First published in February 1976.

2nd Edition, September 1978

The State and the Capitalist Crisis

© David Yaffe, 1976-1998

Foreword to the www edition

This speech/article should be seen as a commentary on the ideological debate

following the end of the post-war boom. It was a defence of the Marxist standpoint on
the theory of crisis and a Marxist analysis of role of the state intervention in the
capitalist economies after the Second World War. Much of the material, therefore,
should prove valuable to the new generation of comrades returning to Marxism.

It had, however, a number of weaknesses which have been corrected since that period.
It did not integrate the theory of crisis and imperialism. Therefore, inevitably, it
underestimated capital's ability to divide the working class. One of the most
significant features of 'neo-liberalism' has been the rapid increase of economic and
political divisions among the working class in imperialist countries such as Britain,
with skilled workers and the middle classes supporting the election of Tory
governments on four occasions, as poverty increased for larger and larger sections of
the working class. It has been the failure of neo-liberal policies over the last few years
which, in turn, has driven the more privileged layers of the working class and middle
classes back to Blair's Labour Party. For a discussion of the latter see David Yaffe's
article The Politics and Economics of Globalisation from FRFI 137 and Robert
Clough's Labour: a party fit for imperialism and much other material contained in the
Marxism, Larkin Publications and Fight Racism! Fight Imperialism! sections of the
RCG/FRFI web site.

November 1998

Foreword to the Second Edition

The article The State and the Capitalist Crisis was based on a speech given to the
VESVU Conference, Amsterdam in October 1975. Nearly three years have passed
since that conference and it is clear that the arguments put forward in the article have
been confirmed by events. While the average rate of inflation has temporarily fallen
in the OECD area from a peak of 12.5% in 1975 to about 7% now, unemployment at
the beginning of 1978 in the OECD area was over 16 million, some half a million
higher than at the trough of the 1975 recession. Recent trends indicate that matters
will get worse with both inflation and unemployment rising together again.

In Britain unemployment is over 1.6 million in spite of artificial state-run schemes to

keep it down. Although the rate of inflation has fallen it should be remembered that
1977 saw the greatest fall in living standards in any single year in Britain since
statistics were kept. The rate of inflation will soon be rising again, even as
unemployment increases. True to form the Labour government has used incomes
policies and a compliant TUC General Council to hold living standards down. At
present the Labour government wants to impose a 5% increase of wages in a period
when inflation is nearly 8% and starting to rise.
The last three years has seen an unprecedented attack on state sector workers in order
to cut back state expenditure. In the Civil Service alone 12,000 jobs have been lost
since April 1976. All the ideological stops were pulled out by the ruling class to
divide state sector workers from workers in the private sector all the better to continue
the attack on all workers. The government-allocated funds going into Education and
Health Service sectors are now simply inadequate to maintain the already poor
standard of service that was normal during the post-war boom. A serious deterioration
in these sectors is rapidly taking place.

Most of the ideological positions countered in the article have been used by the press
and the Labour and Trade Union leadership to hold back any serious opposition to
these attacks on the working class. Even those opposing the Labour government
policies have been unable to mount a serious counter attack. They rely on precisely
those ideological positions – underconsumptionist, regeneration of industry – which
undermine any united class response.*

There is one point in the article which needs developing. The article includes a
critique of those sections of the working class movement who remain tied within the
framework of debate set by the bourgeoisie. What should be pointed out is that this is
not simply a question of their holding 'incorrect ideas', but rather an expression of
their own material interests, their own real ties to the continued existence of British
imperialism. Opportunist currents necessarily develop in the working class movement
and become a major barrier to building a revolutionary movement in the working
class. Whether they consist of the Labour and Trade Union leaders who argue for
wage restraint and responsible trade unionists or academics and other pseudo lefts
who see wage increases as a significant factor causing inflation, such opportunist
currents have an interest in the maintenance of the capitalist system.** Their major
role will be to contain the movement which will necessarily develop as the working
class is forced by the ever-deepening crisis to defend its living standards.

David Yaffe

2nd September 1978

* This is developed in my article 'Trade Unions and the State: The Struggle against
the Social Contract' in Revolutionary Communist 7 pp22-29.

** See 'Which Way Forward for Communists? Critique of the British Road to
Socialism' in Revolutionary Communist 7 especially p18ff and also the 'Editorial' in
the same issue for a discussion of these points.
 The State and the Capitalist Crisis

Introduction

It is very interesting to compare the discussion about what was taken for Marxian
economics over the last twenty years with the period we are moving into today. I
think it can be said that in the period of the post-war boom the bourgeoisie was
confident enough to start talking about and discussing Marx. The whole discussion
about Marxian economics reflected this confidence. It became fashionable to show
how Keynes had Marx as precursor or how near to Marx Keynes was or how near to
Keynes Marx was and so on. A book Marx and Modern Economics [1] [2] Once
again we have the ideas of Adam Smith and Ricardo as central components of the
discussion about the nature of the present crisis. Published in 1968 contained the main
contributions over the period on this issue. Its title sums up the whole approach. The
bourgeoisie was confident, it was living through the post-war boom. It was witnessing
the greatest expansion of capitalist production in its history, and so it could be 'liberal'
with Marx. Today we see something quite different. The trend has changed as that
confidence has been undermined. A major discussion is taking place between
economists, which brings back to life the central theories raised by classical political
economy in the period before Marx.

The bourgeoisie, soon after Marx had written his devastating critique of political
economy, completely dropped the categories used and turned to a standpoint which
was to become the foundation of neoclassical economics. The very categories which
Ricardo had developed, in particular his labour theory of value, had become too
dangerous. The very understanding of capitalism as a class society had to be brushed
aside. For the bourgeoisie after Marx the question was not whether there was a
division of interest between the working class and the capitalist class. It was not only
how much the working class but the capitalist class, the landlord, the technician and
every other freebooting hireling of bourgeois society contributed to the product. The
division was not between the workers and capitalists but an harmonious division
between all sections of society. The basic categories that classical political economy
had developed and that Marx had exposed to a revolutionary critique, were, in
cowardly fashion, laid to rest. Yet today those categories of classical political
economy have been revived. A ruling class in decay has to turn to those warriors of
yesterday to find its weapons as the class struggle, class divisions become threatening
again. They are able to return to classical political economy in spite of Marx's
revolutionary critique precisely because the Marxist movement is so weak today. It,
therefore, becomes necessary to show not only how vital the categories developed by
Marx are for an understanding of the present crisis but also how those categories are
political categories and not economic in the narrow sense of the term. I will show how
we can understand the present crisis from the standpoint of the categories developed
by Marx and in so doing lay the basis for a political defence of the working class.

The first point I want to make is that Marx was not an economist. Marx was not a
writer of a book on economics. He wrote a critique of political economy. That is, a
critique of the ideas with which the bourgeoisie attempted to understand its own
society. In that sense any critique of those ideas today in relation to the crisis is a
critique of political economy. But it is more than that, because underlying the
solutions that the bourgeoisie puts forward to solve its crisis are those ideas. A
critique of those ideas is, therefore, the basis of a critique of the very solutions which
the bourgeoisie wishes to use to solve the present crisis at the expense of the working
class. So immediately we are involved with a political question, we are involved in a
discussion of the various solutions the different classes in society wish to utilize to
overcome the present crisis. That is my starting point. I am not talking about
economics, in the narrow sense of the term, but about a critique of political economy,
a critique of the ideas with which the bourgeoisie attempts to understand its own
society. And this includes a critique of those sections of the working class movement
who remain tied within the framework of debate set by the bourgeoisie.

The way capitalism presents itself

Why do we need a theory of crisis? Is such a theory really necessary in dealing with
the present problems of world capitalism? I want to explain why a theory of crisis is
an essential political weapon. The major problems faced in understanding capitalism
arise because of the way capitalist relations of production appear to the working class,
the capitalists and to those studying it. Things appear in inverted form. Everything
appears to be the opposite of what it actually is. Let us consider an example of this
that Marx discussed in Capital. The wage-labour relation seems to be an equal
relation. The worker sells his labour power to the capitalist and the capitalist buys that
labour power and there seems to be a fair exchange. In the working class movement
in Britain there has grown the slogan 'A fair day's pay for a fair day's work'. This
results from the idea that there can be some kind of real equality in the exchange of
labour power, in the worker selling his capacity to work for a period of time, and what
the capitalist pays for that sale. Yet we know that this exchange is an unequal
exchange, because underlying it is the fact that the worker works a longer time than
the time necessary to produce the consumption goods required to reproduce the
worker's capacity to work. And in that time differential, part of the working day is
taken gratis by the capitalist. It is in the time that is the difference between the time
the worker works and the time necessary to produce the goods that the worker
requires that we have the source of profit. And yet in the exchange of a worker's
labour power for money, in the process of being paid wages for a job of work done,
this unequal 'exchange' has completely disappeared. It seems as though an equal
relationship has taken place. The source of capitalist profit, the fact that the worker is
exploited, is completely hidden from view.

Now when we come to discuss inflation this kind of problem manifests itself again. If
you immediately accept that an equal relationship (exchange) has taken place, then
the notion that if wages rise a price rise must follow seems to conform with common
sense. You have a theory, which is the general theory that the bourgeoisie uses, that
final prices are made up of different types of costs. You have the costs of buying
machinery, the costs of buying raw materials, the costs of wages and the cost that is
often sneaked in as being a cost like all other costs, that of profits. This latter cost is
something to be paid to the capitalist for risking or lending his capital, or for
supervising production and so on. Various apologetic theories have been put forward
to justify profits. Once all these costs are added up together then the final price is
computed. This is the standpoint of the individual capitalist. It is how the individual
capitalist experiences the problem.
On this commonsensical view if wages rise, so must the final price. It only needs a
little imagination to then argue that wage increases are a primary cause of inflation.
On the other hand according to a popular left-wing view it is the price rises of
monopolies, the activities of multinational corporations in securing high profits that is
the primary cause of inflation. In a similar way the national chauvinists from the
imperialist countries have seen in the increasing raw material and oil prices, resulting
from the 'selfish' activities of among others the oil states, a primary cause of inflation.
In all these cases, different rising costs, which themselves need to be explained, are
part of the explanation of rising prices. A rise of wages causes inflation, a rise in
profits causes inflation and so on. In other words, inflation, which is the rise of prices
is explained in this remarkable conception of the bourgeois economists, by rising
prices. And that sums up the brilliant achievement of many bourgeois academics in
attempting to explain inflation.

If we are to explain inflation we have to explain why those prices rose, we have to
explain why money wages increase, why raw material prices have increased and
finally why, in spite of the increase of the mass of profits the rate of profit has fallen.
This is what a theory of the present crisis has to attempt to do. It cannot be done by
explaining rises in prices by rises of other prices. But the problem is that 'common
sense' views tied to the appearance of capitalist production have a lot of appeal. In
Britain when the Heath Conservative government was in power they put forward the
view that wage costs, wage increases were the fundamental cause of inflation. They
argued that a wage freeze was necessary to stop inflation. Unfortunately for the
government when they introduced a wage freeze prices continued to rise. How were
they to explain this? Well the government did not say that the problem was the
contradictions of the capitalist system and not wage increases. No they had to
temporarily shift the blame elsewhere. It was the foreigners, it was those other
countries, who were putting their prices up, so that import prices of goods brought
into Britain were very much higher. Inflation increased because of high import prices,
nothing whatsoever to do with the British, or the capitalist system but the foreigners
who were putting their prices up. And so at each and every stage those trying to
explain inflation and deal with its political consequences always have to avoid the real
issues facing them. Otherwise they would be forced to question the very system of
production they support. It is the workers, it is the large firms, or the importers, the
blame has to shift elsewhere.

We now turn to another argument related to the way capitalism appears. In the
advanced capitalist countries over the last ten to fifteen years or so, we have seen an
enormous growth of state expenditure. The state in many countries today utilizes
more than 50% of the gross national product. Thus has arisen the commonsensical
view that as inflation has increased with the growth of state expenditure, then the
cause of inflation is the growth of state expenditure. What could be more obvious?
You can draw various graphs and produce volumes of statistics and it will appear that
as state expenditure rises the rate of inflation increases as well. And so the cause of
inflation is said to be the growth of state expenditure. This view has been put forward
by a section of the academic profession who, I suppose, we could call monetarists (it
is not the best description of them). What they see as the cause of inflation is the
continually growing money supply and the failure of governments to control this
growth. They argue that the money supply is continuously rising ('out of control') so
that the government can finance its own rapidly rising expenditure. Therefore they
say, if you stop the rise of the money supply, if you slow it down and cut back state
expenditure, then inflation will slow down as a result.

We will find that the growth of state expenditure cannot explain inflation. On the
contrary, the rise of inflation and the rise of state expenditure follow from the
contradictions of the capitalist system itself. They are particular expressions of these
contradictions at a certain stage of the historical development of capitalist production.
It is because of the way things appear, because state expenditure has grown and prices
have risen at the same time, that the crude view that the growth of state expenditure is
the cause of inflation has come to the fore.

There is a further feature to this problem which has surfaced as a major political
discussion in Britain. It is in Britain, a weak link in the capitalist chain, where we
already see the central arguments which the bourgeoisie intends to use to begin its
attack on the working class. The working class has been divided into two types. There
are those who are productive workers, and are good for capitalism as they produce
profitable (marketable) goods, and those who are unproductive workers, who are bad
as they consume too large a share of the profits produced. It turns out that the major
part of unproductive workers are employed in the state sector. As the state sector has
been growing and is seen as a primary cause of inflation, the very simple proposition
has been put forward that too much investment is going into sectors of the economy
employing unproductive workers. This fact underlies the present crisis of capitalism.
And so the call and cry has gone out to massively reduce the numbers of unproductive
worker. A larger part of society's investment must go into the profitable sector and
relatively more productive workers must be employed.

This view is shared by both the right and the left in Britain today. This is a very
important trend and a very dangerous one. The ruling class needs to split the working
class into productive and unproductive workers as a prelude to attacking all workers.
It has no obvious allies to aid it in the form, for example, of a conservative peasantry
which would support the ruling class in its attack on the working class. So it must
split the working class. And it has developed the ideological basis for doing this from
the division between productive and unproductive workers.

The most extreme right-wing view of this kind has been put forward by a monetarist
who is now the leading adviser to the conservative opposition in Britain, Sir Keith
Joseph. It is worth quoting from him to show how this issue has become a very real
question in the minds of these who will attempt to solve the crisis at the expense of
the working class. He says:

"Yet is there any substitute for the entrepreneur, from the one-man businessman to the
tycoon? Someone has to create the wealth. State enterprise has yet to do so. Until now
it has lived off the surplus created by the private sector. But as the state sector grows
– and a new subsidised private sector with it, designed to perpetuate occupational
population patterns inherited from the industrial revolution – the private sector is in
danger of collapsing under the burden." [3]

Here we see the perversity of it all. We see a return to the standpoint of Adam Smith.
Sir Keith Joseph is calling for a new bourgeois revolution in the period of the decay
of the capitalist mode of production. He calls for a new bourgeois revolution to solve
the present crisis of capitalism.

The real problem is the enormously growing state sector. What we have to do is
return industry to private capital, and not only to private capital but to that special
individual the entrepreneur. The situation has got so bad for the bourgeoisie that they
dare say that someone has to create the wealth and suggest that this is the
entrepreneur. So you see the stand and the lengths that the bourgeoisie has to go to try
and justify its present positions.

I want to leave the discussion of these central problems connected with the
appearances of capitalist production and how they give tremendous strength to the
views of the bourgeoisie about the nature of the present crisis. I shall now discuss
briefly what a theory of crisis should actually attempt to do, what it should show and
so on.

The components of a theory of crisis

There are three aspects to the theory of crisis. The first, from a Marxist standpoint, is
to show that socialism is possible, that it is not some utopian viewpoint, but is
scientifically grounded in the development of capitalism itself. So the idea of social
planning, the idea of running an economy on the lines of a socialised economy, not on
the lines of private enterprise, the idea of planning for people's needs rather than to
produce for profit, has to be something that is possible. The theory of crisis has to
show how all tendencies in capitalism itself indicate that socialism actually is a
possibility, that it is not a utopian dream.

The second aspect is to show that socialism is a necessity. That is that the problems
facing the working class, and in that sense the mass of the population, are not
resolvable within capitalism. Capitalism cannot solve the basic problems facing
humanity. So the second aspect of the theory of crisis is that socialism must be
necessary if the basic problems facing the working class are to be resolved.

The third question that must be answered is why, in a period of capitalist decay which
has lasted since the beginning of the twentieth century, is it that we still have
capitalism? Why is it that the dominant views in the working class movement are
those of the reformists, who hold the position that capitalism, with better or more
radical government, can resolve the problems facing the working class? Why is it that
these views generally have been accepted in the working class movement and why
has revolutionary Marxism so far been rejected? The first part of my talk was to give
part of an answer to this question, to actually show that it is the way that capitalism
appears to those who are involved in production, distribution and so on, which gives
tremendous strength to bourgeois ideas about the nature of the capitalist system. If we
look at our own time, the period of the post-war boom, we can see that ideas, to the
effect that the state can act in a neutral way in the interests of all sections of the
population and not just the ruling class, have been given tremendous strength by the
enormous growth of production over the last twenty or thirty years, and the increasing
role the state has played in the capitalist economy. It seems to be the case that the
state can play a leading role, can attempt to redistribute income in the interests of the
working class. Scientific Marxism is required to combat such views. To show this I
shall first of all examine incorrect theories of crisis, and then briefly discuss the
Marxian theory of crisis before going on to the question of the capitalist state.

Incorrect views of the capitalist crisis

The first incorrect view of the crisis I want to deal with has generally been called an
underconsumptionist view of crisis. This theory argues that an increase in
consumption – if, for example, the state increases its expenditure – can rescue the
crisis. This is because the crisis is primarily due to the lack of consuming power in
society. In classical times Malthus argued a view that was similar to this, except that
he wanted the unproductive consumption of landlords and the aristocracy to increase.
Today we have the state that can play a central role for this argument. If the state can
increase its expenditure, if it can be a stimulus to production, then the crisis can be
overcome.

An underconsumptionist view of the crisis, the theory of the permanent arms

economy, has been put forward by Michael Kidron and Tony Cliff to explain the post-
war boom. [4] It explains the generation of the post-war boom as being due to the
growth of arms expenditure. The reformist implications of this standpoint have never
been grasped by the writers. Nevertheless others have taken a similar view with
regard to all state expenditure rather than a particular component of it. They see a
solution to the present crisis with the state increasing its interventionist role in the
capitalist economy, rather than decreasing it. This is the dominant view in the British
labour movement. The state has to increase its involvement in manufacturing industry
or extend Public Works if the crisis is to be solved and unemployment reduced. The
argument is often put in the following way by, for example, the Communist Party of
Great Britain and many other groups on the radical left: if you reduce the wages of the
working class or the expenditure of the state then it will make matters worse. By
reducing overall consuming power, less will be spent on the commodities produced
and as a result the capitalists will not be able to sell their commodities. They will
cease to invest and unemployment will increase. This is a viewpoint that has been put
forward very strongly in the recent period. It is in fact nonsense because what the
capitalists are concerned about is selling their commodities at a profit not just selling
their commodities. The condition for investment to increase is precisely an increase of
unemployment and a reduction of wages below the value of labour power. These are
the conditions necessary for the capitalists to restore the rate of profit.

Another incorrect view of the capitalist crisis has been put forward by among others
Glyn and Sutcliffe. They explain the crisis as being due to two factors. One is
increasing international competition making it more and more difficult for cost
increases to be passed on in the final prices of the product to be sold. The other is the
main increase of costs, the growing wages of the working class, resulting from the
increased combativity of the working class movement leading to both direct increases
and indirect increases through changes of the 'social wage'. [5] So you have a squeeze
on profits, a squeeze which is due to competition preventing prices going up on the
one hand, and wages eating into profits on the other. This view is a view which is
almost identical to the arguments put forward by Adam Smith. The difference is that
in those far off days the problem was not the inability to pass on rising costs by
increasing prices, that is of competition preventing prices being raised, but of
competition driving prices down. The fall in profits then was said to be due to
competition driving prices down while wages more or less remained the same or
increased as accumulation accelerated. The bourgeoisie saw the real problem as too
much competition and too high wages. Today we have the same basic argument.
Profits are falling because international competition is preventing prices going up
sufficiently and wages are too high. Marx once said that history repeats itself, 'the first
time as tragedy, the second as farce'. Today we see the farce of the crude repetition of
views long since criticised and rejected. We need to examine Marx's theory of crisis
to lay the foundation of a critique of the above views.

The Marxian theory of crisis

I now briefly want to examine the Marxian theory of crisis, The point about capitalist
production is that it is production for profit. A commodity is not merely a use-value
but also a value, an exchange-value. Commodities are not produced unless they make
a profit for the capitalist class. Labour is employed by capital to increase the profits of
the capitalist class or to lead to the realisation of these profits. The commodity is
therefore a use-value and an exchange-value. Now if you increase the productivity of
labour, which means that you produce more commodities in the same time, the value
of the individual commodity falls. This is a critical point. By increasing the
productivity of labour it means that the same commodities contain less value than
before. So you have to produce more commodities to have more value than before.
This expresses itself by the fact that to produce the same values as before, capital
investment has to be continually increased. This is because increases in the
productivity of labour mean that less labour is employed by a given amount of capital.
If capital investment did not increase then the values produced would not increase,
accumulation would not take place and unemployment would grow. So that
increasing the productivity of labour is a contradictory process for capital. Many more
use-values are produced, but each use-value contains less value. An increase in the
productivity of labour is expressed, under capitalist conditions of production, as a rise
in the organic composition of capital. That is, more capital is invested as constant
capital, on machinery and raw materials than as variable capital, that is paid out as
wages for productive workers. So that an increase in the productivity of labour
involves an increase in the organic composition of capital, this value relation between
fixed capital and raw materials, and labour employed. Profits arise out of the
exploitation of workers alone. However the rate of profit is measured over the total
capital invested not just that invested in labour power. So that as productivity
increases, there are relatively fewer workers exploited by a given amount of capital
and a larger cost of machinery etc over which to measure the rate of profit. This
means that there is a tendency of the rate of profit to fall. This is (the basis of) Marx's
theory of the tendency of the rate of profit to fall. [6] It is a form of the theory which
classical political economy could not discover, and it is a theory that is just as much
rejected today because of its revolutionary implications as it was after Marx's time.

The tendency of the rate of profit to fall is an expression of the central contradiction
of capitalist production. The more capital is invested, the more the tendency of the
rate of profit to fall asserts itself. The important point is this, that an increase in the
productivity of labour means in Marx's analysis an increase in the rate of exploitation
of the working class. This is because less time is needed to reproduce what the
workers require, more time of the working day is available for profits. But the same
process which increases the rate of exploitation of the working class expresses itself
as a fall in the rate of profit. So the rate of profit falls not because workers are less
exploited and wages rise but because they are more exploited and the value of labour
power falls. And that expresses in heightened form the contradiction of the capitalist
system of production. This is really Marx's revolutionary contribution. Because of this
at a certain stage in the accumulation process when capital has invested too much in
relation to the rate of exploitation, profits are continually rising but not sufficiently for
the amount of total capital invested, at a certain stage in this process the capitalist
crisis occurs, and the crisis is an indication that capital has been overaccumulated.
Too much is invested given the mass of profits produced. Too much is invested given
the rate of exploitation of labour.

The capitalist crisis

The capitalist crisis is both the expression of the contradictions of capitalism, an

expression of the disease of a system, and of the way capitalism attempts to cure itself
internally. It is both the disease and at the same time the way to a cure. Too much
capital has been invested, and in the crisis capital is destroyed as capital, machinery
and buildings are not used and capital is written off. Firms are forced out of business
and become bankrupt. A large amount of capital in the crisis no longer functions as
capital and can lay claim to the mass of profits produced. The amount of capital
laying a claim to the mass of profits is reduced. In the crisis the process of
concentration and centralisation of capital takes place. In general it is only the more
productive capitals that survive, the least efficient go to the wall first, become
bankrupt first. Large firms buy up small firms in this process where only the most
efficient survive. In the crisis unemployment begins to increase, and capitalists are in
a stronger position to force the working class to accept a reduction of wages below the
normal value of labour power, below the normal levels that have been achieved in
previous periods. In that sense the rate of profit can be increased because of the
reduction of wages below the value of labour power.

The capitalist crisis begins to create the conditions for a new period of capital
accumulation. It reduces wages below the value of labour power, it destroys less
efficient capitals, and in this way attempts to restore the rate of profit for capital.
Whether it can do this or not, whether capital can reduce wages below the value of
labour power, and is able to discipline the working class to work at a higher level of
intensity and so on, is a political question. Every crisis poses before the capitalist
system the question as to whether it can survive, whether it can go on to a new round
of capital accumulation.

We are now able to understand the significance of the two world wars within this
context of the capitalist crisis. During the whole inter-war period, it became clear that
the first World War alone and the great depression were not able to resolve the crisis
of capitalism, to usher in a new period of capital accumulation. In spite of the massive
destruction of capital, and very high levels of unemployment during the inter-war
years the working class was still too strong. The Russian revolution had had a major
effect on working class resistance to the capitalists in the whole of Europe up to the
early 1930s. So the actual effects of the First World War and the period after the war
were insufficient to restore profitability. It took a Second World War and the defeats
of the working class expressed by the victory of fascism to recreate these conditions.
I wish to go over the factors, briefly, which were important at the end of the Second
World War. First of all we have the massive destruction of capital in the war itself.
Secondly we had, in the period before the war and leading up to the war, the greatest
defeats of the working class in its history. Fascism and war itself were expressions of
those defeats. Perhaps the conditions were laid for those defeats when the main
leaders of the working class movement in Europe decided to support their own
capitalist class and participated in the war between the major capitalist states. The
major exceptions to this were the Bolsheviks in Russia. However fascism and war
resulted from the crushing blows struck against the Italian, Spanish, German,
Japanese and French working class. After the war in Japan and Germany, the working
class having been defeated could be controlled and easily 'persuaded' into acceptance
of a new period of capital accumulation. The rate of profit, for example, in Germany,
once reconstruction began after the war, was the highest that is has ever been in its
history. The governments carrying through this process, and this was true for Japan,
could be right-wing conservative ones.

In those countries where the working class had not been defeated by fascism or where
the bourgeoisie had been thoroughly compromised through its relationship with the
fascists it was the actual ability to integrate the leadership of the working class that
was central in the reconstruction period. This occurred through the social democratic
party in Britain, the Labour Party, and in France and Italy, by bringing the Communist
Party into government. This process was necessary if capital was to be able to achieve
the conditions, including a low level of wages, that were necessary for the restoration
of capital accumulation.

The third and equally important factor was that the inter-imperialist rivalries which
expressed themselves in battles between the major advanced capitalist powers during
the Second World War were temporarily overcome by the end of the Second World
War. One country dominated and dictated to the world economy, the United States of
America. In other words the conflict between capitalist nations had provisionally been
resolved by one country dominating the capitalist world. This process has a vivid
statistical expression. Just before the Second World War, the US share of world
industrial output in 1937 was 41%. By 1953 it had increased to 52%. Today, it is
below the 1937 figure at approximately 40%. In other words the conditions before the
Second World War are actually the conditions in terms of world industrial power
which are beginning to be established again today. For example, the EEC's share of
world industrial output in 1937 was 22%, it fell to 16% in 1953 after the war and by
1970 it was back to the pre-war level of 22%. It is possible to confirm this picture by
looking at statistics for the export of goods and the export of capital as well as other
factors. The conditions of world power over the post-war boom have led to a situation
that is very similar to that before the Second World War. Only the situation of Japan
and Britain Japan has seen a considerable growth and Britain a continual decline. [7]
have changed.

After the Second World War the dominance of the US was a major factor in the
recovery of the capitalist system. The US could give credits to Germany and Japan
once that it had decided to rebuild these nations' economies again in view of the threat
that the extension of nationalised property relations into Eastern Europe posed for the
capitalist system. The conditions for profitable capital accumulation existed, what was
lacking was the funds and the US could provide them. So that the destruction of the
war, the existence of a working class which had been defeated or could be 'persuaded'
into acceptance of a new period of capital accumulation, and the dominance by one
country of the world economy laid the basis for the post-war boom.

State expenditure and the post-war boom

One dominant feature of the post-war boom, in particular during the last 10 to 15
years, has been the growth of the state's role in the capitalist economy. The rest of my
discussion will be concerned with the contradictions of state expenditure. I shall
examine just what those contradictions are and see why the growth of state
expenditure is not responsible for inflation. I shall show why the present crisis is a
severe crisis for capitalism and how it can reach classical proportions in the not too
distant future.

For a whole period of time capital has attempted to overcome the fall of the rate of
profit by pushing up prices to levels which, in monetary terms, maintain the rate of
profit. To do this it was necessary to have a continual process of credit expansion
which the inter-involvement of capitalist firms with the banks and the state made
possible. The necessary conditions for the capitalists to sell their commodities at
prices higher than those really merited by the conditions of production is that credit
has to be extended in one form or another to allow these higher prices to be realised,
that is to allow commodities to be sold at the higher prices. If credit is not extended,
the commodities would not be sold and the real conditions of production would
express themselves by a severe fall in the rate of profit.

What the capitalists are attempting to do when they increase their prices is to
overcome this fall in the rate of profit. They do not increase prices to make super-
profits as the monopoly profit theories of inflation would have it, but to try and
maintain conditions of profitability in a situation where the rate of profit is falling. In
the period between the two world wars, in fact from around 1895 onwards, we have a
continuous increase of prices, outside the years of the great depression, in spite of the
large increases in the productivity of labour taking place. The reason for this was that
production was allowed to expand by the extensive use of credit, so that capitalists
could attempt to maintain their rate of profit by increasing prices. But the growth of
credit does not cause the increase of prices, rather the growth of credit is necessary if
these prices are to be realised, that is if the commodities are to be sold at these prices.
If credit was not extended the individual capitalist would be immediately faced with a
severe fall of the rate of profit and would cease to invest so precipitating a severe
crisis. The expansion of credit postpones the crisis. Production is allowed to expand
through the expansion of credit.

After the Second World War, however, this process alone was insufficient to keep
capital accumulating at an adequate rate. The state itself, more and more, had to play
a significant role in stimulating production, in particular through deficit financing and
in guaranteeing the conditions [for] capital accumulation itself. [8] And it is to this
process I now wish to turn.

State expenditure by allowing the crisis to be postponed, exacerbates the very

conditions that made state expenditure necessary, that is the tendency of the rate of
profit to fall. This is really what is central to my position on state expenditure. State
expenditure, by postponing the immediate consequences of the fall in the rate of
profit, by allowing capital accumulation to expand, necessitates an increase of credit
and therefore the money supply to finance its own expenditure. In such a way the
state maintains the general conditions of capital accumulation, and supports the
attempts of capital to stave off the fall in the rate of profit. However it is just this
process which is a contradictory one.

In spite of the intervention of the state the rate of return on capital (this gives some
empirical indication as to what is happening to the overall rate of profit of capital) has
been continually falling over the main part of the post-war period, in particular since
about 1958-60 onwards. The capitalist does not experience the rate of profit falling
directly, rather it is experienced as a continual rise in costs. The next part examines
the role of the state in this process.

The first point about state expenditure is that it is usually associated with a so-called
full employment policy. That is, the capitalist state did not allow unemployment to
increase to the levels that existed in the inter-war years. This is a part of the cost paid
for integrating the working class in the process of restoration of capitalist production
after the war and of keeping the institutions etc of the class tied to the machinery of
the state. The point about a 'full' employment policy is that it means that once the
process of capital accumulation is underway, the capitalist is not able to reduce wages
below the value of labour power as a means of restoring the rate of profit. Because
most workers are employed the capitalists do not have the strength to force wages
down. However, real wages after tax in most advanced capitalist countries have risen
at a rate below that of productivity growth although the standard of living of workers,
in the sense of use-values consumed has increased. This means that the value of
labour power has continually fallen in spite of increases in the standard of living.
Values and use-values are not the same thing. The more you increase the productivity
of labour the more use-values you produce in the same time so that each commodity
contains less value than before. So according to this argument what has happened is
that the value of labour power has fallen and there has been an increase in the rate of
exploitation in spite of the improvement in living standards. So to return to the central
argument, one method has not been available to the capitalist class to restore the rate
of profit and that is to reduce the standard of living of the working class by reducing
wages below the value of labour power. This means that the only way open to the
individual capitalist to increase profits is to increase the productivity of labour, to
continually create conditions which allow the reproduction requirements of the
working class, the consumption goods etc, to be produced in less time than before, i.e.
by increasing the rate of exploitation. And this very method of increasing the
productivity of labour leads for capital as a whole to a fall in the rate of profit. So the
fact that the state has a 'full' employment policy means that the tendencies in capitalist
society to increase the productivity of labour are strengthened and this accentuates the
tendency of the rate of profit to fall.

The second point in relation to state expenditure involves the effect of the increase of
social services and welfare expenditure are on the rate of profit of individual capital.
We must make a distinction here between the general rate of profit and the rate of
profit of the individual capitalist. The general rate of profit is calculated from the total
profits (surplus-value) produced over the total capital invested, but the individual
capitalist has to pay part of his profit to the banks as interest for money borrowed, and
a contribution to taxation to finance the expenditure of the capitalist state itself. So the
general rate of profit falls, but the individual rate of profit falls further because of
increased deductions for interest as borrowing increases and as the state's expenditure
grows. The next section will examine the growth of the state sector.

We must examine first what social services are, what it is to give higher pensions and
unemployment benefit, what it is to increase health and education expenditure and so
on. Is it an increase in the wages of the working class? Does it contribute to capital
accumulation and make profits for the capitalist class? My general answer to these
questions is that far from increasing the profits of the capitalist class, these
expenditures are a deduction from these profits. I want to concentrate on health and
education expenditure because the role of unemployment benefits and pensions are
reasonably clear. People who get pensions do not produce surplus-value for the
capitalist. Neither do the unemployed make any contribution to profit making. So we
can regard these expenditures as a cost to capital, as a deduction from surplus value.
We reject the concept of a 'social wage' to cover this expenditure. These expenditures
do not form part of the variable capital (capital invested in labour power for the
purpose of increasing profits) and in general are so low in relation to the average
working wage that they do not, in any sense, merit the designation wage, let alone
'social'. However, health and education are more complex. I shall examine them in
some detail.

To begin with education. What does education do? What has its expansion achieved?
Well, my argument is that a very small amount of education is useful for capitalist
production in the sense of increasing value and surplus value. Education of course
plays an ideological role. But most of it is useless as far as production is concerned.
This is why there has been a move in most capitalist countries to cut down
expenditure on the university sector and expand on the more 'technical' sectors. It
becomes clear, for example, that universities cannot produce a very useful product for
capitalist industry when the rate of profit is falling and the crisis is deepening. During
the period of the post-war boom, with the enormous increase of the mass of profits,
the situation seems to be a reasonable one, and the bourgeoisie could be 'liberal' about
education and was prepared to extend the university and other sectors of education.
But once the crisis begins to assert itself, the call is raised to cut down the length of
courses in those countries such as Germany, where courses extended over many
years, to the three years which is normal in Britain. The 'advantages' of three-year
courses are suddenly being recognised in a number of countries in Europe at the
present time. The reason for this is that the extra years are not only useless as far as
profitable production is concerned but very costly as well. Most education
expenditure does not help once capitalism begins to move into a crisis situation and
so, with or without the best of liberal intentions, it will be cut back.

A small part of education expenditure increases the value of labour power without
directly increasing the surplus value produced. Those who are engaged with training
productive workers are involved with changing the special commodity labour power
itself. The production of this special commodity labour power differs from the
production of other commodities. What is involved is the training of a worker who is
then going to sell his labour power to the capitalist to be exploited in the process of
production. Now if this labour power contains an element of surplus value, an element
of profit, then the capitalist who buys that labour power will be paying more than is
necessary. He will be paying for labour power which contains an extra element of
profit. And this the capitalist class is not prepared to do. They can also avoid doing
this. If labour power with a particular skill becomes too expensive, you can do away
with using that skill, you can introduce another method of production which does not
need that skill. You'll find, for example in industries like computers and other
industries associated with the so-called technological revolution that at one stage you
had people working there and carrying out basic processes who were university
trained. Today the time has come where they can do away with most of these skills
altogether and workers who have had an ordinary education (secondary school) can
usually work in these industries. That is an indication of how capital determines
whether it is going to pay surplus value as part of labour power or not. In general it
won't do it, and in general this is the reason that the state has taken over education.
Because the state is an employer that does not have to make a profit. The capitalist
has to, the state does not have to, and in this sense the state will take over education.
In the case of education or training which increases the value of labour power and the
productivity of labour the costs of education may be partially offset by the increase in
productivity,

But I would argue that most education is not of this kind, most education is of the
kind which is not contributing anyway to increasing the value of labour power or its
value creating capacity. Further, most workers in capitalist society today are
unproductive workers. They are a majority now, and this means that most education is
going on unproductive workers anyway.

So for all these reasons I would argue that education expenditure as a whole does not
contribute to the increase of profits. Therefore the growth of the education sector is a
deduction from the mass of profits, which means that the rate of profit of the
individual capitalists falls further than it would otherwise do if this was not the case.

The same is true of health, except that there are no ways in which health can offset the
costs involved. Health is merely a cost to capital. Where it is involved with productive
workers all it does is increase the value of labour power, without increasing the mass
of profits. And in this sense health will reduce the rate of profit. In the case of
unproductive workers it reduces the mass of profits without increasing the value of
labour power. As far as the police, the growing administration in the state sector, the
obvious unproductive workers are concerned this is merely a reduction of the mass of
profits of individual capital.

So the financing of the state sector which is necessary to pay for this growth is a
deduction from the growing mass of profits. A deduction from an already insufficient
mass of profits, in relation to the total amount of capitol which has been invested. The
individual capitalist finds himself with a smaller rate of profit than the already falling
general rate of profit.

This is the situation with the social services and in fact most of the state sector. An
exception to this is the nationalised industries – these industries which the state takes
over, and by taking them over guarantees the basic inputs, steel, electricity, postage,
gas and so on, to the capitalist class at a cheaper rate. In most advanced capitalist
countries, the capitalists would not be able to produce these basic inputs at a profit.
The state takes them over or subsidises them as the state is able to produce at a lower
than average rate of profit, or making no profits at all. It is very hard to decide which
is the case because the pricing policies of these industries are such that they are a
subsidy to the capitalist class, to the large corporations which use them.

How is the state sector financed, is the final question in dealing with the
contradictions of state expenditure. It is financed either out of taxation, or through
deficit financing, that is future taxation, because if you borrow money it has to be paid
back, and the main revenue of the state comes through taxation. In fact, the deficit is,
in most capitalist countries, continually increasing. Taxation obviously falls on the
working class as well. That is, the working class pays taxes. But it is more correct to
see taxation as a deduction from the profits of the capitalist class. If the working class
maintains its real standard of living, that is, through the class struggle itself the
working class can maintain its real wages after tax, or if the real wages after tax grow
slightly with productivity increases, then taxation is a deduction from the capitalists'
profits.

So in spite of the fact that in most advanced capitalist countries, as the rate of profit
has been falling, taxes on corporations have been reduced enormously, to the extent
that the leading journal of the bourgeoisie (in Britain), The Economist, actually
admitted that there is no point in reducing corporation tax (tax on profits of industry)
any more, because they were paying so little anyway, they still have to pay gross
wages to the working class and it is that part of taxation which is quite vital. This is
where the class struggle becomes important. Because if you are introducing incomes
policies, wage freezes, social contracts (the latter is what we have in Britain at the
present time) what you are attempting to do is to make sure that, as inflation
increases, more and more of the

growth of taxation falls on the working class and is actually a deduction from working
class wages. This occurs when taxation allowances do not increase as fast as inflation.
And if this is the case, then inflation becomes a tax on the working class. You will
find that in most capitalist countries the share of taxes falling on the working class has
increased enormously. This has meant that more and more workers, who have never
paid tax before are actually paying it now. The class struggle determines the outcome
of this process.

What I have attempted to show is how the growth of the state is a necessary condition
for allowing capital accumulation to proceed. But its cozy existence accentuates the
tendency of the rate of profit to fall. The full-employment policies, the fact that a
large share of the growing

surplus value has to go to the state, means that the rate of profit falls faster than would
otherwise be the case for the individual capitalist. But the rate of profit does not fall
because of the growth of state expenditure. The rate of profit falls because of the
contradictions within capital accumulation itself. The actual attempt to overcome
those contradictions, to maintain accumulation in conditions where it is not viable
given the real conditions of production, the attempt to do this actually makes the
problem worse. It accelerates the tendency of the rate of profit to fall.

I have argued that as productivity increases, less and less workers are employed by a
given amount of capital. Without the intervention of the state sector unemployment
would therefore increase with the growth of the productivity of labour. Private capital
would not increase investment sufficiently to maintain full employment given the
falling rates of profit. The growth of state expenditure and the maintenance of 'full'
employment exacerbates this process, as I have just shown. It makes increases in the
productivity of labour all the more essential if the individual capitalist is to increase
profits. So that at every stage the capitalist state has to increase its expenditure if full
employment is to be maintained. Again we see that the process is a self defeating one.

At a certain stage the growth of state expenditure is insufficient to offset the relative
stagnation of accumulation in the private sector. In spite of the fact that the state
sector is growing faster than the overall growth of production, it is insufficient to
compensate for the fall in employment in the private sector. Inflation and
unemployment increase together. The extension of credit and the extension of state
expenditure merely lead to an increase of inflation. They do nothing else.

What it means is that we have reached a stage where even the growth of credit and of
state expenditure will no longer allow profits to be increased significantly enough for
the capitalist to continue to invest. The whole post-war period has avoided a crisis
precisely because it has allowed accumulation to go on, capitalists to expand in
conditions where, in fact, the real conditions of profitability did not merit this. But it
expressed itself not as an immediate fall in production and increase of unemployment,
but as rising costs or rising inflation. Each stage of attempting to avoid the crisis
meant that more and more credit was thrown into the economy, the state sector was
made to increase more and more, and the capitalists had to push up their prices more
and more to maintain their profits.

And slowly but surely the rate of inflation gathered momentum, and we are in a
situation where in the recent period the rate of inflation has doubled every two years.
That is what has occurred. What it means is that no growth of state expenditure now,
no expansion of credit will bring about an increase of profitable production. And so
there is only one answer to resolve this crisis and that is to re-establish the conditions
for a higher rate of profit. And those are two-fold:

One is massive unemployment, to force down wages below the value of labour power.
That is to go against those very conditions that the capitalist state has engendered as
part of the 'full' employment policy, to increase unemployment massively, to reduce
wages massively below the value of labour power. So that what is facing the working
class is a large reduction in the standard of living.

And the second is that capital has to be completely and utterly restructured. That is,
the less efficient capitals have to be literally destroyed, have to go out of the market,
there has to be a major now round of concentration and centralisation of capital.

This problem is not a national problem, it is a world problem. The problem we are
seeing is reflected in the growth of inter-imperialist rivalries again on a world scale.
The concentration now has reached a stage where we are not talking about small firms
merging in individual capitalist countries, but of massive concentrations of capital
that actually have a worldwide domain. The situation we have reached is one where
we can say that the conditions internationally that existed before the first world war
have much more in common with today's conditions than the period since the war.
In fact, we are entering a situation in which nations have to try and get their working
class to accept the kind of struggles that have been taking place in the past and the
question of war between nation states is posed all over again. Because the only way
the capitalist class can begin to obtain the profits required to restore its rate of profit is
in terms of a worldwide change in the balance of power for capitals. This means, as
far as I am concerned, a tendency towards protectionism, import controls, and if the
situation develops further, a tendency for these antagonisms to be expressed once
more in the form of war. This is not exaggerating. We should remember the words of
Mr Kissinger on the question of the Middle East, where they were actually talking in
terms of sending in the imperialist armies, in particular the US army, to try and deal
with this problem of rising oil prices in the way they know best. More and more the
question of protectionism and import controls has become a major issue in the daily
newspapers, and indeed in the working class movement itself.

And so with the profits falling to the degree they are, with the fact that the state in its
traditional role can no longer increase profitable accumulation, the fact that credit
policies will no longer work in the degree that they did in the past – the conditions for
this do not exist – we are now seeing a return of classical crisis conditions. So that
now we have an attack on the growth of state expenditure, the very growth which
helped maintain capital accumulation over the post-war period. There is an attack on
state expenditure, it has to be cut down, says the capitalist class, and in particular an
attack on the workers who work in that sector.

On the other hand, there is also an attack on the workers who work in all sectors in the
sense that wages, say the capitalist class, are much too high. What we see is an
attempt to restructure capital to a greater profitability. And it must take the expression
of a growing and growing crisis. Because any increase in state expenditure, any
reflation of the world economy will accelerate the rate of inflation. That has reached
proportions now where it itself is threatening social stability, so the whole reason for
the growth of state expenditure is now at an end. The very way of actually ensuring
social stability has now led, in a contradictory manner, to results which threaten social
stability. So that is the impasse capital finds itself in. Either you reduce inflation and
cut state expenditure, which means massive unemployment again together with cuts
in social services and all the hardships this implies. Or you maintain employment and
adequate state expenditure levels and accept a massive increase in inflation, which
leads to all the problems of financing capitalist industry and state expenditure which
have existed over the last few years. Capital has reached an impasse.

David Yaffe
20.2.76
NOTES

1. Marx and Modern Economics ed. David Horowitz, MacGibbon and Kee 1968.
2. For a discussion of this and what follows see Peter Howell 'Once again on
Productive and Unproductive Labour' in Revolutionary Communist 3/4, Nov. 1975
pp46 ff.
3. New Statesman April 1975 p502
4. See Michael Kidron, Western Capitalism Since the War, Penguin 1970, and T.
Cliff, 'Perspectives of the Permanent War Economy', Socialist Review 1957. For a
critique of the underconsumptionist position see D. Yaffe 'The Marxian theory of
crisis, capital and the state' in Economy and Society Vol.2 No.2 May l973, also P.
Howell op cit for a refutation of Kidron's standpoint.
5. See Glyn and Sutcliffe, British Capitalism, Workers and the Profits Squeeze,
Penguin 1972 and Glyn 'Notes on the Profits Squeeze' in the Bulletin of the
Conference of Socialist Economists Feb 1975 Vol.IV No.1. For a critique see Paul
Bullock and David Yaffe, 'Inflation, the Crisis and the Post-War Boom' in
Revolutionary Communist 3/4, Nov. 1975 pp5-46.
6. For a full discussion of this see ibid pp13-22 and David Yaffe 'The Marxian
theory...' op cit pp193-207.
7. See Bullock and Yaffe op cit pp37-40 for the relevant statistics and discussion.
8. See ibid for a full discussion of the role of the state, pp31-35.

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