THE ZOMBIE SYSTEM

Let’s imagine an escape route for capitalism. During the next decade, central banks withdraw from QE in an orderly way. They refrain from using the printed money to write off their own government debts; the private market for government bonds, suppressed for a decade, revives. Plus, governments agree to suppress financial mania for all time: they pledge to raise interest rates in response to all future bubbles; they remove for ever the implicit guarantee of bank bailouts. All other markets – for credit, for shares, for derivatives – would then correct, to reflect the increased risk of financial capitalism. Capital would be reallocated to productive investment and away from speculative finance.

Ultimately, the world would have to return to exchange rates pegged against a new global currency managed by the IMF, with the Chinese RMB becoming a fully tradable reserve currency like the dollar. That would address the systemic threat posed by fiat money – the lack of credibility arising from the danger that globalization will break up. But the price would be a permanent end to the global imbalances: the currencies of surplus countries would rise, and
China, India and the rest would have to give up their cheap labour advantage.

35


35

At the same time, financialization would have to be reversed. You would need a shift of political power away from banks and the politicians who support them, towards a policy favouring the onshoring of industry and services back to the West in order to create high-wage employment across the developed world. As a result, financial complexity would shrink, wages would grow, and the financial sector’s share of
GDP would be reduced, as would our reliance on credit.

The most far-sighted among the global elite know this is the only answer: stabilization of fiat money, a retreat from financialization, and an end to the imbalances. But there are enormous social and political obstacles.

In the first place, the rich are opposed to increased wages and regulated finance; they want the opposite.
Secondly, there would be winners and losers at a national level: the German ruling elite benefit from the debt-colonization of Greece and Spain; the
Chinese ruling elite benefit from being the gatekeeper to a cheap labour economy of 1.4 billion people. They have a vested interest in blocking the escape route.

But here’s the biggest problem: for this scenario to work, huge, unpayable sovereign debts would have to be written down, together with a large proportion of


the world’s household and corporate debts.

There is, however, no global system to achieve this.
Write America’s debts down and Chinese savers lose; the result would be to break the essential deal between Asia and the West: you borrow, we lend.
Write off the Greek debt to the EU and it is German taxpayers who lose tens of billions, again, breaching an essential deal.

The outcome of this best-case scenario, even if the transition could be managed peacefully, would be a complete breakdown of globalization.

And, of course, it cannot be managed peacefully.

Russia has, since 2014, become a power dedicated to disrupting the Western economies, not cooperating with them. China – for all the soft power it has begun to project – cannot do what America did at the end of the Second World War: absorb the world’s debts, set explicit rules and create a new global currency system.

Meanwhile, in the West, there is no sign of any strategy resembling the one outlined above. There is talk of it – from the lionizing of the French economist
Thomas Piketty to the Bundesbank’s calls in 2014 for higher wages in Europe. But in practice, the mainstream parties remain wedded to neoliberalism.

36


36

And without the escape route, the prospect looks more and more like long-term stagnation.

In 2014, the OECD released its projections for the world economy in the years between now and 2060.40
World growth will slow to 2.7 per cent, said the Parisbased think tank, because the catch-up effects boosting growth in the developing world – growing population, education, urbanization – will peter out.
Even before that, near-stagnation in advanced economies indicates average global growth of just 3 per cent over the next fifty years, significantly below the pre-crisis average.

Meanwhile, because semi-skilled jobs will become automated, leaving only high- and low-paid ones, global inequality will rise by 40 per cent. By 2060, countries such as Sweden will have the levels of inequality currently seen in the USA: think Gary,
Indiana in the suburbs of Stockholm. There is also the very real risk that climate change will begin to destroy capital, coastal land and agriculture, shaving up to 2.5 per cent off world GDP, and 6 per cent in south-east Asia.

But the bleakest part of the OECD report lies not in what it projects but what it assumes: a rapid rise in productivity due to information technology. Threequarters of all the growth to 2060 is expected to come


from increased productivity.
However, that assumption is, as the report states euphemistically,
‘high compared with recent history’.

In fact, as I will explore in chapter 5, there is no certainty at all that the information revolution of the past twenty years will turn into the kind of growth and productivity that can be measured in market terms. In that case there is substantial risk that the meagre 3 per cent annual growth projected by the
OECD over the next fifty years will be closer to 0.75.

Then there’s the migration problem. To make the
OECD’s central growth scenario work, Europe and the
USA have to absorb 50 million migrants each between now and 2060, with the rest of the developed world assimilating another 30 million. Without them, the workforce and the tax base of the West shrinks so badly that states go bust. The risk – as signalled by a
25 per cent vote for the Front National in France and armed right-wingers haranguing migrant kids on
California’s border with Mexico – is that the populations of the developed world will not accept it.

Allow yourself to imagine the world of 2060 as the
OECD predicts it: Los Angeles and Detroit look like
Manila today – abject slums alongside guarded skyscrapers; Stockholm and Copenhagen look like the destroyed cities of the American rust belt; the middle-income job has disappeared. Capitalism will

37


37

be in its fourth decade of stagnation.

Even to achieve this glittering future, says the OECD, we have to make labour ‘more flexible’ and the economy more globalized. We will have to privatize higher education – for the cost of expanding it to meet the demand for graduates would bankrupt many states – and assimilate tens of millions of migrants into the developed world.

And as we struggle with all this, it is likely that the current means of financing the state will evaporate.
The OECD points out that the polarization of populations into high-and-low-income groups will render income taxes ineffective. We will need – as
Thomas Piketty suggests – to tax wealth instead. The problem here is that assets – whether they be a star racehorse, a secret bank account or the copyright on the Nike swoosh – tend to be held in jurisdictions dedicated to avoiding wealth taxes, even if anybody had the will to raise them, which they currently don’t.

If things do not change, says the OECD, it is realistic to expect stagnation in the West, a slowing pace of growth in emerging markets and the likely bankruptcy of many states.

So what’s more likely is that at some point one or more countries will quit globalization, via


protectionism, debt write-offs and currency manipulation. Or that a de-globalization crisis originating in diplomatic and military conflict spills over into the world economy and produces the same results.

The lesson from the OECD’s report is that we need a complete system redesign. The most highly educated generation in the history of the human race, and the best connected, will not accept a future of high inequality and stagnant growth.

Instead of a chaotic race to de-globalize the world, and decades of stagnation combined with rising inequality, we need a new economic model. To design it will involve more than an effort of utopian thinking. Keynes’s genius in the mid-1930s was to understand what the crisis had revealed about the existing system: that a workable new model would have to be built around the permanent inefficiencies of the old one, which mainstream economics could not see.

This time the problem is even bigger.

The central premise of this book is that, alongside the long-term stagnation problem arising from the financial crisis and demographics, information technology has robbed market forces of their ability to create dynamism. Instead, it is creating the

38


38

conditions for a postcapitalist economy. It may not be possible to ‘rescue’ capitalism, as Keynes did with radical policy solutions, because its technological foundations have changed.

So before we demand a ‘Green New Deal’, or stateowned banks, or free college education, or long-term zero interest rates, we have to understand how they might fit into the kind of economy that is emerging.
And we are very badly equipped to do this. An order has been disrupted but conventional economics has no idea of the magnitude of the disruption.

To go forward we need a mental image smaller than
‘the financial autumn of a failing empire’, but bigger than a theory of boom-bust cycles. We need a theory that explains why, in the evolution of capitalism over the
 past
 two
 centuries,
 big
 moments
 of
 metamorphosis have occurred, and how exactly technological change recharges the batteries of capitalist growth.

We need, in short, a theory that fits the current crisis into a picture of capitalism’s overall destiny. The search for it will take us beyond conventional economics, and way beyond conventional Marxism. It begins in a Russian prison cell in 1938.

39


39

2 Long Waves, Short Memories

The wave-form is beautiful. The sound of the ocean beating against the sand is evidence that order exists in nature.

When you consider the physics of a wave-form, it becomes even more beautiful. It is matter displaying the tendency to invert: the energy that makes the wave rise is the same energy that makes it fall.

When you consider the mathematical properties of the wave-form, it becomes more fascinating still.
Fifteen hundred years ago, an Indian mathematician discovered that if you plot every possible ratio between two sides of a triangle it produces a wavelike pattern. Medieval scholars called it a ‘sine’.
Today we call the smooth, repetitive waves found in nature sine waves. An electrical current moves in the form of a sine wave; so does sound; so does light.

And there are waves within waves. To a surfer, waves seem to come in sets, growing in size, so that the sixth or seventh is the big one that you want to catch.
In fact, this is just the result of a longer, flatter wave moving ‘through’ the short ones.

This relationship – of long waves to short ones – is a source of order in acoustics. For musicians the harmonics created by short waves within longer


waves are what gives each instrument its particular sound; music is in tune when long and short waves are in strict mathematical proportion.

Waves are ubiquitous in nature. In fact, at the subatomic level, the wave-like movement of a particle is the only way we can know it exists. But waves also exist within big, complex and unnatural systems – such as markets. For those who analyse stock markets, the wave-form has become like a religious icon: they use tools to filter out the ‘noise’ of daily fluctuations to produce a predictive curve.
‘Peaks’ and
‘troughs’ have become everyday economic terms.

But in economics the wave-form can be dangerous. It can imply order and regularity where there is none.
A sound wave simply decays to silence; but waves generated from random data become distorted and disrupted after a time. And the economy is a world of complex, random events, not simple waves.

It was the wave-chart experts of the last boom who failed to predict the slump. In surfing terms, they were looking at waves instead of sets; sets instead of tides; tides instead of the tsunami that was about to hit them. We think of a tsunami as a big wave: a wall of water. In fact a tsunami is a long wave: it swells and it keeps on coming.

40


40

For the man who discovered their existence in economics, long waves proved fatal.

DEATH BY FIRING SQUAD

The prisoner shuffles; he can’t walk. He is partially blind, has chronic heart disease and clinical depression. ‘There is no way that I can force myself to think systematically,’ he writes. ‘To think scientifically at all without actively working on materials and books, and with headaches, is very difficult.’1

Nikolai Kondratieff had spent eight years as a political prisoner in Suzdal, east of Moscow, reading only the books and newspapers permitted by Stalin’s secret police. He had shivered in winter and sweltered in summer but his ordeal would soon be over. On 17 September 1938, the day his original sentence expired, Kondratieff was tried a second time, convicted of anti-Soviet activity and executed in his cell, by firing squad.

Thus perished one of the giants of twentieth-century economics. In his time, Kondratieff ranked alongside globally influential thinkers such as Keynes,
Schumpeter, Hayek and Gini. His ‘crimes’ were fabricated. An underground ‘Peasant Labour Party’, of which he was supposed to be leader, did not exist.


Kondratieff’s real crime, in the eyes of his persecutors, was to think the unthinkable about capitalism: that instead of collapsing under crisis, capitalism generally adapts and mutates. In two pioneering works of data-mining he showed that, beyond short-term business cycles, there is evidence of a longer, fifty-year pattern whose turning points coincide with major structural changes within capitalism and major conflicts. Thus, these moments of extreme crisis and survival were not evidence of chaos but of order. Kondratieff was the first person to show the existence of long waves in economic history.

Though it was later popularized as a ‘wave-theory’,
Kondratieff’s most valuable insight was to understand why the global economy goes through sudden change, why capitalism hits structural crisis, and how it morphs and mutates in response. He showed us why business ecosystems that have lasted for decades can suddenly implode. He used the term
‘long cycle’ rather than ‘wave’ because cycles in scientific thought create a sub-language that is highly useful: we speak of phases, states and their sudden alternation.

Kondratieff studied industrial capitalism. Though others claim to have found long waves in prices going back to the Middle Ages, his data series begins with the industrial revolution in the 1770s.

41


41

In Kondratieff’s theory, each long cycle has an upswing lasting about twenty-five years, fuelled by the deployment of new technologies and high capital investment; then a downswing of about the same length, usually ending with a depression. In the ‘up’ phase, recessions are rare; in the ‘down’ phase they are frequent. In the up phase, capital flows to productive industries; in the down phase it gets trapped in the finance system.

There’s more, but that’s the basic theory. In this chapter I will argue that it is essentially right, but that the present crisis represents a disruption of the pattern – and that signals this is something bigger than the end of a fifty-year cycle.

The man himself was supremely cautious about the implications of his theory. He never claimed he could predict events – though he did predict the Depression of the 1930s, ten years before it happened. He arranged for his findings to be published alongside a brutal critique and peer-review.2

But Stalin’s police had, in a way, understood more about Kondratieff’s theory than he did himself. They understood that – if pursued to its conclusion – it would bring Marxism face to face with a dangerous proposition: that there is no ‘final’ crisis of capitalism. There can be chaos, panic and revolution


but, on the basis of
Kondratieff’s evidence, capitalism’s tendency is not to collapse, but rather, to mutate. Huge swathes of capital can be destroyed, business models can be scrapped, empires can be liquidated in global wars, but the system survives – albeit in a different form.

To the orthodox Marxism of the 1920s, Kondratieff’s explanation of what caused these transformations was equally dangerous. The events that seem to cause the big turning points – wars, revolutions, discovery of new gold deposits and new colonies – were, he said, mere effects generated by the demands of the economy itself. Humanity, even as it tries to shape economic history, is relatively powerless over the long term.

For a time in the 1930s, long-wave theory became influential in the West. The Austrian economist
Joseph Schumpeter produced his own theory of business cycles, popularizing the term ‘Kondratieff
Wave’. But once capitalism stabilized after 1945, long-wave theory seemed redundant. Economists believed state intervention could flatten out even the minor ups and downs of capitalism. As for a fifty-year cycle, the guru of Keynesian economics, Paul
Samuelson, dismissed it as ‘science fiction’.3

And when the New Left tried to revive Marxism as a critical social science in the 1960s, they had little

42


42

time for Kondratieff and his waves; they were looking for a theory of capitalist breakdown, not survival.

Only a few diehards, mainly investors, remained obsessed with Kondratieff. In the 1980s, Wall Street analysts turned his careful provisional findings into a bunch of crude, predictive mumbo-jumbo. In place of his complex data, they drew simple lines, showing a wave with a stylized shape: a surge, a plateau, a crisis and a collapse. They called it the ‘K-Wave’.

If Kondratieff was right, these investors said, the economic recovery that began in the late 1940s was the start of a fifty-year cycle, which meant that sometime around the end of the 1990s there should be a depression. They built complex investment strategies to hedge against the catastrophe. And then they waited …

WHAT KONDRATIEFF REALLY SAID

In 2008, what the investors were waiting for finally happened – though, for reasons we’ll come to, ten years later than expected.

Now, people in the mainstream are once again interested in long cycles. As it dawned on them that the Lehman crisis was systemic, analysts began to look for patterns produced by the interplay of tech innovation and growth. In 2010, economists at


Standard Chartered announced that we were in the middle of a global ‘supercycle’.4 Carlota Perez, an
Anglo-Venezuelan economist and follower of
Schumpeter, harnessed wave-theory to promise a new ‘golden age’ for capitalism if it could only shrug off financial panic and return to the state-funded innovation process that produced the post-war boom.5

But to use Kondratieff’s insight properly we have to understand what he really said. His original research, in the 1920s, was based on data for five advanced economies between 1790 and 1920. He did not track
GDP directly but interest rates, wages, commodity prices, coal and iron production and foreign trade.
Using the most advanced statistical techniques of his time – and two assistants whose job-title was
‘computer’ – he established a trend line out of the raw data. He divided the data against population size and smoothed it out using a nine-year ‘moving average’ to filter out random fluctuations and shorter cycles.

The result was a collection of charts that look like shallow sine waves. They show the first long cycle, beginning with the emergence of the factory system in Britain in the 1780s and ending around 1849. Then, a much clearer second wave starts in 1849, coinciding with the global deployment of railways, steam ships and the telegraph, before entering its downswing

43


43

phase, with the so-called ‘Long Depression’ after
1873, and ending sometime in the 1890s.

By the early 1920s, Kondratieff believed there was a third cycle under way. It had reached its peak and begun its downswing, probably sometime between
1914 and 1920. But this downswing was nowhere near finished. As a result, he predicted, the political crisis that consumed Europe between 1917 and 1921 would not lead to immediate economic collapse. A shaky recovery was possible, Kondratieff argued, before a depression yet to come. This was completely borne out by events.

Unlike today’s Wall Street analysts, Kondratieff was not ultimately interested in the shapes of the waves themselves. He saw the sine waves he’d plotted on to graph paper as evidence of something deeper happening in reality: a succession of alternating
‘phases’ which, for our purposes, are the most useful tools to understand the fifty-year cycles.6

Let’s consider in more depth these phases as
Kondratieff describes them. The first, up, phase typically begins with a frenetic decade of expansion, accompanied by wars and revolutions, in which new technologies that were invented in the previous downturn are suddenly standardized and rolled out.
Next, a slowdown begins, caused by the reduction of capital investment, the rise of savings and the


hoarding of capital by banks and industry; it is made worse by the destructive impact of wars and the growth of non-productive military expenditure.
However, this slowdown is still part of the up phase: recessions remain short and shallow, while growth periods are frequent and strong.

Finally, a down phase starts, in which commodity prices and interest rates on capital both fall. There is more capital accumulated than can be invested in productive industries, so it tends to get stored inside the finance sector, depressing interest rates because the ample supply of credit depresses the price of borrowing. Recessions get worse and become more frequent. Wages and prices collapse, and finally a depression sets in.

In all this, there is no claim as to the exact timing of events, and no claim that the waves are regular.
Kondratieff emphasized that each long wave takes place ‘under new concrete-historical conditions, at a new level in the development of the productive forces, and hence is by no means a simple repetition of the preceding cycle’.7 It is, in short, more new than déjà vu.

Now comes Kondratieff’s most controversial point.
He noticed that the start of each fifty-year cycle was accompanied by trigger events. I will quote him in full, despite the old-fashioned language, because the

44


44

parallels with the present are striking:

During roughly the first two decades before the beginning of the rising wave of a long cycle, we observe an invigoration of technical inventions.
Before and during the beginning of the rising wave, we observe the broad application of these inventions to industrial practice, due to the reorganisation of production relations. The beginning of the long cycles usually coincides with an expansion of the orbit of world economic relationships. Finally the beginnings of the last two successive cycles were preceded by major changes in the extraction of precious metals and in monetary circulation.8

If we put that into modern English we get the following. The start of a long cycle sees:
 the rollout of new technologies
 the rise of new business models
 new countries dragged into the global market
 a rise in the quantity and availability of money.

The relevance of this list to us is clear: it describes very well what happened to the global economy between the mid-1990s and the Lehman crash. But
Kondratieff was convinced such phenomena were not


causes, but only triggers. ‘We are no way inclined to think that this provides any form of explanation for the causes of long cycles,’ he insisted.9

Kondratieff was determined to find the cause of long cycles in the economy, not in technology or global politics. And he was right. But in the search for it he relied on theories that had been advanced by Karl
Marx to explain the shorter, ten-year business cycles of the nineteenth century: namely, the exhaustion of capital investment and the need for reinvestment.

If, he argued, the ‘regular’ crises that come along every decade are the result of the need to replace tools and machines, then fifty-year crises are probably caused by ‘the wear and tear, replacement and increase in those basic capital goods requiring a long period of time and tremendous investment for their production’.10 He had in mind, for example, the canal boom of the late eighteenth century and the railway boom of the 1840s.

In Kondratieff’s theory, a long wave takes off because large amounts of cheap capital have been accumulated, centralized and mobilized in the financial system, usually accompanied by a rise in the supply of money, which is needed to fund the investment boom. Grandiose investments are begun – canals and factories in the late eighteenth century, railways and urban infrastructures in the mid-

45


45

nineteenth century. New technology is deployed and new business models created – leading to a struggle for
 new
 markets
 –
 which
 stimulates
 the
 intensification of wars as rivalries over colonial settlements increase. New social groups associated with the rising industries and technologies clash with the old elites, producing social unrest.

Some of the details are obviously specific to each particular cycle, but what’s important in
Kondratieff’s thesis is the argument about cause and effect. Takeoff is caused by capital accumulating faster than it is invested during the previous depression phase. One effect of this is the search for an expanded supply of money; another is the increased availability of new, cheaper technologies.
Once a new growth spurt begins, the effect is a spate of wars and revolutions.

Kondratieff’s insistence on economic causes and political/technological effects would come under attack from three directions. First, from Marxists, who insisted that the major turning points in capitalism could only be caused by external shocks.
Secondly, from Schumpeter, his contemporary, who argued that long waves are driven by technology, not the rhythms of capital investment. A third set of critics said that in any case Kondratieff’s data was at fault and that evidence of waves was overstated.


But Kondratieff was right – and his arguments about causation brilliantly describe what has happened to the economy since 1945. If we can fill in the gaps in
Kondratieff’s theory we come close to understanding not only how capitalism adapts and morphs in response to crisis, but why this capacity to adapt might reach its limits. I will argue in Part II that we are living through a significant and likely permanent disruption of the patterns industrial capitalism has exhibited for 200 years.

First, though, the critics have to be answered.

THE IMAGINARY CURVE

In 1922, the publication of Kondratieff’s first outline of long cycles sparked an immediate controversy.
Leon Trotsky, at the time one of the top three leaders of Russian communism, wrote that, if fifty-year cycles existed, ‘their character and duration are determined not by the internal interplay of capitalist forces but by those external conditions through whose channel capitalist development flows’.11

In the early twentieth century, revolutionary
Marxists had become obsessed with the idea that human action – the ‘subjective will’ – was more important than economics. They felt trapped by economics, which had become the property of moderate socialists who believed revolution was

46


46

impossible. Kondratieff, Trotsky insisted, had got things the wrong way around:

The acquisition by capitalism of new countries and continents, the discovery of new natural resources, and, in the wake of these, such major facts of
‘superstructural’ order as wars and revolutions, determine the character and the replacement of ascending, stagnating or declining epochs of capitalist development.12

It may seem strange to those who know Marxism only as a form of economic determinism, but Trotsky was here insisting that political conflict between nations and classes was more important than economic forces. Instead of the long waves, Trotsky argued that Soviet economics should concentrate on explaining the
‘entire curve of capitalist development’, from birth to takeoff to decline: that is, its whole history. Long waves were interesting, but to those who desired the end of capitalism, the most vital pattern of all was capitalism’s complete lifecycle, which must surely be finite.

Marxists had by now evolved their own explanation of the big mutation in business structures after 1890
– which they dubbed ‘imperialism’ and which, they presumed, was the final or ‘highest’ stage capitalism could reach. So, confronted with Kondratieff’s data,
Trotsky too drew a curve – a curve entirely the


product of his imagination. It showed the takeoff and decline of an imagined capitalist country over ninety years. The purpose of the chart, Trotsky explained, was to show what a full and painstaking computation of the data might produce. According to him, once you understood the trend-line of a capitalist economy you could understand whether a fifty-year cycle – if it existed at all – was part of the overall upswing, downswing or the end. Trotsky made no apology for the imaginary nature of his curve. The data was not yet good enough to draw a real one, he said, though with work it might be done.

Trotsky’s 1922 attack was used then, and has been used since, to refute the idea of long cycles. But it does not. It simply says they are (a) not likely to be regular, caused as they are by external shocks; and
(b) need to be fitted into a bigger, single wave-form that is the rise and decline of capitalism itself. Put another way, Trotsky was calling for a better and more historic definition of the ‘trend’ against which the fifty-year cycles were computed.

This in itself was logical. With all trends, statisticians look for what they call a ‘trend break’: a clear point where the curve stops rising, flattens out and prepares for a fall. The search for a trend break within capitalism was to obsess left-wing economists throughout the twentieth century – and ultimately elude them.

47


Meanwhile Kondratieff had been busy.

A COLD ROOM IN MOSCOW

In January 1926, Kondratieff published his definitive work, Long Cycles of the Conjuncture. On 6 February, the cream of
Soviet economics gathered at
Kondratieff’s think tank, the
Institute for
Conjuncture, above Tverskaya Street in Moscow, to rip it to shreds.

The verbatim record of the meeting contains none of the fear and irrationality that Stalin’s purges would soon inject into Soviet academic life. The participants speak freely and harshly. They pursue the same three lines of attack that have dominated criticism of
Kondratieff ever since: that his statistical methods were wrong; that he’d misunderstood the causes of the waves; and that the political conclusions were unacceptable.

First, Kondratieff’s main opponent, economist Dmitry
Oparin, argued that the method he had used to smooth out shorter cycles was false, and had distorted the results. In addition, long-term data on the rise and fall of savings did not support
Kondratieff’s theory.

Then the seminar turned to the issue of cause-andeffect. The economist V. E. Bogdanov argued that, instead of the rhythm of the long cycles being dictated by capital investment, it must be dictated by innovation. (This makes him the first person to reduce the long-cycle theory to a history of technological innovation, but not the last.) Bogdanov, however, raised a valid point. It was not logical, he argued, that the cost of building big things such as canals, railways or steel mills should dictate the rhythm of the world economy over fifty years. The objection to a capital-driven cycle led him to propose a tech-driven one, and on this basis he then advanced a more rigorous version of Trotsky’s ‘external shock’ argument.

If long waves did exist, they must, according to


If long waves did exist, they must, according to
Bogdanov, be caused by the ‘random intersection of two essentially causal series’: the internal dynamics of capitalism and those of the external, non-capitalist environment.13 For example, the crisis of noncapitalist societies such as China and the Ottoman
Empire in the late nineteenth century created new openings for
Western capital; the agrarian backwardness of a country like Russia shaped the growth of its capitalist sector, forcing it to seek funds from France and Britain.

Bogdanov had a point. Kondratieff’s theory assumed that the rhythms of capitalism exert a one-way gravitational pull on the non-capitalist world. In fact,


48

the two constantly interact, and any synthetic version of Kondratieff’s theory would have to take account of that.

Towards the end of the seminar, a long-time
Communist Party hack, the agrarian economist
Miron Nachimson, weighed in on the political implications of long-wave theory. The obsession with long waves, he said, was ideological. Its purpose was to justify crisis as a normal state of affairs; to say that
‘we are dealing with an essentially perpetual movement of capitalism, first upwards and then downwards, and that it is not appropriate to dream of social revolution yet’. Long cycles, Nachimson realized, would pose a big theoretical challenge to
Bolshevism, whose premise was capitalism’s imminent doom.14

The debate gets close to the heart of the problem with Kondratieff’s work:

He saw the dynamics of capital investment as the primary cause of fifty-year crises. Yet his account of these dynamics was not sophisticated.

He assumed the non-capitalist world was the passive bystander to capitalist wave patterns when it was not.

At this point, though he saw each wave as a more


complicated version of the next, he failed to situate the role of long waves within the ultimate destiny of capitalism.

And there was another, related, problem with
Kondratieff’s work: the data problem. It has pursued long-cycle theory all the way through from the era of the slide rule to that of the Linux box. We must consider it here because the data problem has acted like a ‘no entry’ sign to Kondratieff’s work for a generation.

THE CHALLENGE OF RANDOM NUMBERS

It’s a mark of Kondratieff’s ambition that the research group he ran employed one of the great mathematicians of the twentieth century, Eugen
Slutsky. And while Kondratieff wrestled with real data, Slutsky was engaged in a project of his own, using random numbers.

Slutsky showed that, by applying a moving average to random data, you can easily generate wave-patterns that look like real economic facts. To prove the point, he produced a wave-pattern from random lottery numbers and superimposed it on to a chart of British growth statistics: when the one was squashed down on to the other, the shapes looked remarkably similar. In statistics, this is known as the ‘YuleSlutsky Effect’, and is now understood to mean that

49


49

the very act of smoothing out data generates spurious results. However, Slutsky believed the opposite. He believed that the emergence of regular wave-patterns from random events was real15 – not just in economics but in nature:

It seems probable, that an especially prominent role is played in nature by the process of moving summation with weights of one kind or another, where the magnitude of each consequence is determined by the influence, not of one, but of a number of the preceding causes, as for instance, the size of a crop is determined, not by one day’s rainfall, but by many.16

In other words, raindrops fall randomly into a square kilometre, but at the end of the season you have a crop yield that you can measure against last year’s.
The cumulative impact of random events can produce regular, cyclical patterns.

By the time Slutsky wrote this, Kondratieff was becoming dangerous to know. In 1927 conflicts within the
Soviet bureaucracy erupted into expulsions and street fighting. Historian Judy Klein points out that it would have been easy for Slutsky to disown Kondratieff, who was under suspicion as an avowed market socialist. Instead, he supported
Kondratieff’s basic theory.17


In fact, Slutsky’s experiment added a crucial insight to long-wave theory. He noted that waves generated by filtering random data do not repeat for ever. As he computed them over time, the patterns would suddenly break down, an event he dubbed ‘regime change’: ‘After a more or less considerable number of periods every regime becomes disarranged, the transition to another regime occurring sometimes rather gradually, sometimes more or less abruptly, around certain critical points.’18

To anybody interested in the long-range patterns in economics, the challenge posed by
Slutsky’s observation is clear. First, long waves may not be traceable to a tangible cause – whether it be innovation, external shocks or the rhythms of capital investment. They may just be a regular feature of any complex economic system over time. Secondly, whatever the cause, we should expect regular wave patterns to break down and reset themselves.

Slutsky himself believed this pattern of sudden breakdown could operate at two levels: inside the ten-year business cycle and across the fifty-year long cycles. But his work raises a third possibility. If industrial capitalism has produced a sequence of fifty-year waves over a period of more than 200 years, then maybe at some point this too breaks down, inaugurating a regime change that leads to a whole different pattern.

50


50

In the past twenty years there has been a stats-driven backlash against Kondratieff. Various modern studies claim to show that, if better smoothing-out techniques are used, Kondratieff’s waves simply disappear, or become patchy. Others correctly point out that the long-term price fluctuations observed within the first three waves disappear once a sophisticated global marketplace emerges after
1945.19

However, given the massive amount of extra data and better methods that we possess, it should be possible to detect Kondratieff waves in the global growth statistics.

In 2010, the Russian researchers Korotayev and Tsirel did just that.20 They used a technique called
‘frequency-analysis’ to show convincingly that there are powerful fifty-year pulses in the GDP data. For the post-1945 period, they show that even the raw data contains clear evidence of an up phase after
1945 and a prolonged down phase beginning in 1973.

In fact, using the IMF’s definition of recession (six months during which global growth dips below 3 per cent), they calculate that, while there were no recessions for the period 1945–73, there have been six recessions since 1973. They are confident that the
Kondratieff wave is present in world GDP figures


after 1870, and observable in Western economies before that.

There is more evidence for the existence of long cycles in the work of Cesare Marchetti, an Italian physicist who analysed historical data on energy consumption and infrastructure projects. The result, he concluded in 1986, ‘very clearly reveals cyclic or pulsed behaviour’ in many areas of economic life, with cycles lasting roughly fifty-five years.21

Marchetti rejects the idea that these are waves, or primarily economic – preferring to call them longterm ‘pulses’ in social behaviour. But, he says, signals that are unclear in economics ‘become crystal clear when the “physicals” are analysed’.

Marchetti says that the clearest evidence for long cycles lies in the pattern of investment in physical communication ‘grids’. Taking canals, rail, paved roads and airline networks as his examples, he showed how the build-out of each peaked roughly fifty years after the previous technology had done so.
On this basis, he predicted that a new type of grid should appear around the year 2000. Though writing a mere fourteen years before the millennium he could not guess what it would be. Today we have the answer: the information network.

There is, then, physical and economic evidence that a

51


51

fifty-year pattern exists. The wave shapes generated by such a pattern, or pulse, are of secondary importance to the fact of the pattern’s existence. To an economist they indicate deeper processes at work
– just as for the astrophysicist a black hole can be detected only by the movement of matter around it.

And here’s why it’s important. Kondratieff gave us a way of understanding mutations within capitalism.
Left-wing economics had been looking for a process that led only to breakdown. Kondratieff showed how the threat of breakdown usually leads to adaptation and survival.

The problem with Kondratieff remains his account of the economic force that drives the cycle; and how this relates to the ultimate destiny and longevity of the system. It is this we have to fix.

SAVING KONDRATIEFF

I once gave a lecture on Kondratieff to 200 economics students at a British university. They had not a clue who, or what, I was talking about. ‘Your mistake,’ said an academic to me after the talk, ‘was to mix micro- and macro-economics. They are just not used to that.’ Another lecturer, whose job it was to teach economic history, had never heard of Kondratieff.

But they’d heard of Josef Schumpeter. In Business


Cycles (1939), Schumpeter argued that capitalism is shaped by interlocking wave-cycles, ranging from a short-wave three- to five-year cycle produced by the build-up of stocks inside businesses, through to the fifty-year waves Kondratieff had observed.

In a tortuous logical exercise, Schumpeter ruled out the credit cycle, external shocks, changes in taste and what he termed ‘growth’ as causes of the fifty-year cycle. Instead he argued: ‘Innovation is the outstanding fact in the economic history of capitalist society and … is largely responsible for most of what we would at first sight attribute to other factors.’22 He then supplied a detailed history of each of
Kondratieff’s waves as an innovation cycle: the first is triggered by the invention of the factory system in the 1780s, the second driven by railways from 1842, the third by a cluster of innovations we now call the
Second Industrial Revolution, in the 1880s and 90s.23

Schumpeter took Kondratieff’s wave-theory and made it highly attractive to capitalists: in his version the entrepreneur and the innovator drive each new cycle. Conversely, periods of breakdown are the result of innovation becoming exhausted, and capital being hoarded in the finance system.
For
Schumpeter, crisis is a necessary feature of the capitalist system, in that it promotes the ‘creative destruction’ of old and inefficient models.

52


52

And though Kondratieff was largely forgotten,
Schumpeter’s work has lived on as a kind of religious insight: a techno-determinist account of boom and bust that mainstream economists can turn to at times of crisis, when their normative beliefs fail.

The most prominent modern follower of Schumpeter,
Carlota Perez, has used the tech-driven theory to urge policymakers to give state support to info-tech, biotech and green energy – with the promise of a new
‘golden age’ to follow sometime in the 2020s, once the next wave takes off.

Perez added some refinements to wave-theory that are useful for understanding the present phase. The most important is her idea of the ‘techno-economic paradigm’. It is, she argues, not enough for there to be a cluster of innovations at the start of each wavecycle, nor for these innovations merely to interact with each other. A ‘new common sense, guiding the diffusion of each revolution’ has to emerge, a recognizable ‘logic of the new’ that enables the replacement of one set of technologies and business practices with another.

But by dating the waves from the invention of key technologies, not their rollout, Perez departs both from Kondratieff and Schumpeter. And she proposes a different causal sequence: innovators invent, financiers get excited and speculate, it all ends in


tears and the state moves in, regularizing the situation so that a golden age of high growth and productivity can occur.

Perez’s supporters say this date sequence is just a repackaging of Schumpeter, with the start-point of each wave dragged twenty-five years earlier. But it is more than that. For her, the primary focus of longwave theory is
‘the irruption and gradual assimilation of each technological revolution’, not the upswings and downswings in GDP that were the focus for Kondratieff.24

As a result, she is left with all kinds of consistency problems. Why is the fourth wave (1909–71) nearly seventy years long? Because the policy response to the 1930s Depression did not bear fruit until 1945, she answers.
Why does the clear sequence
‘innovation, bubble, bust’ happen twice between 1990 and 2008? Again, she answers, because of policy mistakes.

Perez’s version of wave-theory stresses the response of governments at crisis points, but puts very little emphasis on the struggles between classes or the distribution of wealth. In an almost pure inversion of
Kondratieff, the economics are driven by technology, and technology is driven by governments.

The attraction of the tech-driven wave-theory is that

53


53

the evidence for it is tangible: clusters of innovation do take place before the start of long waves, and their synergies can be documented. It is materialist, in that it sees revolutions and changes in social attitudes as the product of something deeper. New technologies bring to power what Schumpeter called ‘new men’ – who in turn bring with them their own tastes and norms of consumption.

But Kondratieff was right to reject technology as the driver of big change. It is adequate for describing the start of fifty-year cycles but does not fully explain why the clustering of inventions takes place, nor why a new social paradigm emerges – nor indeed why the wave ends.

If we stick with Kondratieff, and extend his sequence of long cycles to the present, drawing on Marchetti’s
‘physicals’, and much better data than that which was available in the 1920s, we can draw the following outline.

Industrial capitalism has gone through four long cycles, leading to a fifth whose takeoff has stalled:

1790–1848: The first long cycle is discernible in the
English, French and US data. The factory system, steam-powered machinery and canals are the basis of the new paradigm. The turning point is the depression of the late
1820s.
The
1848–51


revolutionary crisis in Europe, mirrored by the
Mexican War and Missouri compromise in the USA, forms a clear punctuation point.

1848–mid-1890s: The second long cycle is tangible across the developed world and, by the end of it, the global economy. Railways, the telegraph, ocean-going steamers, stable currencies and machine-produced machinery set the paradigm. The wave peaks in the mid-1870s, with financial crisis in the USA and
Europe leading to the Long Depression (1873–96).
During the 1880s and 90s, new technologies are developed in response to economic and social crises, coming together at the start of the third cycle.

1890s–1945: In the third cycle heavy industry, electrical engineering, the telephone, scientific management and mass production are the key technologies. The break occurs at the end of the First
World War; the 1930s Depression, followed by the destruction of capital during the Second World War terminate the downswing.

Late-1940s–2008: In the fourth long cycle transistors, synthetic materials, mass consumer goods, factory automation, nuclear power and automatic calculation create the paradigm – producing the longest economic boom in history. The peak could not be clearer: the oil shock of October 1973, after which a long period of instability takes place, but no major

54


54

depression.

In the late–1990s, overlapping with the end of the previous wave, the basic elements of the fifth long cycle appear. It is driven by network technology, mobile communications, a truly global marketplace and information goods. But it has stalled. And the reason it has stalled has something to do with neoliberalism and something to do with the technology itself.

This is just an outline: a list of start- and end-points, technology clusters and significant crises. To go any further, we need to understand the dynamics of capital accumulation better than Kondratieff did, and in ways the techno-theorists barely touch. We need not only to understand that capitalism mutates but also to understand what within the economy drives the mutations, and what might limit them.

Kondratieff gave us a way to understand what systems theorists call the ‘meso’ level in economics: something between an abstract model of the system and its concrete history. He left us a better way to understand its mutations than the theories advanced by twentieth century followers of Marx, who focused on external factors and doom scenarios.

We are not done with Kondratieff yet. But to complete what he tried to do we have to dive into a

problem that has obsessed economics for more than a century: what causes crisis.

55


problem that has obsessed economics for more than a century: what causes crisis.

55

3 Was Marx Right?

In 2008 something bizarre happened to Karl Marx:
‘He’s Back!’ shouted a headline in the London Times.
The German publishers of Marx’s Capital reported a
300 per cent increase in sales after a government minister declared his ideas ‘not so bad’. Meanwhile in
Japan, a manga version of Capital went viral. In
France Nicolas Sarkozy was photographed leafing through the French edition of Marx’s masterpiece.

The catalyst for Marx-mania was, of course, the financial crisis. Capitalism was collapsing. Marx had predicted it so he should be deemed right, or reappraised, or at least allowed some posthumous schadenfreude.

But there’s a problem. Marxism is both a theory of history and a theory of crisis. As a theory of history it is superb: armed with an understanding of class, power and technology, we can predict the actions of powerful men before they know what they’re going to do themselves. But as a theory of crisis, Marxism is flawed. If we are going to utilize Marx in the present situation, we need to understand his limitations – and the theoretical mess his followers got into as they tried to overcome those limitations.

These are not dead questions. The more Marx’s bearded face pops up in the panicked pages of


mainstream newspapers, and the deeper the social catastrophe inflicted on the youth of tomorrow, the greater the chance becomes that they will try to repeat the failed experiments of Marx’s followers:
Bolshevism and the forced-march abolition of the market. The premise of this book – that there is a different route beyond capitalism, and different means to achieve it – demands we deal with the
Marxist theory of crisis here.

So what’s the problem?

Marx understood that capitalism is an unstable, fragile and complex system. He recognized that class gives different agents in the market unequal power.
But Marxism underestimated capitalism’s capacity to adapt.

The man himself had witnessed only one global adaptation: the upswing of the second long wave in the two decades following the 1848 revolution.
Tragically, by the time his followers were in the middle of the third long wave, Marxist economics had stopped evolving as an effective theory of systems.

In the end, three general features of complex adaptive systems were to challenge Marxism. First, such systems tend to be ‘open’ – that is, they thrive on contact with the world outside. Second, they

56


56

respond to challenges by innovating and transforming in unpredictable ways, with each innovation producing an intricate new set of opportunities for growth and expansion within the system. Third, they generate ‘emergent’ phenomena, which can only be studied at a higher level than the workings of the system itself. For example, the behaviour of an ant colony might be a product of the ant’s genetic code, but it has to be studied as behaviour, not genetics.

Marxism was, in a way, the most systematic study ever attempted of emergent phenomena, but was constantly confused as to their nature. Only in the
1970s, when the idea of ‘relative autonomy’ arrived in Marxist economics, did the discipline begin to understand that not all layers of reality are a simple expression of the layers beneath them.

In this chapter, I will show how for the past 100 years capitalism’s adaptive nature has confused not only
Marxism but the wider left. Yet the original insight of
Marx’s
Capital, which describes how market mechanisms lead to breakdown, remains not only valid but essential for understanding the big adaptations.

Marx’s theory of crisis, when properly understood, provides a better explanation than Kondratieff for what drives the major mutations – and why they


might stop occurring. But the Marx we are concerned with here is a twenty-first-century imagination trapped in a nineteenth-century brain.

WHAT MARX SAID …

For the first eighty years of industrial capitalism, economists were pessimistic about its future. The classic economists – Smith, Say, Mill, Malthus and
Ricardo – were haunted by doubts as to whether it would survive at all. The theme of their work was the limits to capital: the barriers to its expansion, the decline of profit, the fragility of stable growth.

At the centre of their disputes was the idea that human labour is the source of value and determines the average price of things. This is known as the
‘labour theory of value’, and in chapter 6 I will explain in detail how it helps us map the transition from capitalism to a non-market economy.

Marx spent his life trying to rectify flaws in the labour-theory, in order to explain the crises and breakdowns early capitalism had been plagued with.
According to Marx, a fully fledged market economy creates inherent instability. For the first time in history, there is the possibility of crisis amid abundance. Things are made that cannot be bought or used – a situation that would have seemed crazy under feudalism or in the ancient world.

57


57

Marx also recognized a tension in economics between what is real and what we assume is real. The market is a machine for reconciling the two. The real value of things is dictated by the quantity of work, machinery and raw materials used to make them – all measured in terms of labour value – but this can’t be calculated in advance. Nor can we see it, because the laws of economics work ‘behind the backs’ of everybody involved.

This tension drives both the small corrections – as when the market stall has too much fruit at closing time – and the big ones, as when the US government is required to bail out Lehman Brothers. It means that when you study a crisis you have to look for what is wrong at a level deeper than the facts presented on the front page of the Wall Street Journal.

Marx argued that in fully fledged capitalism profits have a tendency to converge on the average. So managers – even as their minds tell them they are savagely competing with each other – actually create a discernible average rate of profit in each sector and in the whole economy, against which they set prices and judge performance. Then, via the finance system, they create an aggregate pool of profits into which investors can dip at fairly constant rates of return for any given level of risk. Though the finance sector was small when Marx wrote Capital, he grasped very


clearly the way finance – in the form of interest – becomes the main mechanism for allocating capital rationally in response to average sectoral risks and rewards.

He also realized that the ultimate source of profit is work; specifically, the extra value coerced out of employees by the unequal power relationships in the workplace. But there is an inbuilt tendency to replace labour with machinery, driven by the need to increase productivity. Since labour is the ultimate source of profit this will tend, as mechanization spreads across the whole economy, to erode the rate of profit. In a company, sector or whole economy where increasing proportions of capital are invested in machinery, raw materials and other non-labour inputs, you are reducing the scope for labour to generate
 profit.
 Marx
 called
 this
 ‘the
 most
 fundamental law of capitalism’.

However, the system reacts to this threat spontaneously: it creates institutions and behaviours that counteract the tendency of the profit rate to fall.
Investors switch to new markets where profits are higher; labour costs are driven down by cheapening consumer goods and food; managers search for new sources of cheap labour in foreign countries; or they produce machinery that costs less in labour-terms to make; or they move out of machine-intensive industries into labour-intensive ones; or they pursue

58


58

market share (profit size) instead of margins (profit rate).

Marx identified the rise of finance as a more strategic counter-tendency: a proportion of investors begin to accept interest
– rather than the outright entrepreneurial profit that comes from setting up a company and operating it – as the normal reward for owning large amounts of money. Entrepreneurs will still take one-sided risks, as private capital and hedge funds do today, but large parts of the system are geared to survive on low-risk, low-reward investments via the finance system – which Marx says allows capitalism to go on operating when profits are depressed.

We must be crystal clear on this: for Marx, these counter-tendencies operate constantly. A crisis happens only when they become exhausted or break down.1
That is, when you run out of cheap labour, or new markets fail to appear, or the finance system can no longer safely hold all the capital that risk-averse investors are trying to store there.

In summary, Marx argued that crisis is the pressure valve for the system as a whole. It is a normal feature of capitalism and a product of its technological dynamism.

It can be seen, even from this basic outline, that Marx


is modelling capitalism as a complex system. Even when it looks stable, capitalism is not in equilibrium: there is a spontaneous breakdown process counterbalanced by numerous spontaneous stabilizers. Crisis theory explains when and why these stabilizers stop working.

Across the three volumes of Capital, Marx describes several forms of crisis. The first is an overproduction crisis, when too many commodities are chasing too little demand, leaving the profits generated in the production process unable to be realized by selling the goods. Marx also expected crises to emerge from the inefficient flow of capital between sectors: he lived through numerous crises where heavy industry had grown out of step with the consumer goods producing sector, leading to a recession until they rebalance. Then there is crisis triggered by the failure of the counteracting tendencies listed above, leading to a tangible collapse in the profit rate, an investment freeze, layoffs and falling GDP.

Finally, in volume III of Capital, Marx describes how financial crisis happens: credit becomes massively overextended, and then speculation and crime drive it to unsustainable limits where the bust inevitably overcorrects the boom – pushing the economy into a multi-year depression. In one evocative sentence
Marx anticipated the world of Enron, Bernie Madoff and the wealthy 1 per cent. The main function of

59


59

credit, he wrote, is to develop exploitation ‘to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth’.2 In 2008 it was the parallels between the collapse of finance and the famous passage quoted above that provoked the articles claiming Marx was right. Today, as the financial crisis recedes but real incomes stagnate across the Western world, people are once more saying ‘Marx was right’ – this time on the problem of overproduction, where profits and growth rebound but the workers’ wages do not.

However, Marx’s theory of crisis is incomplete. It contains logical flaws that took its supporters a long time to resolve, above all at the point where he tries to connect his abstract model to concrete reality.
Furthermore, it is a product of its time: Marx could not take into account the major phenomena of the twentieth century – state capitalism, monopolies, complex financial markets and globalization.

In order for Marx to be right – that is, as anything more than a prophet who said ‘crisis is normal’ – we have to make the theory both internally coherent and consistent with the evidence. We have to finetune it so that it includes the features common to complex adaptive systems which it has struggled with: openness, unpredictable response to danger, and long cycles (which lie somewhere between a


normal crisis and the final collapse). But even when thus corrected, a theory of cyclical crisis is not enough when faced with the survival-level changes we are exploring in this book.

In a famous line written in 1859, Marx predicted that
‘At a certain stage of their development, the material productive forces of society come into conflict with the existing relations of production … From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution.’3 But he never explained how the sporadic crises would – or could – create the conditions for the new system. It was left to his followers to fill that gap.

After Marx died, his supporters assumed that overproduction crises could not be alleviated for long by finding or inventing new markets. ‘There is a limit to the extension of the markets,’ wrote the German socialist leader Karl Kautsky in 1892. ‘Today there are hardly any other markets to be opened.’4 They expected short-term crises to gather momentum and snowball into total collapse. By 1898, the Polish socialist Rosa Luxemburg was predicting that, once the system ran out of new markets to exploit, there would be ‘an explosion, a collapse, at which point we will play the role of the syndic [administrator] who liquidates a bankrupt company’.5

60


60

Instead, as we know, the start of its third long cycle saw capitalism mutate. Its adaptive nature enabled it to create markets internally, even when the scramble for colonies reached a dead end. And it proved able to suppress aspects of the market for the sake of its own survival.

The doom premonitions of the Marxist left in the
1890s were proved false. They would first have to live through a massive upswing of capitalism, then through chaos and collapse in the years 1914–21. The impact would disorientate left-wing economics for the best part of a century.

CAPITALISM SUPPRESSES THE MARKET

By 1900 the world economy was in the grip of major change.
Technologies, business models, trade patterns and consumption habits had been evolving rapidly side by side. Now they were fused into a new kind of capitalism.

What strikes us today is the audacity and speed of it all: steel replaces iron; electricity replaces gas; the telephone supersedes the telegraph; motion pictures and tabloid newspapers are launched; industrial output surges; spectacular steel-framed buildings appear in the capital cities of the world, and motor cars drive past them.


At the time, however, business leaders took all this for granted. What concerned them was the relationship between large-scale companies and market forces. If possible, they concluded, market forces should be abolished.

‘Competition is industrial war,’ wrote James Logan, the boss of the US Envelope Company, in 1901.
‘Ignorant, unrestricted competition carried to its logical conclusion means death to some of the combatants and injury for all.’6 At the time, his company enjoyed near-total domination of the US market. At the same time Theodore Vail, the kingpin at Bell Telephone, warned that ‘all costs of aggressive, uncontrolled competition are eventually borne, directly or indirectly, by the public’.7 To relieve the public of such burdens, Vail himself would acquire every single telephone exchange in America.

Competition, argued the business magnates, brought chaos to production and depressed prices to the point where new technology could not be rolled out at a profit. The solutions were to be found at three levels: monopoly, price fixing and protected markets.
The means to these ends were (i) mergers, fostered by aggressive new investment banks; (ii) the creation of cartels and ‘concerns’ to set prices; (iii) government-imposed restrictions on imported goods.

The United States Steel Corporation was formed in

61


61

1901 out of 138 different companies, immediately controlling 60 per cent of the market. Meanwhile,
Standard Oil had 90 per cent of the USA’s refining capacity, and used its power so ruthlessly that it forced railway companies to transport oil at a loss.
Bell Telephone enjoyed a total telecoms monopoly until the mid-1890s, and regained it in 1909 when JP
Morgan teamed up with Vail to buy up the competition.

In
Germany, where price-fixing cartels were politically encouraged and legally registered, their number more than doubled between 1901 and 1911.8
Just one of these cartels, the Rhine-Westphalia Coal
Syndicate, involved sixty-seven companies, had the power to set 1400 different prices and controlled 95 per cent of the region’s energy market.9

To be absolutely clear, because it’s difficult to comprehend today, this was a system where supply and demand did not set prices: millionaires did.

By 1915, two industrial giants dominated the German electrical sector; the chemical, mining and shipping industries likewise each had just two dominant players. In Japan the whole economy was dominated by six zaibatsu, conglomerates that had begun as trading companies but evolved into industrial empires, vertically integrated around mining, steel, shipping and weapons with a powerful banking


operation at the centre. By 1909, for example, Mitsui produced at least 60 per cent of Japan’s electrical engineering output.10

To create these massive companies, finance was organized in a new way. In the USA, Britain and
France, the stock market and investment banks drove the process. In 1890 there were ten industrial companies quoted on Wall Street; by 1897 more than
200.11 In Japan and Germany, where industrial capitalism had been created ‘from above’ under authoritarian governments, finance was mobilized not so much through the stock market but via the banks, and even the state itself. Russia – the latecomer – would adopt a hybrid model, with much of its industry foreign-owned.

The Anglo-Saxon model and the German-Japanese model, therefore, looked very different, and that would provoke a 100-year-long debate over which was best
. But within each lay a variant of the same basic idea: finance took a controlling stake in industry, carving out monopoly positions where possible, suppressing market forces – and the state

 It is complicated by the fact that the US model evolved after 1911, away from outright monopolies towards a system of regulated competition between big industrial firms, with the real monopoly power concentrated on Wall
Street and the newly created Fed. This generated a lot of anti-monopoly bluster from the American right, clouding the fact that throughout the whole period under consideration, monopolies were the norm in the USA.

62


62

was directly allied to the whole project.

The market had, in short, become organized. Now it had to be protected. Alongside the scramble for colonies, the great powers threw up numerous tariffs on external trade, explicitly designed to promote the interests of their companies. By 1913, for example, most industrial countries were protecting their domestic industries with double-digit import taxes on manufactured goods.12 The monopolies, in return, placed key personnel inside governments. The ideology of the state as a ‘nightwatchman’, standing aloof from economic life, was dead.

The emergence of this new system was not crisisfree. In America, a mini-depression in 1893–7 accelerated the merger process; then in 1907 a financial crash corrected the over-valuation of stocks issued during the merger boom. Both Japan and
Germany saw the process of concentration accelerated by short spasms of boom and bust in the
1890s.

But if we take the whole period from around 1895 through to the First World War, progress outweighed crisis: the US economy doubled in size in the decade to 1910, while Canada’s trebled.13 Even in Europe, where the boost from labour migration was not as great, Italy’s economy grew by one third in these ten years and Germany’s by a quarter.


This was the upswing of the third Kondratieff Wave.
You can ‘read’ the results in the cityscapes of New
York, Shanghai, Paris and Barcelona: the most enduring and beautiful public buildings – libraries, pubs, offices, even bath houses – are usually from the period between 1890 and 1914. The story they tell is clear: during the time we call the belle époque or the
Progressive Era – a time of rapid growth, liberalization and cultural uplift – the world prospered not through the market but by the controlled suppression of it. Back then, this caused scant confusion for conservatives. The people it confused were the Marxists.

CAPITALISM MUTATES

The task of updating Marxist economics fell to a 33- year-old Austrian doctor called Rudolf Hilferding.
Hilferding was a classic intellectual of the belle
époque: while studying paediatric medicine in Vienna in the late 1890s he threw himself into the economics scene, which had a stellar cast. Eugen Böhm-Bawerk, the economics professor who had written a famous critique of Marx, hosted seminars at which Hilferding would tough it out with, among others, Schumpeter,
Ludwig von Mises – the founder of neoliberalism – and a Hungarian student, Jeno Varga, who would make his own spectacular impact later.

63


63

In 1906 Hilferding quit medicine and moved to Berlin to teach economics at the training centre of the
German socialist party, which formed the intellectual powerhouse of the global left. In 1910 Hilferding gave the fusion of bank and industrial capital a name:
‘Through this relationship … capital assumes the form of finance capital, its supreme and most abstract expression.’14

His book, Finance Capital, would become the reference point for all left-wing debates on the future of capitalism for a century. Hilferding was the first
Marxist to understand the scale of capitalism’s mutation. What is more, in the new structure many of the permanent features looked exactly like those
Marx had listed as counter-tendencies to the falling profit rate: the export of capital, the export, via migration, of surplus workers to white-colonial settlements abroad, the pooling of profits via the stock market, the move away from entrepreneurship into rentier-style investing.

The finance system, which in the previous century had functioned as a puny redistribution centre for business profit and an unreliable source of capital, now dominated and controlled the business world.
The counter-tendencies to crisis had become synthesized into a new, more stable system.

Hilferding argued that this new structure could


suppress cyclical crisis. Big firms and big banks could survive for long periods on low or zero profits. And investors would rather accept prolonged stagnation than see a sudden crisis destroy firms like Siemens,
Bell or Mitsui. As a result, crisis periods under finance capitalism would be long and stagnant rather than sharp and traumatic. Banks would suppress speculation because they understood its destructive power. Cartels would suppress the operation of market forces – and therefore crisis – for major firms, dumping the losses on less powerful sectors of the economy. Small firms would bear the brunt of any recessions, hastening their acquisition by monopolies.

For Hilferding, the forces of instability had not disappeared, but had been driven into a single sphere: the imbalance between the production and consumption-oriented sectors of the economy. He explicitly ruled out ‘under-consumption’ as a cause of crisis, pointing out that capitalism could always create new markets where old ones were exhausted, and thus go on expanding output. But the possibility remained that sectors would expand at different rates. Hence the need for state intervention to prevent such an imbalance.

Hilferding’s book was a massively influential realitycheck for the left. It dispensed with the thesis of the
‘snowballing crisis’ as the trigger for social change; it

64


64

introduced concepts and terms that Marxism would share with mainstream economics. And it said – earlier than Schumpeter – that the main driver of innovation was now the big company using applied science, not the entrepreneur tinkering in his workshop.15

But Hilferding’s book steered left-wing economics into a dead end. Though he described finance capital as only the ‘latest stage’ of the system, the implication was that it would be the last. A system in which finance capital dominates, he wrote, is the
‘supreme and most abstract’ form of capitalism and it can go no further:

The socializing function of finance capital facilitates enormously the task of overcoming capitalism. Once finance capital has brought the most important branches of production under its control, it is enough for society, through its conscious executive organ – the state conquered by the working class – to seize finance capital in order to gain immediate control of these branches of production.

Hilferding was a moderate socialist and would become more moderate as time went on. He believed capitalism would gradually evolve into socialism. His ideas, however, influenced reformists and revolutionaries alike. Both wings of the labour movement became wedded to the belief that


socialism could be introduced by taking control of the state and the organized market. Finance capital was, as Lenin later put it, ‘moribund capitalism, capitalism in transition to socialism … already dying capitalism’.16 All that the socialists differed on was the kind of action needed to make it die.

What’s important is that Hilferding not only tied socialism to a project of state-led transition, but also that he effectively ruled out any further mutation of capitalism beyond the model established in the 1900s.
And his basic theory remained influential well into our lifetime. As late as the 1970s you could argue that, though capitalism had survived longer than expected, it was still essentially a state-directed, heavily monopolized and national system. Left-wing workers could rationally believe that a world of stateowned airlines, steel mills and auto companies was stage two of the progression: free markets -> monopoly -> socialism.

This was the idea that died after 1989, with the collapse of the Soviet bloc, the rise of globalization and the creation of the fragmentary, marketized and privatized economy we see today. The progression
Hilferding imagined, which had implicitly guided socialism for eighty years, has been broken and indeed reversed.

While it lasted, though, the doctrine of an inevitable

65


65

linear transition – from Standard Oil to socialism – was all-powerful.

THE LEFT’S NEED FOR CATASTROPHE

By 1910, when Hilferding’s book came out, socialdemocracy was influential in every advanced country. Its acknowledged nerve-centre was Berlin, and the work of its German-speaking leaders would be translated and discussed in the factories of
Chicago, the gold mines of New South Wales and clandestine cells aboard Russian battleships. But even as workers digested Hilferding’s message, something rang false. Mass strikes were in progress, from the
New York garment workers to the streetcar drivers of Tokyo and all points between. There was a war brewing in the Balkans. For a system that had supposedly become crisis-free, politically and socially there was turmoil.

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

Luxemburg’s 1913 book, The Accumulation of Capital, was written with twin purposes: to explain the


economic motivation for the colonial rivalry between the big powers, and to show that capitalism was doomed. In the process she produced the first modern theory of under-consumption.

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

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

Her book was immediately torn to shreds – by Lenin and by most of the socialist professors she had

66


66

worked with. They argued, correctly, that any mismatch between production and consumption was temporary,
 and
 would
 be
 solved
 by
 capital
 investment moving from heavy industry to consumer goods. In any case, new colonial markets were not the only escape valve from crisis.

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

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

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


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

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

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

67


67

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

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

THE GREAT DISORIENTATION

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

Luxemburg had always opposed
Bolshevism, predicting that if Lenin’s party took power in Russia it would end up ruling autocratically. But by the mid-
1920s, with supreme irony, her theory had become the state doctrine of the Soviet Union. To understand


why, and how the consequences still haunt the left, we have to understand what people lived through in the early 1920s – which was chaos.

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

Amid this came events most socialists hadn’t dared dream of. The 1917 Revolution in Russia was just over a year old when workers’ republics sprang up in
Bavaria and Hungary. Germany headed off a socialist revolution only through far-reaching reforms at the outset of the Weimar Republic, including the promise to ‘socialize’ the economy. The year 1919 saw the seizure of factories in Italy, strike action bordering on insurgency in both France and Scotland, general strikes in Seattle and Shanghai. All across the
Western world, mainstream politicians had to face the possibility of revolution.

By now the left had more than just Luxemburg’s book to go on. During the war, both Lenin and the
Bolshevik theorist Nikolai Bukharin had produced works inspired by Hilferding, each drawing the conclusion that finance-dominated capitalism was proof of the system’s imminent doom. Lenin called

68


68

this new, declining model ‘imperialism’, and defined it as ‘capitalism in transition’. The scale of organization – by vertically integrated corporations, cartels and the state – meant that the economy was actually becoming socialized under capitalism:
‘Private property relations,’
Lenin wrote in
Imperialism (1916), ‘constitute a shell which no longer fits its contents, a shell which must inevitably decay if its removal is artificially delayed, a shell which may remain in a state of decay for a fairly long period … but which will inevitably be removed.’19

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

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

Both Lenin and Bukharin spent considerable time demolishing the idea that any new kind of capitalism could emerge, in which transnational cooperation


could exist. It was the moderate German socialist
Kautsky who’d had this brainwave on the eve of the
First World War: he envisaged the creation of a single world market dominated by transnational corporations. But by the time his article ‘Ultraimperialism’ was published, the war had begun and the whole issue might have seemed academic.21

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

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

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

Between 1917 and 1923 both wings of socialism got to

69


69

test out the idea that workers could use state power to socialize capitalism.

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

In Hungary, during the brief Soviet republic of 1919,
Jeno Varga, a one-time acolyte of Hilferding in the
Vienna seminars, became finance minister. He decreed that all businesses with more than twenty


workers should be nationalized. All large shops were closed to prevent the middle classes buying luxury goods and using them as investments. Land was nationalized. Soon the Hungarian workers’ republic faced another problem. Factories needed managing, but the workers could not manage. Varga outlined the problem frankly:

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

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

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

In 1920 Bukharin outlined a solution: a detailed plan to move rapidly from this improvised system, known as ‘war communism’, to a permanent one of central planning across the entire economy. Lenin scrapped

70


70

this a year later, as starvation and chaos forced the
Bolsheviks to switch to a crude form of market socialism.

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

From Varga’s recalcitrant works committees in
Budapest to the Russian workers who insisted on selfcontrol, or the Fiat workers in Milan who even tried


to produce cars without the help of managers, this problem – workers control vs planning – would hit the socialist leaders as a total surprise.

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

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

After 1921, the situation began to stabilize.
Kondratieff, as we’ve seen, described 1917–21 as just

71


71

the first crisis in a long downswing. But stabilization left the Marxists who had embraced the sequence
‘monopoly–war–collapse’ with nowhere to go.
Capitalism, they assumed, remained on life support simply due to the immaturity of the proletariat, the unwillingness among workers to take power – plus tactical mistakes by socialist parties. Lenin allowed for the possibility of growth spurts in this or that sector, but not for the entire system’s survival.

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

‘Varga’s Law’ predicted the constant decline of workers’ real incomes. This, he wrote, ‘is the economic basis for the general crisis of capitalism … the absolute impoverishment of the working class comes to the fore’.25 Varga was explicit: the downward trend of mass consumption was a noncyclical, general feature of the twentieth century and


would, given time, destroy all support for reformist and liberal politics among workers. Instead of growth there would be, in Varga’s phrase, ‘decumulation’.

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

Varga himself produced work of some subtlety in the
1930s. As a follower of Luxemburg, he remained aware that conditions in the world beyond the developed economies could impact on crisis dynamics – so he placed a heavy emphasis on the failure of agriculture in the colonial world as a factor suppressing economic revival in the West. As a result, the ‘authorized version’ of Marxist economics – inevitable and imminent collapse – was plausible.
Even the Trotskyists, hounded by Stalin, were convinced of capitalism’s doom by the late 1930s, their leader insisting that ‘the productive forces stagnate’.26

72


72

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

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

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

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

This focus on the ‘real’ led Hilferding to conclude the cyclical crisis was over, Luxemburg to move crisis theory to the terrain of collapse, Lenin to assume the


irreversibility of economic decline. With Varga, we move
 from
 rationality
 to
 dogma:
 the
 least
 sophisticated of all the crisis theories becomes the unchallengeable doctrine of a merciless state, every communist party in the world becomes its emissary, and every left-wing intellectual for a generation gets taught utter rubbish.

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

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

With this, crisis theory had come full circle, back to

73


73

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

THE PROBLEM WITH CRISIS THEORY

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

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

But Kondratieff shows us how at a certain point – when crises become frequent, deep and chaotic – a more structural adaptation is triggered. Because their economic model could not accommodate


structural adaptation, Marxists in the early twentieth century had to describe this in terms of historical
‘epochs’, or philosophical categories such as parasitism, decay and transition.

In fact, the moment of mutation is fundamentally economic. It is the exhaustion of an entire structure – of business models, skill-sets, markets, currencies, technologies – and its rapid replacement by a new one.

It happens – in systems terminology – at the ‘meso’ level, between micro- and macro economics. Its scale locates it somewhere between the credit cycle and the doom of the entire system. Once the mutations are understood as likely and regular events, then any model of capitalism that treats them as accidental or optional is going to be wrong.

There is no form of crisis theory that can contain the whole phenomenon of system mutation, but crisis theory can describe what causes it in each specific case.

Modern crisis theory has to be macro-economic, not abstract.
It can use abstractions to locate fundamental market mechanisms, as Marx does, but you cannot ignore the state as an economic force, organized labour, monopolies, currencies or central banks. Nor can you ignore the finance system as an

74