The historical significance of state capitalism

Within the traditional Marxism of both the Second and Third Internationals state capitalism is viewed as the highest form of capitalism. As Marx argued, the prevalent tendency within the development of capitalism is the both the concentration and centralization of capital. As capital is accumulated in ever large amounts the weak capitals are driven out by the strong. Capital becomes centralized into fewer and fewer hands as in each industry the competition between many small capitals becomes replaced by the monopoly of a few.

By the end of the nineteenth century the theorists of the Second International had begun to argue that this tendency had gone so far that the competitive laissez-faire capitalism that Marx had analyzed in the mid-nineteenth century was giving way to a monopoly capitalism in which the key industries were dominated by national monopolistic corporation or price-fixing cartels. It was argued that the development of such monopolies and cartels meant that the law of value was in decline. Output and prices were now increasingly being planed by the monopolies and cartels rather than emerging spontaneously from the anarchy of a competitive market.

Furthermore it was argued that in order to mobilize the huge amounts of capital now necessary to finance large scale productive investments in leading sectors such those of the steel, coal and rail industries, industrial capital had begun to ally, and then increasingly fuze, with banking capital to form what the leading economic theorist Hilferding termed finance capital. Within finance capital the huge national monopolies in each industry were united with each other forming huge national conglomerates with interests in all the strategic sectors of the economy. The logical outcome of this process was for the centralization of finance capital to proceed to the point where there was only one conglomerate that owned and controlled all the important industries in the national economy.

However, the growth of finance capital also went hand in hand with the growing economic importance of the state. On an international scale the development of finance capital within each nation state led to international competition increasingly becoming politicized as each state championed the interests of its own national capitals by military force if necessary. Against rival imperial powers each state had begun to carve out empires and spheres of influence across the globe to ensure privileged access to markets and raw materials necessary to its domestic capital. At the same time the development of huge monopolies and finance capital forced the state to take a far more active role in regulating the economy and arbitrating between the conflicting economic interests that could no longer be mediated through the free operation of competitive markets.

As a consequence, the development of finance capital implied not only a fusion between industrial and banking capital but also a fusion between capital and the state. Capitalism was remorselessly developing into a state capitalism in which there would be but one capital that would dominate the entire nation and be run by the state in the interests of the capitalist class as a whole. For the theorist of the Second International it was this very tendency towards state capitalism that provided the basis of socialism. With the development of state capitalism all that would be needed was the seizure of the state by the working class. All the mechanisms for running the national economy would then be in the hands of the workers government who could then run the economy in the interests of the working class rather than a small group of capitalists.

But this notion that state capitalism was the culmination of the historical development of capitalism, and hence that it was capitalism’s highest stage, arose out of the specific conditions and experience of Germany at the end of the nineteenth century. Germany’s rapid industrialization following its unification in 1866 had meant that by the end of the nineteenth century it was seriously challenging Britain as Europe’s foremost economic power. At the same time the rapid emergence of an industrial proletariat had given rise to the German Social Democratic Party which was not only the first but also the largest and most important mass workers party in the world and as such dominated the Second International. It is perhaps no surprise then that the Marxist theorists of the Second International, whether German or not, should look to Germany. But their generalization of the development of capitalism of Germany to a universal law was to prove an important error.

This error becomes clear if we consider the other two leading capitalist powers at the end of the nineteenth century: Britain that had been the leading capitalist power throughout the century, and the USA, along with Germany were rapidly overtaking Britain in economic development. Of course, in both Britain and the USA capitalist development had seen the prevalence of the tendency of the centralization and concentration of capital that was to lead to the growth of huge corporations and monopolies. Furthermore, partly as a result of such a concentration and centralization of capital, and partly as a result of the class conflict that accompanied it, the state was to take on increasing responsibilities in managing the economy in the twentieth century. However, there was no fusion between banking and industrial capital nor was their a fusion between the state and capital on any scale comparable that which could be identified in Germany either at the end of the nineteenth century or subsequently in the twentieth century.

The international orientation of British capital that had become further consolidated with the emergence of the British Empire in the late nineteenth century, meant there was little pressure for the emergence of finance capital in Hilferding’s sense. British industrial capital had long established markets across the world and was under little pressure to consolidate national markets through the construction of cartels or national monopolies.

Equally British banking capital was centered on managing international flows of capital and investing abroad and was far from inclined to make the long term commitments necessary for a merger with industrial capital. British industrial capital raised finance principally through the stock market or through retained profits not through the banks as their German counterparts did. While the British state pursued an imperial policy that sought to protect the markets and sources of raw materials for British capital it stop short there. The British State made little effort to promote the development of British capital through direct state intervention since in most sectors British capital still retained a commanding competitive advantage.

In the USA the concentration of banking capital was restricted. As a consequence there could be no fusion between large scale banking capital and large scale industrial capital. As a continental economy there was far more room for expansion in the USA before capitals in particular industries reached a monopolistic stage and when they did reach this stage they often faced anti-trust legislation. Furthermore, the relative geo-economic isolation of the USA meant that protectionist measures were sufficient to promote the development of American industry. There was little need for the US government to go beyond imposing tariffs on foreign imports in order to encourage the development of domestic industry. As a consequence there was not only no basis for the fusion of industrial and banking capital but there was also little basis for the fusion of the state with capital.

In the twentieth century it was the USA, not Germany, that took over from Britain as the hegemonic economic power. While it is true that the tendency towards the concentration and centralization of capital has continued in the USA, that both state regulation and state spending has steadily increased, and that with the emergence of the industrial-military complex there has grown increasing links between the state and certain sectors of industry, the USA, the most advanced capitalist power, can hardly be designated as having a state capitalist political-economy. Indeed, with the rise of global finance capital and the retreat of the autonomy of the nation state, the notion that state capitalism is the highest stage of capitalism has become increasingly untenable.

If state capitalism is not the highest stage of capitalism as was argued by the theorists of the Second and Third Internationals then what was its historical significance? To answer this we must first of all briefly consider the particular development of industrial capitalism in Germany which were provided the material conditions out of which this notion first arose.

Germany and the conditions of late industrialization

As Marx recognized, Britain provided the classic case for the development of industrial capitalism. After nearly four centuries of evolution the development of mercantile and agrarian capitalism had created the essential preconditions for the emergence of industrial capitalism in Britain by the end of the eighteenth century. Centuries of enclosures had dispossessed the British peasantry and created a large pool of potential proletarians. At the same time primitive accumulation had concentrated wealth in the hands of an emerging bourgeoisie and embourgeoified gentry who were both willing and able to invest it as capital.

The early decades of the nineteenth century saw the rapid industrialization and urbanization of Britain. By the mid-nineteenth century Britain had established itself as the ‘workshop of the world’. Britain’s manufacturers flooded the world markets, particularly those of Europe. The development of the factory system and the subsequent application of steam power meant that the products of British industry were far cheaper than those of European industries that were for the most part still based on handicraft production.

As a consequence much of the proto-industrial craft production that had grown up across Europe during the previous two centuries faced ruin from British industrial production. Whereas in Britain the emergence of industrial capitalism had seen a retreat in the role of the state and the emergence of laissez-faire, on the continent the ruinous competition of British industry forced the European states to take measures to protect and foster domestic industry. Indeed British economic competition meant there was no option for the gradual evolution into capitalism. On the contrary the European ruling classes had to industrialize or be left behind. If the domestic bourgeois proved to weak too carry out industrialization then the state had to carry out its historical mission for it.

The 1870s marked a crucial turning point in the development of the formation of the world capitalist economy, particularly in Europe. The period 1870–1900 marked a second stage in industrialization that was to divided the world between a core of advanced industrialized countries and periphery of underdeveloped countries. A division that for the most part still exists today.

The first stage of industrialization that had begun in Britain in the late eighteenth century, and which had been centered on the textile industries, had arisen out of handicraft and artisanal industry that had grown up in the previous manufacturing period. The machinery that was used to mechanize production was for the most part simply a multiplication and elaboration of the hand tools that had been used in handicraft production and were themselves the product of handicraft production. At the same time the quantum of money-capital necessary to set up in production was relatively small and was well within the compass of middle class family fortunes.

The second stage of industrialization that emerged in the final decades of the nineteenth century was centered around large scale steel production, and heavy engineering. Industrial production now presupposed industrial production. Industrial machinery was now no longer the product of handicraft production but was itself the product of industrial production. Industrial production had grown dramatically in scale and in cost. The quantum of capital necessary to set up in production was now often well beyond the pockets of even the richest of individuals. Money-capital had to be concentrated through the development of joint-stock companies and banks.

In Britain, and perhaps to a lesser extent France, the period of early industrialization had created the presuppositions for the future industrialization of the second stage. An industrial base had already been established while the accumulation of capital and the development of the financial institutions provide the mass of money capital necessary for further industrialization. In contrast the division of Germany into petty-statelets that was only finally overcome with its unification in 1866 had retarded the development of industrial capital. As a consequence, Germany had to summon up out of almost nothing the preconditions for the second stage of industrialization if it was not to fall irrevocably behind. This required a forced concentration of national capital and the active intervention of the state.

This was further compounded by Germany’s late entrance into the race to divide up the world. The new industries that began to emerge in the late nineteenth century demanded a wide range of raw materials that could only be obtained outside of Europe. To secure supplies of these raw materials a race developed to divide up the world and this led to the establishment of the vast French and British Empires of the late nineteenth century. Excluded from much of the world, German capital found itself compressed within the narrow national confines of Germany and its immediate eastern European hinterland.

It was this forced concentration and centralization of German capital and its confinement within the narrow national boundaries of Germany and eastern Europe that can be seen as the basis for the tendencies towards the fusion both between industrial and banking capital and between the state and capital that were peculiar to Germany at the end of the nineteenth century. As such the tendency towards state capitalism that was identified by the theorist of the Second International owed more to Germany’s late industrialization than to any universally applicable tendency towards state capitalism. Indeed, the twentieth century has shown, those economies that have managed to overcome the huge disadvantages of late industrialization — such as Japan and more recently the ‘Newly Industrializing Countries’ (NICs) such as South Korea, Taiwan, Indonesia, Brazil and Mexico — state-led development has played a crucial part in their success.[107]

However, state capitalism only remained a tendency in Germany. In the USSR the fusion of the state and capital can be seen to have been fully realized. We must therefore turn to consider the case of the late development of Russia.

Russia and late Development

As we saw in Part I, the Russian autocracy had made repeated efforts to ‘modernize’ and ‘industrialize’ the Russian economy. With the abolition of serfdom in 1866 and the introduction of the Stolypin agrarian reforms in the early 1900s the Czarist Governments had sought to foster the growth of capitalist agriculture. At the same time the Czarist regime encouraged foreign investment in the most modern plant and machinery.

However, the Czarist efforts to modernize and industrialize the Russian Empire were tempered by the danger that such modernization and industrialization would unleash social forces that would undermine the traditional social and political relations upon which the Russian imperial autocracy was founded. Indeed, the prime motive for promoting the industrialization of the Russian Empire was the need for an industrial basis for the continued military strength of the Russian Empire. As military strength increasingly dependent on industrially produced weapons then it became increasingly important for the Russian State to industrialize.

As a consequence, the industrialization of pre-Revolutionary Russia was narrowly based on the needs of military accumulation. While Russia came to possess some of the most advanced factories in the world the vast bulk of the Russian population was still employed in subsistence or petty-commodity producing agriculture. It was this economic structure, in which a small islands of large scale capitalist production existed in a sea of a predominantly backward pre-capitalist agriculture, that the Bolsheviks inherited in the wake of the October Revolution.

The Russian Revolution of 1917 was a dual revolution. On the one hand it was a proletarian revolution. It was the urban working class that brought down the Czarist regime in February, defeated the Kornilov’s counter-revolution in August and then, through the political form of the Bolshevik Party, seized political power in October. Yet although the Russian proletariat, in alliance with the peasantry, succeeded in sweeping away the Czarist autocracy, and uprooting the semi-feudal aristocratic ruling class on which it rested the proletarian revolution was ultimately defeated.

The Russian proletariat failed to go beyond the situation of dual power in the streets and the factories that had arisen during period between the February and October Revolution. Unable to take over and directly transform the social relations of production the contradictions involved in the situation of dual power were resolved in favor of nationalization rather than the communization of the means of production. The consequences of which soon became clear with the re-introduction of Taylorism and the imposition of one man management in the Spring of 1918.

The Bolshevik Party, which had been the political form through which the Russian proletariat had triumphed, then became the form through which it suffered its defeat. The Leninists could only save the revolution by defeating it. The emergency measures employed to defend the gains of the revolution — the crushing of political opposition, the reemployment Czarist officials, the reimposition of capitalist production methods and incentives etc., only served to break the real power of the Russian working class and open up the gap between the ‘workers’ Government’ and the Workers. This process was to become further consolidated with the decimation of the Revolutionary Russian proletariat during the three years of civil war.

Yet, on the other hand, while the Russian Revolution can be seen as a failed proletarian revolution it can also be seen as a partially successful ‘national bourgeois’ revolution. A national bourgeois revolution, neither in the sense that it was led by a self-conscious Russian bourgeoisie, nor in the sense that it served to forge a self-conscious Russian bourgeoisie, but in the sense that by sweeping away the Czarist absolutist state it opened the way for the full development of a Russian capitalism.

In the absence of the Russian Revolution, the Russian Empire would have probably gone the way of the Austrian-Hungarian Empire. The Russian Empire would have been broken up in the face of international competition. The more advanced parts may have then been reintegrated within the orbit of European capitalism, while the rest would have been dumped in the economically undeveloped world. However, the Russian Revolution had forged a strong state that, unlike the previous Czarist regime, was able to fully develop the forces of production.

In the backward conditions that prevailed in Russia, capitalist economic development could only have been carried out by through the forced development of the productive forces directed by the concentrated and centralized direction and power of the state. It was only through state-led capitalist development that both the internal and external constraints that blocked the development of Russian capitalism could be overcome.

In Russia, the only way to industrialize — and hence make the transition to a self-sustaining capitalist economy — was through the fusion of state and capital — that is through the full realization of state capitalism. Yet to understand this we must briefly consider the external and internal constraints that had blocked the capitalist development of Russia at the beginning of the twentieth century.