From boom to war?

Massive state intervention will produce intensified inter-imperialist rivalry, writes Mike Macnair. The system of crises can only be superseded through the international struggle for communism

The US House of Representatives rejected the revised version of the US treasury plan to bail out Wall Street, leading to a 7% fall on the stock exchange overnight. Meanwhile, several banks were nationalised to save them from collapse - Bradford & Bingley in the UK, Glitnir in Iceland and Fortis in Belgium. And there was a run last week on the Hong Kong-based Bank of East Asia. Central banks and treasuries are pumping enormous amounts of money into the system to keep it afloat.

“Staring into the abyss” has become a cliché of the financial pages. What it means is that there is a real risk that without state intervention most of the banking and credit system will collapse, leading to vast numbers of workplaces shutting, most people losing any money they have in bank accounts and not getting paid at the end of the week. Something like this happened in Argentina in 2001 and a milder version happened in the US in 1929-30.

This sort of crisis is no longer quite unthinkable. But the capitalist states will do all they can to avert it: even if that means nationalisation of the whole banking sector, shutting down the financial markets, and/or a presidential or military coup in the US against the Congress and Supreme Court to override political resistance. We are not - quite - at that point in the game, and it seems overwhelmingly likely that whatever bail-outs are needed to avoid it will be agreed before we get to it.

Meanwhile, it is now clear that - contrary to the recent arguments of Permanent Revolution, still last week defended by Bill Jefferies1 - this financial crisis will not be shrugged off by the ‘real economy’. Ireland and New Zealand are already in technical recession (six months of zero growth or declining output). Zero growth in the UK in the second quarter (April-June) is confirmed in the most recent revision of the figures. Third quarter (July-September) figures are likely to be worse. Japan is in a similar situation: output declined in the second quarter and is expected to do so again in the third.2 Relatively optimistic economic commentators are now predicting a recession stretching into 2010. Influential ‘decoupling’ claims - that a crisis in the US would not hit the Asian economies - are characterised as a ‘myth’ by the Asia Development Bank.3

Amidst the extreme uncertainty, the ‘blame game’ has begun. Is the problem greedy bankers and speculators (as George Galloway, among others, says4)? Insufficient or defective regulation of the financial industry? Neoliberalism in general, as Will Hutton and those like him5 argue? Globalisation? - and so on.

The blame game is intimately related to the question of what should be done. Is there a way out of the crisis? What alternative could avoid the extraordinary phenomenon of the bursting of a financial bubble carrying with it severe consequences for the ‘real economy’: that is, for ordinary people’s livelihoods?

In fact, financial crises triggering recessions are normal for capitalism, and no amount of regulation or moralising about greedy bankers will get rid of them. The ‘mild’ cycles of the 1950s and 60s resulted from the acute military-political-economic crisis of 1939-45, together with the major concessions to labour which capital made after 1945. A ‘reformist’ turn to statist and nationalist solutions now is likely to shift the internal contradictions of capital towards international contradictions between capitalist states, and lead us towards a new global war.

The only way to escape from the boom-bust cycle is to get beyond capitalism. But to do so requires that the working class lays collective hands on the physical means of production worldwide and begins democratic decision-making about how they should be used, based on accounting primarily in terms of physical goods and services rather than of the money form. This, in turn, requires the overthrow of the international capitalist state system.

At present the organised workers’ movement is too weak, both organisationally and politically, to challenge for power. In the meantime we face the task of rebuilding the most basic forms of workers’ organisation for self-defence against the consequences of recession, after these forms have been allowed to decay under the ascendancy of the bureaucratic and nationalist left.

The rest of this article is a simplified (maybe oversimplified) attempt to explain those parts of basic Marxist ideas which support these conclusions.


The ‘real economy’ consists of six and a half billion people around the world engaged in a wide variety of productive activities and providing services to others and/or in consuming the output of these activities. At the margins of the capitalist economy, around two and a half billion are subsistence peasants: most of the rest are fully integrated, directly or indirectly, in capitalist market society.

Beyond isolated hunter-gatherer life and subsistence agriculture, the world is dominated by an extended and complex material division of labour.6 Except the very poorest peasants, and the most isolated indigenous populations, no-one is outside the global division of labour. For example, even the simplest iron and steel tools made by local smiths involve supply from the outside iron industry which is - in the modern world - structured by states and markets.

The division of labour implies the need for mechanisms to coordinate people’s different activities. These activities only when combined produce a livable result. For a very simple example, if too much human labour time was spent building monuments (whether pyramids or office blocks) and not enough growing food, the builders would starve.

At the very deep roots of capitalist society is the fact that this coordination is accomplished - imperfectly - through the money mechanism. I do not grow my own food, weave my own clothes, etc: I work for a money wage (salary) and buy the goods I need.

The underlying principle of money is that participants in the market exchange equal quantities of (average, socially necessary) labour time. Without this principle, the aggregate price of food - for example - could fall below its aggregate cost of production, so that the farmers stop producing more than they need for themselves and the rest of us starve. This principle could provide immediate feedback on prices in a low-surplus economy. But in a complex economy it is highly mediated: money prices diverge extensively from labour values, and this divergence only reappears as a problem in the form of the boom-bust cycle.

In order for money to work as a means of coordinating all our different activities under the division of labour, it has to be a means of exchange; and this implies that it has to be not merely a measure of value but also a store of value. If wages ceased to be worth anything between the date at which the worker was paid and the date at which he or she needed to use the money to buy things, the economy would again be dislocated: this is what happens in hyper-inflation, as in Zimbabwe recently. In order to function as a store of value, money has to be limited in quantity.

It should already be apparent that crises in the monetary system will inherently have effects in the ‘real economy’. Money is the means by which the diverse productive activities in the ‘real economy’ are coordinated: if the money mechanism for some reason breaks down, so will the coordination, leading to problems in the ‘real economy’.

Savings and credit

The fact that money functions as a store of value has longer-term implications. Societies as collectives - even if they are divided into classes - need to save material goods against the risks of harvest failure, epidemic disease or other disasters. In societies with private property regimes, individuals need to make provision for illness, old age and so on. People who work for themselves (including peasants) need to save for the replacement of worn-out or superseded tools, machines and buildings; and so, on a much larger scale, do capitalist firms.

In pre-capitalist societies a large part of social saving is collective saving through payments to religious institutions which are expected to help the poor, including the aged poor. An aspect of private saving is maximising the number of children: a cost to the family while they are young, the children can be expected to be a support to the aged parents later.

As long as the society is producing a sufficient material surplus over immediate consumption needs, saving can take the form of money put aside: the saved money is a saved claim on the society’s total stocks of goods. But now two other factors come into play. First, we have already seen that money has to be scarce. Money which is saved is therefore in principle out of circulation, increasing the scarcity of money. The second is that, since saving is long-term, gradual inflation as well as hyper-inflation tends to erode its value - making saving self-defeating.

Both factors tend to produce lending money out for a rent - interest - or otherwise investing it indirectly (shares, etc) in operations which will yield a future return. Moneylending and investment allow people and firms to borrow money in the expectation that their future productive activity will yield a return higher than the rate of interest. For savers, lending their money out offers protection against inflation as well as absolute gains.

They also offer a means of mitigating the ‘excess’ scarcity of money caused by savings. The money saved is lent out, thereby putting it back into circulation. The total quantity of cash money has been in effect multiplied in the process. But this, of course, produces inflation - if, in itself, only fairly gradual inflation - because the supply of money has been increased.

Credit may and does substitute for cash money. A promise to pay from a credit-worthy person can be used as if it were cash to make payments (provided the benefit of the promise is assignable or negotiable: ie, transferable). In reality, most cash is credit money. In the recent past, we do not use gold and silver coins, but promises to pay by the Bank of England or some other bank or government (banknotes) and token coins intended to have a higher face value than their metal content.7 In using these instruments we are giving credit to the state which stands behind the issuer. Equally, in bank current accounts we lend money to the bank and use it to buy goods in shops, etc, with plastic: now the vendor is giving credit to his own and/or the card-issuing bank.

Credit and credit money, therefore, are omnipresent within capitalist societies. They are in modern times practically much more important than commodity money (gold and silver), though crises tend to cause spikes in gold prices (as has been happening recently).

Savings, credit, and boom-bust

The business cycle takes approximately the following form. At the bottom of the cycle, a large part of savings has been either lost in falling markets and bankruptcies, or withdrawn from credit circulation into hoards of cash and primary commodities (especially precious metals). The resulting shortage of money and credit dislocates production: factories, etc, lie idle, while there is high unemployment.

This condition both pushes and pulls savings back into credit circulation. It pushes them because declining economic activity reduces primary raw commodity prices, although this takes place after the primary losses in credit and stock markets.

It pulls them because the effect of the falling markets and bankruptcies is to reduce the total money capital which is expected to share in total profits, thus enabling the profits of the surviving individual firms to rise. In addition, the survivors can buy up bankrupt assets at below their cost of production, and unemployment has the effect of weakening the market position of labour, thus reducing wages and worsening working conditions: both raise absolute profitability.

The result is that it becomes more beneficial to invest in productive industry and agriculture than to hoard primary commodities and cash.

The result is a revival of economic activity, initially bringing idle plant and labour back into production. This in turn increases aggregate demand, leading to a rise in anticipated profits, leading to a rise in investment, and so on: the classic capitalist ‘virtuous circle’ of recovery and boom periods. Credit money increases with economic activity, increasing the total money supply.

From the point of view of the saver-lender, this development involves inflation, if only capital asset price inflation. Savings must therefore pursue the most profitable investments, or at least investments which are projected to be at or above average profitability, in order to maintain their value. The result is that credit is made most extensively available to the most profitable firms and sectors. These sectors expand rapidly, pulling the rest of the economy behind them.

But competition also increases - more credit means expansion of the existing firms and new entrants to the industry. And at or a bit before mid-cycle the labour market begins to tighten and wages have to increase, whether in response to trade union action or only in order to retain the workforce as against capitalist competitors. Hence, there is a shift towards investment in labour-saving machinery, which gives the first firm to invest in it a commercial edge.

However, as the new technology is generalised across the industry, it leads to falling profits in the industry as a whole. This is the reassertion of the fact that money values are ultimately expressions of labour time: replacing workers by machines therefore temporarily raises profitability for the individual firm, but, as it becomes generalised, reduces value added in the industry or sector.

Towards the end of the boom period, underlying real profit rates of individual industries in most directly productive activities are in decline: but total profits and hence savings are continuing to increase, as aggregate economic activity continues to increase. Savings must now shift into forms of financial speculation, which allow higher profits than productive investments. The alternative is to allow the value of savings to be eroded by inflation.

But the result is unavoidably to turn the financial markets into a ‘reverse pyramid’ or generalised Ponzi scheme. The reason is that the actual material surplus is generated in productive activities: money does not breed on its own. The financial operations merely redistribute this surplus and create an asset price inflation. At some point a collapse, substantially devaluing money savings, is inevitable. When the collapse is triggered, savers’ money flies from credit activities into hoards of cash and primary commodities, and the shortage of credit dislocates the ‘real economy’, taking us back to our starting point.

Now it is clear that the class of capitalists skims off a significant element of the total social surplus product for personal consumption and self-aggrandisement. It is also true that speculators and wide boys at the margin of criminality do well out of the financial system. This margin between proper conduct and crime is hard to pin down. This is because - for example - if we take away the rules of positive law that protect them, the high salaries of managers, bankers, etc are functionally equivalent to a shop manager skimming the till, which is generally recognised to be theft.

But in reality this capitalist thieving is marginal to the outcome. The underlying reason for cycles is the fact that everyone is taking individual decisions about productive activity, saving and lending, on the basis of predicted money outcomes - they are predicted by projecting forward recent or present trends. Thus for each individual or firm it is the most rational choice to invest in productive activity at the bottom of the downswing of the cycle; to invest in the most profitable industries or sectors in the upswing; to replace labour by machinery in mid-cycle; to move savings into the financial sector in the late boom phase; and to sell up as quickly as possible, refuse to lend and move into primary commodities in the crash phase.

Hence, even if we capped City salaries down to a ‘fair’ level and imposed punitive taxes on speculative gains (which is actually impossible under the current global political-legal regime), as long as we continued to organise our productive activities through private property decisions coordinated by markets, money and credit, the business cycle would reassert itself. Blaming the City spivs for their gains from speculation is understandable, but wholly futile. We can properly blame the capitalists both for thieving from the collective product and for holding onto the continued existence of capitalism, from which they gain by skimming the collective till. But blaming them for running capitalism badly, leading to crisis, is to tackle the superficial symptoms, while leaving the underlying disease untouched.


What is going on at the moment is that the capitalist nation-states are bailing out the financial institutions and markets, in the hope of avoiding an actual meltdown of the banking system. There is a lot of media talk at the moment about this being the ‘return of socialism’. The Times offered a cartoon of a Soviet-style poster: Marx, Engels, Lenin, Stalin, Bush (September 30). In this context nostalgia for the 1950s and 1960s and the idea of the ‘European model’ (i.e. old-style social democracy) has reasserted itself, as in Will Hutton (cited above). From the far left comes talk of ‘socialism for the bankers’ or ‘socialising the losses’ - with the implication that it would be better if the gains of the financial markets, too, were ‘socialised’.

There is nothing new about large-scale state bail-outs in financial crashes. A state bail-out was, in substance, what happened after the collapse of the South Sea bubble (1720). The House of Commons commented in 1721 that “… the discontents of people daily increasing, and the uncertain and doubtful events which threatened very great and valuable properties, creating such infinite anxieties and dissatisfactions, as had a most fatal and general influence upon all publick and private credit, the interposition of parliament became unavoidable …”8

The capitalist state functions in certain respects as a very large firm. Capitalist states are constituted as perpetual debtors by the organisation of state finance. They are exceptionally reliable debtors, both because they cannot simply shut down, and because they are possessed of a highly predictable income stream in the form of taxation. It is therefore commonly easy for capitalist states to borrow money in order to bail out individual firms, whether or not by nationalising them.

Nationalisation - national-statisation - of parts of the economy is, on the one hand, an endemic feature of the modern economy. On the other, what has been done so far in response to the present financial crisis is extremely limited in spite of the very large numbers. It is endemic because significant elements of infrastructure (like roads, rails, etc) and military-strategically important parts of the economy (like arms manufacture, education and agriculture) cannot be run at a profit within the territory of the individual nation-state; if they disappeared from this territory that would weaken the individual state as a military power; and they therefore require state subsidy.

On the other hand, the nation-states are not yet intervening on a large scale to protect national productive industries, beyond the existing subsidies. That may change if Ford and GM are bailed out, or if any of the leading capitalist states are driven by the crisis to break with the General Agreement on Tariffs and Trade the World Trade Organisation (Gatt II-WTO) and introduce directive planning measures and more generalised regulation and protective tariffs.

The problem with nationalisation and what goes with it - planning in a single country, protective tariffs or state monopoly of foreign trade and so on - is that the material division of labour is international in scope. The UK, for example, both imports and exports a wide range of primary commodities and manufactured products; overall, running a substantial deficit in ‘visible’ trade, which is paid for by the earnings of the financial sector.9 Analogous forms of specialised integration in the world economy affect both the imperialist and the colonial countries.

The fact that the material division of labour is international also implies that money and the credit system have to be international: it is necessary to be able to make payments and transfer money across borders. A real autarkic policy, like that of the USSR, undermines the ‘real economy’.

Capitalism is a global order, not one which can exist purely within single nation-states as closed economies. The nation-state is a firm because it stands not above, but within, this global order. Even Britain before 1914 or the US since 1945, which have half-functioned as world-states, have remained on the other side merely top dogs among a group of competing state-firms.

Nationalisation, then, merely has the effect of shifting more from private firms into the state-firm. But if this project is carried through on any large scale in the productive economy, the state-firm must intervene beyond the initial bail-out to secure the solvency of ‘its’ businesses. There is no point in bailing out Ford and GM, only for them to go bust under state ownership or state backing because of competition from Japanese car makers.

By intervening, the state is using its coercive capacity (which is the basis of its ability to tax, and so to borrow in order to intervene) to support a particular industry. The state then must continue to intervene, using its coercive capacity to support ‘its’ businesses relative to competitors supported by other states. This implies forms of protectionist tariffs, and state backing for both securing markets (by creating imperial or semi-imperial free trade zones) and supplies of raw materials. State intervention as a response to crisis thus necessarily implies the transfer of capitalist competition into competition between states, more or less overt imperialism, and a drift towards war.

Cold war world

This dynamic did not occur in the cold war period; and the nostalgias for social democracy and Stalinism which have recently resurfaced are, at the end of the day, nostalgia for the cold war.

Why not? There are two elements to an answer. The first is the sheer level of destruction of productive forces and of capital values in 1914-18 and 1939-45. Like a very serious crash, the world wars radically reduced the population of capitals which have to live off productive industry - in particular, massively reducing the claims to tribute of the British imperial parasite. This allowed space for a very extensive capitalist redevelopment once the world had restabilised after 1948, reducing the pressure of competition.

The second is that in order to win the war Britain and - particularly - the US built up the productive and military power of the USSR; while experience of the 1930s and the war itself led to very broad mass hostility to capitalism. As a result, in spite of the long-run strategic weakness of the bureaucratic ‘socialist’ regime in the USSR, there was a very real immediate threat to the survival of capitalism. The US capitalist state, which emerged from the war as the world hegemon, dealt with this threat by ‘containment’: a system of concessions to the working class and the other subordinate classes, which also involved systematic concessions to - much weakened - imperialist rivals of the US. At the heart of the new system was managed trade under Gatt I and managed global monetary relations under Bretton Woods: US acceptance that there would be a certain level of protectionism against both US products and US finance capitalist operations.

The business cycle did not disappear in the cold war period.10 But it tended to assume the form of what was called in Britain ‘stop-go’: the state intervened using a wide range of regulatory measures to prevent both booms running away and downturns becoming acute crises.

By the late 1960s-early 70s it had become clear that the cold war regime was itself a threat to capitalism: it made the working class too strong. US imperialism now turned to the policy of ‘rollback’ - directed not only against the USSR, but also against the concessions made in the late 1940s-50s both to the working class and to other capitalist states. ‘Rollback’ triumphed with the fall of the USSR and most of its satellites in 1989-91.

Without the USSR and the threat of the workers’ movement, there is no reason for the US to continue concessions to rival capitals. The ‘Washington consensus’ of the 1990s, Gatt II-WTO, the Trade-Related Aspects of Intellectual Property Rights agreement (Trips) and so on all represent US imperialism cashing its continuing military dominance to extort tribute in both capital and revenue from other states. Under these conditions, nationalisation will either simply fail - or force the creation of alliance systems and rearmament against the US, and a logic which leads towards world war.

The alternative

The boom-bust cycle is not produced by the malignity of individual capitalists, but by the fact that the relations between our different productive and consumption activities are mediated by private property and private decisions through the money and savings-credit mechanism. The attempt to use the nation-state to overcome this problem runs up against the fact that both the material division of labour and the money and savings-credit mechanism are global. It thus leads either to defeat (USSR, etc) or to imperialism and inter-imperialist war.

The alternative is to break with capitalism altogether and carry out social decision-making about production and consumption activities collectively and transparently. To do so is to abandon both private property and the money system. It is to appropriate the means of production collectively: communism.

Precisely because the division of labour is international, even this is only possible through coordinated international action. The most basic decisions have to be the common decisions of the world’s billions, even if many decisions can, in practice, be local in character.

To say that our strategic goal is to abandon private property and decision-making and the money system in favour of collective decision-making means that we have to accept that the largest individual interest anyone can have in any productive activity is - to receive a living income, and to have the right of political participation in collective decision-making. It is thus to proletarianise the whole of global society.

It is for this reason that it is only the working class as a class that can possibly lead the way to communism. Communism is precisely the denial of the property claims, not only of capitalists, but also of family farmers/peasants, petty traders and so on, and of intellectuals, managers, bureaucrat-officials and professional politicians in their personal careers and their control of information.

An instant transformation from capitalism to communism is therefore impossible. What is in question is in the first place the collective appropriation of those means of production which capital has already socialised in its own way, by making them corporate property: factories, ships, mines, commercial farms, patents and copyrights, and so on.

Collective appropriation is something rather different from nationalisation. Nationalisation is the appropriation of property by the state. This can only be a collective appropriation, first, in a world state, because national appropriation is appropriation by part only of the associated producers - those within the nation-state. Second, it can only be collective appropriation if the state is subordinated to the working class by the immediate expropriation of the rights of privacy/control of information, career continuity, powers of patronage (top-down appointments, etc) and so on, of the elected officials and representatives.

Where we are now

We are not living on the eve of the overthrow of the international capitalist state system by the working class, opening the way to the collective appropriation of the major means of production and an end to the logic of boom-bust and war. Even if the current capitalist juggling act fails and the economy is cast into the abyss, the working class will not be presently ready to take power.

The reason is that the working class learns to be able to take power through organising itself. It was through a prolonged prior period of growth of workers’ organisations under capitalism that the question of workers’ power was posed in 1916-21 and 1943-48. Since 1948, however, the domination of the workers’ organisations by the class-collaborationist bureaucracy has led to these organisations being undermined and weakened, both organisationally and politically. The workers’ organisations which do exist expect to use the capitalist state as a crutch, not to organise themselves at the base. Even a small left group like the Socialist Workers Party contributes not to organising a mass class movement, but to disorganising it through the SWP’s bureaucratic centralism.

This crisis does not immediately pose the question of power. It is part of the gradual return to capitalist normality - albeit still within the framework of declining capitalism - after the exceptional conditions of 1948-91. Conditions like 1948-91 will not return: even the overthrow of the US in a new world war would not recreate the ‘Soviet bloc’.

But the crisis does mean that the working class needs to organise itself for defensive struggles under capitalism. That means primarily organising at the base, in trade unions, cooperatives, etc, and an independent workers’ political party which breaks with the dictatorship of the labour bureaucracy, its constitutionalism, class-collaborationism and nationalism: a Communist Party.


1. Comment, September 26 at www.permanentrevolution.net/entry/2322
2. www.marketwatch.com/news/story/bojs-september-tankan-likely-points/story.aspx?guid={88A67021-2636-4E7C-986F-F98D5F77E605}&dist=msr_1
3. Developing Asia: riding out the storm p12ff: www.adb.org/Documents/Books/ADO/2008/update/Part01.pdf
4. East London Advertiser September 19.
5. E.g.The Observer September 28.
6. The division of labour is, of course, already present in hunter-gatherer and peasant societies in the form of division between the tasks of men and women. But this does not pose the same coordination problems as the developed division of labour.
7. Occasionally, a spike in metals prices may lead to the coins being worth more as scrap.
8. Quoted in J Carswell The South Sea bubble London 1993, pp229-30; chapter 14, which contains this quote, summarises the bail-out operation.
9. Data at www.uktradeinfo.com
10. M Webber, D Rigby The golden age illusion New York 1996 is useful on the figures.