What is behind the global assault on labor, the world wide drive for austerity, the collapse of living standards, the decline in production, the rise of unemployment?  Why is this happening?

            On the surface, the world economy seems trapped in a downward vicious cycle without apparent cause.  Everywhere, corporations are attempting, and often succeeding, in driving down real wages.  They are laying off millions of workers, closing plants, reducing manufacturing capacity.  Governments are privatizing state-owned facilities, in many cases closing them down as well, or if not, greatly reducing their work forces.  Social services are being cut, destroying health and education, and producing still more layoffs.

            With wages falling and unemployment rising in every part of the world, the world's working population has less and less money to spend.  The world market for goods is falling.  In addition, the deliberate, planned reduction of capacity shrinks global demand for capital goods used by industry. But this global contraction of the market leads to further layoffs.  Corporations, faced with a declining market, struggle to  reduce costs, trying to produce a greater profit per item on a smaller number of items.  As a result they initiate a new round of wage cuts, and layoffs. Governments, faced with flagging revenues, and rising debts, again cut services.  The consequence is another round of austerity, another ratchet downwards in the scope of the world market.   It appears that austerity is the cause of austerity, a shrinking world market the cause of a shrinking world market.

            But clearly, if we look even a little deeper, something else is going on.  In the process of a general contraction of the world economy an enormous transfer of wealth has taken place from wages to profit, from labor to capital, from the average working person to the extremely rich.  In the United States, for example, gross profits and interest, the income of capital, has grown from 18% of wages in the '50s and '60s to over 40% in the '80s and '90s.[1]  The share of income of the wealthiest half percent of Americans has quadrupled from 1970 to 1990 and their share of total wealth has risen from 17% to almost 40%. [2] The same shift has occurred throughout the world, in every nation.  As we shall see in detail in this chapter, the immediate cause of the global economic crisis is this huge shift of income -- what working people have lost, the capitalists have gained.

            Yet if the immediate cause of the decline in working class incomes is the expansion of profits, why is this true only in the past 20 years?  In the fifties and sixties, corporations were making profits, and trying to make as much as possible, and in fact profits grew.  But wages and general standards of living grew as well.  What changed in the seventies, eighties and nineties?  Indeed the puzzle is worse, since, if we look at the numbers, we find that net profits, profits after accounting for inflation, have actually dropped in the past two decades, even as capital's total share of wealth has increased -- it is an increasing share of a shrinking pie.  And the rate of profit, profit as a return on the total capital, has declined even more.  In the '50s net return on capital after inflation average around 9%, in the '60s about 6.5%, but in the past twenty years, barely 1.5% above inflation.[3] (See Figure 1)

            So why is it, that despite wage gouging and layoffs, despite an enormous transfer of wealth to capital, the capitalists are doing worse and worse, a situation that drives them even more frantically to new austerity, new wage cuts, new layoffs?  What sickness seized the world capitalist economy in the past generation?  Without an answer to this question, it will be impossible to understand the real situation of working people today, or what can be done about it.

            Could it be, as some have suggested, that world capital is still reacting to the labor and radical upsurge of the '60s?  Could mounting unemployment be a tactic to dampen labor militancy?  To be sure, economic policy is often driven, in part, by the actions of the working class, and the efforts of governments and corporations to maintain political control. Yet if this were the whole answer, why would not have some stability of the world economy returned after the militancy of the '60s and '70s evaporated?  Instead, the downward ratchet continues in standards of living, and capitalist profit rates continue to dwindle.

            Could this crisis be the result of perhaps, growing competition among capitalist countries, among Japan the United States and Europe?  But we've seen that international competition, for the most part, is a myth -- corporations are truly multinational, entangled in a thousand ways with all the leading capitalist countries.  How can GM in the US be a serious competition to GM in Japan or Europe?




            To get to the bottom of this mystery, we have to take a step back and look at how capitalism functions.  As everyone knows, the whole point of a capitalist economy is to make a profit -- to sell things for more than their total costs of production.  And profit alone is not enough.  For capitalism to function, profit must become new capital, be re-invested and generate still more profit, creating still more capital.            All this seems pretty simple, if we are looking at a single capitalist, or a single corporation.

            But if we look at the entire world capitalist economy, things look different.  How can all capitalists, capitals as a whole, make a growing profit?  The world economy is complicated, so let's first simplify it as much as possible. Imagine an island, with two capitalists, each having, say two workers.  The first capitalist, call him General Mills, is an agro-businessman and employs his workers to grow wheat.  The second, General Harvester, is a manufacturer and employs his workers to produce plows.

            General Mills pays $200 a year in wages and has to buy $200 worth of plows each year, so to make a profit he prices his crop at $700 with the $300 above expenses going to his own consumption plus profit.  General Harvester also pays $200 in wages, doesn't need much in the way of equipment, so he sells his years' production of plows for $500, with again a $300 profit.  The workers spend their whole $400 wages on wheat.

            But, at the end of the year, a crisis develops.  General Harvester finds that he's only sold to General Mills $200 worth of plows -- the other three fifths of his production is unsold, and he has no profit at all -- not even enough to live on.  General Mills is in the same fix.  He has sold $400 of wheat, made no profit at all, and has $300 worth still on hand.  He at least can eat some of it, but he can't make a profit either.

            Multiply this little picture a hundred million times over, with many capitalists and millions of workers and, in a world of only capitalists and workers, profit is simply impossible.  Capitalists invest their capital in the means of production -- the factories that make goods, the railroads that carry them, in raw materials, and in the means of consumption -- the goods needed to support a work force --housing, clothing, food, an so on.  These means of consumption are not bought directly but are instead paid out in the form of wages to workers, who then buy these means of consumption.    In the process of production, when the workers work in the factories, and in the essential services like energy and transportation that support of production, what gets produced is, first of all, those goods necessary to replace those used up in the production process.  This is first, the means of consumption that have been consumed; second, the raw materials -- iron ore, coal, oil ; and third; the means of production that have become worn out and must be replaced -- worn out machinery, dilapidated plants.  But, in a functioning "normal" capitalist economy, something more had been produced -- a surplus of goods, both means of production and means of consumption that can go into expanding production, building new plants, hiring more workers.  Once the entire product has been sold, the cost of the product is spent on replacing the means of consumption and production that have been used up, and the difference -- the money equivalent of the surplus-- is profit.  This profit, together with the old capitals is reconverted into goods to start another, expanded cycle of production.

            The problem is: how can this surplus be sold?  Workers can buy the means of consumption , the capitalists themselves buy the replacement raw materials and means of production,  but who buys the surplus?  Workers have no income except the wages they get from capitals and how can capitalists make a profit from the money they themselves lay out?  Nor can the capitalists make a profit by selling to themselves.  Sure, one capitalist can gain at the expense of another's losses but there can be no overall net profit.  Yet in the real world, in general there is a net profit for all capitals.  Who, then, buys the surplus -- where does the profit come from?

            The solution, as the socialist economist and revolutionary Rosa Luxembourg first pointed out in 1911[4], elaborating on earlier ideas of Karl Marx, is that capitalism has never existed in a world of only employers and wage earners.  At all times, including today, the largest portion of the world's population is neither -- they are peasants, petty agricultural producers who are not employees, but neither are they capitalists because they don't accumulate capital -- they sell crops just to support themselves and their families.  It is this external market that is crucial for the very survival of capitalism.

            Taking capitalists as a whole, capital can only cover its costs by selling to itself (capitalists selling to capitalists) or to workers.  Ford can sell cars at a profit to GM workers and GM can sell cars at a profit to Ford workers. But collectively, capitalists as a whole can only make a profit to the extent they sell to non-capitalist producers --farmers and peasants, in whatever country they are and other non-capitalist producers, such as state-owned factories.  This is, as we'll see, the key to understand the development of capitalism and to the present crises.

            Why is selling to non-capitalist producers different? Because they can pay not just with money they receive from capitalists, when they sell their agricultural products, but they have independent sources of wealth -- they possess means of production, their land (or today, state-owned enterprises have their factories).  Initially, as capital first penetrated non capitalist areas, it absorbed the previously accumulated wealth of other societies -- of feudal Europe, of India, of China, vast countries that had for centuries settled affairs in gold and money.  Second, when this source is exhausted, capital can loan money to these peasants and their governments -- with the collateral being their land and the mineral wealth beneath it.  Of course capitalists can lend to workers.  But such loans are limited because workers possess and can use as collateral only that which they've bought with capitalist wages -- houses, cars and so on.  Nothing can be produced with them, they can just be resold.  With non-capitalist layers, however, the land itself is the collateral, and as peasant families, or entire nations default on such loans, capital forecloses, seizing in the process vast real wealth, vast means of producing new wealth.

            In our imaginary island example, if we had a population of ten or twenty natives originally living on the island, they first buy surplus plows and grain with their own, anciently accumulated, gold and silver, then they borrow money from General Mills and General Harvester, putting up their land as collateral.  When they cannot pay back the loans, their land is lost and they go to work for the capitalists.  The capitalists have realized their profit -- that is, sold their surplus -- and have, in return, the islanders' gold and silver and their land.  Mills and Harvester then look for the next island.

            What is crucial to their process is not just an external, non capitalist market, but an expanding non-capitalist market. Capital only exists to the extent that it grows -- makes a profit.  Thus the capitalists have appropriated for themselves, after paying out wages and other costs of production, part of the product that the workers produced --this is the essence of capitalist exploitation of labor.  If that fraction of goods is, say 10% of the costs, the initially invested capital, then the rate of profit is 10%.  But this means, in turn, that in the next cycle of production, capital is 10% more, production is 10% larger and profit is 10% larger.

            So, since the scale of profit realized is limited by sales to the external market, that market must grow and grow at a rate determined by the rate of profit.  In rough terms an 10% annual rate of profit means a growth in capital, profit and everything else by 10% a year and thus an increase in the external market by 10% a year.

            This necessity for the rapid expansion of the external market has driven the history of capitalism.  For expanding the external market means seeking ever new populations of non-capitalist producers.  This is because it is not possible to increase the value sold to any given set of peasants without limit.  Initial reserves of money, accumulated over long periods of time in non capitalist economies, are soon exhausted.  The peasant can raise new income by selling his own surplus product -- food or other agricultural raw materials either to the capitalists, or to other non-capitalist layers -- local townspeople for example.  But the peasant's money income is also strictly limited.  Even if he is able, with the help of new tools and technologies, to increase productivity and thus the volume of goods he sells, a process that takes time, he will not similarly increase the money value of his product.  For as peasants produce more goods, the price of the goods declines.  Thus, for example, the volume of grain produced world wide increased by 2.4 times over the past 40 years.  Yet the total market value of the grain crop, in constant dollars, has actually fallen by 11%.[5]

            Under capitalism, over the long run, the prices of given types of goods are roughly proportional to the labor time (of average productivity) expended in making them.  So over the long run, the total value produced by a given population of peasants is limited by the labor time available to them.

            The only way to increase this value is for the peasants to increase their productivity over the world average, which is possible for individual groups of peasants, but not for peasants as a whole, since they represent the bulk of the world population.

            Thus increasing the external market means increasing the number of peasants in the external market, and increasing it far more rapidly than the slow natural growth of population. Capitalism, in its insatiable drive for markets, forcibly opens to trade nation after nation, through war, revolutions and imperialism.  The need for these new markets provides capitalism with its dynamic.  And capitalism accelerates this process because it is continually eating away at these new markets.  As peasants become progressively indebted, as their land is foreclosed, they are proletarianized, converted to part of the wage work force.  So capitalism must be continuously replacing these peasants who are absorbed into the wage earning population, as well as finding new markets for the expansion of capital and production.

            But at the same time, this very process of ransacking the earth for new markets provides capitalism with its other needs.  By generating an ever growing supply of impoverished peasants forced from the land, capitalism forms a reserve army of labor, which applies downward pressure on all wages, at the same time allowing the work force, in boom times, to grow far faster than natural reproduction.  This process is still at work today, as for example, Chinese peasants are driven off the land into factories to make goods for the world market at a fraction of the wages earned in the advanced countries, but in direct competition with their products.  Without such a reserve army of unemployed, desperate for work, shortages of labor would have developed as capitalism expanded, forcing wages upwards and profits down.

            Second, and equally important, the progressive incorporation of more and more of the earth into the capitalism market provides capital with the raw materials needed for production.  Not only was the linen of English textile mills sold to Indian peasants, the cotton for it came from non-capitalist production:  the slave plantations of the American South, and later the feudal plantations of Egypt.  As more and more land is encumbered with capitalist debt, and subsequently foreclosed, the vast mineral wealth underneath falls into the hands of world capital.

            Thus the process of expansion of the external market, the progressive incorporation of non-capitalist layers into that market, is essential for capitalism.  And it is at the same time, the Achilles heel that dooms capitalism.  For it is impossible to continuously expand the external market.  At one point, a point reached some time ago, the entire world was incorporated into the capitalist market and it could no longer expand.  At that point capitalism itself could no longer expand and entered a prolonged crisis.




            To understand the nature of the present economic crisis, its necessary to see in outline how capitalism first developed, and now is decaying.  The history of capitalism has been the history of this struggle to expand the external market.[6]  And at no point has it been a story of mainly peaceful trading.  At every point, capital has had to violently disrupt existing social and economic relations and set up new ones, forcing other populations to buy its products and trade with it.  Initially, this had a progressive impact, as capitalism spurred the destruction of feudal relations in Europe, freeing the peasantry to buy from its growing industry and sell to the towns, rather than merely producing a surplus to be squandered by the feudal lords.  But as capitalism rapidly outstripped the markets of Europe, it turned to imperialism to force open new non-capitalist markets, in many cases by the crudest and most brutal methods.  In China for example, the product capitalism used to open up new markets was opium, and when the Chinese moved to block its sale, the Western power made war on China to force it open to the "benefits" of Western trade.

            In the colonies that it seized by force, in Africa and India, Western capitalists used taxation to break up existing barter economies and to subject them to capitalist market relations.  To raise cash for taxes, peasants were forced to grow more crops for sale on the market, and eventually for shipment to the West.  The taxes, paid into colonial treasuries were then used to pay for railroads, purchased from capitalist factories.  So the surplus "purchased" by peasants was not just means of consumption, but railroads bought with their taxes.  In other countries, debt became the lever for capitalist penetration.  In Egypt, the sultanate ran up vast debt purchasing steam tractors for cotton plantations, paid for by shipments of cotton to English textile mills and by growing taxes on the Egyptian peasantry.  When Egypt defaulted on the loans, the British and French took over Egypt as a colony in "payment" for the loans. (We see the same pattern today, when banks take control of state-owned industries in the Third World in exchange for debt.)

            Wherever, as in North America and Australia, farmers had access to abundant land and could produce large surpluses for trade over and above their own needs, capitalism flourished and grew.  But in the rest of the world, where land was scarce or poor, and surpluses were small, capitalism extorted from peasants what little they had, emiserating them further, disrupting the basis of their societies and bankrupting them.

            In less than two centuries after the establishment of capitalist production in England, world capitalism had, by the end of the nineteenth century, divided up the entire planet, integrating every population into the capitalism market.  The growth of the external market was no longer possible.  And it was at that point that the long term crisis that has characterized the entire twentieth century began.

            Once the expansion of the external market was no longer possible for capital as a whole, the very basis of capitalism was threatened in the early years of this century.  A constant sale of surplus, a constant amount of profit meant that capital could not accumulate.  More capital would yield the same amount of profit, not more profit.  The rate of profit would sink, and the value of capital, which for the capitalist lies solely in its ability to generate profit, would evaporate.  Ultimately since profit is, in reality, a rate of growth of profit -- a 10% profit means a 10% rate of growth --a stagnant profit is the same in the long term as none at all.

            So individual national capitals -- English, German, Russian, American, could only grow by taking markets forcibly from other national capitals.  The result was a rapid build up of international tension leading to the catastrophe of World War I, a war to redivide the world's colonies and markets. But the war, despite its gigantic destruction of life and wealth, decided and changed nothing.  Indeed, the revolution in Russia pulled one significant section of the peasantry out of the capital's orbit altogether.

            To avoid the consequences of stagnating profits, capital first tried in the 1920's to increase the realization of surplus by the proven method of increasing the debt of, especially, the mainly agricultural nations of Latin America and Eastern Europe, and by applying greater pressure on the colonies. Temporarily, the rise of such debt would increase profits, as more goods were sold.  Backed by this rising debt, the world stock markets rose in a speculative bubble.  But since the actual incomes of the peasants were not increasing, the increase in agricultural indebtedness could not absorb all the surplus produced.  Part of it went unsold, destroying part of the capital.  The result was falling production and gradually rising unemployment.

            The new capital produced by the rising debt and by the speculative rise in the stock markets was wholly unbacked by any real rise in production.  On the contrary, production was stagnant or slightly falling.  With production hobbled, the market highly constricted, capitalists faced problems very similar to those they face today.  The results were the same as well.  They applied downwards pressure on wages, attempting to increase the profit on each item sold, as well as attempting to undercut competitors to gain a bigger share of stagnant market.  But of course such decreases in real wages further contracted the market.  Not only was some of the surplus product going unsolved, some of the means of consumption needed to maintain  production were going unsold as well.

            As the gap between the increasing speculative capital and the stagnant or shrinking supply of real goods grew, a burst in the bubble was inevitable.  It came with the stock market crash of '29 and the subsequent collapse of a major European bank, the Creditanstalt, in '31.  In the ensuing Great Depression, the downward cycle of the capitalist crisis, far more than a mere cyclical panic, unfolded swiftly.  Without the speculative credit, capital was destroyed -- loans were written off, stocks shriveled.  With masses of goods unsold, prices plummeted in a devastating deflation.  This, in turn, made more debts unpayable, and shrunk capital further.  With massive layoffs, consumption dropped catastrophically, leading to more layoffs.

            In a desperate effort to maintain profits in the face of a shrinking market, falling prices and unsold goods, capitalists slashed wages.  In the US, with weak unions, this could be done without political repercussion.  But in Germany, with a much stronger union movement, the unlimited slashing of wages meant the smashing of both the unions and their political party, the Social Democrats, as well as destruction of the political alternative on the left, the Communists.  The political vehicle for this destruction of the trade unions was National Socialism.

            While the impact of the Depression on capital in England and France was cushioned by their colonies, which could be squeezed to maintain imports from, and exports to, the imperial countries and in the US by the semi-colonial relation with Latin America, Germany and Japan had no colonies.  A second attempt to redivide the world, this time under much more severe conditions than in 1914, was inevitable.  For German and Japanese capitals to survive, they needed new areas of realization -- new non-capitalist sources of wealth.  To obtain them, they had to conquer them.

            In Nazi Germany, capitalism assumed its most extreme, degenerated from.  Unlike the case of a growing capitalist society, where profit is realized by the sale of a real social surplus, and the surplus reinvested in expansion of production, in Germany, real social production continued to contract -- there was no actual social surplus.  Instead, capitalist profit became capitalist consumption, the production that should have been used to expand production went into goods for use by the capitalist class.  These were not in general luxury goods but armaments.  Armaments were products that could be sold to the government for a profit, but unlike industrial plant and machinery, would not require an expansion of production, which, without an external market, was impossible.  And these arms would in turn provide the means to "open up" such new external sources of wealth.

            In all but the very short run, simply selling arms to the German government could not realize profits.  The government would pay off the arms only by money taxed from German workers and peasants, a fixed and small population.  As we have seen, any ongoing realization of profit required an expanding non-capitalist population.  To obtain that growing source of external wealth, Germany attacked in Europe, launching World War II, while Japan invaded China and South East Asia.

            As Germany conquered a new area, its wealth was absorbed, but not at all by peaceful trade.  On the one hand, both the money and the material production of the conquered peasantry was "taxed" or simply seized by the Germany conquerors.  This vastly expanded governmental income was then used to pay for a vastly expanded production of armaments bought from German capitalists.  Second, the capitalist enterprises of conquered countries was seized are bought at very low prices, and turned over to German firms, which converted them as rapidly as possible to suppliers of the burgeoning needs of the Wehrmacht.  Finally, the labor costs of German industry was reduced to a minimum as the Nazis rounded up millions of Jews, Poles, Gypsies and others and enslaved them, renting the slave labor forces out to German industry.  Slavery was revived in conditions of modern industry, and on a gigantic scale -- one third of the German industrial work force was slave labor. Those used up by slave labor at starvation rations, those too young or old or sick to work, were consigned to the extermination camps, so that no unproductive consumer would exist.  This was the unemotional capitalist logic behind the horror of the Holocaust.[7]




            The Nazi war machine represented capitalists reverting to earlier forms of society based on slave labor.  On its own, it could only generate horror and catastrophe on ever enlarging scales, since the faster German capitalist profits rose, the more demand there was for further expansion, and the more destruction of humanity in the slave labor camps, the more grinding up of social capitals and its conversion to armaments. Japan was following a similar arc in its battle to conquer China.

            But American and British capital, faced with the deadly threat from Germany and Japan, fought back, now in alliance with their erstwhile enemy, the Soviet Union.  The Second World War was not, however, merely a battle of nations, as the First had been.  The battle against fascism mobilized millions of people and was enthusiastically supported in the Allied nations and among the occupied peoples because many saw it as a battle for survival of working people against a revived slave system.

            The victory of the Allies in this war paved the way for a temporary suspension of the global capitalist crisis that had begun thirty years earlier.  Unlike the indecisive first World War, the Second World War did lead to a redistribution of the world market.  All of capitalism was absorbed by American capital.  The capital of Germany and Japan was in essence written off in its entirety, while French and British capital was massively reduced by an American dictated devaluation of their currencies.  The US, alone among the victor nations, had an intact industrial economy and financial base.

            The absorption of other capitals by American capital was accompanied by a great general reduction in the value of world capital, with the destruction of German and Japanese capital and the reduction in British and French capitals.  This was the first pillar of post war recovery.  The crisis had begun when capital's demand for profits outstripped the entire non-capitalist sectors ability to realize those profits.  But now with billions of dollars of capital wiped out at the end of the war, capital's demands had drastically shrunk, far below the scale of available external markets.  There was thus room for renewed expansion.

            Corresponding to the destruction of financial capital was the vast destruction of the real economy.  The industry of Europe, and Japan lay in ruins, Africa and India faced famine. So not only was the capital seeking profit radically reduced, the amount of surplus that could be produced by shattered industries was much smaller as well.  So, although Eastern Europe and China were rapidly removed from the capitalist sphere, the level of surplus production and its sale, or realization, could still be greatly expanded from the shrunken level of 1945.

            The basis of post-war reconstruction was the export of US capital to rebuild industry in Europe and Japan.  Not only the billions of the Marshal plan loans flowed to these nations, but so did millions of tons of US made machinery, especially machine tools.  Recovering European and Japanese industry in turn exported capital in both the form of loans and investments and in the form of industrial and agricultural machinery, to the Third World countries, especially India, and Latin America.  This, then, allowed the recovery of production in those countries to begin, so that their exports flowed back to, above all the United States, but also to West Europe and Japan.  Idled resources and unemployed labor in both the developed countries and the Third World was reemployed, allowing a period of growth.

            But before this scenario could be set in motion two additional conditions were needed.  First, wages must not be allowed to rise too rapidly, or the profit rate, which had risen drastically as the amount of capital decreased, would itself fall.  Thus in France, where real wages had nearly recovered their pre-war levels by 1947, in the wake of liberation and mass struggles by the unions, the government launched an offensive that beat wages back down nearly to their 1945 levels by 1950, a fall from 1947 of some 40%.  In the US, the continuing surge of CIO organizing and the concomitant rise in wages during the strike wave of the late forties was brought to heel by McCarthyite purges of the left wings of the unions.  In Japan, the union upsurge unleashed in the first years of the US occupation was broken by a savage repression.  In the early fifties real wages plunged.

            Second, the artificial depression of wages below the real costs of the reproduction of labor meant that capitalist income, profit, was swollen above the real social surplus.  To put it another way, by forcing wages down, the capitalists were limiting the opportunities of investment in new plant and equipment, since they were artificially contracting the demand new factories would feed.  Of course, real investment, real rebuilding was going on, but at a slower pace than it would have occurred if wages had been allowed to rise rapidly to pre-war levels in Europe and Japan.

            As in earlier periods, the difference between capitalist income and real social surplus had to be absorbed by armaments.  It was not until the Korean War gave the political excuse for a massive revival of the armaments industry that the world economy really began to return towards full employment.  Indeed, during the entire post war period, a huge armaments industry continued to grow, representing the difference between society's ability to produce goods, and capitalism's limits on employing these goods in a productive way.

            On the basis of these conditions, an economic recovery did get under way in 1950.  Initially, as capitalists rushed to expand production during the Korean War, they concentrated investments in the United States, where labor was the more productive the infrastructure was undamaged by war.  This occurred despite a yawning gap in wages between the US and war ravaged Europe and Japan.  So unlike today, where capital continually chases the lowest wage workers available, in the early '50s investment was heaviest in the highest wage areas. Unemployment in the US dropped to 3% while it hovered around 10% in much lower wage countries like Italy.

            This is not a paradox.  When demand exceeds capacity, as it did in the fifties, with capacity still shrunken by war time destruction, an expansion in profit occurs by expanding production as rapidly as possible, so long as the external market needed to realize profit is also growing.  Such expansion is swiftest where productivity is highest and where infrastructure is most available -- even if wages are also higher.  It is only when the market is stagnant that capital relentlessly seeks the lowest wages to extract the most profit from that fixed level of production.

            With the rise in production and low unemployment, US labor, although crippled by the political defeats of the McCarthy era, was able to extract continuous wage and working condition improvements from employers.  As wages increased, the American working class could afford more children --producing the baby boom of the '50s.  (During the '30s and '40s American families could barely afford the two children needed for long term reproduction of the populations, but by the mid '50s three and four children was the norm - see Figure 2).




            But within a few years after the recovery really got under way in 1950, the old problems started to reappear on the horizon.  Again, capital's need for profit, growing exponentially at around 9-10% a year, rapidly outstripped the fund available for realization.  This fund is, to repeat, the sales of all goods to non-capitalist producers, both small scale farmers in the advanced countries and peasants in the Third World. (This fund as well includes sales to state-owned producers in all countries.  Again, only producers count here, those possessing productive assets, not merely sales to governments generally.) The money available to these layers consisted primarily of what they earned by selling their surplus (above what capitalists allowed them, not their real needs) to the international market.  Thus the fund available for purchase by the external market from capitalists is defined by the sales from the external producers to the capitalist market. Indeed it is this flow of real wealth to the capitalist that is the critical process.

            We can actually see this occurring in the statistics of the world economy.  From these statistics we know the total sales of farmers in the advanced countries to the capitalist market.  We also know the total exports of the Third World to the advanced countries.  If we deduct from this total the oil exported from the Third World, which is merely an item of trade among capitalist producers, we get a good estimate of the total sales to the capitalist market of Third World peasants.  (It is a bit more complicated than this -- see note for a full explanation of the statistics)[8].  We then add the exports from the then-socialist bloc, whose entire production was non-capitalist.  We can then get the approximate size of the fund available for realizing capitalist profits --capitalist sales to the non-capitalist producers.

            In Figure 3, this fund is the slowly growing solid line, measured in constant, 1995 dollars.  It grows slowly, as the Third World economies recover from the damage of the World war, and as their population grows.

            But we can also see, from world statistics, what is happening to total capitalist profits -- the sum of all after tax profits and net interest in all the advanced capitalist countries.  (The dashed line in Figure 3.)  Profits, growing rapidly, already begin to outstrip the fund for realizations in 1956, only 11 years after the end of the war, and after only six years of sustained growth.

            The immediate impact was in the recession of 1957-58 as accumulated goods found no markets, and capitalists had to cut back production.  With the market clearly not expanding very rapidly, capitalists began to seek ways to cut costs.  In the US, employers attempted unsuccessfully to reduce wages, provoking the prolonged steel strike in 1958.  Failing this, investment in the highest wage areas in Northern US practically halted and new investments were shifted to lower wage areas both in the South, and, above all, in Europe, where wages were only a third of US levels.  Thus, growth in the US dramatically slowed, while growth in Europe equally dramatically accelerated.  US unemployment rose, with production workers in manufacturing falling by about 6%.  In Europe, unemployment dropped rapidly from '56 to '64; in Italy from 9.4% to 2.7%, in West Germany from 4% to 0.7%, and in Denmark, for 10.2% to 2.9%.  Not only were the existing unemployed given jobs, but there was significant actual expansion of employment in industry.  In Italy, over two million peasants moved into the factories, in France over a million. [9] As well, millions of Turkish, Yugoslav, Algerian and other workers moved to the European industrial countries as Gastarbeiter, or "guest workers".

            Despite these new supplies of labor, as unemployment fell, European workers won significant wage increases of nearly 50% from '57-'64.  Capital was forced to begin paying European workers at the level needed to maintain social reproduction, for the first time since before the Depression. Real wages rose rapidly, and in response, as housing became more available, European birth rates rose to around 2.5 children per family (Figure 2).

            At the same time, US capital attempted to further consolidate its dominance of the world market, expanding its share at the expanse of its junior partners, Britain and France.  Colonial Africa remained a preserve of British and French capitalists, and preserved a small degree of independence of these capitals from the US.  During the late fifties and early sixties, the US applied pressure on these former imperial powers to give independence to the remaining colonies, thus opening them up for US capital.




            Yet despite these efforts, the looming crisis was only postponed, not avoided.  Profit levels were maintained, but the underlying problem -- the limits on the ability of capitalists to sell their products -  remained.  As a result, production was increasingly held back by the constrictions of the world market.  Capitalist world steel production per capita, a good measure of the overall level of both industrial growth and the standard of living, grew far more slowly -- by 2.4% a year between '57 and '64 as against 6.6% per year between '50 and '57 (Figure 4)[10].

            With profit and capital growing rapidly -- in part in anticipation of future sales -- but with real production growing far more slowly, a growing gap emerged between monetary capital and the real plant and equipment it was supposed to represent.  Figure 5 shows the growth of world capital -- the sum of all stocks, bonds, bank loans and so on -- in constant dollars, and the ratio of capital to capitalist world steel production.[11]  In the period before '57, capital and production had kept in step.  And capitalists' total investment in the world economy of about $26,000 resulted in the production of a ton a steel annually, (along, of course, with all the other goods that went with that ton of annual capacity.)  But from '58 on, the ratio started to rise and by '64 was nearly 50% higher.

            What this means is that a portion of that capital was fictitious -- it had nothing to do with the real economy, yet it was demanding profit anyway.  But as is always the case, a growing disproportion between money of any sort and real goods has an inevitable consequence -- inflation, which starts to eat away at that fictitious value of money.  By the end of the business cycle, that is, by the time a cycle of production from raw materials to finished products, had been completed in 1964, this inflation began to manifest itself.  Suddenly prices began rising.

            Inflation is a dire threat to capitalists because it devalues the worth of its capital -- it creates an instant loss.  If a capital has a billion dollars, a 5% inflation produces, by itself, a loss of $50 million dollars, and thus reduces a nominal profit of say 10% to a real profit of 5%. So as inflation began in the mid sixties, real profits started to fall far below nominal profits, dropping toward the limits set by realization-- the sales to the external market.  (see Figures 1 and 3)  The net  rate of profit began to fall, and the world economy slipped into another recession, hitting Europe particularly hard.

            Simultaneously, the increasing inflation destabilized the world monetary system, based on fixed rates of exchange among currencies and a fixed price of gold.  First Britain than France and other countries were forced to devalue their currency in terms of dollars to bring them into relation with the real costs of goods.

            Again, the immediate reaction of capital was to increase profits by reducing wages.  In part, this could again be accomplished by shifting to lower wage areas -- to Japan, where wage rates were still only half that in Europe and a quarter that of the US.  And, starting in the mid '60s, heavy investment flowed to Japan, dropping unemployment there, and beginning to bid up wage rates.  But Japan's work force was half that of Europe's, so by itself, this shift would only somewhat reduce global average wages.

            More directly, employers in Europe and the US halted the advance of real wages by fiercely resisting union demands. Real wage increases stopped in Europe and slowed radically in the US, setting in motion the early stages of what would become a global strike wave.  In the US in particular, as the slowing of wage gains began to freeze minority workers, especially African-Americans, out of any possibility of advancement, the civil rights movement, fresh from political gains in the South, turned increasingly towards addressing economic issues, and the frustrations of the ghettos boiled over in the riots of Watts, Newark, and Detroit.  For the first time in decades, the US Army was called onto the streets of American cities.

            While real wages in the US continued to advance, it was not enough to keep up with the growing needs of the population.  As college became more and more of a requirement, families required more income just to maintain the same standard of living.  In response to the slowing of wage gains, birth rates began to drop sharply both in the US and Europe --the post war baby boom was over (Figure 2).  In Europe, the reduction of consumption slowed up most dramatically in the sharp fall in the construction of housing, which dropped by nearly a quarter during the mid sixties.

            But perhaps the most significant shift in capitalist policies after 1964 came in the Third World.  Capitalists realized first of all that their market in the Third World had to expand.  From the point of view we've established here, the fund for realization or sale of the surplus had to increase.  Since no new markets were available, the only way sales to the Third World countries could increase was by forcing those countries to export more.  And that meant cutting consumption through increased taxation on peasant populations.

            At the same time, capitalists looked to Third World countries as a possible way of cutting wages world wide -- by shifting production to them.  But given low levels of infrastructure and productivity, this would only be possible if wage rates in the Third World were cut.

            Neither increased taxation on peasants nor cutting workers wages would be possible in most countries with their existing governments or with any sort of democratic rights. To implement the new policies, American-led capital required savage military dictatorship in the Third World.  And with the help of the CIA, that is what they got.  In 1964, the elected government of Brazil was overthrown by a military coup.  In '65, Sukarno was overthrown by coup in Indonesia, and hundreds of thousands of Communists, who led the main opposition peasant organizations and trade unions, were slaughtered.  In both countries, and in many others around the world, wages were sharply reduced and taxes increased.  The result was a sharp rise in the realization fund -- exports from the Third World jumped and total per capita accumulation increased by almost 20%.

            But despite these moves to increase profits and realization, real profits remained stagnant and the rate of profit continued to gradually decline, dropping to 7%.  And these policies of austerity were not without political costs. In the advanced countries, strikes became more prevalent as workers resisted the employers pressures and, as the post war boom came to an end, there was a broad radicalization of youth, whose opportunities appeared to be shrinking.  Above all, in the Third World there was the very real and growing threat of armed insurgencies against the dictatorial regimes that were imposing austerity.

            It was in this context that the United States, in 1964-65, sent its army into Vietnam.  The Vietnam war was seen by the US economic and political leadership as a test of its ability to crush any insurgency that could arise against the new economic policies.  If it could prevail in Vietnam, where the insurgents had supply lines directly to China and the Soviet Union, then the US could prevail anywhere, went the reasoning.

            At the same time, the war itself had the immediate economic effect of sustaining profits.  With real production constrained by global austerity, the expansion of profit could only mean the expansion, again, of capitalist consumption. This took the form of a massive expansion of the arms industry, as before in the post war period .  Nominal profits, backed by this rapid expansion,  soared upwards.

            But they were again eating away by a ratcheting upwards of inflation.  Real profits continued to fall back toward the limits set by the realization fund -- the difference was consumed by inflation.  To constrain inflation, at least temporarily, the US government would have had to massively raise taxes to finance the Vietnam War.  But popular opposition to the war was growing rapidly by 1967, and President Lyndon Johnson could not afford to inflame it further by linking it to new taxes.  Instead, the government financed the war through an expansion of debt.  This was the first major step toward the ballooning of debt that would characterize the next decades.

            By the beginning of 1968, American-led world capital was besieged by a growing massive wave of resistance to its attempt to impose a global austerity.  Workers in French factories, overcrowded European students, oppressed African American, tax-burdened Third World peasants, and, at the focus of this global conflict, the armed resistance of the Vietnamese were battling against a unified capitalist force. The Tet offensive in January, 1968, by breaking forever the myth of American military invincibility, set loose a global wave of uprisings.  To those outside the US, to whom American power had become a symbol of imperial oppression, the Tet offensive, seemed to show that any power, even one backed by B-52 bombers and half a million troops, could be shaken to its roots.  In America, the offensive demonstrated even to those who had supported the war that it was a bottomless sinkhole of American lives.  And to those within the US, especially youth and African Americans who were already rebelling against the increasing narrowing of their futures, it became a signal for a far more widespread resistance.

            The capitalists themselves rapidly realized that their policies of the last four years had unraveled.  The prices of gold soared, turmoil rolled through the currency and stock markets.  In rapid succession came the enormous African American uprising following the assassination of Martin Luther King in April, the student rebellions at Columbia and other US universities, the May Student protest in France, leading to the gigantic General Strike in France, when 10 million workers occupied nearly the entire industrial plant of France.




            The massive wave of strikes and unrest in 1968 set off a chain reaction of worker outrage and action.  In '69 came the hot autumn of Italy, with general strikes and a huge wave of economic strikes.  In '70 the strike wave peaked in the US, and wildcatting Teamsters joined forces with anti-war student in battles with national guardsmen.  Neither the bureaucratic structure of existing trade unions nor the military and political forces of government could immediately curb this strike wave.

            Confronted with it, the capitalists retreated and gave substantial concessions.  Not only did real wages rise swiftly in '68 and '69, but especially in Europe there were major reforms elsewhere, with the obsolescent and cramped educational system being massively expanded.  Capitalists around the world were frightened that the strike wave would go beyond mere economic demands and threaten their political power and their control of the world economy.  The General Strike in France in May '68 had nearly been a  socialist revolution.  Workers had occupied almost all the factories and plainly expected to reopen them under workers control and socialist ownership.  Only the betrayal of the French Communist Party in settling the strike for limited economic concession and the lack of real alternative leadership prevented the collapse of capitalist rule in France.  The capitalists reasoned that if economic concessions could cool the worker's anger and prevent them from turning further to the left, then concessions would be granted.  Along with such concessions came a political shift -- to de-escalation in Vietnam, detente with the Soviets, and class collaboration in European governments.

            But such concessions came at a cost -- with the external market still limited, increased wages could only come at the direct expense of profits, which fell sharply.  By mid-1970 the real value of stocks had fallen by over a third and the value of capital as a whole, including bonds and other forms of loans was stagnant (see Figures 3, and 5).  World capital desperately floundered for ways to maintain profits and dampen the strike wave.  On the one hand, where they still had maintained their power, they would turn the screws.  In Brazil, the savage military dictatorship was further tightened with roundups, assassinations and torture, ensuring that Brazilian wages could be still further reduced.  But in most of the world, capital lacked the political muscle.  So, central bankers turned to the tried and true cure of unemployment.  In 1969, interest rates were raised in the US and Europe, initiating a recession.  As unemployment jumped upwards, employers were able to drive real wages down, recovering much of what had been lost.

            As soon as the recession started to ease, however, the strike wave resumed.  Again the capitalists were forced to give concessions.  Now, as individual employers strove to maintain profits in the face of wage concession, a surge of inflation rolled through the world economy.  The inflation gathered momentum as the capitalists themselves shifted capital into an increasing cycle of speculation on commodities, bidding them up in the hope of profits greater than those that could be gained by production.

            But the rise of inflation to about 6% per year by mid-73 devoured the value of capital's real profits, which had slipped to zero in '72, dropped to a loss of 2% a year in '73.  The profits above the fund of realization that had been gained in the early sixties were now being paid back with a vengeance. The value of capital was dropping back toward the scale of production, as the fictitious capital built up in the previous decade was eroded by inflation.

            In five years, a massive upsurge by labor had succeeded in redistributing the wealth available.  Global real annual profits fell during this period by $1.5 trillion dollars (in 995 dollars), or $600 per capita, while global real incomes of workers and peasant rose by nearly the same amount (after accounting for population increase), a rise of nearly a quarter. The period of the post war boom, where profits can wages could rise in tandem was over for ever.  The world economy had entered a period in which gains for labor meant losses for capital.  Unfortunately, this proved to be a two-way street.




            While the employers had failed to prevent a further increase in wages in '68-'73, they had succeed in holding onto power and in increasingly channeling labor protest into manageable bounds.  In the US, Nixon, through his freeze on wages and prices in 1971 and subsequent policies, led the trade union leadership into cooperating with government and employers, increasingly discrediting such leadership and demoralizing rank and file workers.  Similar labor-employer collaboration schemes blossomed in Europe.  More significantly, no real left opposition arose to challenge these cozy relationships, a key point we'll return to when we look at the recent history of the labor movement in Chapter 5.

            But, if capitalists were to resume making real profits, if wages were to be successfully reduced, a new strategy was needed.  Neither frontal assault nor labor management cooperation was enough, given the widespread militancy of labor, emerging from the turmoil of the late '60s and early '70s.  Yet something had to be done.  For capitalists, a prolonged period of zero profits or even loses is intolerable. Since the value of capital is only to produce profit, a prolonged lack of profit tends to reduce the value of capital to zero.

            Beginning in '68, capitalists began to formulate such a new strategy and an ideological justification for it.  This justification was the ideology of "zero growth" or "limited resources" -- the notion that the world was running short of vital raw materials and thus must curtail consumption (i.e. workers wages).  This ideology had been developed by various academics over the pervious decade but had attracted little attention, in part because it was so demonstrably false.  But in a series of hurriedly called meetings, most notably by the newly formed Club of Rome, a collection of financial leaders and academics, the "Limits to Growth" were loudly announced to the media and became the basis of a continuing propaganda blitz.[12]

            By 1970, the first steps were taken to implement a new strategy of austerity, with "limited resources" as a cover. Since petroleum is by far the most important raw material in world trade and since the production and distribution of oil was, and is, in the hands of a small number of companies, whose boards of directors overlapped entirely with those of the world's leading banks, it was natural that oil would become the method of imposing a universal tax on the world's population.  While the general inflation that had been gathering momentum in the early '70s eroded capitalists values and was too gradual to beat down workers wages, a sudden increase in the price of a single commodity, whose profits would accrue directly to capital ,could potentially shift a huge chunk of wealth back onto capitalist ledgers.

            There is overwhelming evidence that the OPEC price increases of 1974, in which the price of oil suddenly quadrupled, was not the independent work of producing countries, but were planned, encouraged and made possible by the giant oil companies, the "Seven Sisters".  The official story was that the OPEC oil producing nations imposed a boycott on the Western nations during the Yom Kippur war that followed Egypt's attack on the Israeli forces occupying the Sinai.  Emboldened by the shortage created by the boycott, the OPEC nations increased oil prices in one leap by four fold, from $3 to $12 a barrel.

            But this story of the omnipotent OPEC is a myth.  At the time, not only did the Seven Sisters completely control the distribution and refining of petroleum, four of them -- Exxon, Sunoco, Texaco and Mobil jointly owned Armaco, which produced all of Saudi Arabia's oil (the largest producer in OPEC) and directly controlled the oil production in both Iran and Kuwait.   It was the companies that planned, organized and enforced the "first oil shock".  The Yom Kippur War was merely a convenient political cover.[13]

            The sudden price increase led to a dramatic transfer of wages to profits.  Directly the oil increase represented a global tax of some half a trillion dollars (in 95 dollars) on the entire world population.  Prices at retail rose faster than crude prices, magnifying the effect, so that real wages overall fell by about 10%, giving back about half of the gains since 1967.  In West Europe, housing production, a good indication real consumption, shrank by a third.  Birth rates plummeted in all the industrial nations.  By mid-decade, workers' families were having less than two children on average in all the developed countries. (Figure 2)  In Central Europe, the population had actually begun to slowly decline.

            The level of the realization fund rose by about 10% on a per capita basis.  Non-oil exports from the Third World jumped by nearly 30% in real terms, as Third World countries were forced to sell more to pay for oil imports.  At the same time, they were forced to borrow money to maintain imports.  Squeezed, many nations imposed sharp internal austerity polices to reduce fuel consumption and to make more goods available for export.  In India, a famine resulted as irrigation pumps shut down for lack of fuel.  With wages even further depressed, capitalists began a shift of production out of the developed world and into the Third World, especially in areas such as Brazil and South Korea, where military dictatorships could hold wages down.  While steel plants closed in France, Germany and the US, new ones, often under the same ownership, opened in Latin America and Asia.

            There was, however, no immediate surge in overall profits.  Oil companies' profits did indeed rise spectacularly, but with the general recession set off by the oil price rise, overall profits were stagnant.  In addition, the oil price rise set off another surge of inflation, which further eroded real, net profits.  As nations, businesses and individuals sought to offset the higher costs of energy by borrowing money, there was a huge surge in demand for credit, and an accompanying jump in interest rates.  With interest rates rising, investors jumped out of stock and into bonds, which allowed high, secure returns.  Around the world stock markets crashed, dropping to half their '68 real value or less.  And even though interest yields were high, high inflation wiped out much of credit net profit as well.

            It was not until after the sharp '74-'75 global recession cut demand and moderated inflation that the capitalists began to, for a while, enjoy the fruits of the first oil shock. With both inflation down and wages cut, both profits and real profits soared.  Creditors, such as the major banks, benefited particularly as they collected the high interest loans made in the previous years.  In '76-'77, net world profits jumped upwards by $1.2 trillion, returning briefly to the 1968 level. (see Figure 3)

            The '74-'75 recession was not just another downturn.  It marked the end of the post war recovery.  The year 1973 was in a real sense the high water market of capitalist development in the late twentieth century.  From that point on, standards of living have declined, per capita production has fallen, the entire capitalist world economy has shrunken.  The process of expanded reproduction of the society had come to a halt. Capitalism had bumped up against the same realization problem that confronted it back in 1914.  And, by some measures, the world economy had merely recovered from the disasters of the two world wars and the Depression.  While per capita food consumption in the capitalist sector (excluding the East Bloc) had grown an impressive 50% from the low point of 1948, in 1973 it had achieved almost exactly the same level as was reached in 1914, some 330kg of grain per year. [14](Figure 6)  The distribution had changed -- European consumption was actually less, US consumption about the same, Third World consumption somewhat more, but the total per head was nearly the same as sixty years earlier.  Indeed if the sector under continuous capitalist rule is considered (excluding the Soviet Union, China and East Europe from both earlier and later figures) there had been in some ways a regression.  In 1914, nearly 40% of the population lived in industrialized nations -- but by '73 only 25% did.[15]  Capital had failed to develop agrarian societies into industrial ones as it had done in the previous century.

            Of course, health levels and life expectancies had advanced overall as relatively cheap public health measures such as vaccination became available.  Yet the capitalist sector was, in a real sense, no closer in 1973 than in 1914 to providing adequate food, clothing and housing for all the population.  The reason for this lack of overall progress lies in the process of capitalist accumulation and realization itself.  Once the world economy was entirely integrated into the capitalist market, any real development would reduce the size of the external market, the agricultural sector and thus cut off further industrial expansion.  The end of post war expansion in 1973 confirmed what had already been clear to the most far sighted in 1914 -- capitalists' progressive role in the development of humanity is over.

            The shift from economic expansion to stagnation and contraction was reflected in the shift in the source of capitalist income.  During expansion, capitalist income came mainly from profit on equity (stocks in corporations), and at least part of this profit was reconverted into investments in industry.  But with the onset of the contraction, net new investment in industry shriveled up.  At the same time, there was a continued growth in debt and interest, so that the main portion of capitalist income now was becoming interest on loans.  By the end of the '70s almost half of US capitalist income was interest.

            The income from elevated oil prices was not invested in new industry -- this was impossible when production was stagnant.  It was "recycled" as petrodollar loans -- vast new amounts of credit to the Third World, to businesses and individuals.

            Loan capital -- debt -- while a part of total capital, plays a different role in the capitalist economy than does equity and profit.  Equity -- accumulated profits -- can, as we've seen only grown through the growth of the external market.  Not so debt.  Since debt simply represents the transfer of wealth from one part of the economy -- generally workers and peasant -- to capital, it can grow even with a fixed external market or a contracting one.  The interest on the debt is simply a deduction from the wages of workers or the incomes of peasants.  But in such circumstance, for loan capital to accumulate, for the return from interest to grow, wages and peasant incomes must continuously drop.  So as debt becomes the predominant form of capitalist income, capital become purely parasitic -- it can only be grown as the world economy shrinks, as standards of living drop.

            Finally the economic shifts after 1973 were also reflected in political shifts.  The era of detente with the Soviet Union, of concessions to working class movement around the world, came to an abrupt halt.  The CIA-organized Chilean coup that overthrew the leftist government of Salvador Allende and installed the ruthless dictatorship of Pinochet was a signal of this shift, as was the increasing hardening of US foreign policy against the Soviets.

            The post war expansion was definitely over.  But the real collapse of the world economy was yet to come.