Duncan Hallas

Western Capitalism:
The Latest Phase


Published in International Socialism (1st series), No.44, July/August 1970, pp.36-8.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

“For Western capitalism is once again creating conditions for the convergence of working-class protest and revolutionary politics that could change the world.” [1] So concludes Kidron in the revised paperback edition of Western Capitalism. Its publication coincided with a fall in the New York stock market so massive as to produce a rush of references to October 24, 1929 in the serious press. The thesis of the book’s new third section, boldly entitled Predictions, that Western capitalism’s built-in stabiliser, the permanent arms economy, is now becoming a destabiliser and source of crisis, appeared to receive impressive confirmation. At the very least, the ruling class of the USA is losing confidence. Perhaps the end of the long boom is really in sight

Not that Kidron forecasts catastrophe and collapse. His case is that the ruling classes of the West now face such a complex of intractable structural problems that whatever policy options they chose, exacerbate some aspects of them and are bound to sharpen the class struggle. Economic expansion will continue, although more slowly and more irregularly Than in the last two decades. But the relatively strain free and “peaceful” expansion of the fifties and sixties is already fast receding into history. The seventies will be a decade of massive social struggles, of the revival of revolutionary socialism in the West.

So runs the prediction and there is no shortage of evidence for it. The wages explosions in every Western capitalist country, the repeated falterings of the international exchange mechanism, the growing regional problems, the creeping rise of unemployment, the Negro revolt, the student radicalisation, the reappearance of revolutionary grouplets, all seems to point in the same direction. Yet it could be argued that these are transitional problems associated with adjustment to a new phase of capitalist expansion. Certainly, in and of themselves, they are an inadequate basis for predicting the red dawn. The question is the validity of the underlying analysis and this, in turn, depends in part on the correctness of Kidron’s initial argument that the arms economy was the root cause of the great boom.

Three basic theories have been advanced to account for the explosive expansion of post-war capitalism. The first, the growth of state economic planning and management as such, has lost much of its plausibility. Perhaps it would be more accurate to say that it is now less suitable to the ideological requirements of the politicians and academics who used to be its main propagandists. The status quo they now seek to justify is one in which huge international and multinational firms freely shift huge resources across national frontiers. In the corresponding ideology neo-liberalism is a larger component than neo-mercantalism. And so the tune changes. Professor Milton Friedman, an influential theorist of conservative American opinion, proclaims that “we simply do not know enough to be abler to use either fiscal policy or monetary policy as a flexible and sensitive instrument to control the course of the economy.” [2] Of course, State planning and management exist and have great importance. But not as a stabiliser. As Kidron convincingly demonstrates they are probably, on balance, a destabilising factor for the Western economy as a whole. Certainly they cannot account for economic growth and high employment. “In Britain, at least, where economic policy has, more often than not been directed at creating rather than alleviating unemployment, the contrary view is untenable.” [3]

A more persuasive case has been presented for a second theory, that of the “wave of technological innovation” or “second industrial revolution” (or third according to some authors). In Ernest Mandel’s formulation “long-term waves of more rapid expansion are explained basically by a rapid succession of technological innovations which tend to appear ‘in bunches’. This same explanation seems sufficient to account for the long-term wave of accelerated growth which world capitalism witnessed since the beginning of World War II. We could even add that this movement of technological innovation – generally called the third industrial revolution – has a tendency to become permanent, which is something quite new in the history of capitalism”. [4] There can be no dispute about the avalanche of innovation or about its increasing rate or about the steady shrinkage in the interval between invention and manufacture. “Thus Frank Lynn did a study for the United States Commission on Technology, Automation and Economic Progress on the rate of maturation of 20 major American innovations of the period 1880-1955; the results show an average span of 37 years from conception to commercialisation during the period 1885-1919; 24 years during the post-World War I era; and 14 years since the Second World War.” [5]

Yet Kidron is surely correct in rejecting this as the prime cause of the prolonged economic expansion. “Innovation,” he says, is important. It is hardly autonomous.” [6] This is an old problem. Innovation is both a necessary condition and a consequence of major expansion. What cannot be assumed is a simple casual relationship between the two. “The puzzle lies in the relationship between making profit and technological innovation. It is often assumed that an economy of private enterprise has an automatic bias towards innovation, but this is not so. It has a bias only towards profit. It will revolutionise manufactures only if greater profits are to be made in this way than otherwise.” [7]

In the conditions of late capitalism the relationship is primarily determined by the type and level of military and space expenditure. This is the heart of Kidron’s case. On the one hand increasingly sophisticated armament production is the greatest source of technological advance – 52 per cent of all expenditure on research and development in the USA was for direct military purposes in 1961-62. [8] On the other hand, arms expenditure is the major factor offsetting the tendency of the rate of profit to decline and thus postponing overproduction and slump.

The last point is crucial. If it is not valid the whole thesis falls and it is a pity that Kidron did not take the opportunity, in this revised edition, to expand the rather curt exposition of his version of Marxist crisis theory. Not that his argument is unsound given its assumptions. But the theoretical level of the reviving revolutionary left reflects the decades of isolation when the attempt to maintain the basic tenets of Marxism in a hostile environment with few resources inevitably produced a certain primitivism.

Kidron tends to assume too much here. He tells us baldly “Von Bortkiewicz showed, in a paper published in 1907, that the capital-labour (value) ratio in luxury goods production (for the personal consumption of capitalists) has no part in determinbig the rate of profit” [9], then shows that the neo-Ricardian Sraffa arrives at the same conclusion and leaves it at that. Unfortunately this will not do for a readership which is, by and large, unaware of the controversies of the early years of this century. Thus it is possible for a writer regarded in some circles as something of an authority on Marxian economics to state “Why arms production is a ‘drain’ and why it has a restraining effect on the tendency of the organic composition of capital to rise, remains an absolute mystery”. [10] If it is a mystery to Ernest Mandel then, clearly, a more detailed exposition of the case is needed. Kidron himself has discussed the problem elsewhere [11] but it may be useful to present its elements here.

In the first volume of Capital, published in 1867, Marx argued that the value of a commodity was determined by the quantity of socially necessary labour incorporated in its production. Given that the labour-capital ratio (organic composition of capital) was uniform throughout the branches of production and that effective competition obtained, prices would tend to equal values. In the third volume, published by Engels in 1894, the assumption of uniform organic composition was dropped. Once this is done, as it must be if the model is to be applied to the system as it actually exists, values and prices cannot be simply equated.

This is a serious matter for there is then no reason to assume that the rate of profit will be roughly equal in the various fields of production. Thus, for example, if the organic composition of capital in petroleum refining is much higher than in the garment trade, a plausible assumption, then the rate of profit in the latter, labour intensive industry should be much higher than in the former. This is contrary both to the requirements of theory and to empirical observation. As Marx himself pointed out “there is no doubt that, aside from unessential, accidental, and mutually compensating distinctions, a difference in the average rate of profit of the various lines of industry does not exist in reality, and could not exist without abolishing the entire system of capitalist production”. [12] This is the alleged “great contradiction” of Bohm-Bawerk and others. It gives rise to the so-called “transformation problem” – the development of a scheme for converting values into prices according to some general rules. Marx’s own solution accepted that the law of value did not operate directly but postulated that a sort of averaging out process took place so that the capitalist did not receive the amount of surplus value actually produced by his workers but rather a share in the overall total proportional to his capital. His transformation scheme was intended to show how this took place. In fact, as various critics showed, this scheme is logically untenable.

The significance of Von Bortkiewicz is that he produced a logically rigorous transformation scheme which shows how the process actually takes place. [13] All of which might seem remote from our subject. In fact it takes us to the heart of the matter. For Von Bortkiewicz’s algebra proves conclusively that “Department III” production – “luxury goods” – do not directly affect the rate of profit. “Luxuries” are equated by Kidron with armaments, a valid equation in that they are not used either as instruments of production (“Department I”) or as wage goods (“Department II”).

Von Bortkiewicz, as a neo-Ricardian critic of Marx, was concerned to show that there was nothing inevitable about the tendency of the rate of profit to decline given Marx s assumptions, including the tendency of the organic composition of capital to rise. Hence there was no reason to assume that capitalist crises must necessarily become more severe.

The argument is undoubtedly valid as far as it goes. As Sweezy, writing in 1946, conceded “to demonstrate that there is no necessary connection between variations in the average composition of the total social capital and variations in the average rate of profit, one need only assume that the organic composition of capital in Department III rises whilst everything else remains unchanged. The average organic composition of capital must rise, but the rate of profit remains unaffected.” [14] He goes on to argue the practical significance of this criticism is not great. [15] Yet in fact it is enormous; arms expenditure corresponds to about one half of gross capital formation throughout the world. [16] It does in fact constitute a massive drain for capital and a huge market for “end goods”. If Mandel and similar critics wish to be taken seriously they have to show, concretely, an alternative mechanism that could achieve results of the same order of magnitude. [17]

Alternative mechanisms can, of course, be postulated; have been indeed by various reformist theoreticians. “Defence spending could be replaced by other forms of government spending ... houses, roads, dams, power stations, schools, etc, etc.” [18] The difficulty of such proposals is essentially a question of their size. [19] The experience of the New Deal in the thirties is instructive in this connection. In spite of unprecedented state expenditure of the “social service” and “hole filling” variety the us economy relapsed into a second slump, superimposed on an already low level of activity, in 1938-39. Further, economic stimulation on the required scale was effectively impossible because “too much productive expenditure by the state is ruled out. Seen from individual capitalist’s corner, such expenditure would be a straight invasion of his preserve by an immensely more powerful and materially resourceful competitor. Seen from that of the system, it would lead to such a rapid build-up of the capital-labour (value) ratio, to use one mode of expression, or to such a low marginal productivity of capital, to use another, and to such a low average rate of profit as a consequence, that the smallest rise in real wages would precipitate bankruptcy and slump. Shorn of technicalities, too much productive expenditure on the pan of the state would both upset the balance between individual capitals and accentuate the system’s bias towards overproduction.” [20]

Hence the unique importance of “Department III” production. Hence the correctness and crucial importance of Kidron’s theory.

Towards the end of the sixties the stability of the permanent arms economy began to decline, in part because of the massive capital growth it had promoted, in pan because of the growing effect of the uneven incidence of arms expenditure, in part because of the extraordinary growth of labour productivity in Department III, in part because of the increasing political crisis its irrationality generates.

The consequence of the first was to increase the absolute amount of arms spending needed to keep it at the same level of importance relative to Departments I and II. The consequences of the second was to make this extremely difficult. In practice it was not achieved. “Neither Cuba nor Vietnam have reversed the declining trend in Western arms expenditure, as a proportion of government spending they have dropped from 25 per cent in 1955 to 17 per cent in 1965. [21] Essentially this is a problem of the relative weight on, mainly, the US economy and the associated balance of payments problems. Nevertheless the evidence is not all on one side. Kidron attaches great importance to the us (and Russian) decision to develop ABM systems. This must involve massive resources. “In its early phase it promises to involve 15,000 firms in 72 Congressional Districts, to create a million jobs.” [22] And also “Because of the enormous quantities of equipment involved, and the new rapid rate at which technology changes, to maintain an effective system one would essentially have to turn over the whole system, the whole $20 billion system, every few years.” [23]

If such a programme is rapidly developed it must give a tremendous upward push to the inflationary spiral and hence precipitate dangerous balance of payments problems which could disorganise the international exchange system. If not the relative weight of Department III spending continues to decline and long-term unemployment is likely to grow.

The difficulties of adjustment are exacerbated by the increasingly capital intensive character of the arms industry. On the one hand this is valuable to the system in maintaining the rate of profit, on the other hand it means fewer and fewer jobs per megadollar. It makes possible the extraordinary situation in which inflation and unemployment rise together while overall production is relatively constant. The revolt in the ghettos and its murderous repression, the mass radicalisation of student youth and the loss of confidence by the ruling class itself are all tied into this intractable dilemma. Given the enormous specific weight of the us economy in the Western economy as a whole the effects will spread throughout the system to amplify all the home grown problems of European capitalism. The long era of “economic miracle” is ending.

The book has its defects. The argument is sometimes extraordinarily compressed. The conceptual scheme which excludes, as a first approximation, the relationship of Western capitalism to the “Third World” and to the state capitalist countries necessarily implies that its conclusions must be modified, in some degree, when these relationships are taken into account. Nevertheless Western Capitalism is indispensable. No single substitute exists. It is a basic text for contemporary socialists.



1. Michael Kidron, Western Capitalism Since the War, Penguin, 6s, p.174.

2. Quoted in Kidron, op. cit., p.172.

3. Ibid., p.43.

4. Mandel, The Economics of Neo-Capitalism, in Socialist Register, 1964, p.57.

5. Landes, The Unbound Prometheus, 1969, p.519.

6. Kidron, op. cit., p.47.

7. Hobsbawm, Industry and Empire, 1968, p.25.

8. Kidron, op. cit., p.51.

9. Ibid., p.55.

10. Mandel, The Inconsistencies of State Capitalism, 1969, p.6.

11. Kidron, Marx’s Theory of Value, IS32.

12. Marx, Capital, Vol.III, Saraswaty edition, p.117.

13. Sweezy, Theory of Capitalist Development, 1946. Von Bortkiewicz’s transformation equations are discussed, pp.115-123.

14. Ibid., p.124.

15. Ibid., p.125.

16. Kidron, Western Capitalism, p.49. (My emphasis – DH)

17. In Mandel’s case, his first difficulty is to recognise the existence of the problem. Thus he writes, “So the calculation of an ‘organic composition of capital’ in the arms industry, separate and apart from that of the ‘civilian sector’, is completely meaningless to establish the trend of the average rate of profit which results precisely from the social average between all sectors, including the arms sector’. (The Inconsistencies of State Capitalism, p.6, Mandel’s emphasis.) The same author’s exposition of the transformation problem in Marxist Economic Theory (Vol.1, pp.158-162) ignores the main issue.

18. Strachey, Contemporary Capitalism, quoted in Kidron, op. cit., p.54.

19. “Our objections to it (welfare expenditure – DH) ... As an economic substitute for war it is inadequate because it would be far too cheap.” Report from Iron Mountain, 1968, p.92.

20. Kidron, op. cit., p.54-55.

21. Ibid., p.62.

22. Ibid., footnotes p.153.

23. Ibid., footnotes.


Last updated on 19.10.2006