the irrelevance of Marxism in modern conditions. Such is the strength of reaction against Keynesianism that it is now claimed that this spending has been both the source of the inflationary pressures which erupted in the early 1970s as well as of the slow growth in the British economy consequent on the diversion of spending from ‘productive’ to ‘unproductive’ spheres.
As far as Marxism is concerned, the issue of state spending has been the subject of much recent controversy. Some Marxists have argued that state spending has had a stabilising effect on post-war capitalist economy. They have claimed that such spending is either an essential precondition for capitalist equilibrium in so far as it provides various forms of socialisation, training, etc. (Gough et al.); or that it has the effect of counteracting the tendencies towards stagnation to which capital is allegedly prone (Baran and Sweezy; the various proponents of the permanent arms economy thesis). Others have argued that state spending, while necessary for capitalism, is none the less a drain on surplus value and that far from resolving the contradictions of capitalism it must, certainly in the long run, serve to aggravate those contradictions (Mattick, Yaffe, Fine and Harris).
Each of these positions involves a certain conception of the distinction between productive and unproductive expenditure. As is clear from the quotation from The General Theory which opened this chapter, Keynes also took a definite stand on this matter: he regarded all expenditure as being equally productive on the grounds that it would, via the process of the multiplier, raise the level of national income and employment. Here, as in most other respects, he followed the path of neoclassical economics, which holds that all labour, if it finds a reward in the market, is, by definition, productive. In other words, Keynes adopted the normal ahistorical view of bourgeois economics that quite fails to distinguish between what is productive ‘in general’ and what is productive for capital. That Keynes did accept this position is clear from the following passage:
unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as goldmining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions. If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course by tendering for leases of the note-bearing territory), there need be no more unemployment and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would indeed be more sensible to build houses and the like but if there are political and practical difficulties in the way of this, the above would be better than nothing. (GT: 129; cf. ibid.: 219-20)
The worker digging holes in the road and paid by the state is, from the point of view of his impact on the national income, of the same order as a worker employed in capitalist enterprise and producing surplus value. Such is Keynes’ view of the matter
In order to clarify the impact of state spending on capitalist economy, let us review briefly the ideas of economics about the nature of productive labour. For it was from a critical examination of their theoretical work that Marx’s conception was developed.
In the period when the paramount need of the ascending bourgeoisie was to accumulate liquid capital, mercantilism was able, with some historical justification, to regard that labour which led to the accumulation of treasure as alone productive. Once industrial capital gains dominance over mercantile capital – once, that is, the production of surplus value rather than its mere redistribution through trade emerges as the principal economic activity – the notion of mercantilism to the effect that surplus value arises ‘upon alienation’ (through trade) is rejected. Attention now swings to the sphere of production, and in particular to an analysis of the capital-labour relationship.
The Physiocrats were the first to give any systematic treatment to the question of productive labour; the work of this school was decisive because although its basic area of concern was the agricultural sector of the economy – in France at that time predominantly feudal in kind – it none the less examined this sector from the standpoint of the emerging relations of capital. The Physiocrats came to the conclusion that agricultural labour was alone productive and they were further of the opinion that the future of the French economy hinged upon the activities of the farmer, for no other labour apart from that expended on the land played any role in the generation of the ‘product net’ (surplus value) out of which further accumulation alone could come. Despite the fact that in the Physiocratic conception lay the fetishised notion that the privileged position accorded to agricultural labour was taken as an expression of the productive power of the soil, it was of considerable historical significance precisely because it represented the first effort to investigate the processes of production rather than those of circulation. But because there was a confusion in the work of Physiocrats, namely one between natural phenomena (the power of the earth) and social phenomena (the specific historical form in which the natural world was confronted), the Physiocratic conception reduced itself to the elaboration of a correct state policy: How could a greater surplus be made available? Excessive state spending was amongst those misguided economic activities which for this school served to dissipate the surplus needed for capital accumulation.
Of all the political economists, Adam Smith paid greatest attention to the question of productive and unproductive labour. This was no accident. For Smith’s theoretical work took place against the background of the manufacturing stage of the development of capitalism, in the period immediately prior to the appearance of large-scale industry. Industrial capital had yet to win its final victory over the landlord, moneylenders and others. Smith was more than anything concerned with the fate of the economic surplus (surplus value). He was worried lest it be wasted in the upkeep of state functionaries, not to say those many professions: jesters, opera singers, churchmen, the monarchy which, judged from the standpoint of capital, involved the expenditure of unproductive labour. All these groups were taken by Smith as being of the same order as domestic servants. The income they received involved a drain on surplus value. Marx summed up this point when he said that Smith spoke in
the language of the still revolutionary bourgeoisie, which had not yet subjected to itself the whole of society, the state, etc. The state, Church, etc. are only justified in so far as they are committees to superintend or administer the common interests of the productive bourgeoisie and their costs – since by their nature these costs belong to the overhead cost of production – must be reduced to the unavoidable minimum. (Th: 1)
Smith shared at least one concern with the Physiocrats, for like them he was aware of the harmful effects of unproductive consumption on the tempo of capital accumulation. As we have already seen, Smith’s advance over the Physiocrats lay in the fact that he was interested not merely in the material foundations of production but specifically in the social forms which it assumed. Thus for Smith it was no longer a matter of selecting a particular type of concrete labour and elevating this to the rank of sole productive labour; he regarded all labour which exchanges against capital as being productive. Smith’s step forward, one which has important implications for a consideration of Keynes, was that he drew a distinction between labour exchanging directly against capital (productive labour) and labour exchanging against the various forms of revenue (wages, profit, rent etc., i.e. unproductive labour). Only labour which by its consumption assists in the self-expansion of capital, is, from a capitalist standpoint, really productive. The second type of labour, that exchanging against revenue, constitutes a drain on surplus value and is therefore a source for the diminution of the rate of capital accumulation. Thus, to give an example from Smith, a tailor working in a capitalist enterprise and producing surplus value is a productive labourer. A tailor working in the household of a capitalist is quite unproductive. This is so because his income (his wage) is paid out of surplus value already created. In other words, in this case, the consumption of the capitalist impedes the production of surplus value, a truth reflected in the fact that capitalism – at least in its relatively early phases – is characterised by great frugality on the part of the owners of capital. (It is not suggested that Smith was unambiguous on this issue of productive and unproductive labour. In fact he eclectically combines this view of unproductive labour with the vulgar, commonsense, view that productive labour is that which is realised in a saleable commodity.)
Ricardo, writing in the period of a more fully developed capitalism, agreed with Smith’s basic distinction between revenue (income) and capital as the indispensable criterion for distinguishing between productive and unproductive labour. But unlike Smith, Ricardo was concerned not so much with the absolute numbers of productive and unproductive workers as with the productivity of the former group. Ricardo drew a distinction between gross and net revenue:
the whole produce of land and labour of every country is divided into three portions: of these one portion is devoted to wages, another to profits and the other to rent. It is from the last two portions only, that any deductions can be made for taxes or for savings, the former, in constituting all the necessary expenses of production provides [the nation’s] net real income, its rent and profits, it is of no importance whether it consists of ten or twelve million inhabitants. Its power of supporting fleets and armies and all species of unproductive labour, must be in proportion to its net and not its gross revenue. (DR: 1)
Unlike many of those current commentators who have returned to the long-ignored theme of productive labour, Ricardo recognised that one of the key indices, of capitalist development was the extent to which a declining number of productive workers could, because of improvements in technology, sustain a growing number of non-productive workers. (In this respect, those who ‘blame’ the capitalist crisis on the fact that too many workers are unproductively employed fall below the level of Ricardo and repeat some of the far less profound propositions of Adam Smith.) Dunks to the continual advance of productive techniques, the rate of profit could be maintained, said Ricardo, because such technical progress tended to depress the value of workers’ subsistence and hence raise profits. We have seen that for Ricardo the fundamental reason for any capitalist breakdown lay not in the irreconcilable internal contradictions of the system, but solely because it runs up against the barrier of nature. But Ricardo somewhat modified this optimistic stance. For he moved towards the conclusion that the introduction of machinery might prove injurious to the interests of the workers, thereby marking the first decisive break in Adam Smith’s generally harmonious view of the capitalist system. Accumulation involves the economising of unproductive expenditures, but the introduction of machinery might well reduce the demand for labour. Here was a potential conflict between employment and accumulation, a fact first alluded to by Ricardo and one which has haunted economics to this day. Ricardo avoided the problems into which his scientific endeavours had led him by the simple device of postulating full employment, that is by means of an uncritical acceptance of Say’s law. Having in his very premises ruled out of court the possibility of unemployment, Ricardo was able to concentrate on the other aspects of his conclusion – that the growth of unproductive expenditures was harmful to the accumulation of capital.
It was Malthus who sought to stress and bring into sharp relief the contradiction between the process of capital accumulation and that of employment, clearly a central theme for Keynes. Malthus argued that since workers were held to a subsistence level of wages and as capitalists tended to accumulate a large proportion of their income, the productive expenditures of the landlord as well as those of the state official, which had been the object of such scorn on Smith’s part, were, in point of fact, essential if a glut of commodities was to be avoided. This notion of the necessity, and indeed the virtue, of unproductive consumption was bound up with the adding-up theory of value which Malthus derived from the weak, vulgar, side of Smith. Malthus held that if capitalist profit arises from ‘overcharging’ it is logically impossible for the worker to purchase the equivalent of the whole of his produce. Thus, according to Malthus, demand must always, in the nature of things, stand below supply. If a general overproduction of commodities was to be avoided it was required that the deficiency of demand be repaired by those standing outside the capital-labour relation. Adam Smith’s unproductive workers were introduced as an artefact to resolve this problem. Malthus had established so he believed, a sound theoretical base for an inflated state bureaucracy and a well-maintained Church.
Malthus posed the matter in the following manner. It is one which anticipates Keynes in many significant respects and helps to put the Keynesian ‘revolution’ into some historical perspective:
under a rapid accumulation of capital, or, more properly speaking, a rapid conversion of unproductive into productive labour, the demand, compared with the supply of material products, would prematurely fail, and the motive for further accumulation checked, before it was checked by the exhaustion of the land. It follows that, without supposing the productive classes to consume much more than they are found to do by experience, particularly when they are rapidly saving from their revenues to add to their capitals, it is absolutely necessary that a country with great powers of production should possess a body of unproductive consumers. (DR 2: 241)
And specifically on those sustained from taxes, Malthus made the following point:
Those which are supported by taxes are equally useful with regard to distribution and demand; they frequently occasion a division of property more favourable to the progress of wealth than would otherwise have taken place; they ensure that consumption which is necessary to give the proper stimulus to production; and the desire to pay a tax, and yet enjoy the same means of gratification, must often operate to excite the exertion of industry quite as effectually as the desire to pay a lawyer or physician. (ibid.: 432)
Moving now to Keynes. As we have already noted, not least amongst the consequences of the victory for the ‘marginal revolution’ during the last three decades of the nineteenth century was the loss of any critical distinction between productive and unproductive labour. The triumph of a theory of value – or what purported to be a theory of value – based on the principle of scarcity, meant a central emphasis was henceforth placed on the coordinate contribution of all the ‘factors of production’. This necessarily precluded any separation of productive from unproductive labour. Indeed, the latter term could have no meaning. Any labour embodied in a good finding a purchaser on the market was by definition productive labour. Under capitalism there is no exploitation. Keynes, while repudiating Say’s law of markets, accepted the neoclassical reformulation of value theory. He does, however, somewhat modify this position in making an implicit distinction between productive and unproductive consumption. Whereas in Smith and the classics generally productive consumption is that consumption of labour power which creates a surplus (surplus value), Keynes considered unproductive expenditure to be any in excess of the ‘supply price’ of a factor of production. Thus in the Treatise Keynes says:
We may define ‘unproductive consumption’ as consumption which could be forgone by the consumer without reacting on the amount of his productive effort, and ‘productive consumption’ as consumption which could not be forgone without such a reaction ... so long as unemployment and unproductive consumption are allowed to exist side by side, present total net income and future total available income are less than they might be; and nothing is required to mend this situation except a method of transferring consumption from one set of individuals to another. (JMK CW: 6)
And further:
the evil of not creating wealth would be greater than the evil that wealth, when created, should not accrue to those who have made the sacrifice, namely, to the consumers whose consumption has been curtailed by the higher prices consequent on the Profit Inflation. (ibid.)
Keynes proceeded to explain that the mechanism for such a transfer was through a fall in real wages, that is, by means of a profit inflation. According to Keynes, workers bargain for a money wage rather than a real wage, from which fact he concluded that a rise in prices not accompanied by an increase in money wages does not reduce the supply of labour. On this basis the market price of labour power lies above its supply price and this excess of market over supply price constitutes unproductive consumption. The corollary of this position is that if each productive factor is paid at its supply price then the category of unproductive consumption disappears. (It was only on the basis of the separation of labour from the means of production that the supply price of the resultant commodity, labour power, could be determined. Keynes here takes as given the fact that labour power has a supply price, that is to say, he assumes what any serious analysis of capitalist economy is bound to explain.)
It should be clear from this brief survey that the Keynesian conception of unproductive consumption has little if anything in common with that of the classical economists and even less with that of Marx. Certainly as far as Marx was concerned, the fundamental question was not whether the price of labour power lies above or below its supply price but first why labour power should exist as a commodity and why the ability to perform labour should under certain historical-social conditions be transformed into a commodity, attach itself to a thing and thereby acquire a price. The nature, significance and origin of these facts either entirely eludes or, even worse, is completely unexplained in orthodox economics. The problem for Keynes concerned the particular prices at which these and other transactions took place. To have examined critically the conditions under which labour power becomes a commodity would have taken him in the direction of a thorough-going appraisal of bourgeois economics which was quite beyond his scope and aim.
As we know, the view prevalent in the last century, that all public expenditure was of an unproductive nature, with the rise of Keynesianism gave way to the proposition that public spending was just as beneficial as private capital investment, even where this was financed out of increased state indebtedness: both have the same positive impact on production and income. And if this should involve higher levels of state borrowing this did not matter, for the money could be recouped out of the higher income that the initial injection of state expenditure would produce in the next round. Writing in the mid-1960s, and analysing the post-war expansion of the American economy, Alvin Hansen, a leading Keynesian, could say:
The events of the last fifteen years ... reaffirm the long-standing lesson of history that growth requires an increase in money, credit and debt. And in the public-private economy of today, a well-balanced growth suggests an increase of debt at all levels – business debt, consumer debt, state and local debt, and federal debt. (Hansen 1964: 655-6)
On the face of it, such a conception seemed justified in the light of the post-war boom. State intervention in the economy, involving amongst other things increasing quantities of private and public debt, did coincide with a general expansion of capitalism. But this is just the point: this was only the outward, superficial appearance of the matter. For it by no means follows that the first phenomenon (increased state involvement in the economy and growing debt) was the cause of the second (the longish period of relatively crisis-free extended reproduction after 1945). Nor is the reverse the case, namely that a decrease in public spending can necessarily provide the basis for a renewed period of expansion within capitalism, as the advocates of ‘sound finance’ claim to be the case. No amount of empirical work can of itself yield an answer to this question: the real impact of state spending on the functioning of capitalism must first of all be evaluated from the theoretical angle. And this in turn involves a definite conception as to the nature of capitalist economy.[1]
We can start from the basic proposition that state spending is financed in one of two ways. It is paid for either out of taxes or is financed by loans made by the state. In practice the cost of such spending is usually met by a combination of these means. Let us therefore analyse the role of taxation from the point of view of the Marxist notion of unproductive expenditure. Marx’s analysis of capitalism rests upon the proposition that net wages constitute the price of labour power. Naturally, because labour power is a commodity its price can and does fluctuate in response to the changes in demand and supply conditions. But such fluctuations take place around a definite point. Wages are the price of labour power, the value of which is determined by the value of the necessary means of subsistence required to maintain the worker and his family, taking into account the historical conditions under which the labour power concerned is bought, sold and employed. Nor does Marx ignore the fact that the working class, through trade union and other forms of action, can raise the price of labour power, although he points out that there are definite limits to such action, the principal one being that such increases cannot move beyond the point where they endanger the process of capital accumulation. (Here is expressed the fact that Marx’s theory of wages is by no means identical with the ‘iron law of wages’ generally subscribed to by the classical economists and which depended upon the Malthusian theory of population.[2])
Unless this proposition is accepted – unless, that is to say, we commence from the basic assumption that net money wages do represent the price of labour power – then it becomes impossible to explain the existence of surplus value in any theoretical sense. Surplus value would depend upon the ability of the capitalists to ‘rob’ the working class. This was the old ‘force’ theory held by many socialists prior to Marx. Just as in his theoretical investigation of capitalism Marx started from the assumption that all commodities were bought and sold at value, so he proceeded from the premise that labour power was similarly bought and sold at its value. The task was to reconcile the existence of surplus value with this law, not explain it in terms of its abrogation, as the Ricardian socialists and others had tended to do.
Now if we accept these propositions, then it follows automatically that all taxes are in the last resort deductions from surplus value. And this is true whether the taxes are levied on profits and dividends (where this is self-evidently the case) or on wages. In the latter case although the worker ‘pays’ the taxes – either as income tax or a tax on expenditure – they are none the less deductions from surplus value. This fundamental point has direct implications for our theoretical approach to the question of state spending. All state spending represents a deduction from surplus value: this is the basic Marxist proposition. As such it constitutes unproductive expenditure, in that only expenditure which sets in motion labour which in turn creates surplus value is productive from the point of view of capital. And this is so whether state spending is financed out of immediate taxation or out of loans. The latter instance is no different in principle, for whereas in the case where state spending is matched by an equivalent volume of surplus value in the form of taxes, in the latter case the state is obliged to make interest payments to the rentier to cover its borrowing.
We noted earlier that according to Mathews and others, Keynesian-type policies could not claim credit for the post-war boom, at least not in Britain, in that budget deficits were not run and, if anything, budgetary policy was deflationary in its impact on the economy. While this might lead us to the conclusion that Keynesianism was not practised in the postwar period, it by no means follows that the level of state spending was of no economic consequence. Quite the contrary is the case. The state cannot compete with private capital and therefore its main activity is confined to the provision of goods and services for ‘public consumption’. And because such consumption is financed out of surplus value it must, other things being equal, involve a reduction in the rate of capital accumulation: for what is consumed by individuals cannot, in the nature of things, be accumulated. If such public consumption (road building, hospitals, schools, etc.) is financed out of state loans, this does not alter the matter in any fundamental way for now the burden is simply pushed into the future. In this case public consumption is financed out of future surplus value, or more strictly out of hoped-for surplus value.
In other words the ‘mixed economy’ is in reality an economy which produces surplus value (the private sector) but which at the same time supports a public sector financed out of state taxation. And resources devoted to the latter must in the final analysis be made at the expense of the former. Of course, from the point of view of his own profits, an individual capitalist does not mind whether he ‘works’ for the state or whether he sells his commodities on the market in the normal way. Indeed he may prefer the former in so far as his orders may be guaranteed for a long period and he may be able to sell his output at prices which yield him above-average profits. The analysis of capitalism cannot however proceed from the standpoint of the needs and interests of the individual capitalist but from the point of view of the system as a whole. If this latter viewpoint is adopted it is clear that while the individual firm producing goods for public consumption extracts surplus value from his labour force, this surplus value is not realised by exchange on the market against other commodities but is realised with money which the government has raised by means of taxation; in short, it is realised against surplus value which has already been created in another part of the economy. To presume that such state spending can be the means to the creation of surplus value is to indulge in double-counting.
Now it is of course true that if the state purchases goods which otherwise would go unproduced this will have the effect of raising employment, income and wealth. This is indeed the basis of Keynesian theory. This has to be considered from the point of view of certain of the most decisive trends in capitalist economy within the epoch of imperialism. The twentieth century is characterised by an intense concentration of production and capital leading to the predominance of monopoly, the merging of banking and industrial capital to form the foundation for finance capital. The accumulation of capital on this basis led capitalism to become ‘overripe’, to use Lenin’s phrase, and resulted in the metropolitan countries in particular producing a ‘surplus’ of capital which was unable to find profitable investment outlets in the country concerned. This surplus capital is a very real phenomenon: it exists as chronic under-capacity production, in the accumulation of huge monetary reserves in both individual capitalist enterprises as well as in the banks, in the ever increasing scope for speculation on money and commodity markets, etc. and not least in the ever present striving for the export of capital. In this respect, profits on taxes represent the accumulation of this surplus capital in the state budget. And if the government drains off, by means of taxes on surplus value, a certain proportion of this surplus capital – the part which has not found profitable outlets elsewhere – it makes a demand on the product of private industry that leads to an expansion of total purchasing power and along with it incomes and employment. Hence it would be stupid not to allow for the fact that state action can, within certain limits, expand the scope of the domestic market beyond that which would obtain on the basis of the spontaneous circulation of capital. But it would be even more erroneous to see the state’s power as without limit in this sphere. For this only serves to take us back to the most fundamental of all questions and one dealt with from various angles in the last chapter. The fact is that the level of income in capitalist society is, objectively, limited by the accumulation of capital. And only if the general conditions for the accumulation of capital are sound can the state, even to a limited extent, raise the level of national income by means of fiscal policies.
The real question at issue here is this: Is the capitalist system one founded on the production of goods and services to satisfy human needs, or is it one based on the production of surplus value in which the production of use values is purely incidental to the process? As we know Marx answers this latter question in the affirmative. The production of wealth takes place only in so far as the production of surplus value takes place. So to the extent that goods, wealth and income are, via public spending, generated at the expense of surplus value, far from alleviating the crisis of capitalism such spending must only serve to aggravate its underlying contradiction – which takes the form of an inability to generate sufficient profit on the capital currently in existence. In financing its activities the state creams off a portion of surplus value from private capital. Even if we assume that taxation were reduced and private investment increased by an equivalent amount this would not necessarily lead to an increase in surplus value. For this would depend entirely on the conditions of production, the conditions for the extraction of surplus value, etc. Only by a concrete examination of these conditions can that question be answered one way or the other. If, on the other hand, the surplus value which was otherwise creamed off by the state was to lie idle in the hands of the capitalists this could clearly lead to no increase in surplus value. For such surplus value would no longer be capital but merely a hoard.
So far it has been assumed that state spending has been financed out of taxation. In practice this is not the case. Although for a period after the last war the state did cover much of its spending from tax revenues, from the mid-1970s onwards it has been forced to borrow on an increasing scale. The fact that state spending is covered out of budget deficits does not alter the substance of the argument presented above; it merely complicates the appearance of the situation somewhat. Should the state run a budget deficit this has to be financed in some way: the state has to balance its books by borrowing. But this borrowing, like taxes, is a drain on surplus value. The money capital utilised by the government is not invested as capital but disappears from the system in the form of public consumption. As Marx says, ‘Interest-bearing capital remains as such only so long as the loaned capital is actually converted into capital and a surplus is produced with it, of which interest is a part’ (III: 374). From this point of view the interest-bearing ‘capital’ involved in the financing of the state debt in the shape of interest payments to bond-holders is not real capital but what Marx calls fictitious or illusory capital. For it is not invested in productive activities which yield surplus value. Marx poses the issue in the following manner when speaking of illusory capital:
The sum that was lent to the state no longer has any kind of existence. It was never designed to be spent as capital to be invested, and yet only by being invested as capital could it have made itself into self-maintaining value. . . . No matter how these transactions are multiplied, the capital of the national debt remains purely fictitious, and the moment these promissory notes become unsaleable, the illusion of this capital disappears. (III: 595-6)
Again, if we adopt the standpoint of the individual capitalist the matter appears to be quite the opposite and straightforward. As an individual, the capitalist cares not one iota whether on the one hand his income is derived from capital invested in industry and is thus the means for the generation of surplus value or whether, on the other, it arises from money loaned to the government and bringing him a return, which, given the laws of competition, and taking into account the degree of risk involved, must tend towards the average rate of profit on capital as a whole. (Indeed, other things being equal, the owner of capital might prefer to take his surplus value in the form of interest paid by the government on the grounds that this appears safer, based as it is on the strength of the state and given that holding state bonds does not involve the risk of committing one’s capital to industrial production.) But if we commence, not from the consciousness of the individual capitalist, but from the objective laws (the ‘being’) of the economy as a whole, capitalism cannot be indifferent about this matter. This is so because the ultimate basis of the capitalist economy remains industrial production. The stability of capital rests upon its ability to extract surplus value in the course of industrial production.
Industrial capital is the only mode of existence of capital in which not only the appropriation of surplus-value, or surplus product, but simultaneously its creation is a function of capital. Therefore with it the capitalist mode of production is a necessity. Its existence implies the class antagonism between capitalists and wage-labourers. To the extent that it seizes control of social production, the technique and social organisation of the labour-process are revolutionised and with them the economico-historical type of society. The other types of capital which appeared before industrial capital amid conditions of social production that have receded into the past or are now succumbing, are not subordinated to it and the mechanism of their functions altered in conformity with it, but move solely with it as their basis, hence live and die, stand and fall with this basis. Money-capital and commodity capital, so far as they function as vehicles of particular branches of business, side by side with industrial capital, are nothing but modes of existence of different functional forms now assumed, now discarded, by industrial capital in the sphere of circulation modes which, due to social division of labour, have attained independent existence and been developed one-sidedly. (11: 55)
And again:
Money-capital, commodity-capital, and productive capital do not therefore designate independent kinds of capital whose functions form the content of likewise independent branches of industry separated from one another. They denote here only special functional forms of industrial capital, which assumes all three of them one after another. (11: 53)
It is quite true to say that so long as capital is accumulating at an appropriate rate the system as a whole can stand the existence of a certain portion of surplus value drainage in the form of interest paid on state bonds. For much of the post-war boom, although the public debt of the major capitalist countries was increasing, it was growing at a rate less than the accumulation of capital. Although this in no way altered the nature of such state debts the situation was containable. It is only when the specific weight of such debt begins to mount, when it threatens to consume a greater proportion of a shrinking or only slowly rising volume of surplus value, that the situation becomes intolerable for capitalism. Then the needs of the individual capitalist with his share in the state debt and the need of the system as a whole to extract surplus value in the course of industrial production come into conflict. Marx sums up the point at issue in the following passage; it makes clear that there are definite limits to the ability of capital to assume the form of money capital. Marx points out that while the individual owner of capital does not concern himself about the form of his surplus value,
This is correct in the practical sense for the individual capitalist. He has the choice of making use of his capital by lending it out as interest-bearing capital, or expanding its value on his own by using it as productive capital. ... But to apply it to the total capital of society, as some vulgar economists do, and to go so far as to define it as the cause of profit, is, of course, preposterous. The idea of converting all the capital into money-capital without there being people who buy and put to use means of production, which make up the total capital outside a relatively small portion existing in money [i.e. gold] is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e. without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. (HI: 370)
Here lies the key to understanding the fallacy of the Keynesian view that the size of the public debt was of little or no consequence, given the fact that it was debt ‘we owed ourselves’.
Spending on armaments is regarded by some writers as constituting the major source of the post-war capitalist boom.[4] Because for a time this theory exercised a certain degree of influence in radical circles and because it was essentially a variant upon Keynesianism (though often decked out in what purported to be Marxist terminology) we shall say something specifically about it. Harman (1983) provides a resumé of the essential points of this theory, which often goes under the label of the ‘permanent arms economy’. The fact that he is an advocate of this theory makes his rehearsal of its main points doubly useful. He summarises the version of the theory proposed by Michael Kidron in the following manner:
Kidron points out that there has always been one way in which capitalists use surplus value which prevents it being used to expand the means of production: when they invest in luxury goods for their own consumption. He suggests that spending by the state on arms which has expanded enormously this century – should be regarded in the same way. (Harman 1984: 39)
Further, according to Harman (here again following Kidron), Marx, writing in the conditions of the nineteenth century, did not analyse the role of luxury production. In fact Marx assumed
a closed system in which all output flows back as inputs in the form of investment goods or wage goods. There are no leaks. Yet in principle a leak could insulate the compulsion to grow from its most important consequences. ... In such a case there would be no decline in the average rate of profit, no reason to expect increasingly severe slumps and so on. (ibid.)
An immediate response to Harman is that it is a strange sort of capitalism which produces only wage goods and investment goods! Where does the consumption of the owners of capital enter the picture? Capitalism does after all involve precisely what Harman charges Marx with having ignored, namely the consumption on the part of those who take no part in the process of production. As we shall see, the charge that Marx ignored the consumption of the capitalist is in any event quite false. But this apart, according to Harman and Kidron, luxury goods production, is, from the theoretical angle, to be treated as equivalent to arms production. In order to examine the basis of the theory of the arms economy and establish that it is indeed of a fundamentally Keynesian character, we can follow Kidron and Harman on this point. As we have established, the key feature of Marx’s distinction between productive and unproductive labour was this: that it had nothing at all to do with the resulting commodity, that is with the use value of the product which entered the market. Here Marx clashed with the vulgar economist who insisted that everything, precisely because it had a use value, must, by definition, be the result of productive labour. Now whether the labour expended on the production of luxuries (that is on articles produced for the consumption of the bourgeoisie) is productive, for Marx rests upon one and only one consideration: Did its consumption result in the direct production of surplus value? In this respect the fact that the good is a luxury has nothing whatsoever to do with the essence of the matter. From the point of view of capital, the production of luxury liners can be equally productive of surplus value as can the production of bread. So the production of luxuries cannot be separated from the production and circulation of commodities as a whole within capitalist economy, nor can such production be considered apart from the basis on which the economy as a whole rests: the production of surplus value.
Now why, according to Harman, should goods produced in the so-called Department III (luxury goods production) be distinguished from other goods?
Such goods, by definition, do not enter into ‘productive consumption’ Goods which form part of the means of production pass on their value to new goods as they are consumed in the production process. Goods which form part of the real wage of workers pass on their value as workers who consume them create value and surplus value. Goods which are consumed in one way or another by the capitalists end their life without passing their value on to anything else. (Harman 1984: 40)
Just as Keynes’ pyramids do not ‘stale with age’, so luxury goods do not have any impact on the formation of the average rate of profit and its movement, except in the negative sense that they serve to arrest the fall in the rate of profit. But what Harman says here is sheer nonsense from the standpoint of Marx’s most fundamental conception of capitalist economy. Of course the labour socially necessary for the production of constant capital (machinery, raw materials, etc.) is passed on in the course of production. The value embodied in such constant capital is absorbed into the commodities which are realised in the course of the production process. But this can take place only because of the active element in that process – labour power. All commodities, this one apart, play a purely passive role in the process of production. The fact that workers consume articles of subsistence is of course necessary for the production of surplus value in that should the workers starve there would naturally be no surplus value. This is hardly a profound conclusion. But the consumption of such means of subsistence, indispensable though it is, is not the source of surplus value, as Harman appears to suggest. The real question is this: if the labour employed in the production process creates commodities (such commodities can assume the form of any material objects, or none at all) which embody surplus value, then such surplus value cannot but participate in the formation of the average rate of profit. For this rate is determined by the total capital (c + v) compared with the total surplus value (s) throughout the economy as a whole. To argue otherwise is to abandon Marx’s basic contention that capital is motivated by one thing only: the creation of surplus value. For capitalism, the production of use values (material production) is a necessary nuisance, one which ‘ideally’ it would like to get rid of, reducing the process of capital accumulation to the circuit M-M’, that is, one in which the intervening stage of production is eliminated. (Needless to say, this it can never achieve.)
Now did Marx ignore unproductive consumption, as Kidron suggests?
Quite the opposite is the case. For far from ignoring such consumption Marx analysed its necessity and why it tended to grow with the development of the productive forces. In order to establish this fact and to make clear Marx’s approach to the questions discussed in this part of the argument we can refer to a passage from his ‘Results of the Immediate Process of Production’ where the following is found:
A large part of the annual product which is consumed as revenue and hence does not re-enter production as its means consists of the most tawdry products (use-values) designed to gratify the most impoverished appetites and fancies. As far as the question of productive labour is concerned, however, the nature of these objects is quite irrelevant (although obviously the development of wealth would inevitably receive a check if a disproportionate part were to be reproduced in this way instead of being changed back into the means of production and subsistence, to become absorbed once more – productively consumed, in short – into the process of reproduction either of commodities or of labour-power). This sort of productive labour produces use-values and objectives itself in products that are destined only for unproductive consumption. In their reality they have no use-value for the process of reproduction... ordinary economic theory finds it impossible to utter a sensible word on the barriers to the production of luxuries even from the standpoint of capitalism itself. The matter is very simple, however, if the elements of the process of reproduction are examined systematically. If the process of reproduction suffers a check, or if its progress, in so far as this is already determined by the natural growth of the population, is held up by the disproportionate diversion of productive labour into unproductive articles, it follows that the means of subsistence or production will not be reproduced in the necessary quantities. In that event it is possible to condemn the production of luxury goods from the standpoint of capitalist production. For the rest, however, luxury goods are absolutely necessary for a mode of production which creates wealth for the non-producer and which therefore must provide that wealth in forms which permit its acquisition only by those who enjoy. (Marx 1976: 1045-6)
At one point (despite denials of the fact at other stages in his argument), Harman is obliged to admit that Marx did recognise the growth of unproductive consumption, with which the development of capitalism was associated. Thus he quotes Marx:
As capitalist production grows, accumulation and wealth become developed, the capitalist ceases to be the mere incarnation of capital. The progress of capitalist production not only creates a world of delights; it lays open in speculation and the credit system, a thousand sources of individual enrichment. When a certain stage of development has been reached, a conventional degree of prodigality, which is also an exhibition of wealth and consequently a source of credit, becomes necessary.... Luxury enters into the expenses of representation. (1: 544)
In commenting on this passage Harman says:
Thus Marx suggests in passing in Capital that capitalism, which initially flourished through the destruction of preceding societies with their vast superstructure of unproductive classes, becomes sluggish as it becomes old and thereby creates its own non-productive superstructure. (ibid.: 43)
Here Harman’s procedure is quite unhistorical. First, in the passage he quotes from Marx the point is that in the last century, in the period when capitalism was still able to develop the productive forces in a manner which was relatively crisis-free, the growth of what Harman calls a non-productive superstructure was an expression of this development and in no sense an ‘escape route’ for capital. The fact that capital could sustain a growing layer of middle-class personnel who were not directly engaged in productive activities was an expression of its vigour. But when the twentieth century is reached, the epoch of imperialism, the situation is quite different. Lenin criticised Hilferding for many weaknesses in his work: one of them was his failure to examine the parasitic nature of capitalism as a whole in the present epoch. (Here Hilferding the ‘Marxist’ fell below the level of Hobson the radical liberal who had dealt with this issue, in connection with the Boer War for instance.)
This is how Lenin posed the issue:
As we have seen. the deepest economic foundation of imperialism is monopoly. This is capitalist monopoly, i.e., monopoly which has grown out of capitalism and which exists in the general environment of capitalism, commodity production and competition, in permanent and insoluble contradiction to this general environment. Nevertheless, like all monopoly, it inevitably engenders a tendency towards stagnation and decay. Since monopoly prices are established, even temporarily, the motive cause of technical, and consequently, of all other progress disappears to a certain extent and, further, the economic possibility arises of deliberately retarding technical progress. (Lenin 1969: 241)
And Lenin went on to point to the connection between the (relative) tendency towards stagnation on the one hand and the growth of an increasing proportion of the capitalist class whose capital was not engaged in the productive process.
Further, imperialism is an immense accumulation of money capital in a few countries ... hence the extraordinary growth of a class, or rather a stratum of rentiers, i.e. people who live by ‘clipping coupons’, who take no part in any enterprise whatever, whose profession is idleness. The export of capital, one of the most essential economic bases of imperialism, still more completely isolates the rentiers from production and sets the seal of parasitism on the whole country that lives by exploiting the labour of several overseas countries and colonies. (ibid.)
Quoting figures from Hobson dealing with the income from trade as against that yielded by foreign investments, Lenin comments, ‘The income of the rentiers is five times greater than the income obtained from the foreign trade of the biggest “trading” country in the world! This is the essence of imperialism and imperialist parasitism’ (ibid.). And drawing attention to the increasingly widespread use of the term ‘rentier state’ in analyses of imperialism: ‘The rentier state is a state of parasitic, decaying capitalism, and this circumstance cannot fail to influence all the sociopolitical conditions of the countries concerned, in general, and the two fundamental trends in the working-class movement, in particular’ (ibid.: 243).
So the growth of ‘unproductive expenditures’ did not constitute an ‘escape route’ for capitalism along the lines envisaged by Harman. In these passages and in his study, of imperialism as a whole, Lenin is drawing attention to the fact that this parasitism cannot be divorced from the overall crisis of capitalism in this epoch. The export of money capital and the export of capital generally, as far as Lenin was concerned, was one of the most potent sources of war in the twentieth century as capital was driven to divide and redivide the world market and the total available stock of capital among the various monopoly interests.
(Here, incidentally, is revealed the thoroughly shallow nature of Keynes’ ‘attack’ on the rentier capitalist. Keynes wanted to remove such elements while leaving the system as whole intact. Naturally he quite failed to see the connection between the rapid emergence of ‘coupon clipping’ and the overall decay and decline of capitalist economy. Like all petty bourgeois critics he wanted to remove certain unseemly features of capital while preserving its foundation. This is yet another expression of the eclecticism which lay behind his thinking as a whole.)
Another example Harman cites to justify the same essential theoretical position is that concerned with the growth of commercial activities. He reproduces a passage from Marx:
It is clear that as the scale of production is expanded, commercial operations required constantly for the recirculation of industrial capital multiply accordingly ... the more developed the scale of production, the greater ... the commercial operations of industrial capital. (III: 293)
According to Harman, this passage indicates that Marx saw ‘with the expansion of the system industrial capital has to surrender an increasing amount of surplus value to finance the unproductive buying and selling of its output’ (ibid.: 43). But again the point at issue is misconstrued. The growing division of labour amongst the various branches of capital in the last century was, at that specific period, an expression of the growth of the productive forces, an indication of the fact that just as the means of finance were increasingly beyond the range of even the largest capitalist so were the means of distribution. The greater share of capital going to those engaged (unproductively) in the realisation of surplus value testifies to the growth of the productive forces, indicates that they are pressing ever more against the limits of the private ownership of the means of production, signifies the fact, not of some ability on the part of capital to chart a course out of its historical dilemma, but establishes its impending historical demise. And the objective conditions for that demise are joined in the twentieth century when each capitalist power engages in ever greater parasitic activities, the main expression of this being the ever greater resources devoted to war and war preparations. In both these cases, that of unproductive consumption, especially state spending, and the expansion of commercial activities, Harman in fact stands reality diametrically on its head. In short he confuses effect with cause. Capital is able to expand expenditure under both these heads only to the extent that economic conditions allow (which concretely means the ability to extract surplus value at the required rate, or, especially in the present century, to seize the surplus value belonging to one’s rivals). Once such conditions no longer hold – as in periods of mounting crisis – intense efforts are necessarily made to reduce such ‘waste’ while at the same time pressure for war is likewise intensified.
The theory that arms expenditure represents one crucial way in which capitalism can overcome its contradictions depends, in the final analysis, on the view that the surplus capital which the system generates can be absorbed by means of state spending. As Harman puts it:
The experiences of the First World War and the period 1933-45 was that, provided the competing groups of capitalists within any country allowed it, the capitalist state could intervene to ensure that production proceeded on an upward course – even if the rate of profit declined. For the state could collect into its hands the mass of surplus value and direct it into investments, regardless of profitability. (Harman 1984: 78)
This thesis is essentially a variant on Keynesianism in that it holds that the tempo of capitalist development is ultimately dependent on the rate of capital investment. Keynesianism sees in periods of prosperity a tendency for over-investment and in periods of slump a tendency towards under-investment. (It was, of course, this latter question which exercised Keynes’ attention.) By ironing out these fluctuations, by means of credit controls or direct state investment, capitalist economy can be stabilised. According to those who see in arms spending a means of capitalist stability, it is the ability of the system to invest in arms which allows it to escape from its old pattern of booms and slumps. This is the case because capital invested in arms, it is argued, does not take part in the formation of the average rate of profit. Many aspects of this thesis could be taken up, but one issue which it involves is that of the relationship of investment and consumption.
Now for Marxism the theory of reproduction is certainly based on the fundamental fact that the production of means of production (Department I industries) plays the leading role in capitalist development. Production grows principally on the basis of the growth of the means of the production, rather than the means of consumption, that is to say, on the more rapid rate of increase in Department I as against Department II. This is but another way of saying that the organic composition of capital (the ratio of constant to variable capital) tends to rise over time. The growth of personal consumption under capitalism follows the growth of productive consumption. But it fulfils one role in the production sphere, and another as the cause of the capitalist economic cycle. While the production of the means of production is certainly the most important moment in the investigation of the cyclical movement of capital, it is not the initial link, not the ‘prime mover': the cause of capitalist crises is to be located in the laws and the contradictions of capitalist production, rather than in the specific features of the production and reproduction of the means of production.
It has long been held by certain economists that capital investment is a self-contained entity, quite independent of consumption in the capitalist process of reproduction. It is of course true that during the phases of recovery and especially in periods of prosperity the production of machinery, equipment, the build-up of stocks, etc. increases, while in the downturn the production of such items fails sharply, often more so than in the case of consumer goods. But it would be false to conclude from this undoubted empirical fact that the real source of capitalist crises is to be discovered in the movement of the level of capital investment, with its corollary that if some means could be discovered for damping down the fluctuations in the rate of investment the key to the regulation of capitalist economy as a whole would be to hand.
It was the Russian legal Marxist, Tugan Baranovsky, proceeding, so he believed, from the Marxist reproduction schema, who argued that capitalist reproduction on an expanded scale was possible even where personal consumption fell absolutely or even ceased completely. That the development of capitalism could take place quite independently of the level of personal consumption was possible, Tugan Baranovsky held, because personal consumption could be replaced by the production of means of production alone. Starting from the correct point that there is a tendency for Department I to grow more rapidly than Department II, he took a false step in declaring the complete separation of production from consumption. In so far as Keynesianism gives currency to the idea that capital investment is a factor independent of the level of consumption, a self-contained factor in the process of reproduction, it follows the same path as Tugan Baranovsky, although not necessarily drawing its conclusions as sharply.
The significant thing to note here is that Harman shares this same position for he writes,
One of the greatest followers of Marx, Rosa Luxemburg, could not understand how capitalism could continually expand without producing more goods for consumption. Similarly these Marxists [opponents of the theory of the permanent arms economy] could not understand how capitalism could possibly benefit from continually expanding the means of destruction. Like Rosa Luxemburg, they were so bemused by the irrationality of what capitalists were doing as to try to deny that this was how the system worked. (Harman 1984: 83)
According to Marx, the reproduction of fixed capital is the most important aspect explaining the length of the capitalist production cycle – ‘fixed’ not in the sense that capital is fixed in the instruments of labour but rather in the sense that a portion of the value laid out in instruments of labour remains fixed in them, while the other portion circulates as a component of the value of the product (see II: 202). The average length of time during which machinery and equipment are renewed constitutes the most important aspect explaining those long-term cycles through which industrial development has taken place since the creation of large-scale industry. The general reduction of commodity prices and a depression of the rate of profit in times of crisis increases enormously the pressure on entrepreneurs to reduce production costs. This is attempted by means of wage reductions. But this is by no means the only way. Capital in such periods strives to introduce more modern and efficient methods of production. Price reductions on equipment greatly depreciate (de-valorise’) existing capital, that is brings about what Marx calls its ‘moral’ depreciation before its physical deterioration has necessarily taken place. Weaker capitals, those less well placed to stand such pressures, will be eliminated, with the consequent further concentration and centralisation of capital. But such a crisis prepares the way for a renewal of fixed capital, providing the basis for a period of industrial prosperity when the replacement of fixed capital in turn lays the foundation for the growth of other branches of production. But one cannot conclude from this (simplified) review of Marx’s theory that the reproduction of fixed capital or ‘investment’ constitutes a self-contained factor which, in itself, determines the nature of capitalist cycles and crises. On the contrary, for as Marx explains:
Competition compels the replacement of the old instruments of labour by new ones before the expiration of their natural life, especially when decisive changes occur. Such premature renewals of factory equipment on a rather large social scale are mainly enforced by catastrophe and crises. (II: 170)
And further, ‘But a crisis always forms the starting-point of large new investments. Therefore from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle’ (II: 186). Here Marx poses the matter in a manner which is diametrically opposed to that of Keynesianism, which sees in investment as such the key to the dynamic of the capitalist economy. For Marx it is the periodic crises of overproduction engendered by the inherent contradictions of capitalism which give rise to fluctuations in the rate of capital investment, and not the other way round. Crises are the means by which initial disproportions (in this case a disproportion between investment and consumption) are corrected, often in the most violent manner. So a collapse of investment which is characteristic of a slump is not the cause of such a slump but merely one of its consequences. Here is one more instance of the bankruptcy of positivism. The issue cannot be settled by discovering the degree of correlation between the phenomena concerned (here investment and the industrial cycle). Such a method can never provide the basis for a real explanation of the processes which have brought these appearances into being. This task requires theoretical analysis, a point which eludes Harman.
It was Lenin who developed Marx’s work on the relationship of consumption to production within the capitalist system. In the first place it is a consequence of Marx’s theory of realisation that the growth of means of production develops faster than the growth of consumer goods: ‘Capitalist production, and, consequently, the home market, grow not so much on account of articles of consumption as on account of means of production. In other words, the increase in means of production outstrips the increase in articles of consumption’ (LCW 3: 54). Production not only grows more rapidly than consumption but precedes it. Thus Lenin:
To expand production (to ‘accumulate’ in the categorical meaning of the term) it is first of all necessary to produce means of production, and for this it is consequently necessary to expand that department of social production which manufactures means of production, it is necessary to draw into it workers who immediately present a demand for articles of consumption, too. Hence ‘consumption’ develops after accumulation’, or after ‘production'; strange though it may seem, it cannot be otherwise in capitalist society. (LCW 2: 155)
Now within certain limits, production is independent of consumption in that in the industries producing means of production an exchange takes place between firms within that department so that production, to a certain degree, creates its own market. But this independence is far from being absolute; on the contrary it is strictly relative and there is no basis for the contention that production can proceed indefinitely independently of consumption. From the fact that production of means of production tends to expand more rapidly than means of consumption
in no way does it follow that the turning out of the means of production can develop completely independently of the production of articles of consumption and without any connection to it. . . . In the final analysis, therefore, productive consumption (the consumption of means of production) is always bound up with individual consumption and is always dependent on it. (LCW 4. 59)
Here is the key to rejecting Harman’s thesis that capitalist production can develop independently of capitalist consumption, and its corollary that arms spending was the key to the longevity of the post-war boom.
What has been said in this chapter should not be taken to mean that the increased government spending which characterised post-war capitalism was without its importance or indeed its serious economic consequences. And this certainly holds true for arms spending. Our objections to the theories of permanent arms economy rest not on the proposition that arms spending is of no economic consequence but rather on the fact that first, in these theories arms spending is separated out from the nature of capitalism as a whole in the twentieth century (its drive to war, etc.) and secondly, these economic consequences are misunderstood, being viewed through Keynesian spectacles. Now there is no doubt that arms spending was one of the potent sources of the inflationary pressures which had become so acute by the 1970s. If we look at the nature of military spending in a little more detail, we can suppose that the government carries out military spending financed by an issue of paper. Certain capitalists, lacking profitable outlets for their capital in other (productive) spheres, take up this paper. With the loans the government purchases arms which, let us assume, are destroyed in use. (Even if the arms remain physically in existence they cannot, of course, be the source of surplus value, that is the means of repaying the bonds which have been issued.) Where is the wealth which the bond is supposed to represent? Marx called such capital fictitious capital. Trotsky explained the point at issue thus:
When a government issues a loan for productive purposes, say for the Suez Canal, behind the particular government bond there is a real value. The Suez Canal provides passageway for ships, collects tolls, provides revenue, and in general participates in economic life. But when a government floats war loans, the values mobilised by these loans are subject to destruction, and in the process additional values are obliterated. Meanwhile the war bonds remain in the citizens’ pockets and portfolios. The state owes hundreds of billions. These hundreds of billions exist as paper wealth in the pockets of those who made loans to the government. But where are the real billions? They no longer exist. They have been burned. They have been destroyed. What can the owner of these securities hope for? If he happens to be a Frenchman, he hopes that France will be able to wring billions out of German hides, and pay him. (Trotsky 1960: 185)
Here is the key to understanding one of the most powerful sources of inflation in the post-war period and in the twentieth century generally. For, as Trotsky points out, military expenditure involves the production of goods which, while they do not circulate within capitalist economy (and are therefore not commodities), do none the less generate revenues in the form of wages to those who produce them, profits to the firms who undertake their production, and interest to the rentiers who lent money to the state for such production. The effect is one tending to generate inflation.
But the effect on the capitalist system when the accumulation of paper claims takes the place of the accumulation of real capital are not confined to the stimulation of inflation. Real accumulation of capital (in short, capital which leads to the production-extraction of surplus value in industry) has a double effect. On the one hand it stimulates economic activity, raising the level of employment as more workers are drawn into work and raising incomes in line with the expansion of employment. On the other hand it leads to an enlargement of the capital of the owner concerned and provides the source for further productive investment. Now with regard to the accumulation of paper capital associated with the financing of a growing military budget, as we have noted in connection with government spending as a whole, the first effect is identical: the level of economic activity expands and along with it the level of income. A billion dollars spent by the state from loans stimulates business activity just as much as does the investment of a similar sum by the owner of capital in the expansion of his business. But there the analogy ceases. For after the fictitious investment, the wealth is gone and only the piece of paper remains. How is the government to make payment on it? By levying taxes? But as we know, this can only bite into the surplus value of the productive sector of the economy, slow down the rate of accumulation, and exacerbate the tendency for the rate of profit to fall. In other words, fictitious capital is not, from the point of view of capital as a whole, a real asset but a parasitic claim which fastens on to, lives off the back of, real capital. Its expansion, beyond a definite limit, must lead to an intensification of the struggle between classes as the owners of capital as a whole attempt to pass the burden of financing such spurious capital onto the working class (through reductions in living standards, efforts at greater exploitation, etc.) but also to the intensification of rivalries between the owners of capital as they strive to make sure ‘others’ will carry the burden.
One final point needs to be dealt with in concluding the discussion in this chapter. The idea that government spending is the root cause of the mounting capitalist crisis has been widespread in recent years, its most publicised representatives on the right being Bacon and Eltis. The thrust of this chapter is that state spending does indeed constitute a burden for capitalism, whether it be financed by an equivalent volume of taxation or by state borrowing. But to conclude from this that the capitalist crisis has been created by this government spending and that its reduction would re-establish stability would be to take a false step. As we have seen, the momentum of capital accumulation is determined above all by the rate of profit: as long as the rate of profit (or in some circumstances the mass of profit) is growing, a rising volume of state spending can be carried by capitalism without any necessary threat to its general stability. So the real source of the crisis must be located in the increasing difficulty which capitalism as a whole and especially its weaker sections experience in maintaining its rate of profit and this, for Marxism, is the classical expression of the fundamental contradiction of capitalism. Because of its political implications this point must be stressed, especially in connection with state spending on the social services. That capitalism is no longer able to finance an adequate welfare state, and is in fact driven to make severe cuts in this area, indicates not that spending on the welfare state is the cause of the crisis but signifies that capitalism can no longer provide the basic requirements (health care, education, social services, etc.) for the millions who are, after all, the most decisive element in the productive forces. The roots of this inability are to be found not in the national economy and its malfunctioning, but are international in character and it is to these international aspects of the crisis of Keynesianism that we now turn.
1. At one point Harman (1 984: 8 1) says: ‘Any honest empirical study of the 1940s, 1950s and early 1960s thus has to see that a historically high level of arms expenditure was accompanied by a stabilisation of the system, an offsetting of the tendencies for the organic composition of capital to rise and the rate of profit to fall, and a prolonged period of boom.’ But matters can never be settled in this way: or rather for the empiricist only can they be so settled. The fact that arms expenditure increased and capitalism experienced a boom over a certain period cannot of itself establish that the boom was created by the spending on arms. And this is so no matter how ‘honest’ or detailed the facts gathered in support of the proposition. The same facts could just as readily support the conclusion that arms expenditure grew because an expanding capital could afford to make such outlays.
2. As we know, Marx opposed utopian socialists such as Weston because they denied that trade unions could exert any upward pressure on the level of wages. In periods of boom especially the working class may, for a more or less short period, be able to drive its wages up ‘above value’. But the basic law remains: wages are the price of labour power.
3. Some such as Rowthorne hold that arms spending is important for capital in that it may generate technical change in the economy as a whole due to spin-off effects. This is of course undoubtedly so. But the fact still remains that such expenditures constitute a deduction from surplus value and their (indirect) impact on the rest of the economy depends absolutely on the conditions for profitable production in the private sector of the economy. Unless those conditions prevail, state spending of whatever kind can have no impact, except a negative one. So it is on the conditions of production, the possibilities of and limits to profitable production, that the investigation of capitalist economy must centre. One further point in this connection. To the extent that arms production creates the conditions for technical change in other branches of the economy it must, via increases in the organic composition of capital, create downward pressures on the rate of profit. It might be said that arms production is ‘necessary’ for capital (as a means to war, etc.). But here again the economic impact of arms spending cannot be judged from this standpoint. Many things are absolutely necessary for capitalism (a state machine, for instance) which do not however create surplus value. The same point applies just as much to spending on the welfare state which, under certain conditions, capitalism may find it vital to make. This was obviously so during and after the Second World War when the proposals for the Welfare State were inspired by fear of the consequences of not providing certain minimum benefits for the working class in Britain. But again, this cannot be the basis on which we decide whether such spending was productive. Only that expenditure which leads to the creation of surplus value is productive. This is the essential point to be kept continually in mind.
4. Joan Robinson (1962: 96) appears to share this view, to some extent at any rate: ‘Nowadays the paradoxes are taken in sober earnest and building weapons that become obsolete faster than they can be constructed has turned out far better than pyramids ever did to keep up profit without adding to wealth. The relapse on Wall Street that follows any symptom of relaxation in the Cold War is a clear demonstration of the correctness of Keynes’ theory.’